<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED
BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[X] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
TRANSACTION NETWORK SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
--ENTER COMPANY NAME HERE--
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) 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:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[_] 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:
-----------------------------------------------------------------------
Notes:
<PAGE>
[LOGO OF TRANSACTION NETWORK SERVICES, INC.(R) APPEARS HERE]
TRANSACTION NETWORK SERVICES, INC.
1939 ROLAND CLARKE PLACE, RESTON, VIRGINIA 22091
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON TUESDAY, APRIL 22, 1997
---------------------
The Annual Meeting of Stockholders of Transaction Network Services, Inc.
(the "Company") will be held on April 22, 1997 at TNS Headquarters, 1939
Roland Clarke Place, Reston, Virginia 20191, at 2:00 p.m., local time, to
consider and act upon the following matters:
1. To elect two Class III Directors to serve for the ensuing three years.
2. To approve an increase in the aggregate number of shares of Common Stock
authorized for issuance under the Company's 1994 Stock Option Plan, as
amended, from 600,000 to 1,800,000 shares.
3. To ratify the selection by the Board of Directors of Arthur Andersen LLP
as the Company's independent accountants for the current fiscal year.
4. To transact such other business as may properly come before the meeting
or any adjournment thereof. Stockholders of record at the close of
business on February 24, 1997 will be entitled to notice of and to vote
at the meeting or any adjournment thereof. All stockholders are
cordially invited to attend the meeting.
By Order of the Board of Directors,
JOHN J. MCDONNELL III, Secretary
Reston, Virginia
March 19, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE FOLLOW THE
INSTRUCTIONS ON THE ENCLOSED PROXY IN ORDER TO ENSURE REPRESENTATION OF YOUR
SHARES AT THE MEETING.
<PAGE>
TRANSACTION NETWORK SERVICES, INC.
1939 ROLAND CLARKE PLACE
RESTON, VIRGINIA 20191
---------------------
PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON TUESDAY, APRIL 22, 1997
---------------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Transaction Network Services, Inc. ("TNS"
or the "Company") for use at the Annual Meeting of Stockholders (the "Annual
Meeting") to be held on Tuesday, April 22, 1997 at 2:00 p.m. local time, and
at any adjournments of the Annual Meeting. All proxies will be voted in
accordance with stockholders' instructions, and if no choice is specified, the
proxies will be voted in favor of the matters set forth in the accompanying
Notice of Annual Meeting. Any proxy may be revoked by a stockholder at any
time before its exercise by delivery of written revocation or a subsequently
dated proxy to the Secretary of the Company or by voting in person at the
Annual Meeting. Proxies submitted through the TNS Automated Proxy System also
may be revoked at any time before 1:00 p.m. local time on April 22, 1997 by
submitting a revocation or subsequent proxy through the TNS Automated Proxy
System.
At the close of business on February 24, 1997, the record date for the
determination of stockholders entitled to vote at the Annual Meeting, there
were outstanding and entitled to vote an aggregate of 12,335,142 shares of the
Company's common stock (the "Common Stock"). Stockholders are entitled to one
vote per share. The Company's Annual Report for 1996 is being mailed to
stockholders with this Proxy Statement and the accompanying form of proxy on
or about March 19, 1997.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, EXCEPT
FOR EXHIBITS, IS INCLUDED IN THE ANNUAL REPORT. ADDITIONAL COPIES WILL BE
FURNISHED WITHOUT CHARGE TO ANY STOCKHOLDER UPON WRITTEN REQUEST TO INVESTOR
RELATIONS, TRANSACTION NETWORK SERVICES, INC., 1939 ROLAND CLARKE PLACE,
RESTON, VIRGINIA 20191. EXHIBITS WILL BE PROVIDED UPON WRITTEN REQUEST AND
PAYMENT OF AN APPROPRIATE PROCESSING FEE.
VOTES REQUIRED AND TABULATION OF VOTES
The affirmative vote of the holders of a plurality of the shares of Common
Stock present or represented by proxy at the Annual Meeting is required for
the election of directors. The affirmative vote of a majority of the shares of
Common Stock present or represented by proxy at the Annual Meeting is required
for the approval of each of the other matters to be voted upon at the Annual
Meeting. A majority of the shares of Common Stock outstanding is required to
be present or represented by proxy at the Annual Meeting in order to
constitute the quorum necessary to take action at the Annual Meeting. Votes
cast by proxy or in person at the Annual Meeting will be tabulated by the
inspector of elections appointed for the Annual Meeting. The inspector of
elections will treat abstentions as Common Stock that is present and entitled
to vote for purposes of determining the presence of a quorum but as not voted
for purposes of determining the approval of any matter submitted to
stockholders for a vote. If a broker indicates on a proxy that such broker
does not have discretionary authority as to certain Common Stock to vote on a
particular matter, such shares will not be considered as present and entitled
to vote with respect to that matter.
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of January 31, 1997 by (i) each person who is
known by the Company to own beneficially more than 5% of the outstanding
shares of the Common Stock, (ii) each director of the Company and each nominee
for director, (iii) each Named Executive Officer of the Company and (iv) all
directors and executive officers as a group. Except as indicated in the
footnotes to this table, each stockholder identified in the table possesses
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by such stockholder. The amounts and percents
shown exclude options not vesting within 60 days after January 31, 1997.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED (1)
-----------------------
NUMBER PERCENT
------------ ----------
<S> <C> <C>
BENEFICIAL OWNER
The Kaufmann Fund, Inc.(2)............................ 1,848,000 15.0%
140 E. 45th Street
43rd Floor
New York, New York 10017
Jurgen Manchot(3)..................................... 1,300,500 10.5
Kraumenshausweg 3
D 40822 Mettman
Germany
Massachusetts Financial Services Company (4).......... 886,000 7.2
500 Boylston Street
Boston, Massachusetts 02116
William N. Melton (5)................................. 717,500 5.8
2086 Hunters Crest Way
Vienna, Virginia 22182
Li Juen Melton........................................ 655,305 5.3
12521 Summer Place
Herndon, Virginia 22070
American Express Company (6).......................... 628,500 5.1
American Express Tower
200 Vesey Street
New York, New York 10285
John J. McDonnell, Jr. (7)............................ 595,569 4.8
Henry R. Nichols (8).................................. 116,750 *
Brian J. Bates (9).................................... 64,328 *
John S. McCarthy (10)................................. 63,608 *
David J. Walsh (11)................................... 10,883 *
Brian K. Barnum (12).................................. 7,317 *
Luther Peters III (13)................................ 5,750 *
All directors and executive officers as a group (17
persons) (14)........................................ 2,886,641 23.2%
</TABLE>
- ---------------------
*Represents less than 1%.
2
<PAGE>
(1) Applicable percentage ownership is based on 12,335,142 shares of Common
Stock outstanding on January 31, 1997. Shares which a person (or group)
has the right to acquire within 60 days after January 31, 1997 are deemed
to be outstanding in calculating the percentage ownership of such person
(or group), but are not deemed to be outstanding as to any other person
(or group).
(2) Based upon a Schedule 13G filed March 4, 1997.
(3) Shares beneficially owned include 7,500 shares issuable upon exercise of
stock options within 60 days from January 31, 1997.
(4) Based upon a Schedule 13G filed December 31, 1996, Massachusetts
Financial Services Company ("MFS") retains sole voting power with respect
to 775,100 of such shares and sole dispositive power with respect to
886,000 of such shares. MFS shares beneficial ownership of all 886,000
shares with certain other non-reporting entities.
(5) Shares beneficially owned include 7,500 shares issuable upon exercise of
stock options within 60 days from January 31, 1997.
(6) Based upon a Schedule 13G filed February 12, 1997, shares beneficially
owned include 3,250 shares held of record by American Express Financial
Corporation ("AEFC"), a registered investment advisor which is a
subsidiary of American Express Company ("AEC"), and 625,000 shares held
of record by IDS Discovery Fund, Inc. ("IDS"), a registered investment
company which is advised by AEFC, respectively. IDS retains sole voting
power with respect to 625,000 of such shares, and AEC and AEFC share
voting power with respect to 3,250 of such shares. IDS shares dispositive
power with respect to 625,000 of such shares, and AEC and AEFC each share
dispositive power with respect to all 628,500 shares. AEC disclaims
beneficial ownership of all such shares.
(7) Shares beneficially owned include 375,000 shares held of record by
McDonnell & Associates, L.P., 37,800 shares held of record by Mr.
McDonnell's spouse and 15,000 shares issuable upon exercise of stock
options within 60 days from January 31, 1997. Mr. McDonnell is the
President of McDonnell Holdings, Inc., the corporate General Partner of
McDonnell & Associates, L.P. and, therefore, may be deemed to
beneficially own all shares held of record by McDonnell & Associates,
L.P.
(8) Shares beneficially owned include 7,500 shares issuable upon exercise of
stock options within 60 days from January 31, 1997.
(9) Shares beneficially owned include 30,562 shares issuable upon exercise of
stock options within 60 days from January 31, 1997, 52,500 shares held of
record by Mr. Bates' spouse, and 7,500 shares held as custodian for Mr.
Bates' two minor children. Mr. Bates disclaims beneficial ownership of
all shares held of record by his spouse and by himself as custodian for
his children.
(10) Shares beneficially owned include 7,500 shares issuable upon exercise of
stock options within 60 days from January 31, 1997.
(11) Shares beneficially owned include 2,400 shares issuable upon exercise of
stock options within 60 days from January 31, 1997.
(12) Shares beneficially owned include 6,750 shares issuable upon exercise of
stock options within 60 days from January 31, 1997.
(13) Shares beneficially owned include 5,750 shares issuable upon exercise of
stock options within 60 days from January 31, 1997.
(14) Shares beneficially owned include 127,261 shares issuable upon exercise
of stock options within 60 days from January 31, 1997.
3
<PAGE>
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation provides that the Board of
Directors is divided into three classes (designated Class I Directors, Class
II Directors and Class III Directors), with members of each class holding
office for staggered three year terms. There are currently two Class I
Directors, two Class II Directors and two Class III Directors, who will serve
until the Annual Meeting of Stockholders to be held in 1998, 1999 and 2000,
respectively (in all cases subject to the election and qualification of their
successors and to their earlier death, resignation or removal). Messrs. Melton
and Guidi, the current Class III Directors whose terms expire in 1997, will
stand for reelection as directors of the Company. The persons named in the
enclosed proxy will vote to elect Messrs. Melton and Guidi as Class III
Directors, unless authority to vote for the election of such nominees is
withheld by the stockholder. The proxy may not be voted for more than two
directors. If a nominee is unable to serve, the persons acting under the proxy
may vote the proxy for the election of a substitute. It is not presently
contemplated that any nominee will be unable to serve. The terms of the Class
III Directors elected at the Annual Meeting will expire in 2000. The following
information relates to the nominees listed above and to the other directors of
the Company whose terms of office will extend beyond the Annual Meeting.
NOMINEES
CLASS III DIRECTORS WITH TERMS TO EXPIRE IN 2000:
WILLIAM N. MELTON
Mr. Melton, 54, has served as a director of the Company since 1990. He is
President and Chief Executive Officer of CyberCash, Inc., which is a customer
of the Company, and serves as a director on the boards of various technology
companies, including America Online, Inc.
PAOLO L. GUIDI
Mr. Guidi, 54, has served as a director of the Company since 1996. He is
President and Chief Executive Officer of Teleglobe International Corp., a
subsidiary of Teleglobe Inc., a Canadian telecommunications company. Mr. Guidi
has previously served as the President and Chief Executive Officer of Sprint
International and Telenet Communications Corp., as well as various management
positions with GTE Corporation.
OTHER DIRECTORS
CLASS II DIRECTORS WITH TERMS TO EXPIRE IN 1999:
JOHN J. MCDONNELL, JR.
Mr. McDonnell, 59, has served as President, Chief Executive Officer and a
director of the Company since founding the Company in 1990. From 1987 to 1989,
Mr. McDonnell served as President and Chief Executive Officer of Digital Radio
Networks, Inc., a local access bypass carrier for point of sale transactions.
Mr. McDonnell has previously served as Group Vice President for the
Information Technologies and Telecommunications Group of the Electronic
Industries Association (EIA); Vice President, International Operations and
Vice President, Sales, for Tymnet, Inc. with responsibility for both private
network sales and public network services; and Director of Technology and
Telecommunications for the National Commission on Electronic Funds Transfer.
Mr. McDonnell was one of the founding members and is currently Chairman of the
Executive Committee of the Board of Directors of the Electronics Funds
Transfer Association. Mr. McDonnell is also a director of Credit Management
Solutions, Inc., a software development company.
4
<PAGE>
JURGEN MANCHOT
Mr. Manchot, 60, has served as a director of the Company since 1991. Mr.
Manchot is a private investor. He serves as Vice Chairman of the shareholders
committee of Henkel KGaA, Germany and as a member of the supervisor board of
Degussa AG, Frankfurt. Mr. Manchot is a director of The Clorox Company.
CLASS I DIRECTORS WITH TERM TO EXPIRE IN 1998:
JOHN S. MCCARTHY
Mr. McCarthy, 48, has served as a director of the Company since 1992. Since
1984, Mr. McCarthy has served as a Managing General Partner of Gateway
Associates, L.P., a venture capital management firm.
HENRY R. NICHOLS
Mr. Nichols, 41, has served as a director of the Company since 1990. Since
1988, Mr. Nichols has served as the President of Resource Leasing Corporation.
Until January 1997, he also served as the President of ArJay Data Corporation,
which is a customer of the Company.
BOARD AND COMMITTEE MEETINGS
The Company has a standing Audit Committee of the Board of Directors, the
principal functions of which are to make recommendations to the Board
regarding the selection of the Company's independent accountants, to consult
with the Company's independent accountants and financial and accounting staff
and to review and report to the Board with respect to the scope of audit
procedures, accounting practices and internal accounting and financial
controls. The Audit Committee met once during 1996. The current members of the
Audit Committee are Messrs. Melton and Nichols. The Company has a standing
Compensation Committee of the Board of Directors, the principal function of
which is to review and make recommendations to the Board on all compensation
and hiring issues relating to officers and senior staff members. The
Compensation Committee also administers the Company's 1991 Stock Option Plan,
1994 Stock Option Plan and 1994 Employee Stock Purchase Plan. The Compensation
Committee acted seven times by unanimous written consent during 1996. The
current members of the Compensation Committee are Messrs. McCarthy and Melton.
See "Report of Compensation Committee on Executive Compensation" below. The
Board of Directors met five times and acted four times by unanimous written
consent during 1996. Each director attended at least 75% of the aggregate of
the number of Board meetings and the number of meetings held by all committees
on which he then served, except for Mr. Melton, who did not attend three of
the five Board meetings held during 1996.
BOARD COMPENSATION
Directors do not receive any cash compensation for their services as members
of the Board of Directors, although they are reimbursed for their expenses in
attending Board and committee meetings. In lieu of cash compensation, the
Company's 1994 Stock Option Plan provides for the automatic grant of options
for the purchase of 7,500 shares of Common Stock, up to an aggregate of 37,500
shares of Common Stock, to non-employee directors upon election, re-election
or appointment to the Board.
5
<PAGE>
NON-DIRECTOR OFFICERS
The Company's current non-director officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Luther Peters III....... 52 Senior Vice President, Technical Director
David J. Walsh.......... 37 Senior Vice President, Strategic Planning
Richard Sternitzke...... 37 Senior Vice President, Chief Technical Officer
Brian J. Bates.......... 36 Senior Vice President and General Manager, POS Services Division
Matthew M. Mudd......... 34 Senior Vice President, Operations
Craig B. Stutzman....... 42 Vice President, Network Engineering
Scott E. Ziegler........ 39 Vice President, Systems Integration
David P. O'Connor....... 36 Vice President, Marketing
Roderick W. Lyman....... 34 Vice President, Development
Elizabeth A. Crawford... 32 Vice President, Finance
John J. McDonnell III... 31 Vice President, General Counsel, Secretary and Treasurer
</TABLE>
Mr. Peters has served as Senior Vice President, Technical Director of the
Company since 1993. From 1984 to 1993, Mr. Peters served as Senior Vice
President of Systems Center, Inc., an international systems software company,
where he managed the product development process from conception through
commercial availability. Mr. Peters has held technical management positions at
STSC, Inc., where he designed and implemented an advanced telecommunications
network for the company, and Boeing Computer Services, and served as a systems
programmer at TRW, Inc.
Mr. Walsh has served as the Senior Vice President, Strategic Planning of the
Company since the merger of Fortune Telecommunications, Inc. ("FTI"), a wholly
owned subsidiary of the Company, into the Company in 1996. From 1991 to 1996,
Mr. Walsh was President of FTI, a provider of validation and fraud control
computer services to the telecommunications industry. From 1988 to 1991, Mr.
Walsh was Managing Director for Maiden Lane Associates, Ltd., a merchant
banking subsidiary of AmBase Corporation specializing in leveraged buy outs.
Prior to 1988, Mr. Walsh was a Principal in the Mergers and Acquisitions Group
of Ernst & Young, a major accounting and consulting firm.
Mr. Sternitzke has served as Senior Vice President, Chief Technical Officer
of the Company since 1996 and Vice President, Development from 1990 to 1996.
During 1990, he served as Technical Project Manager at Telic Corp., which
develops and markets systems software for telephone companies. From 1987 to
1990, Mr. Sternitzke served as the Director of Management Information Services
at Digital Radio Networks, Inc.
Mr. Bates has served as Senior Vice President and General Manager, POS
Services Division of the Company since 1996, Vice President, Sales from 1992
to 1996, and Director of Sales from 1990 to 1992. From 1988 to 1990, Mr. Bates
served as Regional Sales Manager with Digital Radio Networks, Inc. Prior to
joining Digital Radio Networks, Inc., Mr. Bates served as General Business
Sales Representative and Major Account Manager with U.S. Sprint. Mr. Bates is
a son in law of the President and Chief Executive Officer.
Mr. Mudd has served as Senior Vice President, Operations of the Company
since 1996, Vice President, Operations of the Company from 1993 to 1996,
Director of Network Operations from 1991 to 1993 and Manager of Customer
Service from 1990 to 1991. From 1988 to 1990, Mr. Mudd was Media Manager for
the U.S. Chamber of Commerce. Prior to that time, Mr. Mudd served with the
Communications Group at Hill & Knowlton, a public relations firm. Mr. Mudd is
a son-in-law of the President and Chief Executive Officer.
6
<PAGE>
Mr. Stutzman has served as Vice President, Network Engineering of the
Company since 1992 and Vice President, Operations from 1990 to 1992. Prior to
joining the Company, he served as Director of Systems Integration from 1987 to
1990 and as Director of Product Marketing during 1990 at Digital Radio
Networks, Inc., where he was responsible for the technical integrity of that
company's POS communications service. Mr. Stutzman has previously held a
variety of technical and marketing positions, including international field
support and installation of X.75 and X.25 gateways for public and private data
networks, at BT North America and its predecessor companies during his nine-
year tenure there.
Mr. Ziegler has served as Vice President, Systems Integration of the Company
since 1996, Director, Systems Integration from 1993 to 1996, and Systems
Engineer from 1992 to 1993. During 1992, Mr. Ziegler served as Network
Engineer at Ogden Government Systems, providing technical review of
communications systems for government clients. Mr. Ziegler served as Systems
Engineering Manager from 1990 to 1992, and as Project Engineer from 1988 to
1990 at Telecom Systems Integrated, where he was responsible for business
development, contract management and project management for telecommunications
projects. Prior to 1988, Mr. Ziegler was Project Manager at American
Communications Company.
Mr. O'Connor has served as Vice President of Marketing for the Company since
January 1997, Director of Marketing from 1994 to 1997, and Project Manager
from 1993 to 1994. From 1990 to 1993, Mr. O'Connor held the position of
Director, Carrier Programs, for Oncor Communications. Prior to 1990, Mr.
O'Connor served in various Customer Support and Project Management capacities
for Cable & Wireless Communications.
Mr. Lyman has served as Vice President, Development of the Company since
1995, Director of Telephony Systems from 1994 to 1995 and Manager of Advanced
Systems from 1993 to 1994. From 1990 to 1993, Mr. Lyman was Software
Engineering Manager for Universal Dynamics Corporation. From 1989 to 1990, Mr.
Lyman served as Senior Software Systems Engineer at Digital Radio Networks,
Inc. Prior to that time, Mr. Lyman served as Software Engineer for Universal
Dynamics Corporation and Development Engineer for Hewlett Packard Company.
Mrs. Crawford has served as Vice President, Finance of the Company since
February 1997, Controller of the Company from 1993 to 1997, and as Senior
Accounting Assistant from 1992 to 1993. From 1989 to 1992, she served as
Director of Contracts and Finance for Analytic Operations, Inc.
Mr. John J. McDonnell III has served as Vice President, General Counsel and
Secretary of the Company since 1993 and Treasurer of the Company since
February 1997. From 1992 to 1993, Mr. McDonnell was associated with the law
firm of Brown & Wood, where he specialized in public offerings of debt
securities. From 1991 until 1992, he was associated with the law firm of
Orrick, Herrington & Sutcliffe, following his graduation from law school. Mr.
McDonnell is the son of the President and Chief Executive Officer.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and certain of its officers, and persons who own more
than 10% of the Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Such directors,
officers and stockholders are required by the Securities and Exchange
Commission's regulations to furnish the Company with copies of all Section
16(a) reports that they file. Based on its review of the copies of such
reports received by it, or written representations from certain reporting
persons that no such reports were required for those persons, the Company
believes that from January 1, 1996 through December 31, 1996, all filing
requirements applicable to such directors, officers and stockholders were
complied with except for the following: Mr. Mudd, an officer of the Company,
failed to timely file one Form 4 report with respect to two sales of Common
Stock
7
<PAGE>
in February 1996; however, such sales were subsequently reported in a Form 4
filed in May 1996. Mr. Peters, an officer of the Company, failed to timely
file one Form 4 report with respect to the sale of Common Stock in March 1996;
however, such sale was subsequently reported in a Form 4 filed in April 1996.
Mr. Stutzman, an officer of the Company, failed to timely file one Form 4
report with respect to the gift and sale of Common Stock in March 1996;
however, such gift and sale was subsequently reported in a Form 5 filed in
March 1997. Mr. McCarthy, a director of the Company, failed to timely file one
Form 4 report with respect to the acquisition of Common Stock in May 1996 via
a distribution effected pursuant to a partnership agreement; however, such
acquisition was subsequently reported in a Form 4 filed in June 1996.
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation. The following table sets forth information concerning
the compensation received for services rendered to the Company during the last
three fiscal years by the Company's Chief Executive Officer and the Company's
other four most highly compensated executive officers (together, the "Named
Executive Officers") for the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
AWARDS
-----------------
LONG TERM
ANNUAL COMPENSATION (1) COMPENSATION
------------------------ ----------------- ALL OTHER
NAME/POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#)(2)(3) COMPENSATION (4)($)
------------- ---- ------------ ----------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
John J. McDonnell, Jr... 1994 $ 175,000 $ 104,008 -- $2,249
President and Chief 1995 191,346 160,403 60,000 4,498
Executive Officer 1996 225,000 252,675 90,000 2,249
Brian K. Barnum......... 1994 87,078 17,250 9,000 2,275
Chief Financial Officer 1995 101,240 27,063 7,500 4,550
1996 107,500 20,738 20,000 2,275
Brian J. Bates.......... 1994 100,000 64,383 -- 2,136
Senior Vice President 1995 118,308 49,067 11,250 4,615
and General Manager, 1996 136,000 40,473 45,000 2,375
POS Services Division
Luther Peters III....... 1994 127,186 30,550 -- 2,310
Senior Vice President, 1995 135,615 38,812 -- 4,566
Technical Director 1996 145,943 33,150 20,000 2,375
David J. Walsh.......... 1994 72,115 110,000 6,400 1,397
Senior Vice President, 1995 162,404 43,500 -- 4,620
Strategic Planning 1996 160,000 40,300 40,000 2,375
</TABLE>
- ---------------------
(1) Annual bonus compensation awarded to Mr. Bates includes sales commissions
paid to Mr. Bates of $64,383, $49,067 and $40,473 in 1994, 1995 and 1996,
respectively.
8
<PAGE>
(2) The grant of options in 1996 to the individuals named in the Summary
Compensation Table is conditional upon the approval by the Company's
stockholders of the proposed amendment to the Company's 1994 Stock Option
Plan.
(3) The options granted in 1996 to Mr. Barnum were cancelled upon the
termination of Mr. Barnum's status as an employee of the Company effective
February 7, 1997.
(4) Consists solely of matching contributions made during the years indicated
on behalf of the individuals named in the Summary Compensation Table
pursuant to the Company's 401(k) Plan. The aggregate amount of perquisites
and other personal benefits, securities or property received by each Named
Executive Officer was less than 10% of the total of annual salary and
bonus reported for such individual and therefore is omitted from this
table.
Option Grants. The following table summarizes option grants during 1996 to
the Named Executive Officers:
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
PERCENT OF OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM (3)
GRANTED (1) EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME (#) FISCAL YEAR ($/SHARE)(2) DATE 5%($) 10%($)
---- ----------- ------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John J. McDonnell, Jr... 90,000 13.1 $22.50 4/16/2006 $1,273,504 $3,227,323
Brian K. Barnum......... 20,000 2.9 22.50 4/16/2006 283,000 717,182
Brian J. Bates.......... 44,000 6.4 22.50 4/16/2006 622,601 1,577,801
Luther Peters........... 20,000 2.9 22.50 4/16/2006 283,000 717,182
David J. Walsh.......... 40,000 5.8 22.50 4/16/2006 566,001 1,434,365
</TABLE>
- ---------------------
(1) All identified options were granted on April 16, 1996 and are conditional
upon the approval by the Company's stockholders of the proposed amendment
to the Company's 1994 Stock Option Plan. If the proposed amendment is
approved, the options will be exercisable starting 12 months after the
grant date, with 25% of the shares covered thereby becoming exercisable at
that time and with an additional 25% of the option shares becoming
exercisable on each successive anniversary date, with full vesting
occurring on the fourth anniversary date. The options were granted for a
term of 10 years, subject to earlier termination in the event of
termination of employment.
(2) If the Company's stockholders approve the proposed amendment to the
Company's 1994 Stock Option Plan, the exercise price per share of all
identified options will be adjusted to reflect the fair market value of
the Common Stock on the date that the amendment is approved.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date of grant to their expiration date.
Actual gains, if any, on stock option exercises will depend upon the
future performance of the Common Stock and the dates on which the options
are exercised.
9
<PAGE>
Option Exercises and Year End Values. The following table sets forth
information concerning option exercises and the value of unexercised stock
options held as of December 31, 1996 by the Named Executive Officers.
AGGREGATE 1996 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
SHARES VALUE OF UNEXERCISED
ACQUIRED NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ON VALUE FISCAL YEAR END (#) FISCAL YEAR END (2)
EXERCISE REALIZED ------------------------------------- ----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE(1)
---- -------- -------- --------------- ------------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John J. McDonnell, Jr... -- -- 15,000 135,000 $ 32,505 $ 97,515
Brian K. Barnum......... 7,125 $123,998 6,750 36,875 50,625 18,283
Brian J. Bates.......... -- -- 30,563 52,437 308,738 18,283
Luther Peters III....... 35,500 655,728 5,750 38,750 53,860 175,631
David J. Walsh.......... 900 12,825 2,400 44,800 12,600 25,200
</TABLE>
- ---------------------
(1) Includes options granted on April 16, 1996 which are conditional upon the
approval by the Company's stockholders of the proposed amendment to the
Company's 1994 Stock Option Plan. Mr. Barnum's 36,875 options which
remained unexercisable at fiscal year end were cancelled upon the
termination of Mr. Barnum's status as an employee of the Company effective
February 7, 1997.
(2) Calculated on the basis of the fair market value of the underlying Common
Stock as of December 31, 1996 of $11.50 per share minus the aggregate
exercise price.
REPORT OF COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors (the "Committee"), which is
composed of two non-employee directors. The Committee is responsible for
establishing and administering the policies which govern both annual
compensation and equity ownership programs.
OVERVIEW AND PHILOSOPHY
The Company's executive compensation program is designed to promote the
following objectives:
. To provide competitive compensation that will help attract, retain and
reward highly qualified executives who contribute to the long term
success of the Company.
. To align management's interests with the success of the Company by
placing a portion of the executive's compensation at risk in relation to
the Company's performance.
. To align management's interests with stockholders by including long term
equity incentives.
The Committee believes that the Company's executive compensation program
provides an overall level of compensation that is competitive within its
industry and among companies of comparable size and complexity. To ensure that
compensation is competitive, the Company regularly compares its compensation
practices with those of other similar companies and sets its compensation
guidelines based on this review. The Company also seeks to achieve an
appropriate balance of the compensation paid to a particular individual and
the compensation paid to other executives both inside the Company and at
comparable companies and attempts to maintain an appropriate mix of salary and
incentive compensation. While compensation data are useful guides for
comparative purposes, the Company believes that a successful compensation
program also requires the application of judgment and subjective
determinations of individual performance, and to that extent the Committee
applies judgment in reconciling the program's objectives with the realities of
retaining valued employees.
10
<PAGE>
EXECUTIVE COMPENSATION PROGRAM
The Company's executive compensation program consists of base salary, annual
incentive compensation and long term equity incentives in the form of stock
options. Executive officers also are eligible to participate in certain
benefit programs which are generally available to all employees of the
Company, such as life insurance benefits, the Company's employee stock
purchase plan, medical and 401(k) savings plans.
Base Salary
The base salary for the Chief Executive Officer is set by the Committee and
reviewed by the full Board of Directors. In setting the annual cash
compensation for the Chief Executive Officer, the Committee reviews
compensation data published by various trade associations for chief executive
officers at other companies in the same or similar businesses and of
comparable size and success. In 1996, John J. McDonnell, Jr., the Company's
President and Chief Executive Officer, received salary compensation of
$225,000, which represents an increase of $33,654 from 1995. Base salaries for
all other executive officers are set by the Chief Executive Officer at the
time of hire and are reviewed annually by the executive's immediate supervisor
with next level approval. The Chief Executive Officer attempts to set base
salary compensation within the range of salaries of executive officers with
comparable qualifications, experience and responsibilities at other companies
in the same or similar businesses and of comparable size and success. In
setting the annual cash compensation for Company executives, the Chief
Executive Officer reviews compensation for comparable positions by reviewing
compensation data published by various trade associations for similar
companies with similar structures. In addition to external market data, salary
determinations depend both upon the Company's financial performance and upon
the individual's performance as measured by certain subjective non financial
objectives. These non financial objectives include the individual's
contribution to the Company as a whole, including his or her ability to
motivate others, develop the skills necessary to grow as the Company matures,
recognize and pursue new business opportunities and initiate programs to
enhance the Company's growth and success.
Annual and Long Term Incentive Compensation
The Company's bonus program is designed to provide its key employees with
cash incentives to achieve the Company's financial goals. The bonus program
for the Chief Executive Officer is set each year by the Committee and reviewed
by the full Board of Directors. Generally, the payment of bonus compensation
to the Chief Executive Officer depends on the attainment by the Company of
projected revenues and pre-tax earnings goals and is calculated as a
percentage of the financial goals actually attained. In 1996, Mr. McDonnell
received bonus compensation of $252,675, as compared to $160,403 in 1995 and
$104,008 in 1994. For all other employees, there are two components to the
Company's bonus program, the first based on Company performance and the second
based on the executive's individual performance. At the beginning of each
year, the Chief Executive Officer submits to the Committee recommended target
annual bonus levels expressed as a percentage of salary according to level of
management, which amount the executive will receive if the Company achieves
its target net income for the year. The second component of the Company's
bonus program will be awarded to the executive based upon the review of the
executive's performance in relation to individual objectives. Cash bonuses are
then paid quarterly to each executive based upon the Company's net income for
the quarter and its relationship to target annual net income as well as the
review of individual objectives established and measured by the executive's
immediate supervisor with next level approval. Because the Company's fiscal
1996 performance did not meet all target goals, bonus targets based upon
Company performance during the fourth fiscal quarter were not met and thus the
first component of certain bonuses were not awarded to the Named Executive
Officers. The Company's sales personnel, including Mr. Bates,
11
<PAGE>
receive a monthly commission based on sales bookings for the month and their
relationship to targeted annual bookings.
The Company's stock option plans are designed to promote the identity of
long term interests between the Company's employees and its stockholders and
to assist in the retention of executives. The size of option grants is
generally intended by the Committee to reflect the executive's position with
the Company and his or her contributions to the Company. Stock options are
granted at an option price equal to the fair market value of the Common Stock
on the date of grant and generally vest over a four year period in order to
encourage key employees to continue in the employ of the Company. As both a
reward for his performance as President and Chief Executive Officer as well as
an incentive to continue to serve in these positions, Mr. McDonnell received a
grant of 90,000 options during 1996. Mr. McDonnell also received an option
grant of 40,000 in 1995.
Benefits
The Company's executive officers are entitled to receive medical and life
insurance benefits and to participate in the Company's 401(k) Plan on the same
basis as other full time employees of the Company. The Company's 1994 Employee
Stock Purchase Plan, which is available to virtually all employees including
executive officers, allows participants to purchase shares at a discount of
approximately 15% from the fair market value at the beginning or end of the
applicable purchase period. The amount of perquisites, as determined in
accordance with the rules of the Securities and Exchange Commission relating
to executive compensation, did not exceed 10% of salary and bonus for 1996 for
any of the Named Executive Officers.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
The Company does not believe that Section 162(m) of the Internal Revenue
Code, which disallows a tax deduction for certain compensation in excess of $1
million, will generally have an effect on the Company. The Committee intends
to review the potential effect of Section 162(m) periodically and in the
future may decide to structure the performance-based portion of its executive
officer compensation to comply with Section 162(m).
COMPENSATION COMMITTEE
John S. McCarthy
William N. Melton
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are William N. Melton and John S.
McCarthy, both non-employee directors of the Company. No executive officer of
the Company has served as a director or member of the compensation committee
(or other committee serving an equivalent function) of any other entity, whose
executive officers served as directors of or members of the Compensation
Committee.
William N. Melton, a director of the Company, is President and Chief
Executive officer of CyberCash, Inc. ("CyberCash"), which is a customer of the
Company. During its last fiscal year, CyberCash made payments totalling
approximately 45% of CyberCash's consolidated gross revenues for its last
fiscal year for the purchase of network services from the Company. CyberCash
expects to purchase services from the Company and to make payments to the
Company in excess of 5% of CyberCash's gross revenues during the current
fiscal year.
12
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Henry R. Nichols, a director of the Company, is the majority shareholder of
ArJay Data Corporation ("ArJay"), a customer of the Company. During its last
fiscal year, ArJay made payments totalling approximately 35% of ArJay's
consolidated gross revenues for its last fiscal year for the purchase of
network services from the Company. Mr. Nichols has executed a letter of intent
for the sale of substantially all of Arjay's assets (the "Arjay Assets") as
well as the assignment of the service agreement between Arjay and the Company
to an unaffiliated third party. Under the terms of the sale, Mr. Nichols will
continue to collect certain payments from the net profits generated by the
continuing operations of the Arjay Assets by the unaffiliated third party,
which entity expects to continue to purchase services from the Company and to
make payments to the Company during the current fiscal year in excess of 5% of
ArJay's consolidated gross revenues for its last fiscal year.
13
<PAGE>
COMPARATIVE STOCK PERFORMANCE
The graph below compares cumulative total stockholder return on the Common
Stock during the period from April 22, 1994 (the date on which the Common
Stock commenced trading) through December 31, 1996 with the cumulative total
return over the same period of (i) the NASDAQ Market Index and (ii) a peer
group of publicly traded companies* selected by the Company for purposes of
this comparison (the "Peer Group"). This graph assumes the investment of $100
at the close of trading on April 22, 1994 in the Company's Common Stock, the
NASDAQ Market Index and the Peer Group and assumes reinvestment of dividends.
Measurement points are at April 22, 1994, June 30, 1994, September 30, 1994,
December 30, 1994, March 31, 1995, June 30, 1995, September 29, 1995, December
29, 1995, March 31, 1996, June 30, 1996, September 30, 1996, December 31,
1996.
COMPARATIVE TOTAL RETURNS
TRANSACTION NETWORK SERVICES, INC., NASDAQ MARKET INDEX, PEER GROUP
(Performance results from 4/22/94 through 12/31/96)
[LINE GRAPH APPEARS HERE]
<TABLE>
- -------------------------------------------------------------------------
Transaction Network Peer Group NASDAQ Market
Services, Inc. Index Index
<S> <C> <C> <C>
4/22/94 100 100 100
12/31/94 145 114.18 101.44
12/31/95 250 172.02 131.58
12/31/96 172.41 214.9 163.51
</TABLE>
- -------------------------------------------------------------------------
Source: Media General Financial Services
- ---------------------
* The peer group includes the following companies: First Data Corporation
(FDC), SPS Transaction Services, Inc. (PAY), Total Systems Services, Inc.
(TSS), ENVOY Corporation (ENVY), PMT Services, Inc. (PMTS), National Data
Corporation (NDC) and Concord EFS, Inc. (CEFT). The stockholder returns of
each company have been weighted to reflect relative stock market
capitalization.
14
<PAGE>
PROPOSAL TO AMEND THE COMPANY'S
1994 STOCK OPTION PLAN
The Company's 1994 Stock Option Plan (the "Plan") is designed to promote the
identity of long term interests between the Company's employees and its
stockholders and to assist in the retention of executives. Stock options are
granted at an option price equal to the fair market value of the Common Stock
on the date of grant and generally vest over a four-year period in order to
encourage key employees to continue in the employ of the Company. As of April
1996, the number of options available for grant under the Plan had decreased
to less than 158,700 shares. In order to allow the Company to continue to
recruit and retain qualified personnel through this form of equity
compensation, the Company's Board of Directors has authorized an increase in
the number of shares available for grant under the Plan from 600,000 to
1,800,000 shares. To become effective, this proposed amendment requires
approval by the Company's stockholders.
PROPOSED AMENDMENT
The Plan was amended by action of the Company's Board of Directors on April
16, 1996 by replacing paragraph(a)of Section 6 of the Plan with a new
paragraph (a) as follows:
(a) The stock subject to the Options shall be shares of the Common Stock.
Such shares may, in whole or in part, be authorized but unissued shares
contributed directly by the Company or shares which shall have been or
which may be acquired by the Company. The aggregate number of shares of
Common Stock as to which Options may be granted from time to time under the
Plan shall be one million two hundred thousand (1,200,000) shares. The
limitation established by the preceding sentence shall be subject to
adjustment as provided in Section 7(i) hereof.
Pursuant to the subsequent 3-for-2 stock split of the Company's outstanding
shares of its Common Stock effective May 10, 1996, the aggregate number of
shares authorized for grant under the Plan will automatically be adjusted
under Section 7(i) of the Plan to 1,800,000 upon approval of this proposed
amendment by the Company's stockholders.
OPTION PLAN DESCRIPTION
The Plan provides for the grant of stock options to officers, directors and
key employees of the Company. Under the Plan, the Company may grant options
that are intended to qualify as incentive stock options ("ISOs") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or options not intended to qualify as incentive stock options ("Non-
Qualified Options"). The option price with respect to ISOs may not be less
than 100% of the fair market value of the Common Stock on the date of grant of
the option. However, in the case of an ISO granted to a person owning over 10%
of the Common Stock, the option price may not be less than 110% of such fair
market value. The option price of Non-Qualified Options may not be less than
50% of such fair market value. The aggregate fair market value (determined at
the time of grant) of the Common Stock subject to ISOs granted to any one
person which first become exercisable in any calendar year may not exceed
$100,000. On March 13, 1997, the closing price of the Common Stock was $11.13.
ISOs are exercisable over the exercise period specified by the Stock Option
Committee (the "Committee") in the option agreement, but in no event may such
period exceed ten years from the date of grant; provided, however, that in the
case of an ISO granted to any person owning over 10% of the Common Stock, the
exercise period may not exceed five years from the date of grant. Non-
Qualified Options are exercisable over a period of up to eleven years from the
date of grant. Options granted under the
15
<PAGE>
Plan are generally nontransferable and, with certain exceptions in the event
of death or disability of the optionee, options granted under the Plan
generally terminate thirty days after termination of an optionee's employment
with the Company or an affiliate. The Plan is administered by the Committee,
consisting of not less than two members of the Board who are non-employee
directors within the meaning of Rule 16b-3 under the Securities Exchange Act
of 1934 (the "Exchange Act"). Currently, the Committee is comprised of the two
members of the Compensation Committee. Subject to the provisions of the Plan,
the Committee has the authority to designate the persons to whom options are
granted and the terms of each option, including the number of shares of Common
Stock to be covered by the option, when the option becomes exercisable, the
option exercise price and the duration of the option. The Board of Directors
may at any time amend or terminate the Plan except that no such amendment may
be made without the approval of the holders of a majority of the outstanding
Common Stock, if such amendment would (i) materially increase the benefits
which may be issued under such plan, (ii) materially increase the number of
shares which may be issued under such plan or (iii) materially modify the
requirements as to eligibility for participation under such plan. The Plan was
drafted to obtain the benefits of the exemption from Section 16(b) of the
Exchange Act provided by Rule 16b-3. Section 16(b) of the Exchange Act
provides, among other things, that a director or officer of a corporation who
purchases and sells the stock of the corporation within a six month period is
liable to the corporation for the difference between the purchase price and
the sale price. Rule 16b-3 promulgated under the Exchange Act provides that
the acquisition of a stock option and the exercise of such option by a
director or officer of a corporation pursuant to a stock option plan which
meets certain requirements does not constitute a transaction subject to
Section 16(b) of the Exchange Act. The Company has filed a registration
statement under the Securities Act of 1933 covering the shares of Common Stock
reserved for issuance under the Plan.
The following table sets forth information concerning options granted
pursuant to the Plan subsequent to the Board approval of the proposed
amendment in April 1996 and which will become effective upon stockholder
approval of the proposed amendment.
OPTIONS GRANTED UNDER PROPOSED PLAN AMENDMENT
<TABLE>
<CAPTION>
1994 STOCK OPTION PLAN
NAME AND POSITION NUMBER OF OPTIONS GRANTED
- ----------------- -------------------------
<S> <C>
John J. McDonnell, Jr., President and Chief
Executive Officer.................................. 90,000
Brian J. Bates, Senior Vice President and General
Manager, POS Services Division..................... 44,000
Luther Peters III, Senior Vice President, Technical
Director........................................... 20,000
David J. Walsh, Senior Vice President, Strategic
Planning........................................... 40,000
Executive Officers as a group....................... 408,000
Non-Executive Officer Employees as a group.......... 242,200
</TABLE>
The following is a summary of the federal income tax consequences relating
to options granted under the Plan:
ISOs. Under the Code, an optionee will not recognize income at the time of
grant of an ISO or the subsequent purchase of the shares pursuant to the
exercise of such ISO. The amount by which the fair market value of the shares
purchased at the time of exercise exceeds the option price will constitute an
item of tax preference and may be potentially subject to the alternative
minimum tax. If the employee makes no disposition of the shares purchased on
exercise of an ISO within two years from the date of grant and within one year
from the date of exercise of the option, upon a subsequent sale of shares the
employee will recognize
16
<PAGE>
a long-term capital gain or loss equal to the difference between the amount
realized on the disposition of such shares and his option exercise price. If
an employee disposes of shares purchased through the exercise of an ISO within
the foregoing two or one year periods, the transaction will be treated as a
disqualifying disposition and the employee will be required to include in his
gross income as compensation for the taxable year in which the disposition
occurs, the amount by which the fair market value of the shares on the date
the option was exercised by the employee (or the amount realized upon
disposition, if that amount is less than the fair market value on the date of
exercise) exceeds the option exercise price. In addition, upon a sale within
either period, the employee will recognize a capital gain or loss equal to the
difference between (a) the sum of the exercise price he paid (or if the
exercise price is paid in whole or in part by the transfer of shares
previously owned by the employee, the amount of money plus the adjusted basis
of such previously owned stock) and any amount he is required to include in
his gross income in accordance with the preceding sentence and (b) the amount
realized on the sale. The Company will be entitled to a deduction for
compensation with respect to an ISO only if and to the extent that the
employee recognizes ordinary income from a disqualifying disposition of shares
received upon the exercise of such ISO.
Non-Qualified Options. The grant of Non-Qualified Options will have no
immediate tax consequences to the Company or the optionee. If shares received
on the exercise of a Non-Qualified Option are not subject to a substantial
risk of forfeiture, the optionee will recognize ordinary income equal to the
excess, if any, of the fair market value of the shares at the time of exercise
over the exercise price. It is not contemplated that the Company will, upon
the exercise of a Non-Qualified Option, issue or deliver shares that are
subject to a substantial risk of forfeiture, except as noted in the next
paragraph. Shares received on the exercise of a Non-Qualified Option will be
treated as subject to a substantial risk of forfeiture for up to a six month
period if the sale of the shares at a profit during such six months could
subject the optionee to suit under Section 16(b) of the Exchange Act. Under
these circumstances, however, the optionee has a right to elect, within a
30-day period from the date of transfer of the shares, to include in his
taxable income for the taxable year of exercise an amount equal to the excess
of the fair market value of such shares at the time of the exercise over the
exercise price. If the optionee does not make the preceding election, the
optionee will recognize ordinary income upon the expiration of the above-
referenced six month period. The amount of such income will be equal to the
excess of the fair market value of the shares at that time over the exercise
price, and the holding period for determining whether any capital gain or loss
on the subsequent sale or exchange of the shares is long-term or short-term
capital gain or loss will commence at that time. Where ordinary income is
recognized by an optionee as described above in connection with shares
received on the exercise of a Non-Qualified Option, the Company will be
entitled to a deduction in the amount of ordinary income so recognized by the
optionee. The Plan requires the employee to pay or make arrangements
acceptable to the Committee regarding withholding taxes due upon exercise of a
Non-Qualified Option. With the Committee's approval, the optionee may make
such payment in whole or in part by surrendering shares of Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ADOPTION OF
THE PROPOSAL.
PROPOSAL TO RATIFY SELECTION OF
INDEPENDENT ACCOUNTANTS
The Board of Directors, at the recommendation of the Audit Committee, has
selected the firm of Arthur Andersen LLP as the Company's independent
accountants for the current fiscal year. Arthur Andersen LLP has served as the
Company's independent accountants since 1992. Although stockholder approval of
the Board of Directors' selection of Arthur Andersen LLP is not required by
law, the Board of Directors believes that it is advisable to give stockholders
an opportunity to ratify this selection. If this proposal is not approved at
the Annual Meeting, the Board of Directors will reconsider its selection of
Arthur Andersen LLP. Representatives
17
<PAGE>
of Arthur Andersen LLP are expected to be present at the Annual Meeting and
will have the opportunity to make a statement if they desire to do so and will
also be available to respond to appropriate questions from stockholders.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 1998 Annual
Meeting of Stockholders must be received by the Company at its principal
office in Reston, Virginia, not later than November 15, 1997, for inclusion in
the proxy statement for that meeting.
OTHER MATTERS
The Board of Directors does not know of any other matters which may come
before the Annual Meeting. However, if any other matters are properly
presented to the Annual Meeting, it is the intention of the persons named in
the accompanying proxy to vote, or otherwise act, in accordance with their
judgment on such matters. All costs of solicitation of proxies will be borne
by the Company. In addition to solicitations by mail, the Company's directors,
officers and regular employees, without additional remuneration, may solicit
proxies by telephone, telegraph and personal interviews, and the Company
reserves the right to retain outside agencies for the purpose of soliciting
proxies. Brokers, custodians and fiduciaries will be requested to forward
proxy soliciting material to the owners of stock held in their names, and, as
required by law, the Company will reimburse them for their reasonable out of
pocket expenses in this regard.
By Order of the Board of Directors,
JOHN J. MCDONNELL III, Secretary
March 19, 1997
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO VOTE YOUR PROXY PURSUANT
TO THE ENCLOSED INSTRUCTIONS. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE
THEIR STOCK PERSONALLY EVEN THOUGH THEY HAVE SUBMITTED THEIR PROXIES.
18
<PAGE>
1299-PS-97
<PAGE>
TNS is offering this interactive proxy voting system to its shareholders as an
alternative to traditional proxy cards. It also gives us an opportunity to
demonstrate one of our technology applications to our shareholders.
From a touch-tone phone, just dial 1-800-867-9084. You'll be connected to the
TNS proxy voting system. A voice prompt will guide you through the voting
process. YOU'LL NEED TO ENTER YOUR SOCIAL SECURITY OR TAX I.D. NUMBER,
FOLLOWED BY THE FOUR HIGHLIGHTED DIGITS OF THE ACCOUNT NUMBER LOCATED JUST BELOW
THE PERFORATION ABOVE, SO PLEASE HAVE THIS INFORMATION AVAILABLE BEFORE YOU
PLACE YOUR CALL.
If you make a mistake or wish to change your vote, just press
the star key (*) at any time. You'll be returned to the
beginning of the prompt and you may start over again.
If you need further instructions or have any questions, please
contact Karen Kazmark, Director of Investor Relations, by
calling (703) 453-8406 from 9 a.m. to 6 p.m. EST, Monday through
Friday.
We're proud to be able to bring this voting option to you
through TNS technology. Thank you for your vote.
DETACH HERE
TRANSACTION NETWORK SERVICES, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 22, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The stockholder and recipient of the enclosed TNS 1996 Proxy Voting Card
(the "Card Recipient"), having received the Notice of the Annual Meeting and
the Board of Directors' Proxy Statement, hereby appoint(s) John J. McDonnell,
Jr. and John J. McDonnell III, and each of them, proxies (the "Proxies") of the
Card Recipient (with full power of substitution) to attend the above Annual
Meeting and all adjournments thereof (the "Meeting") and there to vote all
shares of Common Stock of Transaction Network Services, Inc. that the Card
Recipient would be entitled to vote, if personally present, in regard to all
matters which may come before the Meeting, and especially to vote on the matters
set forth below.
This Proxy, when properly executed through the Automated Voice Response
System, will be voted in the manner specified by the Card Recipient therein. If
any nominee is not available to serve, this Proxy may be voted for a substitute
or for a lesser number of Directors.
If you wish to vote in accordance with the Board of Directors'
recommendations, please answer in the affirmative at the appropriate voice
prompt.
There are three proposals on which shareholders will vote.
1. The election of two Class III Directors to serve for the ensuing
three years. The nominees are William N. Melton and Paolo L. Guidi.
2. The approval of an increase in the aggregate number of shares of
Common Stock authorized for issuance under the Company's 1994 Stock Option Plan,
as amended, from 600,000 to 1,800,000 shares.
3. The ratification of the selection by the Board of Directors of Arthur
Andersen & Co. LLP as the Company's independent accountants for the current
fiscal year.
In their discretion the Proxies are authorized to vote upon such other business
as may properly come before the Meeting.
<PAGE>
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
1. The election of two Class III Directors
to serve for the ensuing three years.
NOMINEES: William N. Melton and Paolo L. Guidi.
FOR WITHHOLD
[ ] [ ]
[ ]
---------------------------------------
For both nominees except as noted above
FOR AGAINST ABSTAIN
2. The approval of an increase in the [ ] [ ] [ ]
aggregate number of shares of Common
Stock authorized for issuance under
the Company's 1994 Stock Option Plan,
as amended, from 600,000 to 1,800,000 shares.
FOR AGAINST ABSTAIN
3. The ratification of the selection by the [ ] [ ] [ ]
Board of Directors of Arthur Andersen & Co. LLP
as the Company's independent accountants for the
current fiscal year.
In their discretion the Proxies are authorized to
vote upon such other business as may properly
come before the Meeting. MARK HERE [ ]
FOR ADDRESS
CHANGE AND
NOTE AT LEFT
SIGNATURE: DATE:
--------------------------------- ------------------------
SIGNATURE: DATE:
--------------------------------- ------------------------
<PAGE>
TRANSACTION NETWORK SERVICES, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
APRIL 22, 1997
The Undersigned, having received the Notice of Annual Meeting and the
Board of Directors' Proxy Statement, hereby appoint(s) John J. McDonnell, Jr.
and John J. McDonnell, III, and each of them, proxies of the undersigned
P (with full power of substitution) to attend the above Annual Meeting and all
R adjournments thereof (the "Meeting") and there to vote all shares of Common
O Stock of Transaction Network Services, Inc. that the undersigned would be
X entitled to vote, if personally present, in regard to all matters which may
Y come before the Meeting, and especially to vote on the matters set forth on
the reverse side.
This Proxy when properly executed will be voted in the manner specified
herein. If no specification is made, the proxies intend to vote for all of
the nominees. If any nominee is not available to serve, this Proxy may be
voted for a substitute or for a lesser number of Directors.
SEE REVERSE SIDE. If you wish to vote in accordance with the Board of
Directors' recommendations, just sign on the reverse side. You need not
mark any boxes.
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CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE
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<PAGE>
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
1. The election of two Class III Directors
to serve for the ensuing three years.
NOMINEES: William N. Melton and Paolo L. Guidi.
FOR WITHHOLD
[ ] [ ]
[ ]
---------------------------------------
For both nominees except as noted above
FOR AGAINST ABSTAIN
2. The approval of an increase in the [ ] [ ] [ ]
aggregate number of shares of Common
Stock authorized for issuance under
the Company's 1994 Stock Option Plan,
as amended, from 600,000 to 1,800,000 shares.
FOR AGAINST ABSTAIN
3. The ratification of the selection by the [ ] [ ] [ ]
Board of Directors of Arthur Andersen & Co. LLP
as the Company's independent accountants for the
current fiscal year.
In their discretion the Proxies are authorized to
vote upon such other business as may properly
come before the Meeting. MARK HERE [ ]
FOR ADDRESS
CHANGE AND
NOTE AT LEFT
SIGNATURE: DATE:
--------------------------------- ------------------------
SIGNATURE: DATE:
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