<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
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
TRANSACTION NETWORK SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(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:
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(4) Date Filed:
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<PAGE>
[LOGO]
TRANSACTION NETWORK SERVICES, INC.
1939 ROLAND CLARKE PLACE, RESTON, VIRGINIA 20191
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON TUESDAY, APRIL 14, 1998
------------------------
The Annual Meeting of Stockholders of Transaction Network Services, Inc.
(the "Company") will be held on April 14, 1998 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 I 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 1,800,000 to 2,300,000 shares.
3. To approve an increase in the aggregate number of shares of Common Stock
authorized for issuance under the Company's 1994 Employee Stock Purchase
Plan from 150,000 to 250,000 shares.
4. To ratify the selection by the Board of Directors of Arthur Andersen LLP
as the Company's independent accountants for the current fiscal year.
5. 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 16, 1998 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 16, 1998
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 14, 1998
------------------------
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 14, 1998 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 14, 1998 by submitting a revocation or
subsequent proxy through the TNS Automated Proxy System.
At the close of business on February 16, 1998, 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 12,275,982 shares of the
Company's common stock (the "Common Stock"). Stockholders are entitled to one
vote per share. The Company's Annual Report for 1997 is being mailed to
stockholders with this Proxy Statement and the accompanying form of proxy on or
about March 16, 1998.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997 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.
1
<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, 1998 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 reflect
duplicative "beneficial ownership" of Common Stock and exclude options not
vesting within 60 days after January 31, 1998.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED (1)
-----------------------
NUMBER PERCENT
---------- -----------
<S> <C> <C>
BENEFICIAL OWNER
The Kaufmann Fund, Inc. (2)................................................................. 2,000,000 16.3%
140 E. 45th Street
43rd Floor
New York, New York 10017
Jurgen Manchot(3)........................................................................... 1,060,500 8.6
Kraumenshausweg 3
D-40822 Mettman
Germany
Massachusetts Financial Services Company (4)................................................ 1,041,200 8.5
500 Boylston Street
Boston, Massachusetts 02116
William N. Melton (5)....................................................................... 717,500 5.9
2086 Hunters Crest Way
Vienna, Virginia 22182
Li Juen Melton.............................................................................. 655,305 5.3
12521 Summer Place
Herndon, Virginia 22070
Frontier Capital Management Company, Inc. (6)............................................... 642,890 5.2
99 Summer Street
Boston, Massachusetts 02110
John J. McDonnell, Jr. (7).................................................................. 605,869 4.9
Henry R. Nichols (8)........................................................................ 97,500 *
Brian J. Bates (9).......................................................................... 81,015 *
John S. McCarthy............................................................................ 52,108 *
Luther Peters III (10)...................................................................... 29,500 *
Richard Sternitzke (11)..................................................................... 14,778 *
David J. Walsh (12)......................................................................... 11,421 *
Paolo Guidi (13)............................................................................ 7,500 *
All directors and executive officers as a group (23 persons) (14)........................... 2,926,030 23.3%
</TABLE>
- ------------------------
*Represents less than 1%.
2
<PAGE>
(1) Applicable percentage ownership is based on 12,265,469 shares of Common
Stock outstanding on January 31, 1998. Shares which a person (or group) has
the right to acquire within 60 days after January 31, 1998 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 February 17, 1998, The Kaufmann Fund, Inc.
retains sole voting power with respect to 2,000,000 of such shares and sole
dispositive power with respect to 2,000,000 of such shares.
(3) Shares beneficially owned include 7,500 shares issuable upon exercise of
stock options within 60 days from January 31, 1998.
(4) Based upon a Schedule 13G filed February 12, 1998, Massachusetts Financial
Services Company ("MFS") retains sole voting power with respect to 1,015,900
of such shares and sole dispositive power with respect to 1,041,200 of such
shares. MFS shares beneficial ownership of all 1,041,200 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, 1998.
(6) Based upon a Schedule 13G filed February 27, 1998, Frontier Capital
Management Company, Inc. retains sole voting power with respect to 642,890
of such shares and sole dispositive power with respect to 642,890 of such
shares.
(7) Shares beneficially owned include 375,000 shares held of record by McDonnell
& Associates, L.P., 29,800 shares held of record by Mr. McDonnell's spouse
and 52,500 shares issuable upon exercise of stock options within 60 days
from January 31, 1998. 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, 1998.
(9) Shares beneficially owned include 44,376 shares issuable upon exercise of
stock options within 60 days from January 31, 1998, 25,750 shares held of
record by Mr. Bates' spouse, and 8,900 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 29,500 shares issuable upon exercise of
stock options within 60 days from January 31, 1998.
(11) Shares beneficially owned include 13,813 shares issuable upon exercise of
stock options within 60 days from January 31, 1998.
(12) Shares beneficially owned include 10,000 shares issuable upon exercise of
stock options within 60 days from January 31, 1998.
(13) Shares beneficially owned include 7,500 shares issuable upon exercise of
stock options within 60 days from January 31, 1998.
(14) Shares beneficially owned include 294,642 shares issuable upon exercise of
stock options within 60 days from January 31, 1998.
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 1999, 2000, and 2001, respectively (in all
cases subject to the election and qualification of their successors and to their
earlier death, resignation or removal). Mr. Nichols, a current Class I Director
whose term expires in 1998, will stand for reelection as director of the
Company. Mr. Joseph Squarzini, Jr. is nominated as a new member to the Board of
Directors to serve as a Class I Director. The persons named in the enclosed
proxy will vote to elect Messrs. Nichols and Squarzini as Class I 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 I Directors elected
at the Annual Meeting will expire in 2001. 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 I DIRECTORS WITH TERMS TO EXPIRE IN 2001:
HENRY R. NICHOLS
Mr. Nichols, 42, 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 was a customer of the Company until December 1997.
JOSEPH SQUARZINI, JR.
Mr. Squarzini, 58, most recently served as senior vice president of UUNET,
an Internet access and services provider. Prior to that, Mr. Squarzini served
for 14 years in numerous senior technical and operational positions with GE.
Before joining GE, he was director of systems engineering at Satellite Business
Systems. Mr. Squarzini began his career at IBM where he held various technology
management positions during his 15 year tenure there.
OTHER DIRECTORS
CLASS III DIRECTORS WITH TERMS TO EXPIRE IN 2000:
WILLIAM N. MELTON
Mr. Melton, 55, 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.
4
<PAGE>
PAOLO L. GUIDI
Mr. Guidi, 55, 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.
CLASS II DIRECTORS WITH TERMS TO EXPIRE IN 1999:
JOHN J. MCDONNELL, JR.
Mr. McDonnell, 60, 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 of the Electronics Funds Transfer Association and serves on
its Board. Mr. McDonnell is also a director of Credit Management Solutions,
Inc., a software development company, and Intelidata Technologies, Inc., an
electronic commerce company.
JURGEN MANCHOT
Mr. Manchot, 61, 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.
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 twice during 1997. 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 eight times by unanimous
written consent during 1997. 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 four times and acted
five times by unanimous written consent during 1997. 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 two of the four Board Meetings held during 1997. The Company
does not have a nominating committee.
5
<PAGE>
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.
NON-DIRECTOR OFFICERS
The Company's current non-director officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- -----------------------------------------------------------------------
<S> <C> <C>
Brian J. Bates.................... 37 Senior Vice President and General Manager, Point-of-Services Division
Matthew M. Mudd................... 35 Senior Vice President, Operations
Luther Peters III................. 53 Senior Vice President, Technical Director
John Schanz....................... 34 Vice President and General Manager, Financial Services Division
Richard Sternitzke................ 38 Senior Vice President, Chief Technical Officer
David J. Walsh.................... 38 Senior Vice President and General Manager, Telecom Services Division
Larry Crompton.................... 41 Vice President of Sales
Roderick W. Lyman................. 35 Vice President, Development
John J. McDonnell III............. 32 Vice President, General Counsel, and Secretary
David P. O'Connor................. 37 Vice President, Marketing
Aytxa Ramirez..................... 49 Vice President, Fraud Services
Craig B. Stutzman................. 43 Vice President, Network Engineering
Scott E. Ziegler.................. 40 Vice President, Systems Integration
Thaddeus G. Weed.................. 36 Chief Financial Officer and Treasurer
Elizabeth A. Crawford............. 33 Vice President, Finance
Patricia A. Kelly................. 54 Controller
</TABLE>
Mr. Bates has served as Senior Vice President and General Manager,
Point-of-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. 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. Schanz has served as Vice President and General Manager, Financial
Services Division since July of 1997. Before joining TNS, Mr. Schanz was
Director of Engineering at Sprint Corporation from 1992 to 1997. From 1986 to
1992, he served in various network engineering and management positions at GE.
Mr. Schanz is the son-in-law of Joseph Squarzini, Jr., a current Board of
Directors nominee.
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. Walsh has served as Senior Vice President and General Manager of the
Telecom Services Division since 1996, and before that as 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 1994. From 1991 to 1994, 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. Crompton has served as Vice President of Sales since February of 1997.
Prior to that, he served as Director of Sales at TNS since joining the Company
in 1992. From 1989 to 1992, Mr. Crompton was Senior Vice President of National
Sales for First USA Paymentech, a national credit card processor. Before that,
he held several other sales positions with various companies since beginning his
sales career.
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.
Mr. John J. McDonnell III has served as Vice President, General Counsel and
Secretary of the Company since 1993 and Treasurer from February 1997 until July
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.
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.
7
<PAGE>
Ms. Ramirez has served as Vice President, Fraud Services since November
1997. Prior to that, she served as Director of Customer Service for TNS' Telecom
Services Division. Ms. Ramirez previously served as Vice President, Customer
Service for Fortune Telecommunications, Inc. from 1987 to 1994, when the company
was acquired by TNS. From 1982 to 1987, she served as Corporate
Telecommunications Manager for Storer Communications.
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. Weed has served as Chief Financial Officer and Treasurer since July of
1997. From 1987 to 1997, he was an audit manager with Arthur Andersen LLP,
managing accounts for various public and private companies, including
Transaction Network Services, Inc.
Mrs. Crawford has served as Vice President, Finance of the Company since
1997, Controller of the Company since 1993, 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.
Ms. Kelly has served as Controller since June of 1997. Prior to that, she
served as Senior Director of Business Operations for TNS' Telecom Services
Division from 1995 to 1997. From 1989 to 1994, Ms. Kelly was Vice President and
Chief Financial Officer of Fortune Telecommunications, Inc., which was acquired
by TNS in 1994. From 1983 to 1988, Ms. Kelly served as Controller for White
Motor Reorganization Trust and as a staff accountant for A.M. Pullen and Company
from 1980 to 1982.
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 and the Nasdaq National
Market. 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, 1997 through December 31, 1997, all filing
requirements applicable to such directors, officers and stockholders were
complied with except for the following: Mr. David Walsh, an officer of the
Company, failed to timely file one Form 4 with respect to the sale of Common
Stock in September 1996 and one Form 4 with respect to the acquisition of Common
Stock in November 1996; however, such sale and acquisition were subsequently
reported by the late filing of a Form 5 for 1996 in August of 1997. Ms.
Elizabeth Crawford, an officer of the Company, failed to timely file one Form 4
report with respect to a same day sale of Common Stock in late November of 1997;
however, such sale was subsequently reported the following month.
8
<PAGE>
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, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
AWARDS
ANNUAL COMPENSATION(1) -------------
------------------------ OPTIONS ALL OTHER
NAME/POSITION YEAR SALARY ($) BONUS ($) (#)(2) COMPENSATION (3)($)
- ------------------------------------------- --------- ---------- ------------ ------------- ---------------------
<S> <C> <C> <C> <C> <C>
John J.McDonnell, Jr., President and Chief 1995 $ 191,346 $ 160,403 60,000 $ 4,498
Executive Officer 1996 225,000 252,675 90,000 2,249
1997 225,000 262,528 -- 2,375
Brian J. Bates, Senior Vice President and 1995 118,308 49,067 11,250 4,615
General Manager, POS Services Division 1996 136,000 40,473 44,000 2,375
1997 151,192 59,368 -- 2,375
Luther Peters II, Senior Vice President, 1995 135,615 38,812 -- 4,566
Technical Director 1996 145,943 33,150 20,000 2,375
1997 156,707 38,971 25,000 2,375
Richard Sternitzke Senior Vice President, 1995 90,000 22,250 11,250 4,620
Chief Technical Officer 1996 112,046 20,875 44,000 2,375
1997 117,665 30,375 -- 2,375
David J. Walsh, Senior Vice President and 1995 162,404 43,500 -- 4,620
General Manager, Telecom Services Division 1996 160,000 40,300 40,000 2,375
1997 167,939 59,188 -- 2,375
</TABLE>
- ------------------------
(1) Annual bonus compensation awarded to Mr. Bates includes sales commissions
paid to Mr. Bates of $49,067, $40,473, and $59,368 in 1995, 1996, and 1997
respectively.
(2) The grant of options in 1996 to the individuals named in the Summary
Compensation Table was conditional upon the approval by the Company's
stockholders of the proposed amendment to the Company's 1994 Stock Option
Plan. The proposed amendment was approved by shareholders at the 1997 Annual
Meeting of Shareholders on April 22, 1997.
(3) Consists solely of matching contributions made during the years indicated on
behalf of the individuals named in the Summary Compensation Table pursuant
to the Company's 401(k) Plan. The aggregate amount of perquisites and other
personal benefits, securities or property received by each Named Executive
Officer was less than 10% of the total of annual salary and bonus reported
for such individual and therefore is omitted from this table.
9
<PAGE>
OPTION GRANTS. The following table summarizes option grants during 1997 to
the Named Executive Officers:
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF
PERCENT OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM (2)
GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME (#)(1) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- --------------------------------------- ----------- --------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
John J. McDonnell, Jr.................. 90,000 7.4 $ 10.00 4/16/2006 $ 566,005 $ 1,434,368
Richard Sternitzke..................... 44,000 3.6 10.00 4/16/2006 276,713 701,247
Brian J. Bates......................... 44,000 3.6 10.00 4/16/2006 276,713 701,247
Luther Peters.......................... 20,000 1.7 10.00 4/16/2006 125,779 318,748
25,000 2.1 13.625 7/7/2007 214,217 542,869
David J. Walsh......................... 40,000 3.3 10.00 4/16/2006 251,558 637,497
</TABLE>
- ------------------------
(1) All identified options, with the exception of 25,000 shares granted to
Luther Peters on 7/7/97, were approved by the Board of Directors on April
16, 1996 and were conditional upon the approval by the Company's
stockholders of the 1997 proposed amendment to the 1994 Stock Option Plan.
The amendment was approved at the 1997 Annual Meeting of Stockholders and
the approval provided that the share exercise price be determined at the
time of grant. The options are exercisable starting 12 months after the
Board approval date, with 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) 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.
10
<PAGE>
OPTION EXERCISES AND YEAR-END VALUES. The following table sets forth
information concerning the value of unexercised stock options held as of
December 31, 1997 by the Named Executive Officers.
AGGREGATE 1997 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
ACQUIRED OPTIONS AT FISCAL YEAR END THE-MONEY OPTIONS AT
ON VALUE (#)(1) FISCAL YEAR END (2)
EXERCISE REALIZED -------------------------- --------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------ ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John J. McDonnell, Jr............... -- -- 52,500 97,500 $ 400,635 $ 726,885
Richard Sternitzke.................. -- -- 13,813 38,624 102,021 283,775
Brian J. Bates...................... -- -- 44,376 38,624 586,496 283,775
Luther Peters III................... -- -- 29,500 40,000 406,617 199,375
David J. Walsh...................... 4,800 $ 52,797 10,000 32,400 72,500 243,900
</TABLE>
- ------------------------
(1) Includes options approved by the Board of Directors on April 16, 1996 which
were conditional upon the approval by the Company's stockholders of the
proposed 1997 amendment to the Company's 1994 Stock Option Plan.
(2) Calculated on the basis of the fair market value of the underlying Common
Stock as of December 31, 1997 of $17.25 per share minus the aggregate
exercise price.
11
<PAGE>
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.
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 1997, John J. McDonnell, Jr., the Company's President and Chief Executive
Officer, received salary compensation of $225,000, which represents the same
amount he received in 1996. 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
12
<PAGE>
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 1997, Mr. McDonnell received bonus
compensation of $262,528, as compared to $252,675 in 1996 and $160,403 in 1995.
For all other executives, 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. The Company's sales personnel, including Mr. Bates, 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 1997 and 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 1997 for any
of the Named Executive Officers.
13
<PAGE>
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Henry R. Nichols, a director of the Company, is the majority shareholder of
ArJay Data Corporation ("ArJay"), which was a customer of the Company until
December 1997. During its last fiscal year, ArJay made payments totalling
approximately 34% of ArJay's consolidated gross revenues for its last fiscal
year for the purchase of network services from the Company. Mr. Nichols has
executed 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.
14
<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, 1997 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 31, 1994, March 31, 1995, June 30, 1995, September 29, 1995, December
29, 1995, March 31, 1996, June 30, 1996, September 30, 1996, December 30, 1996,
March 31, 1997, June 30, 1997, September 30, 1997, and December 31, 1997.
COMPARATIVE TOTAL RETURNS
TRANSACTION NETWORK SERVICES, INC., NASDAQ MARKET INDEX, PEER GROUP
(Performance results from 4/22/94 through 12/31/97)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
4/22/94 12/31/94 12/31/95 12/31/96 12/31/97
<S> <C> <C> <C> <C> <C> <C>
Transaction Network Services,
Inc. 100 145 250 172.41 258.62
Peer Group Index 100 114.18 172.02 214.9 182.27
NASDAQ Market Index 100 101.44 131.58 163.51 200.01
</TABLE>
Source: Media General Financial Services
- ------------------------
* The peer group includes the following companies: Concord EFS, Inc. (CEFT),
ENVOY Corporation (ENVY), First Data Corporation (FDC), First USA
Paymentech, Inc. (PTI), National Data Corporation (NDC), NOVA Corporation
(NIS), PMT Services, Inc. (PMTS), SPS Transaction Services, Inc. (PAY), and
Total Systems Services, Inc. (TSS). The stockholder returns of each company
have been weighted to reflect relative stock market capitalization.
15
<PAGE>
PROPOSAL TO AUTHORIZE AN INCREASE IN THE
COMMON STOCK SUBJECT TO THE COMPANY'S
1994 STOCK OPTION PLAN
The 1994 Stock Option Plan (the "1994 Plan") currently authorizes the grant
of options to purchase a maximum of 1,800,000 shares of Common Stock, subject to
adjustment for stock splits and similar capital changes. Assuming that all such
options were granted and exercised, the shares would constitute approximately
15% of the outstanding Common Stock.
PROPOSED AMENDMENT
The Company believes that equity participation by its key employees is an
important element in its overall compensation program. In furtherance of this
goal, the Company has adopted two stock option plans, the 1991 Stock Option Plan
(the "1991 Plan") and the 1994 Plan. Except for the number of shares available
for issuance under the 1991 Stock Option Plan and the 1994 Stock Option Plan
(collectively, the "Option Plans"), the Option Plans are substantially
identical. The 1991 Plan expires on December 31, 2000 and the 1994 Plan expires
on January 17, 2004. Of the 690,000 shares subject to the 1991 Plan, as of
January 31, 1998, options for the purchase of a total of 547,086 shares had been
exercised, options for the purchase of a total of 133,614 shares at a weighted
average exercise price of $1.48 per share were outstanding and only 9,300 shares
were available for option issuances. Of the 1,800,000 shares subject to the 1994
Plan, as of January 31, 1998, options for the purchase of a total of 189,603
shares had been exercised, options for the purchase of a total of 1,397,428
shares at a weighted average exercise price of $10.96 per share were outstanding
and only 212,969 shares were available for option issuances. As of January 31,
1998, all 125 employees were participating in the Option Plans. In addition to
grants awarded upon acceptance of employment or promotion, the Company evaluates
every employee's option status on a quarterly basis. The Company has established
option target levels based on the employee's position at the Company. Each
quarter, management evaluates the vested and unvested option levels for each
employee and determines if additional grants are warranted based upon
pre-established target levels. In order to continue its policy of providing
equity participation to the Company's employees, the Board of Directors proposes
that the 1994 Plan be amended to increase the shares of Common Stock available
for grant under the 1994 Plan from 1,800,000 shares to 2,300,000 shares.
OPTION PLAN DESCRIPTION
The Option Plans provide for the grant of stock options to officers,
directors and all employees of the Company. Under the Option Plans, 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 2, 1998, the closing price of the Common Stock was $20.75.
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 either of the Option Plans are generally
16
<PAGE>
nontransferable and, with certain exceptions in the event of death or disability
of the optionee, options granted under either of the Option Plans generally
terminate thirty days after termination of an optionee's employment with the
Company or an affiliate. The Option Plans are 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 Option
Plans, 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 either of the Option Plans 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 Option
Plans were 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 an officer of a corporation who purchases and
sells the stock of the corporation which employs him or her 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 an
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 Option Plans. The following is a summary of the federal income tax
consequences relating to options granted under the Option Plans.
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 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.
17
<PAGE>
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, provided appropriate tax withholding procedures are implemented. The
Option Plans require 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 adopted the proposed amendment at a regular meeting
held on October 28, 1997. Under the terms of the Option Plan, the amendment must
be approved by the stockholders of the Company. The Board of Directors
recommends that stockholders vote FOR the adoption of the proposal.
PROPOSAL TO AUTHORIZE AN INCREASE IN THE
COMMON STOCK SUBJECT TO THE COMPANY'S
1994 EMPLOYEE STOCK PURCHASE PLAN
The 1994 Employee Stock Purchase Plan (the "Purchase Plan") currently
authorizes the grant of options to purchase a maximum of 150,000 shares of
Common Stock, subject to adjustment for stock splits and similar capital
changes. Assuming that all such options were granted and exercised, the shares
would constitute approximately 1.2% of the outstanding Common Stock.
PROPOSED AMENDMENT
The Purchase Plan promotes the Company's goal of increasing equity
participation by the Company's employees. The Company believes that
participation in the Purchase Plan by all employees fosters commitment and more
closely aligns compensation with stockholder objectives by focusing employees on
stockholder return. In order to continue its policy of providing equity
participation to the Company's employees, the Board of Directors proposes that
the Purchase Plan be amended to increase the shares of Common Stock available
for grant under the Purchase Plan from 150,000 shares to 250,000 shares.
18
<PAGE>
PURCHASE PLAN DESCRIPTION
The Purchase Plan authorizes the grant of rights to purchase a maximum of
150,000 shares of Common Stock (subject to adjustment for stock splits and
similar capital changes) to eligible employees. Each employee of the Company or
of a subsidiary of the Company having at least three months of continuous
service on the date of grant of a right is eligible to participate in the
Purchase Plan. Any employee who immediately after the grant of a right is
determined to own 5% or more of the Common Stock, however, would not be eligible
to participate. The Purchase Plan is administered by the Compensation Committee.
After an initial three-month offering period which lasted from August 15, 1994
to November 15, 1994, all rights are granted twice yearly under the Purchase
Plan, on May 16 and November 16, and will be exercisable on the succeeding
November 15 or May 15. Eligible employees may purchase shares of Common Stock
through accumulation of payroll deductions (of not less than 1% nor more than
10% of compensation, as defined in the Purchase Plan), at a purchase price which
is 85% of fair market value at the beginning or end of each six-month offering
period, whichever is lower. Of the approximately 91 eligible employees, 60
participants were enrolled in the Purchase Plan as of November 16, 1997. On
November 17, 1997, the closing price of the Common Stock for purposes of the
current six-month offering period was $15.875. The Purchase Plan has a term of
ten years. The following table shows certain information regarding the purchase
of Common Stock during the last fiscal year pursuant to the Purchase Plan:
<TABLE>
<CAPTION>
NAME ACQUIRED
- ------------------------------------------------------------------------------------ -----------
<S> <C>
John J. McDonnell, Jr............................................................... --
Brian J. Bates...................................................................... 1,473
David J. Walsh...................................................................... 1,421
Luther Peters III................................................................... --
Richard Sternitzke.................................................................. --
All current executive officers as a group........................................... 6,688
All executives, including all current officers who are not executive officers....... 24,223
</TABLE>
As of January 31, 1998, there were 82,564 shares reserved for issuance under
the Purchase Plan. The Board of Directors may at any time amend or terminate the
Purchase 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 accruing to participants 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 Purchase Plan was drafted to obtain the
benefits of the exemption from the Exchange Act provided by Rule 16b-3. Section
16(b) of the Exchange Act provides, among other things, that an officer of a
corporation who purchases and sells the stock of the corporation which employs
him or her 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 stock by an officer of a
corporation pursuant to an employee stock purchase plan which meets certain
requirements does not constitute a transaction subject to Section 16(b) of the
Exchange Act.
The Board of Directors adopted the proposed amendment at a regular meeting
held on October 28, 1997. Under its terms of the Purchase Plan, the amendment
must be approved by the stockholders of the Company. The Board of Directors
recommends that stockholders vote FOR the amendment to the Purchase Plan.
19
<PAGE>
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 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 1999 Annual
Meeting of Stockholders must be received by the Company at its principal office
in Reston, Virginia, not later than November 15, 1998, 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 16, 1998
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.
20
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1299-PS-98
