<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
September 23, 1998
----------------------
Date of Report (Date of earliest event reported)
TRANSACTION NETWORK SERVICES, INC.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-23856 54-1555332
----------- ---------- ---------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation or organization) File No.) Identification No.)
1939 Roland Clarke Place, Reston, Virginia 20191
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(Address of principal executive offices and zip code)
(703) 453-8300
--------------
(Registrant's telephone number, including area code)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
The undersigned registrant, in order to provide the financial
statements required to be included in the Current Report on Form 8-K dated
September 23, 1998 in connection with the acquisition of certain assets of AT&T
Corp.'s ("AT&T") Transaction Access Service ("TAS"), hereby amends the following
items, as set forth in the pages attached hereto.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
Reports of Independent Accountants
Transaction Access Service Statements of Net Assets as of
August 31, 1998 and November 30, 1997
Transaction Access Service Statements of Operations and Changes in Net
Assets for the nine month period ended August 31, 1998 and for the
twelve month periods ended November 30, 1997 and November 30, 1996
(unaudited)
Transaction Access Service Statements of Cash Flows for the nine month
period ended August 31, 1998 and for the twelve month periods ended
November 30, 1997 and November 30, 1996 (unaudited)
Statement of Revenue for the twelve month period ended
November 30, 1996
Transaction Access Service Notes to Financial Statements
(b) Pro Forma Financial Information.
Transaction Network Services, Inc. Pro Forma Statements of Operations
for the nine months ended September 30, 1998 (unaudited) and for
the year ended December 31, 1997 (unaudited)
Explanatory Notes to Pro Forma Financial Statements
(c) Exhibits
23.1 Consent of Independent Public Accountants
2
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
FINANCIAL STATEMENTS
As of August 31, 1998 and November 30, 1997 and
for the nine month period ended August 31, 1998
and for the twelve month periods ended
November 30, 1997 and November 30, 1996 (unaudited)
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
<TABLE>
<CAPTION>
Page(s)
---------
<S> <C>
Reports of Independent Accountants 2
Financial Statements:
Statements of Net Assets as of August 31, 1998 and
November 30, 1997 4
Statements of Operations and Changes in Net Assets for the nine month period
ended August 31, 1998, and for the twelve month periods ended November 30,
1997 and November 30, 1996 (unaudited) 5
Statements of Cash Flows for the nine month period ended August 31, 1998, and
for the twelve month periods ended
November 30, 1997 and November 30, 1996 (unaudited) 6
Statement of Revenue for the twelve month period ended
November 30, 1996 7
Notes to Financial Statements 8
</TABLE>
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management of Transaction Access Service:
We have audited the accompanying statements of net assets of Transaction Access
Service (the "Company") a fully integrated business of AT&T Corp. ("AT&T"), as
of August 31, 1998 and November 30, 1997 and the related statements of
operations and changes in net assets and cash flows for the nine month period
ended August 31, 1998, and for the twelve month period ended November 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Transaction Access Service at
August 31, 1998 and November 30, 1997 and the results of its operations and its
cash flows for the nine month period ended August 31, 1998, and the twelve month
period ended November 30, 1997 in conformity with generally accepted accounting
principles.
The Company is a fully integrated business of AT&T; consequently, as indicated
in Note 2, these financial statements have been derived from the consolidated
financial statements and accounting records of AT&T, and reflect significant
assumptions and allocations. Moreover, as indicated in Note 1, the Company
relies on AT&T and its other businesses for provisioning of telecommunications
services, administrative, management and other services. The financial position,
results of operations and cash flows of the Company could differ from those that
would have resulted had the Company operated autonomously or as an entity
independent from AT&T.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PricewaterhouseCoopers LLP
New York, New York
November 23, 1998
2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management of Transaction Access Service:
We have audited the accompanying schedule of revenue of Transaction Access
Service (the "Company"), a fully integrated business of AT&T Corp. ("AT&T"), for
the twelve month period ended November 30, 1996. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the schedule of revenue is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the schedule of revenue. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall schedule presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the schedule of revenue referred to above presents fairly, in
all material respects, the revenue of Transaction Access Service for the twelve
month period ended November 30, 1996, in conformity with generally accepted
accounting principles.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PricewaterhouseCoopers LLP
New York, New York
November 23, 1998
3
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
Statements of Net Assets
as of August 31, 1998 and November 30, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
August 31, November 30,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable (net of allowances
of $589, $595, respectively) ....................... $11,463 $ 7,008
Prepaid expenses .................................... 151 69
Non-current assets:
Property, plant and equipment, net .................. 15,892 18,578
------- -------
Total assets ......................................... 27,506 25,655
LIABILITIES
Current liabilities:
Accrued expenses .................................... 13 3
Payroll and benefit liabilities ..................... 763 869
Property tax liability .............................. 131 153
------- -------
Total liabilities .................................... 907 1,025
------- -------
Net assets ........................................... $26,599 $24,630
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financials statements.
4
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
Statements of Operations and Changes in Net Assets
for the nine month period ended August 31, 1998, and for the twelve month
periods ended November 30, 1997 and November 30, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
August 31, November 30, November 30,
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Revenues ................................ $ 43,795 $ 48,190 $ 37,489
Cost of Services:
Network operations ..................... 32,978 36,640 31,700
Network maintenance .................... 2,933 3,538 2,762
-------- -------- --------
$ 35,911 $ 40,178 $ 34,462
Selling, General and Administrative:
Depreciation and amortization .......... $ 2,979 $ 1,892 $ 1,130
Provision for uncollectibles ........... -- 26 383
Product management ..................... 288 418 405
Sales and sales support ................ 3,485 3,566 3,843
Research and development ............... 3,036 4,036 4,755
Corporate overhead ..................... 2,069 2,436 2,251
-------- -------- --------
$ 11,857 $ 12,374 $ 12,767
Total operating expenses ................ 47,768 52,552 47,229
-------- -------- --------
Operating loss .......................... $ (3,973) $ (4,362) $ (9,740)
Interest expense ........................ 1,203 1,514 1,064
-------- -------- --------
Net loss ................................ $ (5,176) $ (5,876) $(10,804)
Net advances from AT&T .................. 7,145 10,758 19,186
Net assets, beginning of year ........... 24,630 19,748 11,366
-------- -------- --------
Net assets, end of year ................. $ 26,599 $ 24,630 $ 19,748
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financials statements.
5
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
Statements of Cash Flows
for the nine month period ended August 31, 1998, and for the twelve month
periods ended November 30, 1997 and November 30, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
August 31, November 30, November 30,
1998 1997 1996
----------- ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Cash flows from operating activities:
Net loss ................................... $ (5,176) $ (5,876) $(10,804)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............. 2,979 1,892 1,130
Provision for uncollectibles .............. -- 26 383
Changes in operating assets and liabilities:
(Increase)/decrease in accounts receivable (4,454) 123 (3,404)
(Increase) in prepaid expenses ........... (82) (37) (32)
Increase/(decrease) in accrued liabilities .. (96) (26) 483
Increase (decrease) in property tax liability (22) 41 49
-------- -------- --------
Net cash used in operating activities ... $ (6,851) $ (3,857) $(12,195)
INVESTING ACTIVITIES
Additions to property, plant and equipment .. (294) (6,901) (6,991)
-------- -------- --------
Net cash used in investing activities $ (294) $ (6,901) $ (6,991)
-------- -------- --------
FINANCING ACTIVITIES
Advances from AT&T Corp. .................... 7,145 10,758 19,186
-------- -------- --------
Net cash provided by financing
activities ............................. $ 7,145 $ 10,758 $ 19,186
-------- -------- --------
Net change in cash ...................... $ -- $ -- $ --
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financials statements.
6
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
Schedule of Revenue
for the twelve month period ended November 30, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
November 30,
1996
------------
<S> <C>
Revenues $ 37,489
</TABLE>
The accompanying notes are an integral part of these financials statements.
7
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
Notes To The Financial Statements
(dollars in thousands)
1. Organization and Description of Business:
Transaction Access Service ("TAS" or the "Company") is a fully
integrated business of AT&T Corp. ("AT&T").
As an integrated business of AT&T, the Company relies on AT&T and other
AT&T affiliates to provide administration, management and other
services including, but not limited to, management information systems,
telecommunication services, accounting and financial reporting,
treasury, cash management, human resources, employee benefit
administration, payroll, legal, tax planning and compliance and other
support. The Company receives cost allocations from AT&T and AT&T
affiliates for these services (see Note 2). However, these costs may
not be indicative of costs that would have been incurred had the
Company operated autonomously or as an entity independent of AT&T.
The Company is a data telecommunications services company that provides
flexible and reliable solutions for short transaction applications.
Typically the nature of the services provided on this network might be
retail point of sale ("POS"), health care, electronic benefits and
other short transaction applications. The targeted markets for TAS are
those customers with applications requiring a cost efficient method of
delivering high call volume transactions in a highly competitive
market. Depending upon the day and the month, the volume of some
applications will increase significantly. Applications such as retail
POS have seasonal variations in their call volumes.
TAS uses AT&T's 800 service which offers nationwide toll-free access.
Through the use of a special integrated access system, TAS provides
fast terminal response. Transactions from the AT&T 800 network are
terminated at TAS nodes located at various AT&T central offices across
the country. The transactions are then transported via AT&T's X.25
packet network and delivered to the customer's host(s) over a common
X.25 access line. TAS provides customers the ability and flexibility to
use a single switched network to support access to multiple hosts and
multiple applications. TAS supports message transactions that share the
network and host connection. TAS simplifies host operations by
eliminating the need for multiple host lines and multiple modems.
8
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
Notes To The Financial Statements (Continued)
(dollars in thousands)
2. Basis of Presentation and Significant Accounting Policies:
Basis of Presentation
As an integrated business of AT&T, the Company does not prepare
separate financial statements in accordance with Generally Accepted
Accounting Principles ("GAAP") in the normal course of operations.
Accordingly, the accompanying financial statements have been derived
by extracting the assets, liabilities, revenues and expenses of the
Company from the consolidated assets, liabilities, revenue and
expenses from the accounting records of AT&T. The accompanying
financial statements reflects assets, liabilities, revenue and
expenses directly attributable to the Company as well as allocations
deemed reasonable by management to present the financial position,
results of operations and cash flows of the Company on a stand-alone
basis. Although management is unable to estimate the actual costs that
would have been incurred if the services performed by AT&T and its
affiliates had been purchased from independent third parties, the
allocation methodologies have been described within the respective
footnotes, where appropriate, and management considers the allocations
to be reasonable. However, the financial position, results of
operations and cash flows of the Company may differ from those that
may have been achieved had the Company operated autonomously or as an
entity independent of AT&T.
Revenues of $37,489 for the twelve month period ended November 30,
1996 and accounts receivable of $7,825 as of November 30, 1996 were
directly attributable to the TAS line of business and seperately
identifiable in AT&T's accounting records. However, for all periods
prior to January 1, 1997, TAS was organized and marketed by AT&T as a
part of a larger service offering and as such, information regarding
direct costs associated with the TAS business is not available in the
AT&T accounting system.
Given the fact that the majority of the TAS customers were signed on
in late 1996, and the financial effect of those customers was not
evident until the twelve months ended November 30, 1997, management
believes that the omission of the audited financial statements for
1996 is not material to the reader of the financial statements or to a
potential investor.
All operating expense amounts presented for the twelve month period
ended November 30, 1996 are unaudited and reflect management's best
estimate of expenses attributable to the TAS line of business based on
trended information available from 1997 and 1998. Actual results may
have differed from the amounts presented.
Transaction Service Revenues
The Company provides card-swiping transactions to 39 customers under
contract term agreements, most of which include minimum usage
commitments, continuing out to year
9
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
Notes To The Financial Statements (Continued)
(dollars in thousands)
2003. Revenues are recognized when they become due under the terms of
the agreements. Revenue under the TAS agreements is recognized as
services are performed.
2. Basis of Presentation and Significant Accounting Policies (Continued):
Equipment
Equipment is stated at historical cost. Depreciation on network
equipment has been calculated using a straight-line method with
estimated useful lives ranging from 3 to 10 years.
Upon sale or other disposition of property, plant and equipment, the
cost and related accumulated depreciation are removed from the
Company's accounts and any gain or loss is recorded in the results of
operations.
Software development in support of the TAS service was capitalized
from January 1995 to December 1997, became generally available in and
started amortization in January 1998. Amortization was calculated
using the straight-line method over an estimated 3-year useful life.
Amortization expense for the nine months ended August 31, 1998 was
approximately $519.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, a loss is recognized
for the difference between the estimated fair value and carrying value
of the asset. No such losses have been recognized for any period
presented.
Accounts Receivable and Bad Debts
Accounts receivable are directly related to the Company and include
amounts earned under the TAS service agreements, which generally are
billable on a monthly basis. Bad debt reserves have been determined
based on the Company's specific experience and historical trends.
Accrued Expenses
AT&T does not maintain separate identifiable records for the accounts
payable and accrued expenses, for the Company. Accordingly, these
financial statements do not specifically reflect such liabilities, if
any, however certain direct liabilities specifically identifiable with
the company's operations have been reflected in the Statement of Net
Assets under the caption Accrued Expenses.
10
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
Notes To The Financial Statements (Continued)
(dollars in thousands)
2. Basis of Presentation and Significant Accounting Policies (Continued):
Cost of Services
Cost of services represents costs allocated from AT&T which relate to
the Company's utilization of AT&T Business Services products and
services such as Accunet Packet Switch Services, Private Line and
Megacom 800 Services. These costs represent the approximate cost that
would be incurred by AT&T to service the ultimate customer of the TAS
business.
Operating Expenses
Operating expenses represent an allocation of AT&T's operating expenses
and include payroll and other expenses relating to marketing and sales,
research and development, network operations as well as common support
costs, such as treasury, cash management, accounting, financial
management, legal, public relations, information systems, human
resources, employee benefits, taxes and support services. Also,
included are charges for office space which the Company shares with
AT&T. Payroll costs have been allocated to the Company based on the
ratio that the average number of employees of the Company bears to the
average total employees of a larger business unit within which TAS
resides. Corporate overhead has been allocated to the Company based on
the ratio that the total operating expenses of TAS (before allocated
overhead) bears to the total operating expenses of the AT&T Business
Services within which TAS resides. In the opinion of management, the
methods used to allocate the costs and the resulting costs allocated to
the Company are reasonable.
Income taxes
The Company's results are included in Federal and State tax returns of
AT&T and its affiliates. The Company has provided for income taxes
utilizing a statutory rate as if it were a separate taxpayer utilizing
the federal and state statutory tax rates.
Cash Flows
The Company does not maintain separate cash accounts and all cash
receipts and disbursements are made through AT&T's cash management
system. For purposes of the statement of cash flows, all transactions
between the Company and AT&T have been accounted for as having been
settled in cash at the time the transaction was recorded by the
Company.
11
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
Notes To The Financial Statements (Continued)
(dollars in thousands)
Use of Estimates
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. The most
significant assumptions and estimates relate to the allocation of
certain operating and overhead expenses, the allocation of depreciation
expense and the allowance for bad debts. Actual results could differ
from those estimates.
3. Equipment:
Equipment consists primarily of network and other access equipment. The
historical cost basis of this equipment was $24,408, $24,115 and the
accumulated depreciation was $8,516 and $5,537 as of August 31, 1998
and November 30, 1997, respectively. Depreciation expense was $2,979
and $1,892 for the nine months ended August 31, 1998 and for the twelve
months ended November 30, 1997, respectively.
4. Net Assets:
Because the Company is a fully integrated business, AT&T's accounting
records do not distinguish its investment in the Company between debt
and permanent capital. In addition, AT&T, in the normal course of
operations, does not allocate any portion of its consolidated third
party debt and directly related interest cost to the Company and no
portion of AT&T's debt is directly related to the operations of the
Company.
The financing costs included in these financial statements have been
calculated by applying a blended interest rate based on interest rates
applicable to companies in this industry to the average advances
received from AT&T in each period.
12
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
Notes To The Financial Statements (Continued)
(dollars in thousands)
The average intercompany balance and related weighted average interest
rates were as follows for each of the periods presented:
<TABLE>
<CAPTION>
Average
Average Assigned
Intercompany Interest
Balance Rate
------------------ ------------------
<S> <C> <C>
Nine months ended August 31, 1998 25,615 6.27%
Twelve months ended November 30, 1997 22,189 6.83%
</TABLE>
Interest cost reflected in these financial statements was approximately
$1,203 and $1,514 for the nine months ended August 31, 1998 and the
twelve month period ended November 30, 1997, respectively.
The intercompany balance has been classified as net assets in these
financial statements as there is no debt instrument and no defined
repayment period.
5. Income Taxes:
The Company has calculated the tax provision utilizing a statutory tax
rate as if it were a stand-alone company.
The Company has incurred operating losses and currently pays no income
taxes and, accordingly, no provision or benefit for income taxes has
been recorded in the financial statements.
The income tax benefit at the United States federal statutory rate and
blended state tax rate on the Company's operating loss, for all periods
presented, has been eliminated by an increase in the valuation
allowance for deferred tax assets and operating losses not recognized
At August 31, 1998, the Company had net operating loss carryforwards
available for income tax purposes of approximately $11,560 which begin
to expire in 2017.
13
<PAGE>
TRANSACTION ACCESS SERVICE
(a fully integrated business of AT&T Corp.)
Notes To The Financial Statements (Continued)
(dollars in thousands)
5. Income Taxes (Continued):
Deferred tax assets (liabilities) at August 31, 1998 and November 30,
1997 are as follows:
<TABLE>
<CAPTION>
August 31, November 30,
1998 1997
---------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts 236 256
Net operating loss carryforwards 4,624 2,354
--------- -------
Total deferred tax assets 4,860 2,610
Deferred tax liabilities:
Equipment basis differences (128) (850)
--------- --------
Subtotal 4,732 1,760
Less: Valuation allowance (4,732) (1,760)
--------- --------
Net deferred taxes -- --
--------- --------
--------- --------
</TABLE>
6. Employee Benefit Plans:
The Company participates in various employee benefit plans, including
pension, savings, post-retirement and post-employment plans, which are
sponsored by AT&T. Detailed information concerning costs or the funded
status of the plan is not available for the Company but is included as
part of the expenses allocated by AT&T as described in Note 2. The
specific charges allocated to the Company and the Company's obligations
under these plans are not separately determinable.
7. Subsequent Events:
On September 10, 1998, AT&T sold the Company to Transaction Network
Services, Inc., for $64,325. The buyer purchased all of the TAS
customer contracts, certain network assets and a covenant not to
compete. In addition, TNS entered into a telecommunications service
agreement with AT&T. TNS has confirmed that they have committed the
appropriate funding to ensure the continuity of the TAS operations
effectively through to, at a minimum, the year 2000.
14
<PAGE>
FORWARD LOOKING STATEMENTS
Certain information included in this document may be deemed to be
"forward looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. All statements, other than
statements of historical facts, that address activities, events or developments
that the Company intends, expects, projects, believes or anticipates will or may
occur in the future are forward looking statements. Such statements are
characterized by terminology such as "believe," "anticipate," "should,"
"intend," "plan," "will," "expects," "estimates," "projects," "positioned,"
"strategy," and similar expressions. These statements are based on assumptions
and assessments made by the Company's management in light of its experience and
its perception of historical trends, current conditions, expected future
developments and other factors it believes to be appropriate. These forward
looking statements are subject to a number of risks and uncertainties, including
but not limited to continuation of the Company's relationships with its
customers and vendors including customers acquired in the TAS acquisition, the
Company's ability to integrate acquired businesses and purchased assets into its
operations and realize planned synergies, the extent to which acquired
businesses and assets are able to meet the Company's expectations and operate
profitably, technological and customer related issues associated with the
migration of acquired businesses to the Company's network, the impact of future
revisions to the cost of the Company's network services under the
Telecommunications Act of 1996, the impact of the agreement with AT&T for
providing transitional communication and other transitional services during the
transition of the TAS customers to the Company's network under the Transition
Services Agreement, discussed below, competition, technological change, the
ability to develop new services, dependence on proprietary rights, dependence on
key employees, changes in government regulation, the impact of the Year 2000
issue, seasonality and fluctuations in quarterly results. In addition, the
Company is subject to risks and uncertainties that affect the technology sector
generally including, but not limited to, economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices. Any such forward looking statements are not guarantees of
future performances and actual results, developments and business decisions may
differ from those envisaged by such forward looking statements. The Company
disclaims any duty to update any forward looking statements, all of which are
expressly qualified by the foregoing.
PRO FORMA FINANCIAL STATEMENTS
AT&T Corp.'s Transaction Access Service
On September 10, 1998, the Company acquired from AT&T Corp. ("AT&T")
the right to provide services under certain customer service contracts
relating to AT&T's Transaction Access Service ("TAS") as well as certain
equipment used by AT&T in furnishing this service under an Asset Purchase
Agreement. The consideration paid for these assets after arm's-length
negotiations was approximately $64.3 million in cash. The source of the funds
used to acquire these assets was a $75 million revolving credit facility (the
"Revolver") obtained in connection with this transaction. The Revolver
provides for unsecured LIBOR or base rate borrowings at the Company's option.
A margin is added to the applicable LIBOR or base rate based upon the
Company's ratio of total debt to annualized operating cash flow, as defined
in the Revolver. The interest rate at September 30, 1998 was 6.34% (LIBOR
plus 75 basis points).
In connection with this transaction, the Company also entered into a
communication services agreement with AT&T (the "Communication Services
Agreement") under which the Company agreed to purchase a minimum of $10 million
in communications services per year from AT&T during the two-year period
beginning February 1, 1999. The transaction also included a limited
non-competition agreement and a customer referral arrangement with AT&T. Under
the referral arrangement the Company has agreed to compensate AT&T based upon
future revenues generated by referrals of sales prospects to the Company by
AT&T. The Company and AT&T also entered into a settlement agreement whereby the
Company agreed to dismiss with prejudice its complaint filed against AT&T with
the Federal Communications Commission.
15
<PAGE>
Under the Asset Purchase Agreement, the Company entered into an
arrangement where the Company purchases transitional communication services
and other transitional services (including network operation, engineering
support and billing services) from AT&T (the "Transition Services
Agreement"), until the TAS customers are migrated from the TAS network to the
Company's network. The pricing included in the Transition Services Agreement
will determine the Company's cost per transaction until the associated TAS
transactions are migrated from the TAS network and onto the Company's
network. These transitional communication services rates and the rates for
other transitional services increase at periods specified in the Asset
Purchase Agreement. The communication rates for the transitional
communication services included in the Transition Services Agreement are
greater than the rates the Company separately negotiated with AT&T under the
Communication Services Agreement and the rates incurred when utilizing the
Company's own network. The Company believes that it will experience a cost of
network services above historical levels while these transactions remain on
the TAS network and the Company continues to incur communication costs at
these transitional rates. The Company expects to transition all of the TAS
customers to its network no later than the second quarter of 1999. Once a TAS
customer is transitioned off of the TAS network and onto the Company's
network, the cost per transaction for this TAS contract will be determined by
the communication rates included in the Communication Services Agreement with
AT&T, the Company's service agreements with other vendors, and the costs
associated with the Company's own network, depending upon which network is
utilized to carry the associated transactions. The ultimate impact of the
transitional rates for communications and other services is dependent upon
many factors including the Company's ability to successfully transition the
TAS customers from the TAS network to its network facilities, capacity on the
Company's network, customer cooperation, seasonal issues primarily associated
with the holiday season including a customer's potential resistance to
migrating traffic during this period, successful testing of certain
transaction protocols not previously carried by the Company's network, and
the ability of AT&T to connect the Company's network equipment to AT&T's
network on a timely basis.
The TAS acquisition is being accounted for as a purchase. Amounts
allocated to intangible assets (including customer contracts, a non-compete
agreement, and goodwill) in the purchase accounting are being amortized on a
straight-line basis over periods ranging from 3 to 20 years. The purchase price
allocations have been completed on a preliminary basis and are subject to
adjustment, should new or additional facts about the business become known.
The following unaudited pro forma financial statements give effect to
the TAS acquisition for consideration of $64.3 million in cash. The unaudited
pro forma financial statements do not purport to represent what the Company's
results of operations or financial position actually would have been had the
acquisition occurred on the dates specified, or to project the Company's results
of operations or financial position for any future period or date. The pro forma
adjustments are based upon available information and do not reflect the costs
which the Company believes will be incurred to service the acquired business. In
connection with the transaction, the Company did not acquire AT&T employees or
facilities. Accordingly, the acquired business will be serviced by the Company's
existing and future facilities and employees. The accompanying pro forma
adjustments do not include adjustments related to additional facilities, network
expansion or additional employees and related costs which may be required to
service the acquired business. The pro forma adjustments also do not include
material transitional costs that the Company will incur while the TAS customers
remain on the TAS network. These costs include a communication rate under the
Transition Services Agreement which is greater than the rate the Company
separately negotiated with AT&T under the Communication Services Agreement and
the rate incurred when utilizing the Company's own network.
The pro forma statements of operations assume that the acquisition was
made as of January 1, 1997 for the statement of operations for the year ended
December 31, 1997 and as of January 1, 1998 for the statement of operations for
the nine months ended September 30, 1998. The accompanying pro forma information
combines the TAS operating results for the twelve month ended November 30, 1997
with the Company's operating results for calendar 1997 and, the TAS operating
results for the nine month period ended August 31, 1998 with the Company's
operating results for the nine month period ended September 30, 1998. The impact
of the TAS acquisition was reflected in the Company's Form 10-Q for the period
ended September 30, 1998 previously filed, and as a result, a pro forma balance
sheet is not include herein.
16
<PAGE>
In the opinion of management the adjustments that have been made are
necessary to present fairly the unaudited pro forma financial statements.
17
<PAGE>
TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands)
<TABLE>
<CAPTION>
TNS TAS Adjustments Pro Forma
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $64,092 $43,795 ($3,536) (A) $104,351
Cost of network services 37,049 35,911 (2,904) (A) 61,914
(8,142) (B)
------------------------------ ----------------
Gross profit 27,043 7,884 42,437
------------------------------ ----------------
Other operating expenses:
Engineering & development 3,538 3,036 (116) (A) 3,422
(3,036) (C)
Selling, general & administrative 8,337 5,842 (5,842) (C) 8,337
Depreciation & amortization 6,915 2,979 3,402 (D) 10,317
(2,979) (E)
------------------------------ ----------------
Total other operating expenses 18,790 11,857 22,076
------------------------------ ----------------
Income (loss) from operations 8,253 (3,973) 20,361
Interest income (expense) 910 (1,203) (1,363) (F) (1,656)
------------------------------ ----------------
Income before provision for income taxes 9,163 (5,176) 18,705
Provision for income taxes 3,597 3,698 (G) 7,295
Other 279 279
------------------------------ ----------------
Net income (loss) $5,845 ($5,176) $11,689
------------------------------ ----------------
------------------------------ ----------------
Diluted earnings per common share $0.44 $0.88
Basic earnings per common share $0.46 $0.93
Shares used in per share computations:
Diluted earnings per common share 13,253 13,253
Basic earnings per common share 12,576 12,576
</TABLE>
EXPLANATORY NOTES TO PRO FORMA FINANCIAL STATEMENTS
--------------------------------------------------------------
(A) Represents the elimination of results for the period from
September 10, 1998 to September 30, 1998 recorded by TNS after
the September 10, 1998 acquisition date
(B) Represents the adjustment required to adjust the TAS
communication costs to the rate TNS contracted with AT&T under
the Communication Services Agreement
(C) Represents the elimination of AT&T costs allocated to TAS
(D) Represents amortization of intangible and other assets
acquired
The purchase price and estimated useful lives (in years) were
allocated on a preliminary basis as follows:
<TABLE>
<CAPTION>
Description Amount Useful Life
----------- ------- -----------
<S> <C> <C>
Covenant not to Compete $ 2,500 3
Customer Contracts 10,500 10
Equipment 580 5
Goodwill 50,745 20
---------
Total $ 64,325
---------
---------
</TABLE>
(E) Represents the elimination of depreciation expense associated
with the TAS network
(F) Represents interest expense associated with borrowings to
finance the acquisition, $64.325 million net of $5.0
million repaid, at the interest rate at the borrowing date at
acquisition of 6.34% and the elimination of interest expense
allocated by AT&T to TAS
(G) Represents an adjustment to reflect the appropriate effective
tax rate
18
<PAGE>
TRANSACTION NETWORK SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
TNS TAS Adjustments Pro Forma
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $63,344 $48,190 $111,534
Cost of network services 35,322 40,178 (9,580) (A) 65,920
---------------------------- -----------------
Gross profit 28,022 8,012 45,614
---------------------------- -----------------
Other operating expenses:
Engineering & development 3,431 4,036 (4,036) (B) 3,431
Selling, general & administrative 7,941 6,446 (6,446) (B) 7,941
Depreciation & amortization 6,363 1,892 4,537 (C) 10,900
(1,892) (D)
---------------------------- -----------------
Total other operating expenses 17,735 12,374 22,272
---------------------------- -----------------
Income (loss) from operations 10,287 (4,362) 23,342
Interest income (expense) 1,939 (1,514) (2,247) (E) (1,822)
---------------------------- -----------------
Income before provision for income taxes 12,226 (5,876) 21,520
Provision for income taxes 4,840 3,682 (F) 8,522
---------------------------- -----------------
Net income (loss) $7,386 ($5,876) $12,998
---------------------------- -----------------
---------------------------- -----------------
Diluted earnings per common share $0.59 $1.03
Basic earnings per common share $0.60 $1.06
Shares used in per share computations:
Diluted earnings per common share 12,619 12,619
Basic earnings per common share 12,255 12,255
</TABLE>
EXPLANATORY NOTES TO PRO FORMA FINANCIAL STATEMENTS
-------------------------------------------------------------------
(A) Represents the adjustment required to adjust the TAS communication
costs to the rate TNS contracted with AT&T under the Communication
Services Agreement
(B) Represents the elimination of AT&T costs allocated to TAS
(C) Represents amortization of intangible and other assets acquired
The purchase price and estimated useful lives (in years) were
allocated on a preliminary basis as follows:
<TABLE>
<CAPTION>
Description Amount Useful Life
----------- ------ -----------
<S> <C> <C>
Covenant not to Compete $ 2,500 3
Customer Contracts 10,500 10
Equipment 580 5
Goodwill 50,745 20
---------
Total $ 64,325
---------
---------
</TABLE>
(D) Represents the elimination of depreciation expense associated with
the TAS network
(E) Represents interest expense associated with
borrowings to finance the acquisition, $64.325 million net of $5.0
million repaid, at the interest rate at the borrowing date at
acquisition of 6.34% and the elimination of interest expense
allocated by AT&T to TAS
(F) Represents an adjustment to reflect the appropriate effective tax
rate
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRANSACTION NETWORK SERVICES, INC.
Dated: November 23, 1998 By: /s/ Thaddeus G. Weed
-------------------------
Thaddeus G. Weed
Chief Financial Officer and Treasurer
20
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference of our reports dated November
19, 1998 on our audits of the financial statements of Transaction Access
Service (a fully integrated business unit of AT&T Corp.), as of August 31,
1998 and November 30, 1997 and for the nine month period ended August 31,
1998 and the twelve month period ended November 30, 1997 and on our audit of
the schedule of revenue of Transaction Access Service for the twelve month
period ended November 30, 1996, in the registration statements on Form S-8
(registration Nos. 33-85432, 333-27159, 333-67161 and 333-67163) and Form S-3
(registration No. 333-52221) of Transaction Network Services, Inc., which
reports are included in Transaction Network Services, Inc.'s Current Report on
Form 8-K A#1, dated November 23, 1998.
/s/ PricewaterhouseCoopers LLP
- --------------------------------------
PricewaterhouseCoopers LLP
New York, New York
November 23, 1998
7
