<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
July 1, 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
-------------------------------------------------------------
(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 July
1, 1998 in connection with the acquisition of certain assets and the assumption
of certain liabilities of OmniLink Communications Corporation, 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.
Report of Independent Public Accountants
OmniLink Communications Corporation balance sheet as of December 31,
1997
OmniLink Communications Corporation statement of operations for the
year ended December 31, 1997
OmniLink Communications Corporation statement of stockholders' deficit
for the year ended December 31, 1997
OmniLink Communications Corporation statement of cash flows for the
year ended December 31, 1997
OmniLink Communications Corporation notes to financial statements
OmniLink Communications Corporation comparative balance sheets as of
June 30, 1998 and 1997
OmniLink Communications Corporation comparative statements of
operations for the six months ended June 30, 1998 and 1997
OmniLink Communications Corporation comparative statements of cash
flows for the six months ended June 30, 1998 and 1997
OmniLink Communications Corporation notes to financial statements
(b) Pro Forma Financial Information.
Transaction Network Services, Inc. pro forma balance sheet as of June
30, 1998 (unaudited) Transaction Network Services, Inc. pro forma
statement of operations for the year ended December 31, 1997 and six
months ended June 30, 1998 (unaudited)
Explanatory notes to pro forma financial statements
(c) Exhibits
23.1 Consent of Independent Public Accountants
1
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of
OmniLink Communications Corporation:
We have audited the accompanying balance sheet of OmniLink Communications
Corporation (the Company) as of December 31, 1997, and the related statements of
operations, stockholders' deficit and cash flows for the year ended December 31,
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 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 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 audit provides 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 OmniLink Communications
Corporation as of December 31, 1997, and the results of its operations and its
cash flows for the year ended December 31, 1997 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred substantial
losses since inception. The future success of the Company is dependent upon the
immediate infusion of additional capital, sales in the marketplace and retention
of key management personnel. These factors raise substantial doubt about the
ability of the Company to continue as a going concern. Management's plans in
regards to those matters are described in Notes 1 and 11. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Detroit, Michigan,
August 4, 1998.
<PAGE>
OMNILINK COMMUNICATIONS CORPORATION
BALANCE SHEET AS OF DECEMBER 31, 1997
ASSETS
--------
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and marketable securities ........................................................................... $ 99,046
Accounts receivable, net ................................................................................. 110,816
Inventory, net ........................................................................................... 1,090,030
Prepaid expenses and other ............................................................................... 51,246
-----------
Total current assets ....................................................................... 1,351,138
-----------
PROPERTY AND EQUIPMENT, at cost:
Computer equipment ....................................................................................... 116,068
Furniture and fixtures ................................................................................... 18,439
Machinery and equipment .................................................................................. 80,918
Leasehold improvements ................................................................................... 20,672
-----------
Total ........................................................................................... 236,097
-----------
Less- Accumulated depreciation and amortization .......................................................... 124,156
-----------
Net property and equipment ................................................................. 111,941
-----------
$ 1,463,079
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------
CURRENT LIABILITIES:
Accounts payable ......................................................................................... $ 363,601
Customer deposits ........................................................................................ 74,532
Accrued expenses ......................................................................................... 315,221
Notes payable ............................................................................................ 1,220,785
-----------
Total current liabilities .................................................................. 1,974,139
-----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' DEFICIT:
Series A preferred stock, $12.65 par value, 750,000 shares
authorized, 247,609 issued and outstanding .............................................................. 3,132,254
Common stock, stated value $.01, 1,500,000 shares authorized,
148,117 shares issued and outstanding ................................................................... 1,481
Additional paid-in capital ................................................................................ 67,255
Stock warrants ............................................................................................ 21,750
Retained deficit .......................................................................................... (3,733,800)
-----------
Total stockholders' deficit ................................................................. (511,060)
-----------
$ 1,463,079
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
OMNILINK COMMUNICATIONS CORPORATION
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
SALES:
Product sales ............................................................................................ $ 713,759
Service sales ............................................................................................ 148,521
-----------
862,280
COSTS OF GOODS SOLD ........................................................................................ 443,145
-----------
GROSS PROFIT ............................................................................................... 419,135
-----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ............................................................... 2,119,400
RESEARCH AND DEVELOPMENT EXPENSES .......................................................................... 1,009,185
-----------
NET LOSS ................................................................................................... $(2,709,450)
-----------
-----------
BASIC LOSS PER SHARE (See Note 2) .......................................................................... $ 18.48
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
OMNILINK COMMUNICATIONS CORPORATION
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Series A Convertible
Stock Warrants Preferred Stock Common Stock
--------------------- ------------------------ --------------------
Shares Amount Shares Amount Shares Amount
-------- -------- -------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996 ...................... $ - $ - $148,222 $1,875,008 $145,160 $1,452
Stock issued during conversion (See Note 3) .... 48,417 36,750 79,625 1,007,256 - -
Exercise of options for common stock ........... - - - - 2,957 29
Exercise of warrants ........................... (19,762) (15,000) 19,762 249,990 - -
Net loss for the year ended December 31, 1997 .. - - - - - -
-------- -------- -------- ---------- -------- ------
BALANCE - DECEMBER 31, 1997 ..................... $ 28,655 $ 21,750 $247,609 $3,132,254 $148,117 $1,481
-------- -------- -------- ---------- -------- ------
-------- -------- -------- ---------- -------- ------
<CAPTION>
Additional
Paid-in Retained
Capital Deficit Total
---------- ----------- --------
<S> <C> <C> <C>
BALANCE - DECEMBER 31, 1996 ......................... $64,327 $(1,024,350) $ 916,437
Stock issued during conversion (See Note 3) ....... - - 1,044,006
Exercise of options for common stock .............. 2,928 - 2,957
Exercise of warrants .............................. - - 234,990
Net loss for the year ended December 31, 1997 ..... - (2,709,450) (2,709,450)
------- ----------- -----------
BALANCE - DECEMBER 31, 1997 ......................... $67,255 $(3,733,800) $( 511,060)
------- ----------- -----------
------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
OMNILINK COMMUNICATIONS CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................................................ $(2,709,450)
Adjustments to reconcile net loss to net cash
Used in operating activities-
Depreciation ........................................................................................ 72,966
Amortization of bond discount ....................................................................... (10,875)
Loss on disposal of property and equipment .......................................................... 500
Increase (decrease) in cash resulting from changes in-
Accounts receivable ............................................................................... (66,761)
Inventories ....................................................................................... (432,244)
Prepaid expenses and other ........................................................................ (26,433)
Accounts payable .................................................................................. 204,651
Customer deposits ................................................................................. 10,972
Accrued expenses .................................................................................. 293,134
-----------
Net cash used in operating activities ..................................................... (2,663,540)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property ......................................................................... 500
Purchases of property and equipment ..................................................................... (92,952)
-----------
Net cash used in investing activities ........................................................... (92,452)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable ................................................................. 2,106,660
Proceeds from issuance of common stock .................................................................. 274,705
Non-cash expense to induce conversion of debt ........................................................... 96,145
-----------
Net cash provided by financing activities ................................................. 2,477,510
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................................................. (278,482)
CASH AND CASH EQUIVALENTS - beginning of year ............................................................. 377,528
-----------
CASH AND CASH EQUIVALENTS - end of year ................................................................... $ 99,046
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
(1) DESCRIPTION OF BUSINESS AND RISK FACTORS
OmniLink Communications Corporation (the Company), was incorporated
in May of 1996. It is primarily engaged in the design, marketing
and sale of integrated remote access products for use with
Integrated Services Digital Network (ISDN) technology. ISDN
technology consists of telephone lines designed for high-speed
voice and data transmission. The Company's products are utilized
for Internet access, telecommunications, electronic commerce,
analog voice communication and general data networking.
The Company is experiencing significant cash flow problems resulting
from the Company's failure to meet sales targets. This creates
substantial doubt as to the Company's ability to continue as a
going concern. At December 31, 1997, the Company was in need of an
immediate infusion of capital. See Note 11 for subsequent sale of
assets and certain liabilities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash equivalents include highly liquid instruments which are
stated at cost, which approximates market.
Inventories
As of December 31, 1997, inventories consist of purchased
components used to assemble the remote access products and
finished goods. Inventories are valued on a first-in, first-out
basis and approximate the lower of cost or market. As of
December 31, 1997, the Company had recorded an inventory
reserve of $200,000.
Property and Equipment
Property and equipment is carried at cost. Property and equipment
is depreciated using the straight-line method over the
estimated useful lives of the respective assets ranging from
three to ten years. Leasehold improvements are amortized over
the life of the improvement or the life of the lease, whichever
is shorter.
Revenue Recognition
Revenue from product sales is recognized upon shipment of the
products. Revenue from service sales is recognized when the
service is provided.
6
<PAGE>
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 amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of Credit Risk
During 1997, the three largest customers accounted for
approximately 52% of revenues. At December 31, 1997, the three
largest customers comprised approximately 44% of accounts
receivable.
Earnings Per Share
During 1997, the Company adopted SFAS No. 128, "Earnings Per
Share," (SFAS 128) which was effective December 15, 1997. The
statement changes the calculation of earnings per share to be
more consistent with countries outside of the United States. In
general, the statement requires two calculations of earnings
per share to be more consistent with countries outside of the
United States. In general, the statement requires two
calculations of earnings per share to be disclosed, basic EPS
and diluted EPS. Basic EPS is computed using only weighted
average shares outstanding. Diluted EPS is computed using the
average share price for the period when calculating the
dilution of stock options. In the current year, potentially
dilutive equity instruments including stock options, stock
warrants, convertible preferred stock, and convertible debt
were not considered in the diluted EPS calculation since the
effect of their inclusion is anti-dilutive.
(3) PREFERRED STOCK
Shares of Series A Preferred stock carry certain rights, privileges
and preferences, which include the following:
Dividends
The holder of Series A Preferred stock is entitled to a dividend
when and as declared by the Board of Directors. Shareholders
are also entitled to receive a portion of the dividends
declared on common stock equal to the amount that would have
been payable in respect of the shares of common stock into
which all outstanding shares of Preferred stock could have been
converted.
7
<PAGE>
Conversion
At the holder's option, each share of Preferred Stock is
convertible at any time into shares of common stock at the
conversion rate, as defined, which is initially equal to one
share for one share. The shares shall automatically convert
into common stock at the then-effective Series A conversion
price as defined upon; (A) the closing of an initial public
offering of the Company's common stock, as defined, or (B) the
written consent of conversion by at least 70% of the then
outstanding Series A shares.
Voting Rights
The holder of each outstanding share of Preferred Stock is
entitled to the number of votes equal to the number of shares
of common stock into which each share of Preferred Stock could
be converted and to the same voting rights and powers as the
holders of common stock.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the
Company, either voluntarily or involuntarily, the holder of
each share of Preferred Stock is entitled to receive, prior to
and in preference to any distributions to the holders of common
stock, an amount equal to $12.65 per share, subject to
adjustment, plus any declared but unpaid dividends on those
shares.
(4) STOCK OPTIONS
On August 1, 1996 the Company established an incentive stock option
plan (the Plan) for employees of the Company. Options are granted
at the discretion of the Company's Board of Directors. The maximum
number of shares that may be purchased pursuant to options granted
under the Plan is 96,416. As of December 31, 1997, 72,056 options
have been granted as follows:
<TABLE>
<CAPTION>
Year of Grant Number of Options Exercise Price
------------- ----------------- --------------
<S> <C> <C>
1995 ........................... 51,533 $.10 - $1.00
1997 ........................... 20,523 $1.00
------
Total ..................... 72,056
</TABLE>
Grantees vest in the options at 10% after six months of service and
1/47th for each subsequent month of service. Employees forfeit
vested options three months subsequent to termination, except for
certain specified exceptions. Of the options granted, 47,470
options are vested and have a life of ten years beyond the grant
date. The Company accounts for stock options in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation". The
effect of SFAS No. 123 on the exercisable options is immaterial to
the financial statements.
8
<PAGE>
During 1997, 4,673 options have been cancelled, 2,957 have been
exercised.
(5) INCOME TAXES
The Company accounts for income taxes under SFAS No. 109. Under the
provisions of SFAS No. 109, deferred income taxes reflect the
impact of temporary differences between the amount of assets and
liabilities recognized for financial reporting purposes and such
amounts recognized for tax reporting purposes. Deferred tax assets
may also be recognized to reflect the expected future benefit from
the utilization of net operating loss and tax credit
carryforwards. These deferred tax assets will expire in 2012.
Deferred tax assets and liabilities are measured by applying
current enacted tax laws.
As of December 31, 1997, the Company has deferred tax assets
totalling $1,124,000 primarily resulting from net operating
losses. A valuation reserve has been recorded for the full amount
of the asset as Management does not believe that it is more likely
than not that these amounts will be realized.
(6) LEASE COMMITMENT
The Company is obligated under a noncancellable lease agreement for
the rental of administrative offices and research and development
facilities. Rent expense under this agreement totalled $90,000 in
1997. Future minimum rental payments required under this
agreement:
<TABLE>
<CAPTION>
<S> <C>
1998 $114,000
1999 114,000
2000 114,000
2001 114,000
2002 114,000
Thereafter 530,000
----------
Total $1,100,000
----------
----------
</TABLE>
Subsequent to yearend (see Note 11), substantially all of the assets
and certain liabilities of the Company were sold. As part of this
transaction, the buyer assumed the lease described above.
9
<PAGE>
(7) NOTES PAYABLE
During 1997, the Company issued $1,600,000 of convertible debt. The
debt is convertible into Series A Preferred Stock at a ratio of 1
to $12.65. These notes, at year-end, bear interest at rates
ranging from 9% to 10% and mature in 1998. At year-end, $1,050,000
of this debt was with shareholders and other related parties. A
portion of the debt, $1,150,000, is secured by the Company's
assets. Interest expense on this debt was $70,000 during 1997.
During 1997, the Company induced the conversion of $875,000 in
convertible debt plus accrued interest by offering the Series A
Preferred stock at a reduced price of $11.44 per share. The cost
of $96,145 to induce the conversion was expensed in the current
year.
The Company received a bridge loan from a related party for $500,000.
The note matures in 1998 and bears interest at prime plus 4.5%. The
prime rate at December 31, 1997 was 8.5%.
(8) STOCK WARRANTS
At December 31, 1997, the Company had 28,665 detachable stock
warrants outstanding with $1,225,000 of its convertible debt (see
Note 7). Each warrant gives the holder the right to purchase
Series A Preferred stock for $12.65 per share. The warrants expire
five years after issuance. All warrants issued in 1997 will expire
in 2002.
(9) RELATED PARTY TRANSACTIONS
During the year, the Company entered into various transactions with
shareholders and other related parties. As of December 31, 1997,
the Company had customer deposits, convertible debt, and bridge
loans of $63,000 and $650,000, and $500,000, respectively, with
these related parties. In addition, the Company had sales to a
related party of $130,000.
(10) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit sharing plan for its employees. The
benefits are based on years of service and the employees'
compensation. The Company did not make an additional
discretionary contribution in 1997.
(11) SUBSEQUENT EVENTS
Subsequent to year-end, the Company issued $1,300,000 in additional
debt to an existing creditor, Transaction Network Services, Inc.
(TNS).
On July 1, 1998, TNS acquired substantially all of the assets and
assumed certain liabilities (composed principally of trade
payables) of the Company. TNS paid consideration of
10
<PAGE>
$2.5 million, comprised of (a) approximately $600,000 in cash,
and (b) approximately $1.9 million by cancellation of promissory
notes payable to TNS in the outstanding principal amount of $1.8
million and approximately $100,000 in accrued interest. The terms
of the acquisition also include a royalty payment from TNS to the
Company of up to approximately 5% per unit based upon future
OmniLink product sales. The royalty agreement will terminate upon
the earlier of the date that OmniLink will receive royalties
aggregating $5,000,000 or June 30, 2001. The Company is
continuing certain of its operations in connection with the
royalty agreement referred to above. The Company continues to
suffer from significant cash flow problems and needs an infusion
of capital to continue to operate.
11
<PAGE>
OMNILINK COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and marketable securities .................................... $ 6,000 $ 99,046
Accounts receivable, net .......................................... 10,862 110,816
Inventory, net .................................................... 1,166,315 1,090,030
Prepaid expenses and other ........................................ 32,784 51,246
----------- ------------
Total current assets ...................................... 1,215,961 1,351,138
----------- ------------
PROPERTY AND EQUIPMENT, at cost:
Computer equipment ................................................ 129,377 116,068
Furniture and fixtures ............................................ 28,682 18,439
Machinery and equipment ........................................... 90,105 80,918
Leasehold improvements ............................................ 20,673 20,672
----------- ------------
Total ..................................................... 268,837 236,097
Less- Accumulated depreciation and amortization ................... 154,921 124,156
----------- ------------
Net property and equipment ................................ 113,916 111,941
----------- ------------
$ 1,329,877 $ 1,463,079
----------- ------------
----------- ------------
CURRENT LIABILITIES:
Accounts payable .................................................. $ 422,490 $ 363,601
Customer deposits ................................................. 28,293 74,532
Accrued expenses .................................................. 380,999 315,221
Notes payable ..................................................... 2,487,000 1,220,785
----------- ------------
Total current liabilities ................................. 3,320,782 1,974,139
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Series A perferred stock, $12.65 par value, 750,000 shares
authorized, 247,609 issued and outstanding ...................... 3,132,254 3,132,254
Common stock, stated value $.01, 1,500,000 shares authorized
148,617 and 148,117 shares isssued and outstanding,
respectively .................................................... 1,486 1,481
Additional paid-in capital ........................................ 67,750 67,255
Stock warrants .................................................... 21,750 21,750
Retained deficit .................................................. (5,214,145) (3,733,800)
----------- ------------
Total stockholders' deficit ............................... (1,990,905) (511,060)
----------- ------------
$ 1,329,877 $ 1,463,079
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
12
<PAGE>
OMNILINK COMMUNICATIONS CORPORATION
UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
SALES:
Product sales ............................ $ 195,271 $ 364,673
Service sales ............................ 142,210 65,280
----------- ------------
337,481 429,953
COST OF GOODS SOLD ............................... 300,669 361,138
----------- ------------
GROSS PROFIT ..................................... 36,812 68,815
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ..... 948,936 672,564
RESEARCH AND DEVELOPMENT EXPENSES ................ 568,221 471,752
----------- ------------
NET LOSS ......................................... (1,480,345) (1,075,501)
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these statements
13
<PAGE>
OMNILINK COMMUNICATIONS CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $(1,480,345) $(1,075,501)
Adjustments to reconcile net loss to net cash
Used in operating activities-
Depreciation and amortization..................................... 28,511 34,258
Increase (decrease) in cash resulting from changes in-
Accounts receivable....................................... 27,660 5,724
Inventories............................................... (76,285) (338,772)
Prepaid expenses and other................................ (43,919) (24,147)
Accounts payable.......................................... 1,399,397 773,867
Customer deposits......................................... (46,241) 67,017
Accrued expenses.......................................... 128,161 18,415
------------- -------------
Net cash used in operating activities............. (63,061) (539,139)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............................................... (30,485) (71,787)
------------- -------------
Net cash used in investing activities............. (30,485) (71,787)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable........................................... 500 -
Proceeds from issuance of common stock............................................ - 250,739
------------- -------------
Net cash provided by financing activities......... 500 250,739
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................. (93,046) (360,187)
CASH AND CASH EQUIVALENTS - beginning of year............................................. 99,046 378,689
------------- -------------
CASH AND CASH EQUIVALENTS - end of year................................................... $6,000 $18,502
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements
14
<PAGE>
(1) GENERAL
OmniLink Communications Corporation (the Company), was incorporated in
May of 1996. It is primarily engaged in the design, marketing and sale of
integrated remote access products for use with Integrated Services Digital
Network (ISDN) technology. ISDN technology consists of telephone lines designed
for high-speed voice and data transmission. The Company's products are utilized
for Internet access, telecommunications, electronic commerce, analog voice
communication and general data networking.
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and include, in
the opinion of the Company, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of interim period results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that its disclosures are adequate to make
the information presented not misleading. The results of operations for the
six month periods ended June 30, 1998 and 1997 are not necessarily indicative
of the results to be expected for the full year.
(2) NOTES PAYABLE
During 1997, the Company issued $1,600,000 of convertible debt. The
debt is convertible into Series A Preferred Stock at a ratio of 1 to $12.65.
These notes, at year-end, bear interest at rates ranging from 9% to 10% and
mature in 1998. At year-end, $1,050,000 of this debt was with shareholders and
other related parties. A portion of the debt, $1,150,000, is secured by the
Company's assets. Interest expense on this debt was $70,000 during 1997.
During 1997, the Company induced the conversion of $875,000 in
convertible debt plus accrued interest by offering the Series A Preferred stock
at a reduced price of $11.44 per share. The cost of $96,145 to induce the
conversion was expensed 1997.
The Company received a bridge loan from a related party for
$1,800,000. The note matures in 1998 and bears interest at prime plus 4.5%.
The prime rate at June 30, 1998 was 8.5%.
(3) STOCK WARRANTS
At June 30, 1998, the Company had 28,665 detachable stock warrants
outstanding with $1,225,000 of its convertible debt. Each warrant gives the
holder the right to purchase Series A Preferred stock for $12.65 per share. The
warrants will expire in 2002.
(4) RELATED PARTY TRANSACTIONS
The Company has entered into various transactions with shareholders and
other related parties. As of June 30, 1998 Company had customer deposits,
convertible debt, and bridge loans of $28,000 and $650,000, and $1,800,000,
respectively, with these related parties. In addition, the Company had sales to
a related party of $69,000 for the six month period ending June 30, 1998.
(5) SUBSEQUENT EVENTS
On July 1, 1998, TNS acquired substantially all of the assets and
assumed certain liabilities (composed principally of trade payables) of the
Company. TNS paid consideration of $2.5 million, comprised of (a) approximately
$600,000 in cash, and (b) approximately $1.9 million by cancellation of
promissory notes payable to TNS in the outstanding principal amount of $1.8
million and approximately $100,000 in accrued interest. The terms of the
acquisition also include a royalty payment from TNS to the Company of up to
approximately 5% per unit based upon future OmniLink product sales. The royalty
agreement will terminate upon the earlier of the date that OmniLink will receive
15
<PAGE>
royalties aggregating $5,000,000 or June 30, 2001. The Company is continuing
certain of its operations in connection with the royalty agreement referred
to above. The Company continues to suffer from significant cash flow problems
and needs an infusion of capital to continue to operate.
16
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements gives effect to
the acquisition of substantially all of the assets and the assumption of certain
liabilities of OmniLink Communications Corporation ("OmniLink") for
consideration of $2.5 million composed of (a) approximately $600,000 in cash
paid by the Company and (b) approximately $1.9 million by cancellation of
OmniLink promissory notes payable to the Company in the outstanding principal
amount of $1.8 million (the "Notes") and approximately $100,000 in accrued
interest. The accompanying pro forma financial statements assume that the
acquisition was made as of June 30, 1998 for the unaudited pro forma balance
sheet; as of January 1, 1997 for the unaudited pro forma statement of operations
for the year ended December 31, 1997; and as of January 1, 1998 for the six
months ended June 30, 1998. Pursuant to the acquisition, the Company will make
royalty payments to OmniLink of up to approximately 5% of future OmniLink
product sales. The royalty agreement will terminate upon the earlier of the date
that OmniLink has received royalties aggregating $5,000,000 or June 30, 2001.
Prior to the acquisition, OmniLink developed, manufactured and marketed
modems for electronic commerce, Internet access, telecommuting and advanced
office communications. The Company intends to continue to devote the acquired
OmniLink assets to these lines of business for the foreseeable future. The
Company has also transferred certain recently acquired proprietary technology to
OmniLink for further development and integration into the OmniLink modems; this
development effort is intended to support the Company's strategy to offer
dial-up ISDN access services to both domestic and international customers who
have traditionally relied upon more expensive leased line communications to
process transactions originated at both point-of-sale (POS) locations as well as
automated teller machines (ATMs).
In November 1997, the Company loaned OmniLink $500,000, and in 1998,
the Company loaned OmniLink an additional $1,300,000. Interest accrued at 13%
and the Notes were to mature in November 1998. In connection with making these
loans the Company received the exclusive European distribution rights to
OmniLink's products used in connection with the provision of POS and ATM
services. A limited partnership (the "Partnership"), controlled by the Company's
Chief Executive Officer, and a venture capital firm, one of whose managing
partners is also a director of the Company, are each minority shareholders of
OmniLink and are holders of subordinated notes issued by OmniLink. The
Partnership also guaranteed OmniLink's payment of the Notes.
The acquisition has been accounted for by the purchase method of
accounting. The purchase price has been allocated on a preliminary basis to the
assets acquired based upon the estimated value of such assets. 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 any benefits
from economies which might be achieved from the combined operations. In the
opinion of management all adjustments have been made that are necessary to
present fairly the unaudited pro forma financial statements.
17
<PAGE>
TRANSACTION NETWORK SERVICES, AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
As of June 30, 1998
-----------------------------------------------------------------------------
TNSI OMNILINK ADJUSTMENTS PRO FORMA
--------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................. $6,579 $6 $(600) (A) $5,979
(6) (C)
Short-term investments .................... 5,809 --- (1,900) (B) 3,909
Accounts receivable, net of allowance
for doubtful accounts .................... 14,619 11 14,630
Inventory ................................. --- 1,166 (502) (C) 664
Other current assets ...................... 1,843 33 1,876
--------- -------- ---------
Total current assets .............. 28,850 1,216 27,058
--------- -------- ---------
EQUIPMENT, at cost:
Network equipment ......................... 36,742 --- 36,742
Office equipment .......................... 5,822 269 6,091
Less - Accumulated depreciation ........... (17,157) (155) (17,312)
--------- -------- ---------
25,407 114 25,521
--------- -------- ---------
INTANGIBLE ASSETS:
Software and intangibles .................. 23,507 --- 1,966 (D) 25,473
Less - Accumulated amortization ........... (5,968) --- (5,968)
--------- -------- ---------
17,539 --- 19,505
--------- -------- ---------
OTHER ASSETS ................................. 814 --- 814
LONG-TERM INVESTMENTS ......................... 5,784 --- 5,784
INVESTMENT IN UNCONSOLIDATED AFFILIATE ........ 1,999 --- 1,999
ASSETS AVAILABLE FOR SALE ..................... 8,250 --- 8,250
--------- -------- ---------
Total assets ...................... $ 88,643 $1,330 $88,931
--------- -------- ---------
--------- -------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ..... $ 9,857 $ 832 (544)(C) $10,145
Notes Payable - 2,489 (1,900)(B) -
(589)(C)
DEFERRED INCOME TAX, net of current amount .... 378 --- 378
--------- -------- ---------
Total liabilities ................. 10,235 3,321 10,523
--------- -------- ---------
STOCKHOLDERS' EQUITY .......................... 78,408 (1,991) 1,991 (E) 78,408
--------- -------- ---------
Total liabilities and
stockholders' equity ............ $ 88,643 $1,330 $88,931
--------- -------- ---------
--------- -------- ---------
</TABLE>
18
<PAGE>
TRANSACTION NETWORK SERVICES, AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
-----------------------------------------------------------------------
TNSI OMNILINK ADJUSTMENTS PRO FORMA
-------- --------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues ............................................. $63,344 $862 $(130) (F) $64,076
Cost of network services ............................. 35,322 443 (130) (F) 35,635
-------- --------- --------
Gross profit ......................................... 28,022 419 28,441
-------- --------- --------
Other operating expenses:
Engineering & development .................... 3,431 1,009 4,440
Selling, general & administrative ............ 7,941 2,038 9,979
Depreciation ................................. 4,793 73 4,866
Amortization of intangibles .................. 1,570 - 200 (G) 1,770
-------- --------- --------
Total other operating expenses ........ 17,735 3,120 21,055
-------- --------- --------
Income (loss) from operations ........................ 10,287 (2,701) 7,386
Interest income (expense) ............................ 1,939 (8) (138) (H) 1,794
-------- --------- --------
Income (loss) before provision for income taxes ...... 12,226 (2,709) 9,180
Provision for income taxes ........................... 4,840 - (1,260) (I) 3,580
Equity in earnings of unconsolidated affilliate ...... - - -
-------- --------- --------
Net income (loss) .................................... $7,386 $(2,709) $5,600
-------- --------- --------
-------- --------- --------
Diluted earnings per common share ................... $0.59 $0.44
-------- --------
-------- --------
Basic earnings per common share ..................... $0.60 $0.46
-------- --------
-------- --------
<CAPTION>
For the Six Months Ended June 30, 1998
----------------------------------------------------------------------
TNSI OMNILINK ADJUSTMENTS PRO FORMA
-------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Revenues ............................................. $38,510 $337 (69) (F) $38,778
Cost of network services ............................. 21,874 301 (69) (F) 22,106
-------- --------- --------
Gross profit ......................................... 16,636 36 16,672
-------- --------- --------
Other operating expenses:
Engineering & development .................... 2,168 568 2,736
Selling, general & administrative ............ 5,185 722 5,907
Depreciation ................................. 2,987 129 3,116
Amortization of intangibles .................. 1,092 - 100 (G) 1,192
-------- --------- --------
Total other operating expenses ........ 11,432 1,419 12,951
-------- --------- --------
Income (loss) from operations ........................ 5,204 (1,383) 3,721
Interest income (expense) ............................ 856 (98) (69) (H) 689
-------- --------- --------
Income (loss) before provision for income taxes ...... 6,060 (1,481) 4,410
Provision for income taxes ........................... 2,395 - (675) (I) 1,720
Equity in earnings of unconsolidated affilliate ...... 81 - 81
-------- --------- --------
Net income (loss) .................................... $3,746 $(1,481) $2,771
-------- --------- --------
-------- --------- --------
Diluted earnings per common share ................... $0.29 $0.21
-------- --------
-------- --------
Basic earnings per common share ..................... $0.30 $0.22
-------- --------
-------- --------
</TABLE>
19
<PAGE>
EXPLANATORY NOTES TO PRO FORMA FINANCIAL STATEMENTS
(A) Represents cash portion of total consideration
(B) Represents elimination of note receivable portion of total consideration
(C) Represents elimination of assets and liabilities not assumed
(D) Represents cost over net assets and liabilities assumed to be amortized
on a straight-line basis over a period of 10 years
(E) Represents elimination of historical equity balance in OmniLink
(F) Represents elimination of sales to TNS by OmniLink
(G) Represents amortization of the excess of cost over the net assets
(H) Represents adjustment to interest income due to cash outflow to complete
transaction
(I) Represents adjustment for income tax expense to reflect benefit for
OmniLink operating losses
20
<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: September 14, 1998 By: /s/ Thaddeus G. Weed
-------------------------
Thaddeus G. Weed
Chief Financial Officer
and Treasurer
21
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated August 4, 1998 on the financial statements of
OmniLink Communications Corporation (the Company), included in the Form 8-K
Amendment No. 1 filed by Transaction Network Services, Inc. with the Securities
and Exchange Commission, into the Form S-8 registration statements (registration
nos. 33-85432 and 333-27159) and the Form S-3 registration statement
(registration no. 333-52221) filed by Transaction Network Services, Inc. It
should be noted that we have not audited any financial statements of the Company
subsequent to December 31, 1997 or performed any audit procedures subsequent to
the date of our report.
Detroit, Michigan,
September 11, 1998.
