Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

** **

**x****     ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended March 31,2009**

** **

**OR**

** **

**o****        ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the transition period from          to          **

 

**Commission File Number: 001-32033**

 

**TNS,INC.**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**                                              | ** ** | **36-4430020**                          |
|-----------------------------------------------------------|------------|-----------------------------------------|
| (State or jurisdiction of incorporation or  organization) |       | (I.R.S. Employer Identification Number) |

 

**11480 Commerce Park Drive, Suite 600**

**Reston, VA 20191**

(Address of principal executive offices)

 

**(703) 453-8300**

(Registrant’s telephone number, includingarea code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirement for the past 90 days.  Yes x Noo

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).  Yes oNo o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large accelerated filer o                     |   | Accelerated filer x         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o Nox

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of Common Stock,as of the latest practicable date.

 

**Shares Outstanding as of April 1, 2009**

** **

25,197,302 Shares of Common Stock, $0.001 parvalue

 

 

 

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** **

**TNS, INC.**

 

**INDEX**

 
| ** **                             | ** **                                                                                               | **Page** |
|----------------------------------------|----------------------------------------------------------------------------------------------------------|----------|
| **Part I: FINANCIAL INFORMATION** |                                                                                                     |
| Item 1.                                | Condensed Consolidated Financial Statements (Unaudited)                                                  | 3        |
|                                   | Condensed Consolidated Balance Sheets as of  December 31, 2008 and March 31, 2009              | 3        |
|                                   | Condensed Consolidated Statements of  Operations for the three months ended March 31, 2008 and 2009 | 4        |
|                                   | Condensed Consolidated Statements of Cash  Flows for the three months ended March 31, 2008 and 2009 | 5        |
|                                   | Notes to  Condensed Consolidated Financial Statements                                                    | 6        |
| Item 2.                                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations              | 17       |
| Item 3.                                | Quantitative and Qualitative Disclosures  About Market Risk                                              | 24       |
| Item 4.                                | Controls and Procedures                                                                                  | 25       |
| **Part II: OTHER INFORMATION**    |                                                                                                     |
| Item 1.                                | Legal Proceedings                                                                                        | 26       |
| Item 1A.                               | Risk Factors                                                                                             | 26       |
| Item 2.                                | Unregistered Sales of Equity Securities and  Use of Proceeds                                             | 26       |
| Item 3.                                | Default Upon Senior Securities                                                                           | 26       |
| Item 4.                                | Submission of Matters to a Vote of Security  Holders                                                     | 26       |
| Item 5.                                | Other Information                                                                                        | 26       |
| Item 6.                                | Exhibits                                                                                                 | 26       |

 

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** **

**PART I—FINANCIALINFORMATION**

 

**Item 1. Condensed Consolidated FinancialStatements**

 

**TNS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(dollars in thousands, except share and pershare data)**

 
| ** **                                                                                                                                                                                               | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **2008**              | ** ** | **2009**           | ** ** |
| ** **                                                                                                                                                                                               | ** ** | ** **            | ** ** | **(UNAUDITED)**    | ** ** |
| **ASSETS**                                                                                                                                                                                               |       |                  |       |               |       |
| Current assets:                                                                                                                                                                                          |       |                  |       |               |       |
| Cash and cash equivalents                                                                                                                                                                                |       | $                     | 38,851     |               | $          | 35,028 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $3,631 and $3,353, respectively                                                                                                          |       | 69,501                |       | 68,522             |       |
| Prepaid expenses                                                                                                                                                                                         |       | 5,351                 |       | 5,959              |       |
| Deferred tax assets                                                                                                                                                                                      |       | 1,805                 |       | 1,720              |       |
| Other current assets                                                                                                                                                                                     |       | 4,965                 |       | 4,971              |       |
| Total current assets                                                                                                                                                                                     |       | 120,473               |       | 116,200            |       |
| Property and equipment, net                                                                                                                                                                              |       | 58,795                |       | 58,424             |       |
| Identifiable intangible assets, net                                                                                                                                                                      |       | 151,811               |       | 145,586            |       |
| Goodwill                                                                                                                                                                                                 |       | 10,954                |       | 10,817             |       |
| Deferred tax assets, net                                                                                                                                                                                 |       | 16,141                |       | 14,013             |       |
| Other assets                                                                                                                                                                                             |       | 3,740                 |       | 3,920              |       |
| Total assets                                                                                                                                                                                             |       | $                     | 361,914    |               | $          | 348,960 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                            |       |                  |       |               |       |
| Current liabilities:                                                                                                                                                                                     |       |                  |       |               |       |
| Accounts payable, accrued expenses and  other current liabilities                                                                                                                                        |       | $                     | 59,424     |               | $          | 49,781 |   |
| Deferred revenue                                                                                                                                                                                         |       | 16,360                |       | 15,286             |       |
| Total current liabilities                                                                                                                                                                                |       | 75,784                |       | 65,067             |       |
| Long-term debt, net of current portion                                                                                                                                                                   |       | 178,500               |       | 178,500            |       |
| Deferred tax liability                                                                                                                                                                                   |       | 2,420                 |       | 2,263              |       |
| Other liabilities                                                                                                                                                                                        |       | 2,395                 |       | 2,318              |       |
| Total liabilities                                                                                                                                                                                        |       | 259,099               |       | 248,148            |       |
| Commitments and contingencies                                                                                                                                                                            |       |                  |       |               |       |
| Stockholders’ equity:                                                                                                                                                                               |       |                  |       |               |       |
| Common stock, $0.001 par value; 130,000,000  shares authorized; 25,082,007 shares issued and 25,053,226 shares outstanding  and 25,302,460 shares issued and 25,197,302 shares outstanding, respectively |       | 25                    |       | 25                 |       |
| Treasury stock, 28,781 shares and 105,158  shares, respectively                                                                                                                                          |       | (578                  | )          | (1,168             | )          |
| Additional paid-in capital                                                                                                                                                                               |       | 150,839               |       | 151,702            |       |
| Accumulated deficit                                                                                                                                                                                      |       | (40,800               | )          | (40,824            | )          |
| Accumulated other comprehensive income                                                                                                                                                                   |       | (6,671                | )          | (8,923             | )          |
| Total stockholders’ equity                                                                                                                                                                          |       | 102,815               |       | 100,812            |       |
| Total liabilities and stockholders’ equity                                                                                                                                                          |       | $                     | 361,914    |               | $          | 348,960 |   |

 

See accompanying notes to condensed consolidatedfinancial statements (unaudited).

 

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**TNS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

**(dollars in thousands, except share and pershare data)**

** **
| ** **                                                                            | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| Revenues                                                                              |       | $                                                | 84,125     |   | $ | 75,266 |   |
| Operating expenses:                                                                   |       |                                             |       |   |   |
| Cost of network services, exclusive of the  items shown separately below              |       | 40,707                                           |       | 36,790 |   |
| Engineering and development                                                           |       | 7,199                                            |       | 6,407 |   |
| Selling, general, and administrative                                                  |       | 19,445                                           |       | 17,756 |   |
| Depreciation and amortization of property  and equipment                              |       | 5,967                                            |       | 5,834 |   |
| Amortization of intangible assets                                                     |       | 6,098                                            |       | 5,605 |   |
| Total operating expenses                                                              |       | 79,416                                           |       | 72,392 |   |
| Income from operations                                                                |       | 4,709                                            |       | 2,874 |   |
| Interest expense                                                                      |       | (3,709                                           | )          | (1,451 | ) |
| Interest income                                                                       |       | 180                                              |       | 50 |   |
| Other income, net                                                                     |       | 69                                               |       | 20 |   |
| Income before income tax benefit and equity  in net loss of unconsolidated affiliates |       | 1,249                                            |       | 1,493 |   |
| Income tax benefit (provision)                                                        |       | 352                                              |       | (1,487 | ) |
| Equity in net loss of unconsolidated  affiliates                                      |       | —                                           |       | (30 | ) |
| Net income (loss)                                                                     |       | $                                                | 1,601      |   | $ | (24 | ) |
|                                                                                  |       |                                             |       |   |   |
| Basic net income (loss) per common share                                              |       | $                                                | 0.07       |   | $ | (0.00 | ) |
| Diluted net income (loss) per common share                                            |       | $                                                | 0.06       |   | $ | (0.00 | ) |
| Basic weighted average common shares  outstanding                                     |       | 24,309,655                                       |       | 25,127,069 |   |
| Diluted weighted average common shares  outstanding                                   |       | 24,738,286                                       |       | 25,127,069 |   |

 

See accompanying notes to condensedconsolidated financial statements (unaudited).

 

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**TNS, INC.**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(dollars in thousands)**

 
| ** **                                                                       | ** ** | **Three months ended March 31** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                                            | ** ** | **2009** | ** ** |
| Cash flows from operating activities:                                            |       |                                                |       |   |   |
| Net income (loss)                                                                |       | $                                                   | 1,601      |   | $ | (24 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                                |       |   |   |
| Non-cash items                                                                   |       | 13,343                                              |       | 15,326 |   |
| Changes in operating assets and  liabilities:                                    |       |                                                |       |   |   |
| Accounts receivable, net                                                         |       | 3,703                                               |       | (537 | ) |
| Other current and noncurrent assets                                              |       | 288                                                 |       | 166 |   |
| Accounts payable and accrued expenses                                            |       | (1,363                                              | )          | (10,234 | ) |
| Deferred revenue                                                                 |       | (360                                                | )          | (943 | ) |
| Other current and noncurrent liabilities                                         |       | (1,542                                              | )          | (76 | ) |
| Net cash provided by operating activities:                                       |       | 15,670                                              |       | 3,678 |   |
| Cash flows from investing activities                                             |       |                                                |       |   |   |
| Purchases of property and equipment                                              |       | (6,664                                              | )          | (5,824 | ) |
| Net cash used in investing activities:                                           |       | (6,664                                              | )          | (5,824 | ) |
| Cash flows from financing activities                                             |       |                                                |       |   |   |
| Proceeds from tax benefits for share based  payments                             |       | 200                                                 |       | — |   |
| Repayments of long-term debt                                                     |       | (4,000                                              | )          | — |   |
| Proceeds from stock option exercises,  inclusive of tax benefit                  |       | 587                                                 |       | — |   |
| Payment of long-term debt financing costs                                        |       | (75                                                 | )          | (75 | ) |
| Purchase of treasury stock                                                       |       | (1,233                                              | )          | (590 | ) |
| Net cash used in financing activities                                            |       | (4,521                                              | )     | (665 | ) |
| Effect of exchange rates on cash and cash  equivalents                           |       | 566                                                 |       | (1,012 | ) |
| Net increase in cash and cash equivalents                                        |       | 5,051                                               |       | (3,823 | ) |
| Cash and cash equivalents, beginning of  period                                  |       | 17,805                                              |       | 38,851 |   |
| Cash and cash equivalents, end of period                                         |       | $                                                   | 22,856     |   | $ | 35,028 |   |
|                                                                             |       |                                                |       |   |   |
| Supplemental disclosures of cash flow  information:                              |       |                                                |       |   |   |
| Cash paid for interest                                                           |       | $                                                   | 3,823      |   | $ | 1,484 |   |
| Cash paid for income taxes                                                       |       | $                                                   | 2,012      |   | $ | 1,523 |   |

 

See accompanying notes to condensedconsolidated financial statements (unaudited).

 

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**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**1.****                                      Descriptionof Business and Basis of Presentation**

 

TNS, Inc. (TNS or the Company) is aDelaware corporation. TNS is a leading provider of business-critical datacommunications services to processors of credit card, debit card and automatedteller machine (ATM) transactions. TNS is also a leading provider of callsignaling and database access services to the domestic telecommunicationsindustry and of secure data and voice network services to the global financialservices industry. TNS’ data communication services enable secure and reliabletransmission of time-sensitive, transaction-related information critical to itscustomers’ operations. The Company’s customers outsource their datacommunication requirements to TNS because of the Company’s expertise,comprehensive customer support, and cost-effective services. TNS providesservices to customers in the United States and increasingly to customers in 29countries, including Canada, Mexico and countries in Europe, Latin America andthe Asia-Pacific region.

 

The Company provides its services through itsmultiple data networks, each designed specifically for transactionapplications. These networks support a variety of widely acceptedcommunications protocols, are designed to be scalable and are accessible bymultiple methods, including dial-up, dedicated, wireless and Internetconnections.

 

The Company has fourbusiness divisions: (1) the point-of-sale/point-of-service (POS) division,which provides data communications services to payment processors in the U.S.,Canada and Mexico, (2) the telecommunication services division (TSD),which provides call signaling services and database access services targetingprimarily the telecommunications industry, (3) the financial servicesdivision (FSD), which provides data and voice communications services to thefinancial services community in support of the Financial Information eXchange(FIX) messaging protocol and other transaction-oriented trading applications,and (4) the international services division (ISD), which markets theCompany’s POS and financial services in countries outside of the United States,Canada and Mexico.

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with United States generally accepted accounting principles (GAAP)for interim financial information and in conjunction with the rules andregulations of the Securities and Exchange Commission (SEC). Certaininformation and note disclosures normally included in the annual financialstatements, required by GAAP, have been condensed or omitted pursuant to those rules andregulations, although the Company believes that the disclosures made areadequate to make the information presented not misleading.

 

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements reflect adjustments (all of which are of a normal and recurringnature) that are necessary for the fair presentation of the periods presented.The results of operations for the three months ended March 31, 2009 arenot necessarily indicative of the results to be expected for any subsequentinterim period or for the fiscal year. It is suggested that these unauditedcondensed consolidated financial statements be read in conjunction with theCompany’s annual report on Form 10-K filed with the SEC on March 16,2009, which includes consolidated financial statements and the notes theretofor the year ended December 31, 2008.

 

*Capital Structure*

 

During the three monthsended March 31, 2009, the Company issued 220,453 shares of common stockfollowing the vesting of restricted stock units, of which 76,377 shares weresurrendered by employees to satisfy payroll tax withholding obligations andheld by the Company as treasury shares.

 

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**Use of Estimates**

 

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of certain assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements. Significant estimates affecting the consolidatedfinancial statements include management’s judgments regarding the allowance fordoubtful accounts, future cash flows from long-lived assets, accrued expensesfor probable losses, estimates of the fair value of assets and liabilitiesassumed in business acquisitions and estimates related to the fair value ofemployee stock options, including volatility, expected term and estimates offorfeitures in future periods. Actual results could differ from thoseestimates.

 

**Revenue Recognition**

 

The Company recognizesrevenue when persuasive evidence of an agreement exists, the terms are fixedand determinable, services are performed, and collection is probable. Cashreceived in advance of revenue recognition is recorded as deferred revenue.

 

POS services revenue isderived primarily from per transaction fees paid by the Company’s customers forthe transmission of transaction data, through the Company’s networks, betweenpayment processors and POS or ATM terminals and monthly recurring fees forbroadband and wireless offerings. TSD revenue is derived primarily from fixedmonthly fees for call signaling services and per query fees charged fordatabase access and call validation services. Financial services revenue isderived primarily from monthly recurring fees based on the number of customerconnections to and through the Company’s networks.

 

Incentives granted to newcustomers or upon contract renewals are deferred and recognized ratably as areduction of revenue over the contract period to the extent that the incentivesare recoverable against the customer’s minimum purchase commitments under thecontract. In addition, the Company receives installation fees related to theconfiguration of the customers’ systems. Revenue from installation fees isdeferred and recognized ratably over the customer’s contractual service period,generally three years. The Company performs periodic evaluations of itscustomer base and establishes allowances for estimated credit losses.

 

**Cost of Network Services**

 

Cost of network servicesis comprised primarily of telecommunications charges, which include datatransmission and database access charges, leased digital capacity charges,circuit installation charges and activation charges. The cost of datatransmission is based on a contract or tariff rate per minute of usage inaddition to a prescribed rate per transaction for certain vendors. The costs ofdatabase access, circuits, installation, and activation charges are based onfixed fee contracts with local exchange carriers and interexchange carriers.The cost of network services also includes salaries, equipment maintenance andother costs related to the ongoing operation of the Company’s data networks.These costs are expensed by the Company as incurred. The Company recognizes aliability for telecommunications charges based upon network services utilizedat historical invoiced rates. Depreciation expense on network equipment andamortization expense on developed technology are excluded from cost of networkservices and included in depreciation and amortization of property andequipment and amortization of intangible assets in the accompanying condensedconsolidated statements of operations.

 

**Stock-Based Compensation**

 

The Company accounts forstock-based compensation under Statement of Financial Accounting Standards(SFAS) No. 123R “Share Based Payment”, using the modified prospectivetransition method. SFAS No. 123R requires all stock-based compensation toemployees be measured at fair value and expensed over the requisite serviceperiod and also requires an estimate of forfeitures when calculatingcompensation expense. Stock-based compensation for all non-vested awardsoutstanding as of January 1, 2006, are being recognized based on the grantdate fair value estimated in accordance with the provisions of SFAS No. 123“Accounting for Stock-Based Compensation” and in accordance with SFAS No. 123Rfor all awards granted or modified after January 1, 2006.

 

Stock-based compensationexpense has been included in the following categories in the accompanyingcondensed consolidated statements of operations (in thousands):

 

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| ** **                          | ** ** | **Three months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** |
| ** **                          | ** ** | **2008**                         | ** ** | **2009** | ** ** |
| Cost of network services            |       | $                                | 327        |   | $ | 252 |   |
| Engineering and development         |       | 455                              |       | 370 |   |
| Selling, general and administrative |       | 2,183                            |       | 1,383 |   |
|                                |       | $                                | 2,965      |   | $ | 2,005 |   |

 

As of March 31,2009, there was a total of $10.0 million of deferred compensation cost relatedto stock-based awards, which is expected to be recognized over a weightedaverage period of approximately two years.

 

*Time-Vested Awards*

 

Time-vested awards aresubject to a vesting period determined at the date of the grant, generally inequal installments over three or four years. The Company uses the Black Scholesoption pricing model to determine the grant date fair value of any time-vestedstock options. The Company uses the market price of the Company’s stock on thedate of grant to determine the fair value of any time-vested restricted stockunits. The Company recognizes compensation cost on these time-vested awards inequal installments over the vesting period.

 

During the three monthsended March 31, 2008, the Company granted 15,500 stock options and 17,550restricted stock units at weighted average estimated fair values of $6.84 and$16.31, respectively. During the three months ended March 31, 2009, theCompany granted 2,000 stock options and 5,050 restricted stock units atweighted average estimated fair values of $3.33 and $7.00, respectively.

 

*Performance-Based Awards*

 

Performance-based awardsare tied to the Company’s annual performance against pre-established internaltargets for revenues and adjusted earnings per share and may vary from zero to200% of an employee’s target payout, based upon the Company’s actualperformance over the fiscal year. The Company uses the Black Scholes optionpricing model to determine the grant date fair value of any performance-basedstock options. The Company uses the market price of the Company’s stock on thedate of grant to determine the fair value of any performance-based restrictedstock units. Performance-based awards are also subject to vesting requirements,and generally vest in equal installments over three years. Compensation cost isbased on the expected payout level that will be achieved and is adjusted insubsequent periods as changes in the estimates occur until the performancecriteria have been satisfied. The Company recognizes compensation cost on theseperformance based awards using an accelerated attribution method.

 

In May 2007, theCompany put in place a long-term performance-based stock compensation plan (the2007 Equity Performance Plan). The total performance-based awards issued underthe Company’s 2007 Equity Incentive Plan were 576,076 stock options and 236,341restricted stock units. The weighted average grant date fair value of performance-basedstock options and restricted stock units granted was $6.23 and $12.39,respectively.  As of March 31, 2009,there was a total of $0.7 million of deferred compensation expense relatedto these performance-based awards which is included in the $10.0 million totaldeferred compensation cost mentioned previously.

 

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In February 2008,the Company put in place a long-term performance-based stock compensation plan(the 2008 Equity Performance Plan). The potential payout under the 2008 Equity IncentivePlan ranged from 0% to 100% of an employee’s target payout.  Based upon the Company’s performance in 2008,the results of which were approved by the Company’s board of directors inFebruary 2009, the plan participants earned 50% of the potential payout underthe Company’s 2008 Equity Incentive Plan. The total performance based awards issued under the Company’s 2008 equityincentive plan were 121,269 stock options and 118,817 restricted stock units.The weighted average grant date fair value of performance-based stock optionsand restricted stock units granted was $6.78 and $16.15, respectively.  As of March 31, 2009, there was a totalof $0.8 million of deferred compensation expense related to theseperformance based awards which is included in the $10.0 million total deferredcompensation cost mentioned above.

 

**Income Taxes**

 

The Company accounts forincome taxes in accordance with SFAS No. 109, “Accounting for IncomeTaxes.” Under SFAS No. 109, deferred tax assets or liabilities arecomputed based upon the difference between financial statement and income taxbases of assets and liabilities using the enacted marginal tax rate. TheCompany provides a valuation allowance on its net deferred tax assets when itis more likely than not that such assets will not be realized. Deferred incometax expense or benefits are based upon the changes in the asset or liability fromperiod to period. The Company also recognizes interest and penalties related touncertain tax positions in income tax expense.

 

Effective January 1,2007, the Company adopted Financial Accounting Standards Board (FASB)Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109” (FIN 48), which prescribesa recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken, or expected to be taken,in a tax return, and provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. The adoption of FIN 48 did not result in a cumulativeadjustment to the Company’s accumulated deficit.

 

The Company recordsinterest and penalties related to income taxes as components of the income taxprovision, which totaled $20,000 and $0 for the three months ended March 31,2008 and March 31, 2009, respectively. Of the $4.9 million liability for unrecognizedincome tax benefits as of March 31, 2009, the Company’s accrual forpotential interest and penalties associated with uncertain tax positions was$377,000. To the extent interest and penalties are not assessed with respect touncertain tax positions, amounts accrued will be reversed and reflected as areduction of the overall income tax provision.

 

The Company remainssubject to examination by U.S. Federal, state, local and foreign taxauthorities for tax years 2004 through 2008.  With few exceptions, theCompany is no longer subject to U.S. Federal, state, local or foreign taxexaminations for the tax years prior to 2004.

 

A reconciliation of thebeginning and ending balance for liabilities associated with unrecognized taxbenefits, excluding interest and penalties, is as follows (in thousands)

 
| Balance as of January 1, 2009                         |   | $    | 4,749  |   |
|------------------------------------------------------------|--------|------|--------|--------|
| Additions for tax positions related to the  current period |   | 163  |   |
| Effects of foreign currency translation                    |   | (315 | )      |
| Balance as of March 31, 2009                          |   | $    | 4,597  |   |

 

The entire balance ofunrecognized tax benefits as of March 31, 2009 would impact the effectivetax rate if recognized.

 

The Company’s effectivetax rate for the three months ended March 31, 2008 and March 31, 2009of (28.2)% and 101.7%, respectively, differ from the U.S. Federal statutoryrate primarily due to stock-based compensation expense not deductible forincome tax purposes, profits of our international subsidiaries being taxed atrates different than the U.S. statutory rate and the effect of adjustments forthe three months ending March 31, 2009 to the provision resulting from the finalizationof tax returns in the United Kingdom.

 

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**Recent Accounting Pronouncements**

 

In June 2008, the FASB issued FSP EITF No. 03-6-1,“Determining Whether Instruments Granted in Share-Based Payment TransactionsAre Participating Securities.” This FSP provides that unvested share-basedpayment awards that contain nonforfeitable rights to dividends or dividendequivalents (whether paid or unpaid) are participating securities and shall beincluded in the computation of earnings per share pursuant to the two-classmethod. The FSP is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008, and interim periods within those years.The adoption of FSP No. EITF 03-6-1 on January 1, 2009 did not have amaterial effect on the Company’s consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations, a revision of SFAS No. 141”. SFAS No. 141(R) establishes principles and requirements for how the acquirer of abusiness recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, and any noncontrolling interest inthe acquiree. The statement also provides guidance for recognizing andmeasuring the goodwill acquired in the business combination and determines whatinformation to disclose to enable users of the financial statement to evaluatethe nature and financial effects of the business combination. The Companyadopted SFAS No. 141(R) on January 1, 2009. Accordingly, any businesscombination we engage in beginning January 1, 2009 will be recorded anddisclosed following SFAS No. 141(R). The adoption of SFAS No. 141(R) did nothave a material impact on the Company’s consolidated financial statements.

 

In September 2006, the FASB issuedStatement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (SFAS No. 157) which is effective for fiscal years beginningafter November 15, 2007. The Company adopted SFAS No. 157 on January 1,2008. SFAS No. 157 defines fair value, establishes a framework formeasuring fair value in GAAP, and expands disclosures about fair valuemeasurements. The adoption of SFAS 157 to the Company’s financial assetsand liabilities did not have a material effect on the Company’s consolidatedfinancial statements. In November 2007, the FASB agreed to a one-yeardeferral of the effective date for nonfinancial assets and liabilities that arerecognized or disclosed at fair value on a nonrecurring basis. Accordingly, fornonfinancial assets and liabilities, SFAS No. 157 became effective on January1, 2009 and the Company will apply its disclosure provision prospectivelywhenever applicable.

 

**2.****                                      Long-termDebt**

 

**2007 Credit Facility**

** **

On March 28, 2007,the Company entered into a $240.0 million senior secured credit facility(2007 Credit Facility) to finance a special cash dividend and to refinance its2005 amended and restated senior secured credit facility (2005 CreditFacility). The 2007 Credit Facility consists of a senior secured term loanfacility in an aggregate principal amount of $225.0 million (TermFacility) and a senior secured revolving credit facility in an aggregateprincipal amount of $15.0 million (Revolving Facility), under which therewere no borrowings as of March 31, 2009. The Revolving Facility matures March 27,2013. Payments on the Term Facility are due in quarterly installments over theseven year term beginning June 30, 2007, with the remainder payable on March 28,2014. Voluntary prepayments on the Term Facility are applied as directed by theCompany.

 

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Interest on theoutstanding balances under the Revolving Facility is payable, at the Company’soption, at a rate equal to the higher of the Wall Street Journal published “baserate on corporate loans posted by at least 75% of the nation’s largest banks”or the federal funds rate plus 50 basis points (the “Base Rate”), in each case,plus a margin of 0.75% or at the London Interbank Offered Rate (“LIBOR”), plusa margin of 1.75%. Interest on the outstanding balances under the Term Facilityis payable, at the Company’s option, at the Base Rate plus a margin of 1.0%, orat LIBOR plus a margin of 2.0%. For the three months ended March 31, 2009,borrowings on the Term Facility bore interest at the LIBOR rate (2.5% as of March 31,2009, inclusive of 2.0% margin).  Theweighted average interest rate for the three months ended March 31, 2009was 2.84%.  The weighted average interestrate for the three months ended March 31, 2008 was 6.9%.  The Revolving Credit Facility is subject toan annual commitment fee in an amount equal to 0.5% per annum multiplied by theamount of funds available for borrowing under the Revolving Facility. Interestpayments on the 2007 Credit Facility are due biweekly, monthly, bimonthly orquarterly at the Company’s option.

 

The terms of the 2007Credit Facility require the Company to make an annual prepayment in an amountthat may range from 0% to 50% of the Company’s “excess cash flow” (as such termis defined in the Credit Agreement) depending on the Company’s Leverage Ratiofor any fiscal year. Prepayments are also required to be made in othercircumstances, including upon asset sales.

 

The terms of the 2007Credit Facility require the Company to comply with financial and nonfinancialcovenants, including maintaining a specified leverage ratio at the end of eachfiscal quarter and complying with specified annual limits on capitalexpenditures. As of March 31, 2009, the Company was required to maintain aleverage ratio of less than 2.8 to 1.0. The maximum leverage ratio continues todecline over the term of the 2007 Credit Facility. The Company’s leverage ratioas of March 31, 2009 was 2.1 to 1.0. The 2007 Credit Facility alsocontains nonfinancial covenants that restrict some of the Company’s corporateactivities, including its ability to dispose of assets, incur additional debt,pay dividends, create liens, make investments, make capital expenditures andengage in specified transactions with affiliates. Noncompliance with any of thefinancial or nonfinancial covenants without cure or waiver would constitute anevent of default under the 2007 Credit Facility. An event of default resultingfrom a breach of a financial or nonfinancial covenant may result, at the optionof the lenders, in an acceleration of the principal and interest outstanding,and a termination of the Revolving Facility. The 2007 Credit Facility alsocontains other customary events of default (subject to specified graceperiods), including defaults based on events of bankruptcy and insolvency,nonpayment of principal, interest or fees when due, breach of specifiedcovenants, change in control and material inaccuracy of representations andwarranties. The Company was in compliance with the financial and non-financialcovenants of the 2007 Credit Facility as of March 31, 2009.

 

**2009 Credit Facility**

** **

On May 1, 2009, theCompany entered into a $423.5 million amended and restated senior securedcredit facility (2009 Credit Facility) to finance the acquisition of theCommunications Services Group assets from Verisign, Inc. (see Note 10) andto refinance the 2007 Credit Facility. The 2009 Credit Facility consists of a fully funded term loan facilitywith an outstanding principal amount equal to $178.5 million (the Existing TermLoan Facility), a new fully funded term loan facility with an outstandingprincipal amount equal to $230.0 million (the New Term Loan Facility) and asenior secured revolving credit facility in an aggregate principal amount of$15.0 million (the Existing Revolving Facility), under which there were noborrowings as of May 1, 2009. The Existing Revolving Facility matures March 27,2013. Payments on the Existing Term Loan Facility and the New Term LoanFacility are due in quarterly installments over the term beginning June 30,2009, with the remainder payable on March 28, 2014. Voluntary prepaymentson the New and Existing Term Facilities are applied as directed by the Company.

 

The total scheduled remainingpayments on the New and Existing Term Facilities are as follows (in thousands):

 
| Nine months ending December 31, 2009 |   | $       | 22,978  |   |
|-------------------------------------------|--------|---------|---------|--------|
| 2010                                      |   | 38,297  |    |
| 2011                                      |   | 40,850  |    |
| 2012                                      |   | 48,509  |    |
| 2013                                      |   | 51,063  |    |
| Thereafter                                |   | 206,803 |    |
|                                      |   | $       | 408,500 |   |

 

Interest on theoutstanding balances under the Existing Revolving Facility is payable, at theCompany’s option, at a rate equal to the higher of the prime rate announced bySunTrust Bank,  the federal funds rateplus 50 basis points, or the one-month LIBOR rate plus 100 basis points (the “BaseRate”), in each case, plus a margin of 5.0% or at the London Interbank OfferedRate (“LIBOR”), plus a margin of 6.0%. The applicable margins on the ExistingRevolving Credit Facility are subject to step-downs based on the Company’s leverageratio.  Interest on the outstandingbalances under the New and Existing Term Loan Facilities is payable, at the 

 

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Company’s option,at the Base Rate plus a margin of 5.0%, or at LIBOR plus a margin of 6.0%.  Additionaly, in no event will the LIBOR ratebe less than 3.5%.  The ExistingRevolving Credit Facility is subject to an annual commitment fee in an amountequal to between 0.375% and 0.5% (based on the Company’s leverage ratio) perannum multiplied by the amount of funds available for borrowing under theRevolving Facility. Interest payments on the 2009 Credit Facility are duebiweekly, monthly, bimonthly or quarterly at the Company’s option.

 

The terms of the 2009Credit Facility require the Company to make an annual prepayment in an amountthat may range from 0% to 50% of the Company’s “excess cash flow” (as such termis defined in the Credit Agreement) depending on the Company’s Leverage Ratiofor any fiscal year. Prepayments are also required to be made in othercircumstances, including upon asset sales and sale-leaseback transaction inexcess of $2 million.  The Company ispermitted to repay borrowings under the 2009 Credit Facility at any time inwhole or in part without premium or penalty, provided that prepaymentsresulting from the refinancing of the Term Loan Facilities made during thefirst year after the closing with first lien debt financing containing termssimilar to the terms governing the 2009 Credit Facility will be subject to a 1%prepayment premium.

 

Theobligations under the 2009 Credit Facility are unconditionally and irrevocablyguaranteed, subject to certain exceptions, by the Company and each existing andfuture direct and indirect domestic subsidiary of the Company.  Inaddition, the 2009 Credit Facility is secured, subject to certain exceptions,by a first priority perfected security interest in substantially all of the presentand future property and assets (real and personal) of the Company and a pledgeof 100% of the Company’s capital stock of its respective domestic subsidiariesand 65% of the Company’s capital stock of its respective first-tier foreignsubsidiaries.

 

The terms of the 2009Credit Facility require the Company to comply with financial and nonfinancialcovenants, including maintaining a maximum specified leverage ratio at the endof each fiscal quarter, a minimum consolidated fixed charge coverage ratio andcomplying with specified annual limits on capital expenditures. As of June 30,2009, the Company will be required to maintain a leverage ratio of less than3.25 to 1.0. The maximum leverage ratio continues to decline over the term ofthe 2009 Credit Facility. As of June 30, 2009 and as of the end of eachsubsequent quarter for the twelve month period then ended, the Company will berequired to maintain a consolidated fixed charge coverage ratio of not lessthan 1.20 to 1.0.  The 2009 CreditFacility also contains nonfinancial covenants that restrict some of the Company’scorporate activities, including its ability to dispose of assets, incuradditional debt, pay dividends, create liens, make investments, make capitalexpenditures and engage in specified transactions with affiliates.Noncompliance with any of the financial or nonfinancial covenants without cureor waiver would constitute an event of default under the 2009 Credit Facility.An event of default resulting from a breach of a financial or nonfinancial covenantmay result, at the option of the lenders, in an acceleration of the principaland interest outstanding, and a termination of the Revolving Facility. The 2009Credit Facility also contains other customary events of default (subject tospecified grace periods), including defaults based on events of bankruptcy andinsolvency, nonpayment of principal, interest or fees when due, breach ofspecified covenants, change in control and material inaccuracy ofrepresentations and warranties.

 

**3.****                                      Comprehensive(Loss) Income**

 

The components ofcomprehensive (loss) income, net of tax effect are as follows (in thousands):

 
| ** **                               | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| Net income (loss)                        |       | $                                                | 1,601      |   | $ | (24 | ) |
| Foreign currency translation adjustments |       | 2,440                                            |       | (2,252 | ) |
| Total comprehensive income (loss)        |       | $                                                | 4,041      |   | $ | (2,276 | ) |

 

**4.****                                      NetIncome (Loss) Per Common Share**

 

SFAS No. 128, “EarningsPer Share”, requires the presentation of basic and diluted earnings per share.Basic earnings (loss) per common share is computed by dividing income (loss)attributable to common stockholders by the weighted average number of commonshares outstanding for the period. The diluted earnings (loss) per common sharedata is computed using the weighted average number of common shares outstandingplus the dilutive effect of common stock equivalents, unless the common stockequivalents are anti-dilutive. During the three months ended March 31,2009, the treasury stock effect of options to purchase 1,872,050 shares of

 

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common stock and615,667 restricted stock units were not included in the computation of dilutedincome (loss) per common share as their effect would have been anti-dilutive.

 
| ** **                                                | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| Net income (loss)                                         |       | $                                                | 1,601      |   | $ | (24 | ) |
| Weighted average common share calculation:                |       |                                             |       |   |   |
| Basic weighted average common shares  outstanding         |       | 24,309,655                                       |       | 25,127,069 |   |
| Treasury stock effect of outstanding  options to purchase |       | 109,421                                          |       | — |   |
| Treasury stock effect of unvested  restricted stock units |       | 319,210                                          |       | — |   |
| Diluted weighted average common shares  outstanding       |       | 24,738,286                                       |       | 25,127,069 |   |
|                                                      |       |                                             |       |   |   |
| Net income (loss) per common share:                       |       |                                             |       |   |   |
| Basic net income (loss) per common share                  |       | $                                                | 0.07       |   | $ | (0.00 | ) |
| Diluted net income (loss) per common share                |       | $                                                | 0.06       |   | $ | (0.00 | ) |

 

**5.****                                      SegmentInformation**

 

The Company classifies its business into twosegments: North America and ISD. In addition, the Company’s managementevaluates revenues for its four business divisions: POS, TSD, FSD and ISD. Asignificant portion of the Company’s North American operating expenses areshared between POS, TSD and FSD divisions, and, therefore, management analyzesoperating results for these three divisions on a combined basis.

 

Management evaluates the North American andISD performance on EBITDA before stock compensation expense because operatingexpenses are distinguishable between North American and ISD operations. TheCompany defines EBITDA before stock compensation expense as income fromoperations before depreciation, amortization and stock compensation expense.EBITDA before stock compensation expense is not a generally accepted accountingprinciple measure, but rather a measure employed by management to viewoperating results adjusted for major noncash items. The Company’s definition ofEBITDA before stock compensation expense may not be comparable to similarlytitled measures used by other entities.

 

Revenue for the Company’stwo segments is presented below (in thousands):

 
| ** **          | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------|------------|--------------------------------------------------|------------|
| ** **          | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| Revenues:           |       |                                             |       |   |   |
| POS                 |       | $                                                | 18,355     |   | $ | 17,967 |   |
| TSD                 |       | 17,854                                           |       | 15,019 |   |
| FSD                 |       | 10,746                                           |       | 12,055 |   |
| Total North America |       | 46,955                                           |       | 45,041 |   |
| ISD                 |       | 37,170                                           |       | 30,225 |   |
| Total revenues      |       | $                                                | 84,125     |   | $ | 75,266 |   |

 

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EBITDA before stockcompensation expense for the North American and ISD operations is reflectedbelow (in thousands):

 
| ** **                                          | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| ISD                                                 |       | $                                                | 12,879     |   | $ | 9,539 |   |
| North America                                       |       | 6,860                                            |       | 6,779 |   |
| Total EBITDA before stock compensation  expense (i) |       | $                                                | 19,739     |   | $ | 16,318 |   |

 

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(i)                                     Managementevaluates the performance of its segments before consideration of certainintercompany transactions. Accordingly, these transactions are not reflectedEBITDA by segment. In addition, certain corporate expenses are reflected in theNorth American segment, consistent with information reviewed by our chiefoperating decision maker.

 

EBITDA before stockcompensation expense differs from income before income taxes and equity in netloss of unconsolidated affiliate reported in the condensed consolidatedstatements of operations as follows (in thousands):

 
| ** **                                                                     | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| EBITDA before stock compensation expense                                       |       | $                                                | 19,739     |   | $ | 16,318 |   |
| Reconciling items:                                                             |       |                                             |       |   |   |
| Depreciation and amortization of property  and equipment                       |       | (5,967                                           | )          | (5,834 | ) |
| Amortization of intangible assets                                              |       | (6,098                                           | )          | (5,605 | ) |
| Stock compensation expense                                                     |       | (2,965                                           | )          | (2,005 | ) |
| Interest expense                                                               |       | (3,709                                           | )          | (1,451 | ) |
| Interest income and other income, net                                          |       | 249                                              |       | 70 |   |
| Income before income taxes and equity in  net loss of unconsolidated affiliate |       | $                                                | 1,249      |   | $ | 1,493 |   |

 

**Geographic Information**

 

The Company sells its services throughforeign subsidiaries in Australia, Austria, Bermuda, Canada, France, Germany,Hong Kong, India, Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands, NewZealand, Poland, Romania, Singapore, South Korea, Spain, Sweden, Thailand andthe United Kingdom. Information regarding revenues and long-lived tangibleassets attributable to each geographic region is stated below.

 

The Company’s revenueswere generated in the following geographic regions (in thousands):

 
| ** **     | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|----------------|------------|--------------------|------------|--------------------|------------|
| ** **     | ** ** | **2008**           | ** ** | **2009**           | ** ** |
| North America  |       | $                  | 46,956     |               | $          | 45,042 |   |
| Europe         |       | 29,599             |       | 23,499             |       |
| Asia-Pacific   |       | 7,570              |       | 6,725              |       |
| Total revenues |       | $                  | 84,125     |               | $          | 75,266 |   |

 

Revenues from the Company’ssubsidiaries in the United Kingdom were $17.3 million and$12.3 million for the three months ended March 31, 2008 and 2009,respectively.

 

The Company’s long-livedassets, including goodwill and intangible assets, were located as follows (inthousands):

 
| ** **              | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **              | ** ** | **2008**              | ** ** | **2009**           | ** ** |
| North America           |       | $                     | 182,990    |               | $          | 166,841 |   |
| Europe                  |       | 23,408                |       | 32,630             |       |
| Asia-Pacific            |       | 15,162                |       | 15,356             |       |
| Total long lived assets |       | $                     | 221,560    |               | $          | 214,827 |   |

 

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Total assets are located in the followingreporting segments (in thousands):

 
| ** **    | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|---------------|------------|-----------------------|------------|--------------------|------------|
| ** **    | ** ** | **2008**              | ** ** | **2009**           | ** ** |
| North America |       | $                     | 260,213    |               | $          | 254,762 |   |
| ISD           |       | 101,701               |       | 94,198             |       |
| Total assets  |       | 361,914               |       | 348,960            |       |
|               |            |                       |            |                    |            |  |  |

 

Goodwill and intangible assets are located inthe following reporting segments (in thousands):

 
| ** **                           | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                           | ** ** | **2008**              | ** ** | **2009**           | ** ** |
| North America                        |       | $                     | 123,668    |               | $          | 125,204 |   |
| ISD                                  |       | 39,097                |       | 31,199             |       |
| Total goodwill and intangible assets |       | 162,765               |       | 156,403            |       |
|                                      |            |                       |            |                    |            |  |  |

 

**6.****                                     RestructuringCosts**

 

In August 2006, theCompany implemented a plan to reduce its cost structure and improve operatingefficiencies by reducing its workforce and implementing productivityimprovement initiatives and expense reduction measures (2006 RestructuringPlan). In connection with the 2006 Restructuring Plan, the Company incurredapproximately $5.6 million of severance associated with its workforcereduction, of which $4.2 million was selling, general and administrativeexpense, $0.8 million was engineering and development expense and$0.6 million was cost of network services.

 

During 2007 the Companyincurred an additional $3.0 million in severance and benefits, of which$2.7 million was selling, general and administrative expense and$0.3 million was engineering and development expense.

 

During 2008 the Companyincurred an additional $1.2 million in severance and benefits, which wasincluded in selling, general and administrative expense.

 

A summary of theliability for the Company’s severance and benefits obligation is as follows (inthousands):

 
| ** **                                         | ** ** | **2009** | ** ** |
|----------------------------------------------------|------------|----------|------------|
| Balance as of January 1                       |       | $        | 953        |   |
| Accretion of liability due to the passage  of time |       | 137      |       |
| Effects of foreign currency translation            |       | (35      | )          |
| Cash paid                                          |       | (331     | )          |
| Balance as of March 31                        |       | $        | 724        |   |

 

The above severance andbenefits expenses are based on estimates that are subject to change. Thisliability is classified as accounts payable, accrued expenses and otherliabilities in the accompanying consolidated balance sheet.

 

**7.****                                     Litigation andClaims**

 

The Company is periodically involved indisputes arising from normal business activities. In the opinion of management,resolution of these matters will not have a material adverse effect upon thefinancial position or future operating results of the Company, and adequateprovision for any potential losses has been made in the accompanyingconsolidated financial statements.

 

Certain states in which the Company operatesassess sales taxes on certain services provided by the Company. The Companybelieves it has no liability because its customer contracts contain terms thatstipulate the customer, not the Company, is responsible for any sales taxliability. In jurisdictions where the customer may be liable for sales taxes,the Company either includes sales tax on its invoice or has obtained anexemption certificate from the customer. Certain states have audited theCompany from 1996 to early 2001. On April 25, 2008, the Company enteredinto a settlement agreement with the remaining state’s Commissioner of Revenueto settle the only state sales tax assessment remaining for the period from1996 to early 2000. In the settlement, the Company agreed to settle 

 

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the outstanding sales tax assessment in the amount of $942,000 for asettlement payment in the amount of $250,000. The Company’s customer paid$212,500 of the settlement payment with the remaining $37,500 paid by theCompany. Based on the final executed settlement, the Company reduced its netliability for this matter by $0.9 million. This $0.9 million benefit,related to the reduction in the sales tax liability, is included in selling,general and administrative expenses in the accompanying consolidated statementof operations for the three months ended March 31, 2008.

 

**10.****                               SubsequentEvents**

 

OnMarch 2, 2009, the Company entered into that certain Asset PurchaseAgreement, dated March 2, 2009 (the Purchase Agreement), by and betweenthe Company and VeriSign, Inc. (the Seller) pursuant to which the Companyagreed to purchase certain assets and assume certain liabilities of the Seller’sCommunications Services Group (CSG).  On May 1, 2009, the Companycompleted the acquisition in accordance with the terms and conditions of thePurchase Agreement.  The initial purchase price was approximately $226.2million in cash and is subject to a post-closing working capital adjustment. TheCompany funded the transaction through a new $230 million term loan facility aspart of its 2009 Credit Facility (see Note 2). CSG provides call signalingservices and intelligent database services such as caller ID, toll-free callrouting and local number portability to the U.S. telecommunicationsindustry.  In addition, CSG providewireless roaming and clearing services to mobile phone operators.  The Company will integrate CSG into itstelecommunications services division.

 

This acquisition will be accounted for as abusiness combination under SFAS No. 141(R). While the Company hascommenced the appraisals necessary to assess the fair values of the tangibleand intangible assets acquired and liabilities assumed, the initial purchaseprice allocation is not yet available. No financial activity from thisacquisition has been included in the Company’s consolidated financialstatements as of March 31, 2009.

 

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**Item2.   Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

You should read thefollowing discussion of the financial condition and results of operations ofTNS, Inc. in conjunction with the consolidated financial statements andthe related notes included in our annual report on Form 10-K filed withthe SEC on March 16, 2009 and available directly from the SEC atwww.sec.gov and the condensed consolidated financial statements and the relatednotes of TNS, Inc., included elsewhere in this quarterly report.

 

There are statements madeherein which may not address historical facts and, therefore, could beinterpreted to be forward-looking statements within the meaning of The Private SecuritiesLitigation Reform Act of 1995. These forward-looking statements are based oncurrent expectations, forecasts and assumptions that are subject to risks anduncertainties that could cause actual results to differ materially from thoseset forth in, or implied by, the forward-looking statements. The Company hasattempted, whenever possible, to identify these forward-looking statementsusing words such as “may,” “will,” “should,” “projects,” “estimates,” “expects,”“plans,” “intends,” “anticipates,” “believes,” and variations of these wordsand similar expressions. Similarly, statements herein that describe the Company’sbusiness strategy, prospects, opportunities, outlook, objectives, plans,intentions or goals are also forward-looking statements. Actual results maydiffer materially from those indicated by such forward-looking statements as aresult of various important factors, including: the Company’s reliance upon asmall number of customers for a significant portion of its revenue; competitivefactors such as pricing pressures; uncertainties related to the updatedinternational tax planning strategy implemented by the Company; our customer’sability to direct their data communications from the Company’s networks toother networks; the Company’s ability to grow its business domestically andinternationally by generating greater transaction volumes, acquiring newcustomers or developing new service offerings; fluctuations in the Company’squarterly results because of the seasonal nature of the business and otherfactors outside of the Company’s control such as fluctuations in foreignexchange rates; the Company’s substantial debt could adversely affect itsfinancial health because the Company may be unable to obtain additionalfinancing for working capital, capital expenditures, acquisitions and generalcorporate purposes, the Company may not generate sufficient cash flow to repaythe debt on a timely basis or to pre-pay the debt, and a significant portion ofthe Company’s cash flow from operations will be dedicated to the repayment orservicing of indebtedness, thereby reducing the amount of cash available forother purposes; the Company’s ability to identify, execute or effectivelyintegrate acquisitions including the acquisition of CSG; the Company’s abilityto identify, execute or effectively integrate future acquisitions; increases inthe prices charged by telecommunication providers for services used by theCompany; unfavorable foreign exchange movements; the Company’s ability to adaptto changing technology; additional costs related to compliance with theSarbanes-Oxley Act of 2002, any revised New York Stock Exchange listingstandards, SEC rule changes or other corporate governance issues; andother risk factors described in the Company’s annual report on Form 10-Kfiled with the SEC on March 16, 2009. In addition, the statements in thisquarterly report are made as of the date of this filing. The Company expectsthat subsequent events or developments will cause its views to change. TheCompany undertakes no obligation to update any of the forward-lookingstatements made herein, whether as a result of new information, future events,changes in expectations or otherwise. These forward-looking statements shouldnot be relied upon as representing the Company’s views as of any datesubsequent to the date of this filing. The forward-looking statements in thisdocument are intended to be subject to the safe harbor protection provided bySections 27A of the Securities Act and 21E of the Exchange Act.

 

**Overview**

 

We are an international data communicationscompany which provides networking, data communications and value added servicesto many of the world’s leading retailers, banks and payment processors. We arealso a leading provider of secure data and voice network services to the globalfinancial services industry. We operate one of the largest unaffiliatedSignaling System No. 7 networks in the United States capable of providingservices nationwide, and we utilize this network to provide call signaling anddatabase access services to the domestic telecommunications industry. Our datacommunications services enable secure and reliable transmission oftime-sensitive, transaction-related information critical to our customers’operations. Our customers outsource their data communications requirements tous because of our substantial expertise, comprehensive customer support andcost-effective services. We provide services to customers in the United Statesand increasingly to international customers in 29 countries, including Canadaand Mexico and countries in Europe, Latin America and the Asia-Pacific region.

 

We provide services through our multiple datanetworks, each designed specifically for transaction applications. Our networkssupport a variety of widely accepted communications protocols and are designedto be scalable and accessible by multiple methods, including dial-up,dedicated, wireless, broadband and internet connections.

 

We generate revenues through four businessdivisions:

 

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·                  ***POS services. ***We provide fast, secure andreliable data communications services primarily to payment processors in theUnited States and Canada. POS services revenue is derived primarily from pertransaction fees paid by our customers for the transmission of transaction datathrough our networks between payment processors and POS or ATM terminals.

 

·                  ***Telecommunication services. ***We provide call signalingservices that enable telecommunications service providers to establish andterminate telephone calls placed by their subscribers. We also provide databaseaccess services that enable our customers to provide intelligent networkservices, such as caller identification, toll-free call routing and localnumber portability, and validation services, such as credit card, calling card,third- party billing and collect calling. Our telecommunication servicesdivision generates revenues primarily from fixed monthly fees charged for ourcall signaling services and per-query fees charged for our database access andvalidation services.

 

·                  ***Financial services. ***We provide fast, secure andreliable private data networking services that enable seamless communicationsand facilitate electronic trading among commercial banks, mutual funds, pensionfunds, broker-dealers, alternative trading systems, electronic communicationsnetworks, securities and commodities exchanges and other market participants.Our networks support multiple communications protocols including the FinancialInformation eXchange, or FIX, protocol. Our financial services divisiongenerates revenues from monthly recurring fees based on the number of customerconnections to and through our networks.

 

·                  ***International services. ***We sell our POS and financialservices through our international services division. We are one of the leadingproviders of data communications services to the POS industry in the UnitedKingdom. Our international services division also provides POS and financialservices in Australia, Austria, Belgium, Bermuda, Finland, France, Gibraltar,Germany, Greece, Hong Kong, India, Ireland, Italy, Japan, Malaysia, theNetherlands, New Zealand, Norway, Poland, Romania, Singapore, South Korea,Spain, Sweden, Taiwan and Thailand.

 

Our most significant expense is cost ofnetwork services, which is comprised primarily of telecommunications charges,including data transmission and database access, leased digital capacitycharges, circuit installation charges and activation charges. The cost of datatransmission is based on a contract or tariff rate per minute of usage inaddition to a prescribed rate per transaction for some vendors. The costs ofdatabase access, circuits, installation charges and activation charges arebased on fixed fee contracts with local exchange carriers and interexchangecarriers. The cost of network services also includes salaries, equipmentmaintenance and other costs related to the ongoing operation of our datanetworks. Depreciation expense on our network equipment and amortization ofdeveloped technology are excluded from our cost of network services andincluded in depreciation and amortization of property and equipment andamortization of intangible assets in our consolidated statements of operations.

 

Our engineering and development expensesinclude salaries and other costs related to product development, engineering,hardware maintenance and materials. The majority of these costs are expensed asincurred, including costs related to the development of internal use softwarein the preliminary project, the post-implementation and operation stages.Development costs we incur during the software application development stageare capitalized and amortized over the estimated useful life of the developedsoftware.

 

Our selling, general and administrativeexpenses include costs related to sales, marketing, administrative andmanagement personnel, as well as external legal, accounting and consultingservices.

 

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**Results of Operations**

 

The following table setsforth, for the periods indicated selected statement of operations data (dollarsin thousands):

 
| ** **                                                                            | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| Revenues                                                                              |       | $                                                | 84,125     |   | $ | 75,266 |   |
| Operating expenses:                                                                   |       |                                             |       |   |   |
| Cost of network services, exclusive of the  items shown separately below              |       | 40,707                                           |       | 36,790 |   |
| Engineering and development                                                           |       | 7,199                                            |       | 6,407 |   |
| Selling, general, and administrative                                                  |       | 19,445                                           |       | 17,756 |   |
| Depreciation and amortization of property  and equipment                              |       | 5,967                                            |       | 5,834 |   |
| Amortization of intangible assets                                                     |       | 6,098                                            |       | 5,605 |   |
| Total operating expenses                                                              |       | 79,416                                           |       | 72,392 |   |
| Income from operations                                                                |       | 4,709                                            |       | 2,874 |   |
| Interest expense                                                                      |       | (3,709                                           | )          | (1,451 | ) |
| Interest income                                                                       |       | 180                                              |       | 50 |   |
| Other income (expense), net                                                           |       | 69                                               |       | 20 |   |
| Income before income tax benefit and equity  in net loss of unconsolidated affiliates |       | 1,249                                            |       | 1,493 |   |
| Income tax benefit (provision)                                                        |       | 352                                              |       | (1,487 | ) |
| Equity in net loss of unconsolidated  affiliates                                      |       | —                                           |       | (30 | ) |
| Net income (loss)                                                                     |       | $                                                | 1,601      |   | $ | (24 | ) |

 

**Three months ended March 31, 2009compared to the three months ended March 31, 2008**

 

***Revenues.***Total revenues decreased$8.8 million, or 10.5%, to $75.3 million for the three months ended March 31,2009, from $84.1 million for the three months ended March 31, 2008.We generate revenues through four operating divisions.

 

***International services division.***Revenuesfrom the international services division decreased $7.0 million, or 18.7%,to $30.2 million for the three months ended March 31, 2009, from$37.2 million for the three months ended March 31, 2008. The adverseeffect of foreign exchange translation on a year-over-year basis was $8.4 million.  Excluding the adverse impact of foreignexchange rates, international services division increased $1.4 million, or3.7%, to $38.6 million from $37.2 million for the three months ended March 31,2009 and 2008, respectively. The increase was the result of an additional $0.7million from increased sales of our payment gateway services, highertransaction volumes and increased broadband connections from POS customers inAsia Pacific and $0.7 million from additional connections from financialservices customers. Revenues from our United Kingdom subsidiaries decreased$5.0 million, or 29.2%, to $12.3 million for the three months ended March 31,2009, from $17.3 million for the three months ended March 31, 2008.On a constant dollar basis, revenue from the United Kingdom subsidiaries forthe three months ended March 31, 2009 would have decreased $0.4 million,or 2.6%, to $16.9 million due to a decrease in transaction volumes which waspartially offset by increased revenue from sales of our payment gateway and IPservices.

 

Future revenue growth inthe international services division depends on a number of factors includingthe success of our POS and financial service products in countries we haverecently entered, the total number of POS transactions that we transport, the successof our new product offerings,  thesuccessful expansion of our card-not-present service offerings and the effectsof foreign currency translation.  Inrecent months, we have seen a reduction in the growth rates of our dial-uptransaction volumes in most of the markets we operate, which we attribute tothe overall weakness of the global economy. As we generate the majority of ourrevenue in the international services division from transaction volumes ourfuture revenue may be adversely affected by the continued weakness of theglobal economy.

 

In our international services division weenter into arrangements with our customers in the currency of the markets weoperate in. As a result, our reported results are affected by fluctuations inthe value of the U.S. dollar as compared to foreign currencies, predominantlythe British Pound, the Euro and the Australian dollar. The following tableshows the currency composition of our revenues in the international servicesdivision for the three months ended March 31, 2009 and 2008, respectively,and weighted average exchange rates used to translate our local currencyresults to the U.S. dollar:

 

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| ** **        | ** ** | **2009**                        | ** ** | **2008**                                             | ** ** |
|-------------------|------------|---------------------------------|------------|------------------------------------------------------|------------|
| ** **        | ** ** | **% of ISD  Revenue** | ** ** | **Weighted Average   Exchange Rates** | ** ** | **% of ISD  Revenue** | ** ** | **Weighted Average   Exchange Rates** | ** ** |
| British Pound     |       | 41                              | %          | 1.44                                                 |       | 47 | % | 1.98 |   |
| Euro              |       | 34                              | %          | 1.31                                                 |       | 31 | % | 1.50 |   |
| Australian Dollar |       | 18                              | %          | 0.66                                                 |       | 17 | % | 0.91 |   |

 

For further details onthe effects of foreign exchange on our annual reported revenues, please referto the Outlook section on page 22.

 

***POS division.***Revenues from the POSdivision decreased $0.4 million, or 2.1%, to $18.0 million for thethree months ended March 31, 2009, from $18.4 million for the threemonths ended March 31, 2008. POS dial-up transaction volumes decreased9.7% to 1.18 billion transactions for the three months ended March 31,2009, from 1.31 billion transactions for the three months ended March 31,2008. Revenues from the POS division decreased $1.1 million for the threemonths ended March 31, 2009 due to lower transaction volumes, as mentionedabove, which we primarily attribute to softness in the economy, and $1.1million due to a decrease in revenue per transaction for our dial-up POSoffering mainly resulting from the renewal of certain customer contracts.  This was partially offset by a $1.0 millionincrease in revenue from our managed broadband products, a $0.6 millionincrease from sales of our ATM processing products, primarily in Canada, and a$0.2 million increase in sales of our wireless payment gateway platform.

 

***Telecommunication services division.***Revenuesfrom the telecommunication services division decreased $2.8 million, or15.9%, to $15.0 million for the three months ended March 31, 2009, from$17.9 million for the three months ended March 31, 2008. Revenuesdecreased $4.3 million due to the loss of two customers’ caller ID business in2008 and $0.6 million due to volume declines from a customer following theannouncement in March 2009 of our agreement to acquire CSG, based on theexpectation that we will compete with the customer following the acquisition.These factors were partially offset by an increase of $1.3 million from networkand database access services provided to cable customers and $0.8 million insales and our core SS7 network services. Future revenue growth in the telecommunication services division dependson a number of factors including the number of database access queries wetransport, the number of call signaling routes our customers purchase, thesuccess of our new product offerings, which potentially may be offset bycustomers seeking pricing discounts due to industry consolidation or otherreasons and the successful integration of the business acquired through ourpurchase of CSG.

 

***Financial services division.***Revenuesfrom the financial services division increased $1.3 million, or 12.2%, to$12.1 million for the three months ended March 31, 2009, from$10.7 million for the three months ended March 31, 2008. The increasein revenues was primarily due to increases in new customer endpointinstallations and increases in connectivity between existing customers and to alesser extent from increased demand for greater bandwidth connectivity whichresults in higher average revenue per customer endpoint. Future revenue growthin the financial services division depends on a number of factors including thenumber of connections to and through our networks as well as the success of ournew product offerings. We have begun to see an increased demand from ourcustomers for larger bandwidth connections to our network and while theseconnections create greater revenue per physical endpoint, they require longersales and installation lead-times.  Wealso expect that the current difficulties in the financial services sector mayhave a negative impact on our future growth rates in this division.

 

***Cost of network services.***Cost ofnetwork services decreased $3.9 million, or 9.6%, to $36.8 millionfor the three months ended March 31, 2009, from $40.7 million for thethree months ended March 31, 2008. On a constant dollar basis, cost ofnetwork services would have decreased $0.5 million, or 1.2%, to$40.2 million. Cost of network services were 48.9% of revenues for thethree months ended March 31, 2009, compared to 48.4% of revenues for thethree months ended March 31, 2008. Excluding the effect of foreignexchange, the decrease in cost of network services resulted primarily fromreductions in caller ID query volumes in our telecommunications servicesdivision  and to a lesser extent from areduction in dial-up transaction volumes in our POS division and reductions inthe cost of services provided to us in our POS division through negotiatedprice decreases from our vendors.  Thiswas partially offset by an increase in the number of connections in ourfinancial services division and to a lesser extent from increased broadbandconnections in our POS division.

 

Gross profit represented51.1% of total revenues for the three months ended March 31, 2009,compared to 51.6% for the three months ended March 31, 2008. On a constantdollar basis, gross margins for the three months ended 31 March, 2009 increased40 basis points to 52.0%. The improvement in gross margin, on a constant dollarbasis, from last year is primarily a result of improvements in the margins ofour POS division as a result of continued focus on controlling the cost ofnetwork services provided to us and to a lesser extent as a result of anincrease in the contribution our financial services division, one of ourhighest gross margin divisions.

 

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Future cost of networkservices depends on a number of factors including total transaction and queryvolumes, the relative growth and contribution to total transaction volume ofeach of our customers, the success of our new service offerings, the timing andextent of our network expansion and the timing and extent of any network costincreases or reductions.

 

***Engineering and development expense.***Engineeringand development expense decreased $0.8 million, or 11.0%, to$6.4 million for the three months ended March 31, 2009, from$7.2 million for the three months ended March 31, 2008. On a constantdollar basis, engineering and development expenses would have decreased $0.1 million,or 1.4%, to $7.1 million. Engineering and development expense represented 8.5%and 8.6% of revenues for the three months ended March 31, 2009 and 2008,respectively. Included in engineering and development expense for the threemonths ended March 31, 2009 and 2008 is stock compensation expense of$0.4 million and $0.5 million, respectively.  Capitalizedsoftware development costs, which are offset against engineering anddevelopment costs, increased $0.4 million to $1.6 million from $1.2 million forthe three month period ended March 31, 2009 and 2008, respectively. Theincrease in capitalized software development costs is primarily due to ourplanned investment to enhance our card-not-present payment gateway, and to alesser extent from development of our back-office systems to enhance ourinternal reporting and network monitoring capabilities.  Excluding theitems mentioned above and the effects of foreign exchange, engineering anddevelopment expense before the capitalization of software development costswould have decreased $0.4 million to $5.1 million, or 6.7% of revenues, for thethree months ended March 31, 2009 from $5.5 million, or 6.5% of revenues,for the three months ended March 31, 2008.

 

***Selling, general and administrative expense.***Selling,general and administrative expenses decreased $1.7 million, or 8.7%, to$17.8 million for the three months ended March 31, 2009, from$19.4 million for the three months ended March 31, 2008. On aconstant dollar basis, selling, general and administrative expenses would haveincreased $0.2 million, or 1.0%, to $19.6 million. Selling, general andadministrative expenses represented 23.6% of revenues for the three monthsended March 31, 2009, compared to 23.1% of revenues for the three monthsended March 31, 2008. Included in selling, general and administrativeexpenses for the three months ended March 31, 2009 and 2008 is$1.4 million and $2.2 million of stock compensation expense,respectively. The decrease in stock compensation expense is due to a reductionin performance related stock compensation as a result of fewer grants madeduring the three months ended March 31, 2009. Included in selling, generaland administrative expenses for the three months ended March 31, 2009 are$0.6 million in professional fees related to our acquisition of CSG. Includedin selling, general and administrative expenses for the three months ended March 31,2008 was a $0.9 million pre-tax benefit associated with the settlement ofa state sales tax liability. Excluding these items and the effects of foreignexchange, selling, general and administrative expenses would have decreased$0.5 million to $17.6 million, or 23.4% of revenues, for the three months endedMarch 31, 2009 from $18.1 million, or 21.5% of revenues, for the threemonths ended March 31, 2008 primarily as a result of our efforts to reduceour overall costs.

 

***Depreciation and amortization of property and equipment.***Depreciationand amortization of property and equipment decreased $0.2 million, or2.2%, to $5.8 million for the three months ended March 31, 2009, from$6.0 million for the three months ended March 31, 2008. On a constantdollar basis, depreciation and amortization of property and equipment wouldhave increased $0.2 million, or 3.3% to $6.2 million.  Depreciation and amortization of property andequipment represented 7.8% and 7.1% of revenues for the three month periodsended March 31, 2009 and 2008, respectively.

 

***Amortization of intangible assets.***Amortizationof intangible assets decreased $0.5 million, or 8.1%, to $5.6 millionfor the three months ended March 31, 2009, from $6.1 million for the threemonths ended March 31, 2008 and relates solely to intangible assetsresulting from acquisitions. On a constant dollar basis, amortization of intangibleassets would have remained unchanged at $6.1 million. For purposes ofmeasuring and recognizing impairment of long-lived assets includingintangibles, we assess whether separate cash flows can be attributed to anindividual asset. For our customer relationship intangible assets, we recognizeand measure impairment upon the significant loss of revenue from a customer. Beginningin 2005, we experienced revenue and transaction volume declines with a majorcustomer. The intangible asset value attributable to the customer relationshipwas approximately $19.0 million as of March 31, 2009.  We assessed the recoverability of thiscustomer relationship asset based upon undiscounted anticipated future cashflows and concluded that no impairment existed as of March 31, 2009.

 

***Interest expense.***Interest expensedecreased $2.3 million, or 60.9%, to $1.4 million for the threemonths ended March 31, 2009, from $3.7 million for the three monthsended March 31, 2008. Interest expense decreased primarily as a result ofthe lower effective interest rate associated with our 2007 Credit Facility andto a lesser extent our reduced debt levels.

 

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***Income tax provision.***For the threemonths ended March 31, 2009, our income tax provision was approximately$1.5 million compared to a credit of $0.4 million for the threemonths ended March 31, 2008. The increase in our income tax provision isprimarily related to higher income in the U.S. that cannot be offset againstlosses in other jurisdictions and the effect of adjustments to the provisionresulting from the finalization of tax returns in the U.K. Our effective taxrate was 101.7% and (28.2)% for the three months ended March 31, 2009 and2008, respectively. Our effective tax rate differs from the U.S. Federalstatutory rate primarily due to stock-based compensation expense not deductiblefor income tax purposes and profits of our international subsidiaries beingtaxed at rates different than the U.S. Federal statutory rate, and the effectof adjustments to the provision noted above.

 

**Liquidity and Capital Resources**

 

Our primary liquidity and capital resource needs are to finance thecosts of our operations, to make capital expenditures and to service our debt.Based upon our current level of operations, we expect that our cash flow fromoperations, together with the amounts we are able to borrow under our 2009 CreditFacility, will be adequate to meet our anticipated needs for the foreseeablefuture. 

 

Our operations providedus cash of $3.7 million for the three months ended March 31, 2009, whichwas attributable to a net loss of $24,000, depreciation, amortization and othernon-cash charges of $15.3 million and an increase in working capital of$11.6 million. The increase in working capital relates primarily to thetiming of payments. We expect a large portion of this working capital change toreverse itself in subsequent quarters. Our operations provided us cash of$15.7 million for the three months ended March 31, 2008, which wasattributable to net income of $1.6 million, depreciation, amortization andother non-cash charges of $13.3 million and a decrease in working capital of$0.7 million.

 

We used cash of$5.8 million and $6.7 million in investing activities for the three monthsended March 31, 2009, and March 31, 2008, respectively, whichcomprised solely of capital expenditures to support our revenue growth.

 

We used cash of $0.7 millionfrom financing activities for the three months ended March 31, 2008. Weused cash of $4.5 million from financing activities for the three monthsended March 31, 2008, which includes $4.0 million of voluntarypre-payments on our 2007 senior secured credit facility and $0.6 million inproceeds from stock options exercised during the three months ended March 31,2008.

 

**Outlook**

 

In our foreign operations we conduct business in each of our foreignjurisdictions local currency. Due to the recent strengthening of the U.S.Dollar relative to several major foreign currencies, we expect revenues andoperating income to be negatively impacted by foreign currency translation. Asa point of reference, for the year ended December 31, 2008, the weightedaverage exchange rate used to translate the Company’s Statement of Operations(U.S. Dollar rate for one unit of foreign currency) was $1.85 for the BritishPound, $1.47 for the Euro, and $0.84 for the Australian dollar. For the yearended December 31, 2008, approximately 21%, 14% and 8% of our consolidatedrevenues were generated in the British Pound, Euro and Australian dollar,respectively. For the year ended December 31, 2008, approximately 16%, 11%and 6% of our consolidated operating expenses were generated in the BritishPound, Euro and Australian dollar, respectively. A $0.01 change in exchangerates for each of the major foreign currencies we operate in would have thefollowing impact on revenue for the year ended December 31, 2008: BritishPound, $0.4 million, Euro, $0.4 million and Australian Dollar,$0.3 million. The foreign currency exchange rates which impact ourrevenues and operating income have been volatile recently and are beyond ourcontrol. (See Item 3, Foreign Currency Risk, below)

 

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**Acquisition of the Communications Services Group**

 

On March 2, 2009,TNS entered into an asset purchase agreement, dated March 2, 2009, betweenTNS and VeriSign, Inc. pursuant to which TNS agreed to purchase fromVerisign, Inc. certain assets and assume certain liabilities of CSG.  On May 1,2009, TNS completed the acquisition in accordance with the terms and conditionsof the asset purchase agreement.  The initial purchase price wasapproximately $226.2 million in cash and is subject to a post-closing workingcapital adjustment.  We funded thetransaction through a new $230 million term loan facility as part of its 2009Credit Facility (see Note 2).  CSG providescall signaling services, intelligent database services such as caller ID,toll-free call routing and local number portability to the U.S.telecommunications industry.  Inaddition, they provide wireless roaming and clearing services to mobile phoneoperators.  We will integrate CSG intoour telecommunications services division.

 

We expect to experience operational benefits from the acquisition,including additional overall cost savings from the consolidation of our two SS7call signaling networks, eliminating duplicate intelligent database platformsand reduced network —related costs from the elimination of duplicatefacilities.  We also expect reducedoverall combined capital expenditures as a result of greater economies of scaleand the rationalization of network assets.

 

Theacquisition will be accounted for as a business combination under SFAS No. 141(R).While we have commenced the appraisals necessary to assess the fair values ofthe tangible and intangible assets acquired and liabilities assumed, theinitial purchase price allocation is not yet available. No financial activityfrom this acquisition has been included in our consolidated financialstatements as of March 31, 2009.

 

**Seasonality**

 

Credit card and debitcard transactions account for a major percentage of the transaction volumeprocessed by our customers. The volume of these transactions on our networksgenerally is greater in the third and fourth quarter vacation and holidayseasons than during the rest of the year. Consequently, revenues and earningsfrom credit card and debit card transactions in the first and second quartergenerally are lower than revenues and earnings from credit card and debit cardtransactions in the third and fourth quarters of the immediately precedingyear. We expect that our operating results in the foreseeable future will besignificantly affected by seasonal trends in the credit card and debit cardtransaction market.

 

**Effects of Inflation**

 

Our monetary assets, consisting primarily of cash and receivables, andour non-monetary assets, consisting primarily of intangible assets andgoodwill, are not affected significantly by inflation. We believe thatreplacement costs of equipment, furniture and leasehold improvements will notmaterially affect our operations. However, the rate of inflation affects ourexpenses, such as those for employee compensation and costs of networkservices, which may not be readily recoverable in the price of services offeredby us.

 

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**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk**

 

***Interest rates***

 

Our principal exposure to market risk relates to changes in interestrates. As of March 31, 2009 we had $178.5 million outstanding underour 2007 Credit Facility with interest rates tied to changes in the lender’sbase rate or the LIBOR rate. Based upon the outstanding borrowings on March 31,2009 and assuming repayment of the Term Loan in accordance with scheduledmaturities, each 1.0% increase or decrease in these rates could affect ourannual interest expense by $1.8 million.

 

As of March 31, 2009, we did not hold derivative financial orcommodity instruments and all of our cash and cash equivalents were held inmoney market or commercial accounts.

 

***Foreign currency risk***

 

Our earnings are affected by fluctuations in the value of the U.S.dollar as compared with foreign currencies, predominately the Euro, the BritishPound and the Australian dollar due to our operations in Europe and Australia.(See Item 2, Outlook, above)

 

We have operations in 23 countries outside of the U.S., including theUnited Kingdom, Austria, Australia, Bermuda, Canada, France, Germany, Hong Kong,India, Ireland, Italy, Japan, Malaysia, Mexico, New Zealand, Poland, Romania,Singapore, South Korea, Spain, Sweden, Thailand and the Netherlands. We provideservices in these countries using networks deployed in each country. We manageforeign exchange risk through the structure of our business. In the substantialmajority of our transactions, we receive payments denominated in the U.S.dollar, British Pound, Euro or Australian dollar. Therefore, we do not rely oninternational currency markets to obtain and pay illiquid currencies. Theforeign currency exposure that does exist is limited by the fact that themajority of transactions are paid according to our standard payment terms,which are generally short-term in nature. Our policy is not to speculate inforeign currencies, and we promptly buy and sell foreign currencies asnecessary to cover our net payables and receivables, which are denominated inforeign currencies. For the three months ended March 31, 2009, we recordeda loss on foreign currency revaluation of approximately $0.1 million.

 

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**Item 4. Controls and Procedures**

 

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the Company’s reports under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management necessarily was required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.

 

**Evaluation**

 

The Company carried outan evaluation, under the supervision, and with the participation, of theCompany’s management, including the Company’s Chief Executive Officer and theCompany’s Chief Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures as of March 31, 2009. Based on theforegoing, the Company’s Chief Executive Officer and principal financialofficers concluded that the Company’s disclosure controls and procedures wereeffective as of March 31, 2009 at the reasonable assurance level.

 

There have been nochanges during the three months ended March 31, 2009 covered by thisreport in the Company’s internal control over financial reporting or in otherfactors that could materially affect or are reasonably likely to materiallyaffect the internal control over financial reporting.

 

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**PART II—OTHERINFORMATION**

 
| **Item 1.**                                                                                                                                                                                                                                                         | ** **       | **Legal Proceedings**                                                                                                         |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------|-------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |
|                                                                                                                                                                                                                                                                |             | None.                                                                                                                         |
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |
| **Item 1A.**                                                                                                                                                                                                                                                        | **Risk Factors** |
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |
| The  failure to successfully integrate the CSG acquisition could negatively affect  our operating results.                                                                                                                                                          |
|                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                |             | If  we are not able to successfully integrate CSG in a timely manner, our  operating results may decline, particularly in the |
| fiscal quarters  immediately following the completion of transaction while the operations of  CSG are being integrated into our operations. We also may incur substantial  costs delays or other operational or financial problems during the  integration process. |
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |
| **Item 2.**                                                                                                                                                                                                                                                         | ** **       | **Unregistered Sales of Equity Securities and Use of  Proceeds**                                                              |
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |
|                                                                                                                                                                                                                                                                |             | None.                                                                                                                         |
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |
| **Item 3.**                                                                                                                                                                                                                                                         | ** **       | **Default Upon Senior Securities**                                                                                            |
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |
|                                                                                                                                                                                                                                                                |             | None.                                                                                                                         |
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |
| **Item 4.**                                                                                                                                                                                                                                                         | ** **       | **Submission of Matters to a Vote of Security Holders**                                                                       |
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |
|                                                                                                                                                                                                                                                                |             | None.                                                                                                                         |
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |
| **Item 5.**                                                                                                                                                                                                                                                         | ** **       | **Other Information**                                                                                                         |
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |
| **Item 6.**                                                                                                                                                                                                                                                         | ** **       | **Exhibits**                                                                                                                  |
| ** **                                                                                                                                                                                                                                                          | ** **       | ** **                                                                                                                    |
|                                                                                                                                                                                                                                                                |             | (2.1)                                                                                                                         | Asset Purchase Agreement dated March 2, 2009, by and between  Transaction Network Services, Inc. and VeriSign, Inc. (incorporated by  reference to Exhibit 2.1 to Form 8-k filed March 8, 2009). |
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |   |
|                                                                                                                                                                                                                                                                |             | (10.1)                                                                                                                        | Amended and Restated Credit Agreement, dated May 4, 2009, by and  among Transaction Network Services, Inc., as borrower, TNS, Inc., as a credit  party, SunTrust Bank, as agent, co-administrative agent, L/C issuer and a  lender, General Electric Capital Corporation, as co-administrative agent and  a lender, Bank of America, N.A., as syndication agent, the other financial  institutions party thereto, as lenders, SunTrust Robinson Humphrey, Inc., as  joint lead arranger and sole bookrunner, and GE Capital Markets, Inc., as  joint lead arranger (incorporated by reference to Exhibit 10.1 to form 8-K  filed May 4, 2009). |
|                                                                                                                                                                                                                                                                |             |                                                                                                                          |   |
|                                                                                                                                                                                                                                                                |             | (31.1)                                                                                                                        | Certification—Chief Executive Officer |
|                                                                                                                                                                                                                                                                |             | (31.2)                                                                                                                        | Certification — Chief Financial Officer |
|                                                                                                                                                                                                                                                                |             | (32.1)                                                                                                                        | Written Statement of Chief Executive Officer and Chief Financial  Officer |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                     | TNS, Inc. |
|--------------------------|----------------|
|                     | (Registrant)   |
|                     |           |
| Date:  May 11, 2009 | By:            | /s/ HENRY H. GRAHAM, JR. |
|                     |           |   |
|                     |           | Henry  H. Graham, Jr. |
|                     |           | Chief  Executive Officer |
|                     |           |   |
| Date:  May 11, 2009 | By:            | /s/  DENNIS L. RANDOLPH, JR. |
|                     |           |   |
|                     |           | Dennis  L. Randolph, Jr. |
|                     |           | Executive  Vice President, Chief Financial Officer & Treasurer |

 

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