**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarter endedMarch 31, 2007**

** **

**Commission File Number:001-32033**

** **

**TNS, INC.**

(Exact name of registrantas specified in its charter)

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

 

**11480 Commerce ParkDrive, Suite 600**

**Reston, VA 20191**

(Address of principal executive offices)

 

**(703) 453-8300**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementfor the past 90 days.  x Yes    o No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

Large accelerated filer  o      Acceleratedfiler  x      Non-acceleratedfiler  o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). o Yes    x No

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

| **Shares Outstanding as of April 1, 2007**      |
|------------------------------------------------------|
| 24,206,582  Shares of Common Stock, $0.001 par value |

 

 

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**TNS, INC.**

**INDEX**
| **Part I: FINANCIAL  INFORMATION** |   |          |
|-----------------------------------------|--------|---------------|
|                                    |   |          |   | ** ** |   |   |
|                                    |   | Item 1.  |   | Condensed Consolidated Financial Statements  (Unaudited) |   | 3 |
|                                    |   |          |   | Condensed Consolidated Balance Sheets as of  December 31, 2006 and March 31, 2007 |   | 3 |
|                                    |   |          |   | Condensed Consolidated Statements of Operations for  the three months ended March 31, 2006 and 2007 |   | 4 |
|                                    |   |          |   | Condensed Consolidated Statements of Cash Flows for  the three months ended March 31, 2006  and 2007 |   | 5 |
|                                    |   |          |   | Condensed Consolidated Statements of Stockholders’  Equity for the three months ended March 31, 2007 |   | 6 |
|                                    |   |          |   | Notes to Condensed Consolidated Financial Statements |   | 7 |
|                                    |   | Item 2.  |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   | 16 |
|                                    |   | Item 3.  |   | Quantitative and Qualitative Disclosures About Market  Risk |   | 23 |
|                                    |   | Item 4.  |   | Controls and Procedures |   | 24 |
|                                    |   |          |   |   |   |   |
| **Part II:  OTHER INFORMATION**    |   |          |
|                                    |   |          |   | ** ** |   |   |
|                                    |   | Item 1.  |   | Legal  Proceedings |   | 25 |
|                                    |   | Item 1A. |   | Risk Factors |   | 25 |
|                                    |   | Item 2.  |   | Changes in Securities, Use of Proceeds and Issuer  Purchases of Equity Securities |   | 25 |
|                                    |   | Item 3.  |   | Default Upon Senior Securities |   | 25 |
|                                    |   | Item 4.  |   | Submission of Matters to a Vote of Security Holders |   | 25 |
|                                    |   | Item 5.  |   | Other  Information |   | 25 |
|                                    |   | Item 6.  |   | Exhibits |   | 25 |

 

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**PART I—FINANCIALINFORMATION**

**Item 1.**                          CondensedConsolidated Financial Statements (Unaudited)

**TNS, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(dollars in thousands, except share and per share data)**
| ** **                                                                                                                                                                                                | ** ** | **December 31,  2006** | ** ** | **March 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                                                | ** ** | ** **                  | ** ** | **(unaudited)**          | ** ** |
| **ASSETS**                                                                                                                                                                                                | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Current assets:                                                                                                                                                                                           |       |                        |       |                     |       |
| Cash and cash  equivalents                                                                                                                                                                                |       | $                           | 17,322     |                     | $          | 18,732 |   |
| Restricted cash                                                                                                                                                                                           |       | —                      |       | 102,267                  |       |
| Accounts  receivable, net of allowance for doubtful accounts of $6,435 and $6,502,  respectively                                                                                                          |       | 64,985                      |       | 66,328                   |       |
| Prepaid expenses                                                                                                                                                                                          |       | 4,931                       |       | 4,689                    |       |
| Deferred tax  assets                                                                                                                                                                                      |       | 2,875                       |       | 3,035                    |       |
| Other current  assets                                                                                                                                                                                     |       | 10,232                      |       | 8,726                    |       |
| Total current  assets                                                                                                                                                                                     |       | 100,345                     |       | 203,777                  |       |
|                                                                                                                                                                                                      |       |                        |       |                     |       |
| Property and equipment,  net                                                                                                                                                                              |       | 58,376                      |       | 55,678                   |       |
| Identifiable intangible  assets, net                                                                                                                                                                      |       | 192,700                     |       | 187,361                  |       |
| Goodwill                                                                                                                                                                                                  |       | 12,043                      |       | 12,112                   |       |
| Deferred tax assets,  net                                                                                                                                                                                 |       | 13,096                      |       | 16,674                   |       |
| Other assets                                                                                                                                                                                              |       | 5,117                       |       | 6,116                    |       |
| Total assets                                                                                                                                                                                              |       | $                           | 381,677    |                     | $          | 481,718 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                            | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Current liabilities:                                                                                                                                                                                      |       |                        |       |                     |       |
| Current portion  of long-term debt                                                                                                                                                                        |       | $                           | 1,650      |                     | $          | 2,250 |   |
| Accounts  payable, accrued expenses and other current liabilities                                                                                                                                         |       | 51,751                      |       | 49,374                   |       |
| Dividend payable                                                                                                                                                                                          |       | —                      |       | 98,294                   |       |
| Deferred revenue                                                                                                                                                                                          |       | 15,115                      |       | 16,041                   |       |
| Total current  liabilities                                                                                                                                                                                |       | 68,516                      |       | 165,959                  |       |
|                                                                                                                                                                                                      |       |                        |       |                     |       |
| Long-term debt, net of  current portion                                                                                                                                                                   |       | 121,663                     |       | 222,750                  |       |
| Deferred tax liability                                                                                                                                                                                    |       | 6,440                       |       | 6,284                    |       |
| Other liabilities                                                                                                                                                                                         |       | 5,793                       |       | 6,148                    |       |
| Total  liabilities                                                                                                                                                                                        |       | 202,412                     |       | 401,141                  |       |
| Commitments and  contingencies                                                                                                                                                                            |       |                        |       |                     |       |
| Stockholders’ equity:                                                                                                                                                                                |       |                        |       |                     |       |
| Common stock,  $0.001 par value; 130,000,000 shares authorized; 24,145,804 shares issued and  24,113,434 shares outstanding and 24,280,460 shares issued and 24,206,582  shares outstanding, respectively |       | 24                          |       | 24                       |       |
| Treasury stock,  32,370 shares and 73,878 shares, respectively                                                                                                                                            |       | (605                        | )          | (1,295                   | )          |
| Additional  paid-in capital                                                                                                                                                                               |       | 218,099                     |       | 122,935                  |       |
| Accumulated  deficit                                                                                                                                                                                      |       | (41,463                     | )          | (44,690                  | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                     |       | 3,210                       |       | 3,603                    |       |
| Total  stockholders’ equity                                                                                                                                                                          |       | 179,265                     |       | 80,577                   |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                          |       | $                           | 381,677    |                     | $          | 481,718 |   |

 

See accompanying notes to condensed consolidated financialstatements (unaudited).

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**TNS, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(dollars in thousands, except share and per share data)**
| ** **                                                                                                                                           | ** ** | **Three months ended  March 31,**                                                         | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **        2006        ** | ** ** | **        2007        ** | ** ** |
| Revenues                                                                                                                                             |       | $                                                                                                        | 65,908     |   | $ | 72,661 |   |
| Operating  expenses:                                                                                                                                 |       |                                                                                                     |       |   |   |
| Cost of network services, exclusive of the items  shown separately below                                                                             |       | 33,057                                                                                                   |       | 38,871 |   |
| Engineering and development                                                                                                                          |       | 4,535                                                                                                    |       | 6,362 |   |
| Selling, general, and administrative                                                                                                                 |       | 16,126                                                                                                   |       | 17,175 |   |
| Depreciation and amortization of property and  equipment                                                                                             |       | 5,027                                                                                                    |       | 5,804 |   |
| Amortization of intangible assets                                                                                                                    |       | 4,931                                                                                                    |       | 6,112 |   |
| Total operating expenses                                                                                                                             |       | 63,676                                                                                                   |       | 74,324 |   |
| Income (loss)  from operations                                                                                                                       |       | 2,232                                                                                                    |       | (1,663 | ) |
| Interest expense                                                                                                                                     |       | (2,032                                                                                                   | )          | (3,967 | ) |
| Interest income                                                                                                                                      |       | 118                                                                                                      |       | 245 |   |
| Other income,  net                                                                                                                                   |       | 190                                                                                                      |       | 645 |   |
| Income (loss)  before income tax benefit, equity in net loss of unconsolidated affiliates  and cumulative effect of a change in accounting principle |       | 508                                                                                                      |       | (4,740 | ) |
| Income tax  benefit                                                                                                                                  |       | 15                                                                                                       |       | 1,577 |   |
| Equity in net  loss of unconsolidated affiliates                                                                                                     |       | (1,074                                                                                                   | )          | (64 | ) |
| Loss from  continuing operations before cumulative effect of a change in accounting  principle                                                       |       | (551                                                                                                     | )          | (3,227 | ) |
| Cumulative  effect of a change in accounting principle, net of tax provision                                                                         |       | 84                                                                                                       |       | — |   |
| Net loss                                                                                                                                             |       | $                                                                                                        | (467       | ) | $ | (3,227 | ) |
| Basic and  diluted net loss per common share:                                                                                                        |       |                                                                                                     |       |   |   |
| Loss from  continuing operations before cumulative effect of a change in accounting  principle                                                       |       | $                                                                                                        | (0.02      | ) | $ | (0.13 | ) |
| Cumulative  effect of a change in accounting principle, net of tax provision                                                                         |       | —                                                                                                   |       | — |   |
| Net loss                                                                                                                                             |       | $                                                                                                        | (0.02      | ) | $ | (0.13 | ) |
|                                                                                                                                                 |       |                                                                                                     |       |   |   |
| Basic and  diluted weighted average common shares outstanding                                                                                        |       | 23,990,356                                                                                               |       | 24,135,264 |   |
| Dividends declared per  common share                                                                                                                 |       | $                                                                                                        | —     |   | $ | 4.00 |   |

 

See accompanying notes to condensed consolidatedfinancial statements (unaudited).

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**TNS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(dollars in thousands)**
| ** **                                                                       | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                           |       |                                                 |       |   |   |
| Net loss                                                                         |       | $                                                    | (467       | ) | $ | (3,227 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                                                 |       |   |   |
| Non-cash and working capital items                                               |       | 10,459                                               |       | 11,650 |   |
| Net cash provided by operating activities:                                       |       | 9,992                                                |       | 8,423 |   |
| Cash flows from  investing activities:                                           |       |                                                 |       |   |   |
| Purchases of property and equipment                                              |       | (5,093                                               | )          | (2,732 | ) |
| Cash paid for business acquisitions, net of cash  acquired                       |       | (19,628                                              | )          | — |   |
| Net cash used in investing activities:                                           |       | (24,721                                              | )          | (2,732 | ) |
| Cash flows from  financing activities:                                           |       |                                                 |       |   |   |
| Proceeds from issuance of long term debt, net of  issuance costs of $3,051       |       | —                                               |       | 221,949 |   |
| Borrowings under 2005 amended and restated senior  secured credit facility       |       | 6,000                                                |       | — |   |
| Increase in cash-restricted for payment of dividend                              |       | —                                               |       | (102,267 | ) |
| Payment of debt obligations                                                      |       | —                                               |       | (123,313 | ) |
| Proceeds from stock option exercises, inclusive of  tax benefit                  |       | 176                                                  |       | 30 |   |
| Purchase of treasury stock                                                       |       | (5                                                   | )          | (690 | ) |
| Net cash provided (used in) by financing activities:                             |       | 6,171                                                |       | (4,291 | ) |
| Effect of  exchange rates on cash and cash equivalents                           |       | 53                                                   |       | 10 |   |
| Net (decrease) increase  in cash and cash equivalents                            |       | (8,505                                               | )          | 1,410 |   |
| Cash and cash  equivalents, beginning of period                                  |       | 26,628                                               |       | 17,322 |   |
| Cash and cash  equivalents, end of period                                        |       | $                                                    | 18,123     |   | $ | 18,732 |   |
| Supplemental  disclosures of cash flow information:                              |       |                                                 |       |   |   |
| Cash paid for interest                                                           |       | $                                                    | 21         |   | $ | 2,918 |   |
| Cash paid for  income taxes                                                      |       | $                                                    | 3,467      |   | $ | 2,274 |   |

 

See accompanying notes to condensed consolidatedfinancial statements (unaudited).

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**TNS, INC.CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)(dollars in thousands)**
| ** **                                                       | ** ** | ** **                                                                                | ** ** | ** **   | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|-----------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                       | ** ** | ** **                                                                                | ** ** | ** **   | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **other**              | ** ** | **Total**  | ** ** |
| ** **                                                       | ** ** | **Common Stock**                                                                     | ** ** | **Treasury** | ** ** | **paid-in** | ** ** | **Accumulated** | ** ** | **comprehensive** | ** ** | **stockholders’** | ** ** |
| ** **                                                       | ** ** | **Shares**                                                                                | ** ** | **Amount**   | ** ** | **Stock**   | ** ** | **capital**     | ** ** | **deficit**       | ** ** | **income (loss)** | ** ** | **equity** | ** ** |
| ** **                                                       | ** ** | **(in thousands, except per share and share amounts)** | ** ** |
| Balance,  December 31, 2006                                 |       | 24,145,804                                                                                |       | $            | 24         |        | $          | (605            | )          | $                 | 218,099    |                   | $          | (41,463    | )          | $ | 3,210 |   | $ | 179,265 |   |
| Issuance of  common stock upon vesting of restricted stock units |       | 132,938                                                                                   |       | —       |       | —      |       | —          |       | —            |       | —                 |       | —     |       |
| Exercise of  employee stock options                              |       | 1,718                                                                                     |       | —       |       | —      |       | 30              |       | —            |       | —                 |       | 30         |       |
| Purchase of  treasury stock                                      |       | —                                                                                    |       | —       |       | (690        | )          | —          |       | —            |       | —                 |       | (690       | )          |
| Stock  compensation expense                                      |       | —                                                                                    |       | —       |       | —      |       | 3,100           |       | —            |       | —                 |       | 3,100      |       |
| Foreign currency  translation                                    |       | —                                                                                    |       | —       |       | —      |       | —          |       | —            |       | 393                    |       | 393        |       |
| Net loss                                                         |       | —                                                                                    |       | —       |       | —      |       | —          |       | (3,227            | )          | —                 |       | (3,227     | )          |
| Special cash  dividend declared $4 per share                     |       | —                                                                                    |       | —       |       | —      |       | (98,294         | )          | —            |       | —                 |       | (98,294    | )          |
| Balance,  March 31, 2007                                    |       | 24,280,460                                                                                |       | $            | 24         |        | $          | (1,295          | )          | $                 | 122,935    |                   | $          | (44,690    | )          | $ | 3,603 |   | $ | 80,577 |   |

 

See accompanying notes to condensed consolidatedfinancial statements (unaudited).

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**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

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

TNS, Inc. (TNS or the Company) is a Delawarecorporation. 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 criticalto its customers’ 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 28countries, including Canada and countries in Europe, Latin America and theAsia-Pacific region.

The Company provides its services through its multipledata networks, each designed specifically for transaction applications. Thesenetworks support a variety of widely accepted communications protocols, aredesigned to be scalable and are accessible by multiple methods, includingdial-up, dedicated, wireless and Internet connections.

The Company has four business divisions: (1) thepoint-of-sale/point-of-service (POS) division, which provides data communicationsservices to payment processors in the U.S. and Canada, (2) thetelecommunication services division (TSD), which provides call signalingservices and database access services targeting primarily thetelecommunications industry, (3) the financial services division (FSD),which provides data and voice communications services to the financial servicescommunity in support of the Financial Information eXchange (FIX) messagingprotocol and other transaction-oriented trading applications, and (4) theinternational services division (ISD), which markets the Company’s POS andfinancial services in countries outside of the United States and Canada.

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with United Statesgenerally accepted accounting principles (GAAP) for interim financialinformation and in conjunction with the rules and regulations of theSecurities and Exchange Commission (SEC). Certain information and notedisclosures normally included in the annual financial statements, required byGAAP, 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 of management, the accompanyingunaudited condensed consolidated financial statements reflect adjustments (allof which are of a normal and recurring nature) that are necessary for fairpresentation for the periods presented. The results of operations for the threemonths ended March 31, 2007 are not necessarily indicative of the resultsto be expected for any subsequent interim period or for the fiscal year. It issuggested that these unaudited condensed consolidated financial statements beread in conjunction with the Company’s annual report on Form 10-K filedwith the SEC on March 16, 2007, which includes consolidated financialstatements and the notes thereto for the year ended December 31, 2006.

*Dividends andRecapitalization*

On March 28, 2007, the Company's board of directorsdeclared a special dividend of $4.00 per common share which was paid on April12, 2007. Also, on March 28, 2007, the Company entered into a secured creditfacility, which consists of two facilities: a senior secured term loan facility in an aggregate principal amount of$225,000,000 (the Term Facility) and a senior secured revolving credit facilityin an aggregate principal amount of $15,000,000 (the Revolving Facility). TheCompany used approximately $98.3 million of the proceeds from the Term Facilityto pay the special dividend.  Theremainder of the proceeds from the Term Facility were used to refinanceexisting debt, to pay fees related to the senior secured credit facility andthe special dividend  and for generalcorporate purposes.  No amount was drawnon the Revolving Facility at closing, and the full principal amount of theRevolving Facility remained available to the Company as of March 31, 2007.  The payment of the special dividend and theclosing on the secured credit facility reflect the completion of the Company'srecapitalization plan. The Company believes these actions were in the bestinterest of our shareholders and established a more appropriate capitalstructure for the Company. 

**Use of Estimates**

The preparation of financial statements in conformitywith GAAP requires management to make estimates and assumptions that affect thereported amounts of certain assets and liabilities and disclosure of contingentassets and liabilities 

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at thedate of 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 and estimates related to the fair value of employee stockoptions, including volatility, expected term and estimates of forfeitures infuture periods. Actual results could differ from those estimates.

**Revenue Recognition**

The Company recognizes revenue when persuasiveevidence of an agreement exists, the terms are fixed and determinable, servicesare performed, and collection is probable. Cash received in advance of revenuerecognition is recorded as deferred revenue. POS services revenue is derivedprimarily from per transaction fees paid by the Company’s customers for thetransmission of transaction data, through the Company’s networks, betweenpayment processors and POS or ATM terminals. TSD revenue is derived primarilyfrom fixed monthly fees for call signaling services and per query fees chargedfor database access and validation services. FSD revenue is derived primarilyfrom monthly recurring fees based on the number of customer connections to andthrough the Company’s networks. Incentives granted to new customers or uponcontract renewals are deferred and recognized ratably as a reduction of revenueover the contract period to the extent that the incentives are recoverableagainst the customer’s minimum purchase commitments under the contract. Inaddition, the Company receives installation fees related to the configurationof the customers’ systems. Revenue from installation fees is deferred andrecognized ratably over the customer’s contractual service period, generallythree years. The Company performs periodic evaluations of its customer base andestablishes allowances for estimated credit losses.

**Cost of Network Services**

Cost of network services is comprised primarily oftelecommunications charges, which include data transmission and database accesscharges, leased digital capacity charges, circuit installation charges andactivation charges. The cost of data transmission is based on a contract ortariff rate per minute of usage in addition to a prescribed rate pertransaction for certain vendors. The costs of database access, circuits,installation and activation charges are based on fixed fee contracts with localexchange carriers and interexchange carriers. The cost of network services alsoincludes salaries, equipment maintenance and other costs related to the ongoingoperation of the Company’s data networks. These costs are expensed by theCompany as incurred. The Company recognizes a liability for telecommunicationscharges based upon network services utilized at historical invoiced rates.Depreciation expense on network equipment and amortization expense on developedtechnology are excluded from cost of network services and included indepreciation and amortization of property and equipment and amortization ofintangible assets in the accompanying consolidated statements of operations.

**Stock-Based Compensation**

Effective January 1,2006, the Company adopted Statements of Financial Accounting Standards (SFAS)No. 123R “Share Based Payment”, using the modified prospective transitionmethod. SFAS No. 123R requires all stock-based compensation to employees be measuredat fair value and expensed over the requisite service period and also requiresan estimate of forfeitures when calculating compensation expense. The Companyrecognizes compensation cost on awards with graded vesting on a straight-linebasis over the requisite service period for the entire award. In accordancewith the Company’s chosen method of adoption, results for prior periods havenot been restated. Share-based expenses for all non-vested awards outstandingas of January 1, 2006, are being recognized based on the grant date fairvalue estimated in accordance with the provisions of SFAS No. 123 “Accountingfor Stock-Based Compensation” and in accordance with SFAS No. 123R for allawards granted or modified after January 1, 2006. Prior to the adoption ofSFAS No. 123R, the Company followed Accounting Principles Board (APB) OpinionNo. 25, which accounts for share-based payments to employees using theintrinsic value method and, as such, the Company generally recognized nocompensation cost for employee stock options.

The Company recognized$1.3 million and $3.1 million of stock based compensation for the three monthsended March 31, 2006 and 2007, respectively. During the three months ended March 31, 2006 the Company granted 8,800 stockoptions and 22,350 restricted stock units at weighted average estimated fairvalues of $8.21 and $18.72, respectively. During the three months ended March31, 2007 the Company granted 9,000 stock options and 139,025 restricted stockunits at weighted average estimated fair values of $8.61 and $19.07,respectively. As of March 31, 2007, there was a total of$12.7 million of deferred compensation cost related to share based awardswhich is expected to be recognized over a weighted average period ofapproximately three years.

On March 28, 2007 theCompany’s Board of Directors decided to allow the outstanding restricted stockunits to receive dividend equivalent payments. As a result of this decision, the Company recorded $1.5 million ofstock-based compensation, which is included in the $3.1 million of stock-basedcompensation mentioned above.  The $1.5million charge related to this decision is reported as follows in theaccompanying condensed 

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consolidated statement ofoperations for the three months ended March 31, 2007:  $0.1 million is included in cost of networkservices, $0.4 million is included in engineering and development and $1.0million is included in selling, general and administrative expenses.

**Income Taxes**

Effective January 1,2007, the Company adopted Financial Accounting Standards Board FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109” (FIN 48), which prescribes arecognition 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 cumulative adjustment tothe Company’s accumulated earnings. As of the date of adoption, the Company’sunrecognized tax benefits totaled $2.1 million, of which $1.5 millionwould impact the annual effective income tax rate. 

The Company or one of its subsidiaries is subject totaxation in the US and in various state, local and foreign jurisdictions. TheCompany remains subject to examination by US Federal, state, local and foreigntax authorities for tax years 2003 through 2006.  With the exception of Spain and Australiawhich have longer statutes of limitation than the US, the Company is no longersubject to US Federal, state, local or foreign tax examinations for the taxyears 2002 and prior.  

It is reasonably possible that the amount ofunrecognized benefit with respect to the Company’s unrecognized tax positionswill increase or decrease in the next 12 months; however, quantification of anestimated range cannot be made at this time. These changes may be the result of settlement of ongoing state audits orthe expiration of certain statutes of limitation. 

The Company classifies interest and penalties relatedto income taxes as components of the income tax provision.  The Company’s accrual for potential interestand penalties associated with uncertain tax positions was $306,000 as of March31, 2007. To the extent interest and penalties are not assessed with respect touncertain tax positions, amounts accrued will be reduced and reflected as areduction of the overall income tax provision.

**Recent AccountingPronouncements**

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements”. SFAS No. 157 defines fair value, establishes a frameworkfor measuring fair value in accordance with generally accepted accountingprinciples, and expands disclosures about fair value measurements. In February2007, the FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities”. SFAS No. 159 permits entities to choose tomeasure many financial assets and financial liabilities at fair value. BothSFAS No. 157 and SFAS No. 159 are effective for fiscal years beginning afterNovember 15, 2007. The Company does not believe that the adoption of SFASNo. 157 and SFAS No. 159 will have a material impact on its financialstatements.

**2.****                                     Acquisitionsand Long-term Investments**

**Acquisition of CommsXL**

On January 6, 2006, the Company completed theacquisition of two companies in the United Kingdom, CommsXL Services andCommsXL Limited (collectively, CommsXL). Pursuant to two separate purchaseagreements, the Company paid approximately $11.7 million, plus directacquisition costs of approximately $0.3 million, for CommsXL. The Companypurchased CommsXL to advance its end-to-end POS service offerings in the UnitedKingdom as well as to penetrate new vertical markets. The purchase price forCommsXL was allocated as follows (in thousands):

| Current assets                                            |   | $      | 2,328  |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Property and  equipment                                   |   | 70     |   |
| Other assets                                              |   | 130    |   |
| Customer  relationships                                   |   | 6,578  |   |
| Developed  technology                                     |   | 1,835  |   |
| Non-compete  agreements                                   |   | 1,167  |   |
| Goodwill                                                  |   | 4,966  |   |
| Deferred revenue                                          |   | (993   | )      |
| Accounts  payable, accrued expenses and other liabilities |   | (1,221 | )      |
| Deferred tax  liability                                   |   | (2,874 | )      |
| Net assets  acquired                                      |   | $      | 11,986 |   |

 

The amounts allocated to the customer relationships, developedtechnology and to the non-compete agreements are being amortized on astraight-line basis over their estimated useful life of seven years, sevenyears and three years, respectively. Unaudited pro forma results of operationsare not provided because the historical operating results were not 

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significant and pro formaresults would not be significantly different from reported results for theperiods presented. The Company’s results of operations include the operatingresults of these acquisitions beginning January 6, 2006.

**Acquisitionof InfiniRoute Assets**

On February 28, 2006, the Company acquired certaintangible and intangible assets from InfiniRoute Networks, Inc. (InfiniRoute)for a purchase price of approximately $2.5 million. The assets acquired includethe right to provide TSD services under customer contracts, developedtechnology, certain fixed assets and a non-compete agreement. The Companypurchased these assets to advance its TSD service offerings to enabletraditional telecommunications carriers and next-generation service providersto interconnect directly over Internet Protocol (IP) packet networks, reducingthe cost and complexity associated with these interconnections. The purchaseprice for the InfiniRoute assets was allocated as follows (in thousands):

| Current assets          |   | $   | 272    |   |
|-------------------------|--------|-----|--------|--------|
| Property and  equipment |   | 764 |   |
| Customer  relationships |   | 696 |   |
| Developed  technology   |   | 695 |   |
| Non-compete  agreements |   | 109 |   |
| Net assets  acquired    |   | $   | 2,536  |   |

 

The amounts allocated to the customer relationships,developed technology and to the non-compete agreements are being amortized on astraight-line basis over their estimated useful lives of three years. Unauditedpro forma results of operations are not provided because the historical operatingresults were not significant and pro forma results would not be significantlydifferent from reported results for the periods presented. The Company’sresults of operations include the operating results of this acquisitionbeginning March 1, 2006.

**Acquisitionof Sonic Assets**

On March 13, 2006,the Company acquired certain tangible and intangible assets from Sonic GlobalPTY Ltd. (Sonic) and all of the capital stock of a subsidiary of Sonic for apurchase price of approximately $6.0 million, plus direct acquisition costs ofapproximately $0.1 million. The assets acquired include the right to providePOS services under customer contracts, developed technology, certain fixedassets and non-compete agreements. The Company purchased these assets to enhanceits end-to-end POS service offerings. The purchase price for the Sonic assets was allocated as follows (inthousands):

| Current assets                                            |   | $     | 251    |   |
|-----------------------------------------------------------|--------|-------|--------|--------|
| Property and  equipment                                   |   | 41    |   |
| Customer  relationships                                   |   | 3,257 |   |
| Developed  technology                                     |   | 1,334 |   |
| Non-compete  agreements                                   |   | 634   |   |
| Goodwill                                                  |   | 1,111 |   |
| Deferred revenue                                          |   | (430  | )      |
| Accounts  payable, accrued expenses and other liabilities |   | (128  | )      |
| Net assets  acquired                                      |   | $     | 6,070  |   |

 

The amounts allocated to the customer relationships,developed technology and to the non-compete agreements are being amortized onan accelerated basis over their estimated useful life of seven years, sevenyears and three years, respectively. Unaudited pro forma results of operationsare not provided because the historical operating results were not significantand pro forma results would not be significantly different from reportedresults for the periods presented. The Company’s results of operations includethe operating results of this acquisition beginning March 13, 2006.

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**JPGTelecom, SAS Acquisition**

On September 8, 2006, the Company acquired all of theoutstanding shares of JPG Telecom, SAS (JPG), a French telecommunicationsprovider to the POS market, for a purchase price of $8.3 million, plus directacquisition costs of approximately $0.2 million.  The Company purchasedJPG primarily to increase its market share of the French POS market. Thepurchase price for JPG was allocated, on a preliminary basis, as follows (inthousands):

| Current assets                                            |   | $      | 231    |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Accounts  receivable                                      |   | 2,850  |   |
| Customer  relationships                                   |   | 11,166 |   |
| Non-compete  agreements                                   |   | 717    |   |
| Deferred tax  liability                                   |   | (3,921 | )      |
| Accounts  payable, accrued expenses and other liabilities |   | (2,530 | )      |
| Net assets  acquired                                      |   | $      | 8,513  |   |

 

The amounts allocated to the customer relationshipsand to the non-compete agreements are being amortized on a straight-line basisover their estimated useful life of five years and three years, respectively.Unaudited pro forma results of operations are not provided because thehistorical operating results were not significant and pro forma results wouldnot be significantly different from reported results for the periods presented.The Company’s results of operations include the operating results of this acquisitionbeginning September 8, 2006.

**3.             Long-term Debt**

On March 28, 2007, theCompany entered into a $240.0 million senior secured credit facility (2007Credit Facility) to finance the special cash dividend and to refinance its 2005amended and restated senior secured credit facility (2005 CreditFacility).  The 2007 Credit Facilityconsists of a senior secured term loan facility in an aggregate principalamount of $225.0 million (Term Facility) and a senior secured revolving creditfacility in an aggregate principal amount of $15.0 million (Revolving Facility),under which there were no borrowings as of March 31, 2007. The Revolving Facilitymatures March 27, 2013.  Payments on theTerm Facility are due in quarterly installments over the seven year termbeginning June 30, 2007, with the remainder payable on March 28, 2014.  Voluntary prepayments on the Term Facility areapplied as directed by the Company.  TheCompany made a voluntary pre-payment in April 2007 of $7.0 million on the Term Facility.

As of March 31, 2007, total remaining payments on theTerm B Loan are as follows (in thousands):

| 2007       |   | $       | 1,688   |   |
|------------|--------|---------|---------|--------|
| 2008       |   | 2,250   |    |
| 2009       |   | 2,250   |    |
| 2010       |   | 2,250   |    |
| 2011       |   | 2,250   |    |
| Thereafter |   | 214,312 |    |
|       |   | $       | 225,000 |   |

 

Interest on the outstanding balances under theRevolving Facility is payable, at the Company’s option, at a rate equal to thehigher of the Wall Street Journal published “base rate on corporate loansposted by at least 75% of the nation’s largest banks” or the federal funds rateplus 50 basis points (the “Base Rate”), in each case, plus a margin of 1.0% orat the London Interbank Offered Rate (“LIBOR”), plus a margin of 2.0%. Interest on the outstanding balances under the Term Facility are payable, atthe Company’s option, at the Base Rate plus a margin of 1.0%, or at LIBOR plusa margin of 2.0%.  The Revolving CreditFacility is subject to an annual commitment fee in an amount equal to 0.5% perannum multiplied by the amount of funds available for borrowing under theRevolving Facility.  Interest payments onthe 2007 Credit Facility are due biweekly, monthly, bimonthly or quarterly atthe Company’s option.

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The terms of the 2007 Credit Facility require the Companyto make an annual prepayment in an amount that may range from 0% to 50% of theCompany’s “excess cash flow” (as such term is defined in the Credit Agreement)depending on the Company’s Leverage Ratio for any fiscal year. Prepayments are also required to be made in other circumstances, including uponasset sales.

The terms of the 2007 Credit Facility require theCompany to comply with financial and nonfinancial covenants, includingmaintaining a specified Leverage Ratio at the end of each fiscal quarter andcomplying with specified annual limits on capital expenditures.  As ofMarch 31, 2007, the Company was required to maintain a leverage ratio of lessthan 4.4 to 1.0.  The leverage ratiocontinues to decline over the term of the 2007 Credit Facility.  The 2007 Credit Facility also containsnonfinancial 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 anyof the financial or nonfinancial covenants without cure or waiver wouldconstitute an event of default under the 2007 Credit Facility.  An eventof default resulting from a breach of a financial or nonfinancial covenant mayresult, at the option of the lenders, in an acceleration of the principal andinterest outstanding, and a termination of the Revolving Facility.  The2007 Credit Facility also contains other customary events of default (subjectto specified grace periods), including defaults based on events of bankruptcyand insolvency, nonpayment of principal, interest or fees when due, breach ofspecified covenants, change in control and material inaccuracy of representationsand warranties.  The Company was incompliance with the financial and non-financial covenants of the 2007 CreditFacility as of March 31, 2007.

In connection with the closing of the 2007 CreditFacility, the Company incurred approximately $3.1 million in financingcosts. These financing costs were deferred and are being amortized using theeffective interest method over the life of the 2007 Credit Facility.   In connection with the repayment of the 2005Credit Facility in March 2007, the Company wrote-off approximately $1.4 millionin unamortized deferred financing costs related to the 2005 CreditFacility.  Such write-off has beenincluded in interest expense in the accompanying condensed consolidatedstatement of operations for the three months ended March 31, 2007.

**4.****                                      ComprehensiveLoss**

The components of comprehensive loss, net of taxeffect are as follows (in thousands):

|                                    | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
| Net loss                           |       | $                                                | (467       | ) | $ | (3,227 | ) |
| Foreign currency  translation gain |       | 105                                              |       | 393 |   |
| Total comprehensive  loss          |       | $                                                | (362       | ) | $ | (2,834 | ) |

** **

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

SFAS No. 128, “Earnings Per Share”, requires thepresentation of basic and diluted earnings per share. Basic earnings (loss) percommon share is computed by dividing income (loss) attributable to commonstockholders by the weighted average number of common shares outstanding forthe period. The diluted earnings (loss) per common share data is computed usingthe weighted average number of common shares outstanding plus the dilutiveeffect of common stock equivalents, unless the common stock equivalents areanti-dilutive. During the three months ended March 31, 2006 the treasurystock effect of options to purchase 1,465,776 shares of common stock and349,687 restricted stock units were not included in the computation of dilutedincome (loss) per common share as their effect would have beenanti-dilutive.  During the three monthsended March 31, 2007 the treasury stock effect of options to purchase1,824,142 shares of common stock and 368,380 restricted stock units were notincluded in the computation of diluted income (loss) per common share as theireffect would have been anti-dilutive.

**6.****                                      SegmentInformation**

The Company’s reportablesegments are strategic business units that offer different products andservices. The Company classifies its business into four segments: POS, TSD, FSDand ISD. However, the Company’s management only evaluates revenues for thesefour segments. A significant portion of the Company’s North American operatingexpenses are shared between the POS, TSD and FSD segments, and therefore,management analyzes operating results for these three segments on a combinedbasis.

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Management evaluates the North American and ISDperformance 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. Assets are not segregated betweenreportable segments, and management does not use asset information by segmentsto evaluate segment performance. As such, no information is presented relatedto fixed assets by reportable segment and capital expenditures for eachsegment.

Revenue for the Company’s four business units ispresented below (in thousands):

|                | ** ** | **Three months ended  March 31,** | ** ** |
|----------------|------------|--------------------------------------------------|------------|
| ** **     | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
| Revenues:      |       |                                             |       |   |   |
| POS            |       | $                                                | 18,792     |   | $ | 19,799 |   |
| TSD            |       | 14,829                                           |       | 14,913 |   |
| FSD            |       | 8,373                                            |       | 9,742 |   |
| ISD            |       | 23,914                                           |       | 28,207 |   |
| Total revenues |       | $                                                | 65,908     |   | $ | 72,661 |   |

 

EBITDA before stock compensation expense for the NorthAmerican and ISD operations is reflected below (in thousands):

|                                                 | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
| EBITDA before  stock compensation expense:      |       |                                             |       |   |   |
| North America                                   |       | $                                                | 6,901      |   | $ | 4,367 |   |
| ISD                                             |       | 6,725                                            |       | 8,986 |   |
| Total EBITDA before stock  compensation expense |       | $                                                | 13,626     |   | $ | 13,353 |   |

 

EBITDA before stock compensation expense differs from(loss) income before income taxes and equity in net loss of unconsolidatedaffiliate reported in the condensed consolidated statements of operations asfollows (in thousands):

|                                                                                                                                                                      | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                                           | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
| EBITDA before  stock compensation expense                                                                                                                            |       | $                                                | 13,626     |   | $ | 13,353 |   |
| Reconciling  items:                                                                                                                                                  |       |                                             |       |   |   |
| Depreciation and  amortization of property and equipment and intangible assets                                                                                       |       | (9,958                                           | )          | (11,916 | ) |
| Stock  compensation expense                                                                                                                                          |       | (1,436                                           | )          | (3,100 | ) |
| Interest expense                                                                                                                                                     |       | (2,032                                           | )          | (3,967 | ) |
| Interest income  and other (expense) income, net                                                                                                                     |       | 308                                              |       | 890 |   |
| Income (loss) before  income taxes, equity in net loss of unconsolidated affiliates and cumulative  effect of a change in accounting principle, net of tax provision |       | $                                                | 508        |   | $ | (4,740 | ) |

 

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

|                                                         | ** ** | **December 31,  2006** | ** ** | **March 31,  2007** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| POS                                                     |       | $                           | 127,051    |                     | $          | 124,375 |   |
| TSD                                                     |       | 4,890                       |       | 4,607                    |       |
| FSD                                                     |       | 23,208                      |       | 22,708                   |       |
| ISD                                                     |       | 49,594                      |       | 47,783                   |       |
| Total goodwill and  identifiable intangible assets, net |       | $                           | 204,743    |                     | $          | 199,473 |   |

 

**Geographic Information**

The Company sells itsservices through foreign subsidiaries in Australia, Austria, Canada, Colombia,France, Germany, India, Ireland, Italy, Japan, Malaysia, Mexico, theNetherlands, New Zealand, Poland, Romania, South Korea, Spain, Sweden, Thailandand the United Kingdom. Information regarding revenues and long-lived tangibleassets attributable to each geographic region is stated below.

The Company’s revenues were generated in the followinggeographic regions (in thousands):

|                | ** ** | **Three months ended  March 31,** | ** ** |
|----------------|------------|--------------------------------------------------|------------|
| ** **     | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
| Revenues:      |       |                                             |       |   |   |
| North America  |       | $                                                | 41,994     |   | $ | 44,454 |   |
| Europe         |       | 21,179                                           |       | 24,652 |   |
| Asia-Pacific   |       | 2,735                                            |       | 3,555 |   |
| Total revenues |       | $                                                | 65,908     |   | $ | 72,661 |   |

 

Revenues from the Company’s subsidiaries in the UnitedKingdom were $13.7 million and $15.2 million for the three months ended March 31,2006 and 2007, respectively.

The Company’s long-lived assets, including goodwilland intangible assets, were located as follows (in thousands):

|                         | ** ** | **December 31,  2006** | ** ** | **March 31,  2007** | ** ** |
|-------------------------|------------|-----------------------------|------------|--------------------------|------------|
| North America           |       | $                           | 216,688    |                     | $          | 214,871 |   |
| Europe                  |       | 60,198                      |       | 58,491                   |       |
| Asia-Pacific            |       | 4,446                       |       | 4,578                    |       |
| Total long-lived assets |       | $                           | 281,332    |                     | $          | 277,940 |   |

#####  

**7.             RestructuringCosts**

In August 2006, the Company implemented a plan toreduce its cost structure and improve operating efficiencies by reducing itsworkforce and implementing productivity improvement initiatives and expensereduction measures (2006 Restructuring Plan). In connection with the 2006Restructuring Plan, the Company incurred approximately $5.6 million ofseverance associated with its workforce reduction, of which $4.2 million wasincluded in selling, general and administrative expense, $0.8 million wasincluded in engineering and development expense and $0.6 million was includedin cost of network services in the third quarter of 2006.  Of the total $5.6 million in severance, $5.0million related to the Company’s U.S. operations and $0.6 million related toits ISD operations.

During the first quarter of 2007 the Company incurredan additional $0.9 million in severance and benefits charges related primarilyto the departure of two senior executives. Of the total $0.9 million in severance and benefits, $0.8 million isincluded in selling, general and administrative expense and $0.1 million isincluded in engineering and development expense in the accompanying condensedconsolidated statement of operations for the three months ended March 31, 2007.

Asummary of the liability for the Company’s severance and benefits obligation isas follows (in thousands):

 

| Balance as of January 1,  2006                           |   | $      | — |   |
|----------------------------------------------------------|--------|--------|--------|--------|
| Severance and  benefits from the 2006 Restructuring Plan |   | 5,534  |   |
| Accretion of  liability due to the passage of time       |   | 36     |   |
| Total  restructuring costs                               |   | 5,570  |   |
| Cash paid                                                |   | (792   | )      |
| Balance as of  December 31, 2006                         |   | $      | 4,778  |   |
|                                                     |   |   |   |
| Severance and  benefits from executive departures        |   | 946    |   |
| Accretion of  liability due to the passage of time       |   | 34     |   |
| Cash paid                                                |   | (767   | )      |
| Balance as of March 31,  2007                            |   | $      | 4,991  |   |

 

The remaining cash expenditures relating to the severance and benefits willbe paid through 2009. As of March 31, 2007, $2.7 million of the total $5.0 millionliability for severance and benefits was classified as accounts payable,accrued expenses and other liabilities and the remaining $2.3 million wasclassified as other liabilities in the accompanying condensed consolidatedbalance sheet.

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**8.             Litigationand Claims**

The Company is periodically involved in disputes arisingfrom normal business activities. In the opinion of management, resolution ofthese matters will not have a material adverse effect upon the financialposition or future operating results of the Company, and adequate provision forany potential losses has been made in the accompanying consolidated financialstatements.

The Company and John J. McDonnell, Jr., the Company’sformer Chief Executive Officer, and Henry H. Graham, Jr., the Company’s ChiefExecutive Officer, are defendants in a putative class action lawsuit filed inconnection with the Company’s public offering of common stock in September 2005(“Secondary Offering”). The Cement Masons and Plasterers Joint Pension Trust,purportedly on behalf of itself and others similarly situated, filed theputative class action lawsuit captioned Cement Masons & Plasterers JointPension Trust v. TNS, Inc., et al., Case No. 1:06 CV 363,CMH/BRP, on April 4, 2006 in the United States District Court for theEastern District of Virginia. Plaintiff claims that the Registration Statementfiled in connection with the Secondary Offering negligently failed to disclosethat (1) TNS’ agreement with the Pepsi Bottling Group, Inc. (“Pepsi”)to provide cashless vending to Pepsi had been delayed beyond August 7,2005; (2) TNS was generating less revenues and income than it hadanticipated from its contract with the Royal Bank of Scotland (“RBS”), becauseRBS purportedly had overstated the number of transactions that TNS would beresponsible for processing for RBS; and (3) TNS’ International ServicesDivision was experiencing declining revenues during that time period because ofunfavorable foreign exchange rates. TNS filed a motion to dismiss the lawsuiton July 14, 2006. The Plaintiff filed its memorandum in opposition to TNS’motion to dismiss on August 4, 2006, and TNS filed its reply memorandum onAugust 18, 2006. The Court denied the motion to dismiss on September 12,2006, and ordered the parties to conduct discovery in the case. In March 2007,the Court stayed further discovery in the case pending a mediation of thematter. The parties conducted a mediation on April 26, 2007.  The timing and course of the litigation,including the mediation, are not predictable. As a result, management cannot estimate a range of possible loss and hastherefore not recognized a liability for this expense. However, TNS intends tocontinue to take appropriate steps to defend against the lawsuit, the outcomeof which could have a material adverse affect on the financial condition orfuture operating results of TNS. During the three months ended March 31,2006, the Company accrued legal costs of approximately $0.5 million todefend itself in this matter. These legal costs are included in selling,general and administrative expense in the accompanying condensed consolidatedstatement of operations for the three months ended March 31, 2006.

The Company and themembers of its Board of Directors were also defendants in a putativeshareholder class action lawsuit that initially sought to enjoin thenon-binding proposal announced on March 13, 2006 from senior management of theCompany to acquire all outstanding shares of the Company. Paul Schwartz,purportedly on behalf of himself and others similarly situated, filed thelawsuit captioned*Schwartz v. TNS, Inc., etal.,* C.A. No. 2000-N, on March 13, 2006 in Delaware Chancery Courtfor New Castle County. On December 22, 2006, the plaintiff amended hiscomplaint to seek to enjoin instead the unsolicited acquisition proposalreceived by our Board of Directors on December 21, 2006 from another buyinggroup led by our former Chief Executive Officer John J. McDonnell, Jr. Afterour Board subsequently rejected that proposal on January 22, 2007, theplaintiff decided to voluntarily dismiss his lawsuit against all defendants byfiling with the Court a Notice and Order of Voluntary Dismissal on March 2,2007. Neither the Company nor any of the other defendants paid any compensationto the plaintiff or his attorneys, and the Company considers this case to beclosed.

 

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**Item 2.**                          Management’sDiscussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of thefinancial condition and results of operations of TNS, Inc. in conjunctionwith the consolidated financial statements and the related notes included inour annual report on Form 10-K filed with the SEC on March 16,2007 and available directly from the SEC at www.sec.gov and the condensedconsolidated financial statements and the related notes of TNS, Inc.,included elsewhere in this quarterly report.

There are statements made herein which may not addresshistorical facts and, therefore, could be interpreted to be forward-lookingstatements within the meaning of The Private Securities Litigation Reform Actof 1995. These forward-looking statements are based on current expectations,forecasts and assumptions that are subject to risks and uncertainties thatcould cause actual results to differ materially from those set forth in, orimplied by, the forward-looking statements. The Company has attempted, wheneverpossible, to identify these forward-looking statements using words such as“may,” “will,” “should,” “projects,” “estimates,” “expects,” “plans,”“intends,” “anticipates,” “believes,” and variations of these words and similarexpressions. Similarly, statements herein that describe the Company’s businessstrategy, prospects, opportunities, outlook, objectives, plans, intentions orgoals are also forward-looking statements. Actual results may differ materiallyfrom those indicated by such forward-looking statements as a result of variousimportant factors, including: the Company’s reliance upon a small number ofcustomers for a significant portion of its revenue; competitive factors such aspricing pressures; our customer’s ability to direct their data communicationsfrom the Company’s networks to other networks; the Company’s ability to growits business domestically and internationally by generating greater transactionvolumes, acquiring new customers or developing new service offerings;fluctuations in the Company’s quarterly results because of the seasonal natureof the business and other factors outside of the Company’s control; theCompany's substantial debt could adversely affect its financial health becausethe Company may be unable to obtain additional financing for working capital,capital expenditures, acquisitions and general corporate purposes, the Companymay not generate sufficient cash flow to repay the debt on a timely basis or topre-pay the debt, and a significant portion of the Company's cash flow fromoperations will be dedicated to the repayment or servicing of indebtedness,thereby reducing the amount of cash available for other purposes; the Company'sability to identify, execute or effectively integrate acquisitions; theCompany’s ability to identify, execute or effectively integrate futureacquisitions; increases in the prices charged by telecommunication providersfor services used by the Company; the Company’s ability to adapt to changingtechnology; additional costs related to compliance with the Sarbanes-Oxley Actof 2002, any revised New York Stock Exchange listing standards, SEC rulechanges or other corporate governance issues; and other risk factors describedin the Company’s annual report on Form 10-K filed with the SEC onMarch 16, 2007. In addition, the statements in this quarterly report aremade as of the date of this filing. The Company expects that subsequent eventsor developments will cause its views to change. The Company undertakes no obligationto update any of the forward-looking statements made herein, whether as aresult of new information, future events, changes in expectations or otherwise.These forward-looking statements should not be relied upon as representing theCompany’s views as of any date subsequent to the date of this filing. Theforward-looking statements in this document are intended to be subject to thesafe harbor protection provided by Sections 27A of the Securities Act and21E of the Exchange Act.

**Overview**

We are a leading provider of business-critical datacommunications services to processors of credit card, debit card and ATMtransactions. We are also a leading provider of secure data and voice networkservices to the global financial services industry. We operate one of thelargest Signaling System No. 7 networks in the United States capable ofproviding services nationwide, and we utilize this network to provide callsignaling and database access services to the domestic telecommunicationsindustry. Our data communications services enable secure and reliabletransmission of time-sensitive, transaction-related information critical to ourcustomers’ operations. Our customers outsource their data communicationsrequirements to us because of our substantial expertise, comprehensive customersupport and cost-effective services. We provide services to customers in theUnited States and increasingly to international customers in 28 countries,including Canada and countries in Europe, Latin America and the Asia-Pacificregion.

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 and Internet connections.

We generaterevenues through four business divisions:

·                                          ***POS services***. Weprovide fast, secure and reliable data communications services primarily topayment processors in the United States and Canada. POS services revenue isderived primarily from per transaction fees paid by our customers for thetransmission of transaction data through our networks between paymentprocessors and POS or ATM terminals.

·                                          ***International services***.We are one of the leading providers of data communications services to the POSindustry in the United Kingdom. Our international services division alsoprovides services in Australia, Austria, Colombia, 

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                                                France,Germany, India, Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands,New Zealand, Poland, Romania, South Korea, Spain, Sweden and Thailandthrough subsidiaries located in these countries. Additionally, through theseinternational subsidiaries we also provide services to customers located inBelgium, Bermuda, Finland, Gibraltar, Hong Kong, Norway and Singapore. Our international services division generates revenues primarily from our POSand financial services offerings abroad.

·                                          ***Telecommunication services***.We provide call signaling services that enable telecommunications carriers toestablish and terminate telephone calls placed by their subscribers. We alsoprovide database access services that enable our customers to provideintelligent network services, such as caller identification, toll-free call routingand local number portability, and validation services, such as credit card,calling card, third-party billing and collect calling. Our telecommunicationservices division generates revenues primarily from fixed monthly fees chargedfor our call signaling services and per-query fees charged for our databaseaccess and validation services.

·                                          ***Financial services***.We provide fast, secure and reliable private data networking services thatenable seamless communications and facilitate electronic trading amongcommercial banks, mutual funds, pension funds, broker-dealers, alternativetrading systems, electronic communications networks, securities and commoditiesexchanges and other market participants. Our networks support multiplecommunications protocols including the Financial Information eXchange, or FIX,protocol. Our financial services division generates revenues from monthlyrecurring fees based on the number of customer connections to and through ournetworks.

Our most significant expense is cost of networkservices, which is comprised primarily of telecommunications charges, includingdata transmission and database access, leased digital capacity charges, circuitinstallation charges and activation charges. The cost of data transmission isbased on a contract or tariff rate per minute of usage in addition to aprescribed rate per transaction for some vendors. The costs of database access,circuits, installation charges and activation charges are based on fixed feecontracts with local exchange carriers and interexchange carriers. The cost ofnetwork services also includes salaries, equipment maintenance and other costsrelated to the ongoing operation of our data networks. Depreciation expense onour network equipment and amortization of developed technology are excludedfrom our cost of network services and included in depreciation and amortizationof property and equipment and amortization of intangible assets in ourconsolidated statements of operations.

Our engineering and development expenses includesalaries and other costs related to product development, engineering, hardwaremaintenance 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 administrative expensesinclude costs related to sales, marketing, administrative and managementpersonnel, as well as external legal, accounting and consulting services.

*Dividends andRecapitalization*

On March 28, 2007, the Company's board of directorsdeclared a special dividend of $4.00 per common share which was paid on April12, 2007. Also, on March 28, 2007, the Company entered into a secured creditfacility, which consists of two facilities: a senior secured term loan facility in an aggregate principal amount of$225,000,000 (the “Term Facility”) and a senior secured revolving creditfacility in an aggregate principal amount of $15,000,000 (the “RevolvingFacility”). The Company used approximately $98.3 million of the proceeds fromthe Term Facility to pay the special dividend. The remainder of the proceeds from the Term Facility were used torefinance existing debt, to pay fees related to the senior secured creditfacility and the special dividend  andfor general corporate purposes.  Noamount was drawn on the Revolving Facility at closing, and the full principalamount of the Revolving Facility remained available to the Company as of March31, 2007.  The payment of the specialdividend and the closing on the secured credit facility reflect the completionof the Company's recapitalization plan. The Company believes these actions werein the best interest of our shareholders and established a more appropriate capitalstructure for the Company.

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**Results of Operations**

The following table sets forth, for the periodsindicated, selected statement of operations data (dollars in thousands):
| ** **                                                                                                                                     | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
| Revenues                                                                                                                                       |       | $                                                | 65,908     |   | $ | 72,661 |   |
| Operating  expenses:                                                                                                                           |       |                                             |       |   |   |
| Cost of network  services, exclusive of the items shown separately below                                                                       |       | 33,057                                           |       | 38,871 |   |
| Engineering and  development                                                                                                                   |       | 4,535                                            |       | 6,362 |   |
| Selling,  general, and administrative                                                                                                          |       | 16,126                                           |       | 17,175 |   |
| Depreciation and  amortization of property and equipment                                                                                       |       | 5,027                                            |       | 5,804 |   |
| Amortization of  intangible assets                                                                                                             |       | 4,931                                            |       | 6,112 |   |
| Total operating expenses                                                                                                                       |       | 63,676                                           |       | 74,324 |   |
| Income (loss)  from operations                                                                                                                 |       | 2,232                                            |       | (1,663 | ) |
| Interest expense                                                                                                                               |       | (2,032                                           | )          | (3,967 | ) |
| Interest income                                                                                                                                |       | 118                                              |       | 245 |   |
| Other income,  net                                                                                                                             |       | 190                                              |       | 645 |   |
| Income (loss)  before income taxes, equity in net loss of unconsolidated affiliates and  cumulative effect of a change in accounting principle |       | 508                                              |       | (4,740 | ) |
| Income tax  benefit                                                                                                                            |       | 15                                               |       | 1,577 |   |
| Equity in net  loss of unconsolidated affiliates                                                                                               |       | (1,074                                           | )          | (64 | ) |
| Cumulative  effect of a change in accounting principle, net of tax provision                                                                   |       | 84                                               |       | — |   |
| Net loss                                                                                                                                       |       | $                                                | (467       | ) | $ | (3,227 | ) |

 

**Three months ended March 31, 2007 compared to the threemonths ended March 31, 2006**

***Revenues.***Totalrevenues increased $6.8 million, or 10.2%, to $72.3 million for the threemonths ended March 31, 2007, from $65.9 million for the three months endedMarch 31, 2006. We generate revenues through four operating divisions.

***POS division.***Revenuesfrom the POS division increased $1.0 million, or 5.4%, to $19.8 million for thethree months ended March 31, 2007, from $18.8 million for the three monthsended March 31, 2006.  POS dial-uptransaction volumes increased 10.1%  to1.4 billion transactions for the three months ended March 31, 2007, from1.3 billion transactions for the three months ended March 31, 2006.Included in POS revenue for the first quarter of 2007 is an incremental $0.6million in pass-through revenues. Excluding the incremental pass-throughrevenue, revenues grew through increased contribution from our broadbandservice offerings and higher transaction volumes from our traditional dial-upPOS product.  Future revenue growth inthe POS division depends upon a number of factors including the success of ournew broadband, wireless and vending service offerings as well as the totalnumber of POS dial-up transactions we transport.

***Internationalservices division.***Revenues from the internationalservices division increased $4.3 million, or 18.0%, to $28.2 million for the threemonths ended March 31, 2007, from $23.9 million for the three months endedMarch 31, 2006. International services division revenues increasedprimarily as a result of the favorable impact of foreign exchange and to a lesserextent through higher transaction volumes from POS customers in Europe and AsiaPacific. Revenues from our U.K. subsidiaries increased $1.6 million, or 11.6%,to $15.2 million for the three months ended March 31, 2007, from $13.7million for the three months ended March 31, 2006. Excluding the positiveimpact of foreign exchange rates, revenues from our international servicesdivision would have increased $1.8 million, or 7.5%. Future revenuegrowth in the international services division depends on a number of factorsincluding the success of our POS and FSD products in countries we have recentlyentered, the success of our new product offerings and the successfulintegration of our recent acquisitions, including our recent acquisition of JPGTelecom, SAS.

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***Telecommunication servicesdivision.***Revenues from the telecommunication servicesdivision increased $0.1 million, or 0.6%, to $14.9 million for the three monthsended March 31, 2007, from $14.8 million for the three months endedMarch 31, 2006. Included in telecommunications services revenues for thethree months ended March 31, 2007 and 2006 were approximately $1.2 millionand $1.3 million, respectively, of pass-through revenues. Excluding thedecrease in pass-through revenues, revenues increased through continued demandfor our database access services which offset pricing compression due tocustomer consolidation in our call signaling business and lower volumes in ourvalidation business.

In 2006, one of our largest telecommunicationsservices division customers completed multiple acquisitions in its industry,including acquisitions of several of our other telecommunications servicesdivision customers.  In September 2006, wenegotiated a contract renewal with this significant customer in which we agreedto a pricing discount.  Future revenuegrowth in the telecommunication services division depends on a number offactors including the number of database access queries we transport, thenumber of call signaling routes our customers purchase and the success of ournew product offerings, which potentially may be offset by customers seekingpricing discounts due to industry consolidation or other reasons.

***Financial servicesdivision.***Revenues from the financial services divisionincreased $1.4 million, or 16.4%, to $9.7 million for the three months endedMarch 31, 2007, from $8.4 million for the three months endedMarch 31, 2006. The increase in revenues was due to increases in newendpoint installations as well as increases in connectivity between existingcustomers and increased demand for greater bandwidth connectivity. Futurerevenue growth in the financial services division depends on a number offactors including the number of connections to and through our networks as wellas the success of our new product offerings. We have begun to see an increased demand from our customers for largerbandwidth connections to our network and while these connections create greaterrevenue per physical endpoint, they require longer sales and installation leadtimes.

***Cost of network services.***Cost ofnetwork services increased $5.8 million, or 17.6%, to $38.9 million for thethree months ended March 31, 2007, from $33.1 million for the three monthsended March 31, 2006. Cost of network services were 53.5% of revenues forthe three months ended March 31, 2007, compared to 50.2% of revenues forthe three months ended March 31, 2006. The increase in cost of networkservices resulted from increases in access charges within our POS division andhigher database access volumes in our telecommunication services division. Future cost ofnetwork services depends on a number of factors including total transaction andquery volumes, the relative growth and contribution to total transaction volumeof each of our customers, the success of our new service offerings, the timingand extent of our network expansion and the timing and extent of any networkcost increases or reductions.  Due to anincrease in the fourth quarter of 2006 in the rates charged by one of theproviders of toll-free access services we use to transport domestic dial-up POStransactions, we anticipate that the cost of network services associated withthe POS division will increase between $5 million and $7 million in 2007 ascompared to 2006.  The actual amount ofthis increase will depend upon a number of factors, including the number andaverage length of domestic toll-free POS transactions we transport in 2007 andour ability to find alternate providers of toll-free access services at lowercosts.

Gross profit represented46.5% of total revenues for the three months ended March 31, 2007,compared to 49.8% for the three months ended March 31, 2006. This margincompression resulted primarily from increases in access charges, describedabove, in the POS division as well as price compression and product mix withinour telecommunication services division. Any significant loss or significant reduction intransaction or query volumes could lead to a decline in gross profit because significantportions of our network costs are fixed.

***Engineering anddevelopment expense.***Engineering and development expenseincreased $1.8 million, or 40.3%, to $6.4 million for the three months endedMarch 31, 2007, from $4.5 million for the three months ended March 31,2006. Engineering and development expense represented 8.8% of revenues for thethree months ended March 31, 2007 and 6.9% of revenues for the threemonths ended March 31, 2006. Included in engineering and developmentexpense for the three months ended March 31, 2007 is an incremental $0.8million in stock-based compensation expense, which includes $0.3 millionrelated to the decision by the Board of Directors to allow for dividendequivalent payments on the outstanding restricted stock units of outstandingrestricted stock units.  Engineering anddevelopment expense increased primarily from an increase in engineeringexpenses required to support our international expansion and new productofferings in our POS division.

***Selling, general and administrativeexpense.***Selling, general and administrative expenseincreased $1.0 million, or 6.5%, to $17.2 million for the three months endedMarch 31, 2007, from $16.1 million for the three months endedMarch 31, 2006. Selling, general and administrative expense represented23.6% of revenues for the three months ended March 31, 2007, compared to24.5% of revenues for the three months ended March 31, 2006. Included inselling, general and administrative 

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expense for the firstquarter of 2007 are pre-tax charges to earnings of approximately $0.8 millionrelated to executive severance and a $1.1 million stock-based compensationcharge related to the modification of outstanding restricted stock units, asmentioned above. Included in selling, general and administrative expense forthe first quarter of 2006 is a pre-tax charge to earnings of approximately $0.7million, comprised of an approximate $0.5 million charge related to a reservefor litigation that arose during the quarter and an approximate $0.2 millioncharge for legal expenses incurred by the special committee of our board ofdirectors. Excluding these items, selling, general and administrative expenseincreased primarily from the expenses required to support our revenue growth,mainly within the international services division and to a lesser extent anincrease in stock-based compensation expense as a result of grants made during2006 and 2007.

***Depreciation andamortization of property and equipment.***Depreciation andamortization of property and equipment increased $0.8 million, or 15.5% to $5.8million for the three months ended March 31, 2007, from $5.0 million forthe three months ended March 31, 2006. Depreciation expense increasedprimarily due to capital expenditures made during 2006 to support our revenuegrowth. Depreciation and amortization of property and equipment represented8.0% of revenues for the three months ended March 31, 2007, compared to7.6% of revenues for the three months ended March 31, 2006.

***Amortization ofintangible assets.***Amortization of intangible assetsincreased $1.2 million, or 24.0%, to $6.1 million for the three months endedMarch 31, 2007, from $4.9 million for the three months endedMarch 31, 2006. The amortization of intangible assets for the three monthsended March 31, 2007 and 2006 relates solely to the intangible assetsresulting from acquisitions. The increase was primarily attributable toacquisitions we completed during 2006. For purposes of measuring andrecognizing impairment of long-lived assets including intangibles, we assesswhether separate cash flows can be attributed to the individual asset. For ourcustomer relationship intangible assets, we recognize and measure impairmentupon the significant loss of revenue from a customer. Based upon our contractwith one of our major customers, we believe that revenues and relatedtransaction volumes from this customer will continue to decline in 2007 and maydecline further thereafter. The intangible asset value attributable to thiscustomer relationship was approximately $22.0 million as of March 31,2007. We assessed the recoverability of this customer relationship asset basedupon undiscounted anticipated future cash flows and concluded no impairmentexisted as of March 31, 2007.

***Interest expense.***Interestexpense increased $1.9 million to $3.9 million for the three months endedMarch 31, 2007, from $2.0 million for the three months endedMarch 31, 2006. Included in interest expense for the three months endedMarch 31, 2007 is a $1.4 million charge related to the write-off ofunamortized deferred financing fees related to the termination of the 2005 amendedand restated senior secured credit facility. Excluding this write-off, interestexpense increased due to higher debt levels as well as increases in ourweighted average borrowing rate.

***Interest income.***Interest income was $0.2 million for the three months ended March 31, 2007compared to $0.1 million for the three months ended March 31, 2006.  The increase in interest income is primarilydue to higher outstanding average cash balances during the three months endedMarch 31, 2007.

*** Other income, net.***Otherincome, net was $0.6 million for the three months ended March 31, 2007compared to $0.2 million for the three months ended March 31, 2006.Included in other income, net for the three months ended March 31, 2007 isa gain on the sale of an asset of  $0.2million and a gain on foreign currency translation of approximately $0.3 milliondue to fluctuations in the value of the U.S. dollar as compared with foreigncurrencies, principally, the euro and the British pound, versus a gain onforeign currency translation of $0.2 million for the three months endedMarch 31, 2006.

***Income tax benefit.***For the three months ended March 31, 2007, ourincome tax benefit was approximately $1.6 million compared to an income taxprovision of $15,000 for the three months ended March 31, 2006.  The increase in our income tax benefit isprimarily related to fewer losses from our unconsolidated equity methodinvestments, which are not benefited, and to a lesser extent, lowernon-deductible expense, such as meals and entertainment and stock-basedcompensation.

***Equity in net lossof unconsolidated affiliates.***For the three months endedMarch 31, 2007, our equity in net loss of unconsolidated affiliates was$64,000 compared to a loss of $1.1 million for the three months endedMarch 31, 2006. The decrease was due primarily to the fact that we wrotedown the carrying value of our investment in Way Systems, Inc. and IP Commerce,Inc. to zero in the fourth quarter of 2006. As of March 31, 2007, we havea $0.9 million long-term investment in another unconsolidated affiliate, and weexpect to incur additional losses on this investment in 2007, and we maycontinue to incur losses thereafter.

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**Seasonality**

Credit card anddebit card transactions account for a major percentage of the transactionvolume processed by our customers. The volume of these transactions on ournetworks generally is greater in the third and fourth quarter vacation andholiday seasons than during the rest of the year. Consequently, revenues andearnings from credit card and debit card transactions in the first and secondquarter generally are lower than revenues and earnings from credit card anddebit card transactions in the third and fourth quarters of the immediatelypreceding year. We expect that our operating results in the foreseeable futurewill be significantly affected by seasonal trends in the credit card and debitcard transaction market.

**Liquidity and Capital Resources**

Our primary liquidity and capital resource needs areto finance the costs of our operations, to make capital expenditures and toservice our debt. Based upon our current level of operations, we expect thatour cash flow from operations, together with the amounts we are able to borrowunder our 2007 revolving credit facility, will be adequate to meet ouranticipated needs for the foreseeable future. Although we have no specific plansto do so, to the extent we decide to pursue one or more significant strategicacquisitions, we will likely need to incur additional debt or sell additionalequity to finance those acquisitions.

Our operations provided us cash of $8.4 millionfor the three months ended March 31, 2007, which was attributable to a netloss of $3.2 million, depreciation, amortization and other non-cashcharges of $16.3 million and an increase in working capital of$4.7 million. Our operations provided us cash of $10.0 million forthe three months ended March 31, 2006, which was attributable to a netloss of $0.5 million, depreciation, amortization and other non-cashcharges of $12.6 million and an increase in working capital of $2.1 million.

We used cash of $2.7 million in investingactivities for the three months ended March 31, 2007, which comprisedsolely of capital expenditures to support our growth. We used cash of$24.7 million in investing activities for the three months endedMarch 31, 2006, which includes capital expenditures of $5.1 million.In addition we completed the acquisition of CommsXL in the UK, InfiniRoute andSonic.

We used cash of$4.3 million from financing activities for the three months endedMarch 31, 2007, which includes proceeds of $222 million from our seniorsecured credit facility, of which $102 million is held in restricted cash forpayment of dividends and payments for long term debt obligations of $123million. We generated cash of $6.2 million from financing activities for thethree months ended March 31, 2006, which includes $6.0 million ofborrowings under our 2005 amended and restated senior secured credit facility,the proceeds of which were used to finance the stock and asset purchase fromSonic.

***Senior Secured Credit Facility***

On March 28, 2007, weentered into a $240.0 million senior secured credit facility to finance the $4.00per share special cash dividend described elsewhere in this report and to refinanceour 2005 amended and restated senior secured credit facility.  The 2007 senior secured credit facilityconsists of a senior secured term loan facility in an aggregate principalamount of $225.0 million and a senior secured revolving credit facility in anaggregate principal amount of $15.0 million, under which there were noborrowings as of March 31, 2007. The revolving credit facility matures March27, 2013.  Payments on the term loans aredue in quarterly installments over the seven year term beginning June 30, 2007,with the remainder payable on March 28, 2014. Voluntary prepayments on the term loans are first applied pro-rata tothe scheduled quarterly installments due within the next succeeding twelvemonth period until paid in full and then applied to the term loans in inverseorder of maturity.  We made a voluntarypre-payment in April 2007 of $7.0 million on the term loans.

As of March 31, 2007, total remaining payments on theterm loans are as follows (in thousands):

| 2007       |   | $       | 1,688   |   |
|------------|--------|---------|---------|--------|
| 2008       |   | 2,250   |    |
| 2009       |   | 2,250   |    |
| 2010       |   | 2,250   |    |
| 2011       |   | 2,250   |    |
| Thereafter |   | 214,312 |    |
|       |   | $       | 225,000 |   |

 

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Interest on the outstanding balances under therevolving credit facility is payable, at our option, at a rate equal to thehigher of the Wall Street Journal published “base rate on corporate loansposted by at least 75% of the nation’s largest banks” or the federal funds rateplus 50 basis points (the “Base Rate”), in each case, plus a margin of 1.0% orat the London Interbank Offered Rate (“LIBOR”), plus a margin of 2.0%. Interest on the outstanding balances under the term loans are payable, at ouroption, at the Base Rate plus a margin of 1.0%, or at LIBOR plus a margin of2.0%.  The revolving credit facility issubject to an annual commitment fee in an amount equal to 0.5% per annummultiplied by the amount of funds available for borrowing under the RevolvingFacility.  Interest payments on the 2007senior secured credit facility are due biweekly, montly, bimonthly or quarterlyat our option.

The terms of the 2007 senior secured credit facilityrequire us to make an annual prepayment in an amount that may range from 0% to50% of our “excess cash flow” (as such term is defined in the Credit Agreement)depending on the Company’s leverage ratio for any fiscal year. Prepayments are also required to be made in other circumstances, including uponasset sales.

The terms of the 2007 Credit Facility require us tocomply with financial and nonfinancial covenants, including maintaining aspecified leverage ratio at the end of each fiscal quarter and complying withspecified annual limits on capital expenditures.  As of March 31, 2007, wewere required to maintain a leverage ratio of less than 4.4 to 1.0.  The leverage ratio continues to decline overthe term of the 2007 senior secured credit facility.  The 2007 senior secured credit facility alsocontains nonfinancial covenants that restrict some of our corporate activities,including our ability to dispose of assets, incur additional debt, pay dividends,create liens, make investments, make capital expenditures and engage inspecified transactions with affiliates.  Noncompliance with any of thefinancial or nonfinancial covenants without cure or waiver would constitute anevent of default under the 2007 senior secured credit facility.  An eventof default resulting from a breach of a financial or nonfinancial covenant mayresult, at the option of the lenders, in an acceleration of the principal andinterest outstanding, and a termination of the revolving credit facility. The 2007 senior secured credit facility also contains other customary events ofdefault (subject to specified grace periods), including defaults based onevents of bankruptcy and insolvency, nonpayment of principal, interest or feeswhen due, breach of specified covenants, change in control and materialinaccuracy of representations and warranties. We were in compliance with the financial and non-financial covenants ofthe 2007 senior secured credit facility as of March 31, 2007.

In connection withthe closing of the 2007 senior secured credit facility, we incurredapproximately $3.1 million in financing costs. These financing costs weredeferred and are being amortized using the effective interest method over thelife of the 2007 senior secured credit facility.   In connection with the repayment of the 2005amended and restated senior secured credit facility in March 2007, we wrote-offapproximately $1.4 million in unamortized deferred financing costs related tothe 2005 amended and restated senior secured credit facility.  Such write-off has been included in interestexpense in the accompanying condensed consolidated statement of operations forthe three months ended March 31, 2007.

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**Item 3.**                          Quantitativeand Qualitative Disclosures About Market Risk

***Interest rates***

Our principal exposure to market risk relates tochanges in interest rates. As of March 31, 2007, we had $225.0 millionoutstanding under our 2007 senior secured credit facility with interest ratestied to changes in the lender’s base rate or the LIBOR rate. Based upon theoutstanding borrowings on March 31, 2007 and assuming repayment of theTerm Loan in accordance with scheduled maturities, each 1.0% increase in theserates could add an additional $2.2 million to our annual interest expense.

As of March 31, 2007, we did not hold derivativefinancial or commodity instruments and all of our cash and cash equivalentswere held in money market or commercial accounts.

***Foreign currency risk***

Our earnings are affectedby fluctuations in the value of the U.S. dollar as compared with foreigncurrencies, predominately the euro, the British pound and the Australian dollardue to our operations in Europe and Australia.

We have operations in 21 countries outside of theU.S., including the United Kingdom, Australia, Austria, Canada, Colombia,France, Germany, India, Ireland, Italy, Japan, Malaysia, Mexico, theNetherlands, New Zealand, Poland, Romania, South Korea, Spain, Sweden andThailand. We provide services in these countries using networks deployed ineach country. We manage foreign exchange risk through the structure of ourbusiness. In the substantial majority of our transactions, we receive paymentsdenominated in the U.S. dollar, British pound, euro or Australian dollar. Therefore,we do not rely on international currency markets to obtain and pay illiquidcurrencies. The foreign currency exposure that does exist is limited by thefact that the majority of transactions are paid according to our standardpayment terms, which are generally short-term in nature. Our policy is not tospeculate in foreign currencies, and we promptly buy and sell foreigncurrencies as necessary to cover our net payables and receivables, which aredenominated in foreign currencies. For the three months ended March 31,2007, we recorded a gain on foreign currency translation of approximately $0.3million.

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**Item 4.**           Controls and Procedures

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the Company’s reports under the Securities Exchange Act of 1934,as amended, is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to the Company’s management, including itsChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

**Evaluation**

The Company carried out an evaluation, under thesupervision, and with the participation, of the Company’s management, includingthe Company’s Chief Executive Officer and the Company’s Chief FinancialOfficer, of the effectiveness of the Company’s disclosure controls andprocedures as of March 31, 2007. Based on the foregoing, the Company’sChief Executive Officer and principal financial officers concluded that theCompany’s disclosure controls and procedures were effective as ofMarch 31, 2007.

There have been no significant changes during thethree months ended March 31, 2007 covered by this report in the Company’sinternal control over financial reporting or in other factors that could significantlyaffect the internal control over financial reporting.

 

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**PART II—OTHERINFORMATION**

**Item 1.**                          LegalProceedings

Information regarding legal proceedings is containedin Note 8 to the Condensed Consolidated Financial Statements contained inthis Report and is incorporated herein by reference.

**Item 1A.**                 Risk Factors

There were no materialchanges from the risk factors previously disclosed in “Item 1A. Risk Factors”included in our Annual Report on Form 10-K for the year ended December 31,2006.

**Item 2.**                          UnregisteredSales of Equity Securities and Use of Proceeds

None.

**Item 3.**                          DefaultUpon Senior Securities

None.

**Item 4.**                          Submissionof Matters to a Vote of Security Holders

None

**Item 5.**                          OtherInformation

None.

**Item 6.**                          Exhibits
|        |   | (4.7)   |   | Credit Agreement, dated as of March 28, 2007,  by and among Transaction Network Services, Inc., Registrant, the several  financial institutions from time to time party thereto as Lenders and General  Electric Capital Corporation, as Agent, L/C Issuer and a Lender, with GECC  Capital Markets Group, Inc., as sole Lead Arranger.* |
|--------|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |    |   |                                                                                                                                                                                                                                                                                                                                                    |
|   |   | (10.29) |   | Employment Agreement, dated as of January 8,  2007, by and among the Registrant, Transaction Network Services, Inc.  and James McLaughlin.                                                                                                                                                                                                    |
|   |   |    |   |                                                                                                                                                                                                                                                                                                                                                    |
|        |   | (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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*                    Incorporatedby reference to exhibit 99.1 in the Registrant’s current report onForm 8-K filed March 29, 2007.

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                         |   | TNS, Inc. |
|-------------------------|--------|----------------|
|                    |   | (Registrant)   |
|                    |   |           |   |   |
|                    |   |           |   |   |
| Date: May 10, 2007 |   | By:            |   | /s/ HENRY H. GRAHAM, JR. |
|                    |   |           |   | Henry H. Graham, Jr. |
|                    |   |           |   | Chief Executive Officer |
|                    |   |           |   |   |
| Date: May 10, 2007 |   | By:            |   | /s/ DENNIS L. RANDOLPH, JR. |
|                    |   |           |   | Dennis L. Randolph, Jr. |
|                    |   |           |   | Executive Vice President, Chief Financial  Officer & Treasurer |

 

 

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