Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

**(MarkOne)**

 
| **x** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended June 30, 2009**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-------------------------------------------------------------------------------------------------------------------|

 

**Forthe transition period from          to          **

 

**CommissionFile Number: 001-32033**

 

**TNS,INC.**

(Exact name ofregistrant as specified in its charter)

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

 

**11480Commerce Park Drive, Suite 600**

**Reston,VA 20191**

(Address ofprincipal executive offices)

 

**(703) 453-8300**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(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.  Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o  No o

 

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

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of Common Stock, as of the latestpracticable date.

 

**SharesOutstanding as of July 1, 2009**

25,259,059 Sharesof Common Stock, $0.001 par value

 

 

 

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**TNS, INC.**

 

**INDEX**

 
| ** **                              | ** **                                                                                                       | **Page** |
|-----------------------------------------|------------------------------------------------------------------------------------------------------------------|----------|
| **Part I:  FINANCIAL INFORMATION** |                                                                                                             |
| Item 1.                                 | Condensed Consolidated  Financial Statements (Unaudited)                                                         | 3        |
|                                    | Condensed  Consolidated Balance Sheets as of December 31, 2008 and June 30,  2009                      | 3        |
|                                    | Condensed  Consolidated Statements of Operations for the three and six months ended  June 30, 2008 and 2009 | 4        |
|                                    | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30,  2008 and 2009           | 5        |
|                                    | Notes to Condensed Consolidated Financial Statements                                                             | 6        |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      | 16       |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                                      | 24       |
| Item 4.                                 | Controls and  Procedures                                                                                         | 25       |
| **Part II:  OTHER INFORMATION**    |                                                                                                             |
| Item 1.                                 | Legal Proceedings                                                                                                | 26       |
| Item 1A.                                | Risk Factors                                                                                                     | 26       |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                     | 26       |
| Item 3.                                 | Default  Upon Senior Securities                                                                                  | 26       |
| Item 4.                                 | Submission  of Matters to a Vote of Security Holders                                                             | 26       |
| Item 5.                                 | Other Information                                                                                                | 26       |
| Item 6.                                 | Exhibits                                                                                                         | 26       |

 

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**PART I—FINANCIAL INFORMATION**

 

**Item1. Condensed Consolidated Financial Statements**

 

**TNS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(dollarsin thousands, except share and per share data)**

 
| ** **                                                                                                                                                                                                | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                | ** ** | **2008**              | ** ** | **2009**          | ** ** |
| ** **                                                                                                                                                                                                | ** ** | ** **            | ** ** | **(UNAUDITED)**   | ** ** |
| **ASSETS**                                                                                                                                                                                                |       |                  |       |              |       |
| Current  assets:                                                                                                                                                                                          |       |                  |       |              |       |
| Cash  and cash equivalents                                                                                                                                                                                |       | $                     | 38,851     |              | $          | 23,126 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $3,631 and $7,532,  respectively                                                                                                          |       | 69,501                |       | 98,590            |       |
| Prepaid  expenses                                                                                                                                                                                         |       | 5,351                 |       | 10,033            |       |
| Deferred  tax assets                                                                                                                                                                                      |       | 1,805                 |       | 2,047             |       |
| Other  current assets                                                                                                                                                                                     |       | 4,965                 |       | 5,928             |       |
| Total  current assets                                                                                                                                                                                     |       | 120,473               |       | 139,724           |       |
| Property  and equipment, net                                                                                                                                                                              |       | 58,795                |       | 111,539           |       |
| Identifiable  intangible assets, net                                                                                                                                                                      |       | 151,811               |       | 286,597           |       |
| Goodwill                                                                                                                                                                                                  |       | 10,954                |       | 15,836            |       |
| Deferred  tax assets, net                                                                                                                                                                                 |       | 16,141                |       | 13,312            |       |
| Other  assets                                                                                                                                                                                             |       | 3,740                 |       | 7,308             |       |
| Total  assets                                                                                                                                                                                             |       | $                     | 361,914    |              | $          | 574,316 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                             |       |                  |       |              |       |
| Current  liabilities:                                                                                                                                                                                     |       |                  |       |              |       |
| Accounts  payable, accrued expenses and other current liabilities                                                                                                                                         |       | $                     | 59,424     |              | $          | 73,190 |   |
| Deferred  revenue                                                                                                                                                                                         |       | 16,360                |       | 18,478            |       |
| Current  portion of long-term debt                                                                                                                                                                        |       | —                |       | 20,850            |       |
| Total  current liabilities                                                                                                                                                                                |       | 75,784                |       | 112,518           |       |
| Long-term  debt, net of current portion and discount                                                                                                                                                      |       | 178,500               |       | 346,948           |       |
| Deferred  tax liability                                                                                                                                                                                   |       | 2,420                 |       | 1,770             |       |
| Other  liabilities                                                                                                                                                                                        |       | 2,395                 |       | 2,476             |       |
| Total  liabilities                                                                                                                                                                                        |       | 259,099               |       | 463,712           |       |
| Commitments  and contingencies                                                                                                                                                                            |       |                  |       |              |       |
| Stockholders’  equity:                                                                                                                                                                               |       |                  |       |              |       |
| Common  stock, $0.001 par value; 130,000,000 shares authorized; 25,082,007 shares  issued and 25,053,226 shares outstanding and 25,378,146 shares issued and  25,259,059 shares outstanding, respectively |       | 25                    |       | 25                |       |
| Treasury  stock, 28,781 shares and 119,087 shares, respectively                                                                                                                                           |       | (578                  | )          | (1,390            | )          |
| Additional  paid-in capital                                                                                                                                                                               |       | 150,839               |       | 154,838           |       |
| Accumulated  deficit                                                                                                                                                                                      |       | (40,800               | )          | (40,371           | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                     |       | (6,671                | )          | (2,498            | )          |
| Total  stockholders’ equity                                                                                                                                                                          |       | 102,815               |       | 110,604           |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                          |       | $                     | 361,914    |              | $          | 574,316 |   |

 

See accompanyingnotes to condensed consolidated financial statements (unaudited).

 

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**TNS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)**

**(dollarsin thousands, except share and per share data)**

** **
| ** **                                                                            | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
| Revenues                                                                              |       | $                                               | 90,148     |                                          | $          | 121,950 |   | $ | 174,273 |   | $ | 197,217 |   |
| Operating  expenses:                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Cost  of network services, exclusive of the items shown separately below              |       | 42,225                                          |       | 58,314                                        |       | 82,932 |   | 95,104 |   |
| Engineering  and development                                                          |       | 7,669                                           |       | 10,507                                        |       | 14,868 |   | 16,914 |   |
| Selling,  general, and administrative                                                 |       | 20,955                                          |       | 24,172                                        |       | 40,400 |   | 41,929 |   |
| Depreciation  and amortization of property and equipment                              |       | 6,094                                           |       | 7,994                                         |       | 12,061 |   | 13,828 |   |
| Amortization  of intangible assets                                                    |       | 6,359                                           |       | 8,153                                         |       | 12,457 |   | 13,757 |   |
| Total  operating expenses                                                             |       | 83,302                                          |       | 109,140                                       |       | 162,718 |   | 181,532 |   |
| Income  from operations                                                               |       | 6,846                                           |       | 12,810                                        |       | 11,555 |   | 15,685 |   |
| Interest  expense                                                                     |       | (2,631                                          | )          | (11,417                                       | )          | (6,340 | ) | (12,869 | ) |
| Interest  income                                                                      |       | 148                                             |       | 61                                            |       | 327 |   | 239 |   |
| Other expense, net                                                                    |       | (290                                            | )          | (345                                          | )          | (221 | ) | (452 | ) |
| Income  before income tax benefit and equity in net loss of unconsolidated affiliates |       | 4,073                                           |       | 1,109                                         |       | 5,321 |   | 2,603 |   |
| Income tax provision                                                                  |       | (2,977                                          | )          | (633                                          | )          | (2,625 | ) | (2,121 | ) |
| Equity  in net loss of unconsolidated affiliates                                      |       | (70                                             | )          | (23                                           | )          | (70 | ) | (53 | ) |
| Net  income                                                                           |       | $                                               | 1,026      |                                          | $          | 453 |   | $ | 2,626 |   | $ | 429 |   |
|                                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Basic  and diluted net income per common share                                        |       | $                                               | 0.04       |                                          | $          | 0.02 |   | $ | 0.11 |   | $ | 0.02 |   |
| Basic  weighted average common shares outstanding                                     |       | 24,699,262                                      |       | 25,228,319                                    |       | 24,504,459 |   | 25,177,974 |   |
| Diluted  weighted average common shares outstanding                                   |       | 25,274,241                                      |       | 25,522,433                                    |       | 25,002,074 |   | 25,445,218 |   |

 

See accompanyingnotes to condensed consolidated financial statements (unaudited).

 

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**TNS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (UNAUDITED)**

**(dollarsin thousands)**

 
| ** **                                                                       | ** ** | **Six months ended June 30** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| Cash  flows from operating activities:                                           |       |                                             |       |   |   |
| Net  income                                                                      |       | $                                                | 2,626      |   | $ | 429 |   |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |                                             |       |   |   |
| Non-cash  items:                                                                 |       |                                             |       |   |   |
| Depreciation  and amortization of property and equipment                         |       | 12,061                                           |       | 13,828 |   |
| Amortization  of goodwill and other intangibles                                  |       | 12,457                                           |       | 13,757 |   |
| Loss  on disposal of property and equipment                                      |       | 129                                              |       | 16 |   |
| Deferred  income tax (benefit) provision                                         |       | (3,371                                           | )          | 2,734 |   |
| Non  cash interest and deferred financing fees                                   |       | 418                                              |       | 4,738 |   |
| Equity  in net income (loss) of unconsolidated affiliate                         |       | 70                                               |       | (53 | ) |
| Stock  compensation expense                                                      |       | 6,050                                            |       | 4,532 |   |
|                                                                             |       | 27,814                                           |       | 39,552 |   |
| Changes  in operating assets and liabilities:                                    |       |                                             |       |   |   |
| Accounts  receivable, net                                                        |       | (4,248                                           | )          | 6,575 |   |
| Other  current and noncurrent assets                                             |       | (990                                             | )          | (1,610 | ) |
| Accounts  payable and accrued expenses                                           |       | 4,858                                            |       | (5,530 | ) |
| Deferred  revenue                                                                |       | 1,434                                            |       | 1,160 |   |
| Other  current and noncurrent liabilities                                        |       | (1,691                                           | )          | 81 |   |
| Net  cash provided by operating activities:                                      |       | 29,803                                           |       | 40,657 |   |
| Cash  flows from investing activities                                            |       |                                             |       |   |   |
| Purchases  of property and equipment                                             |       | (13,718                                          | )          | (11,136 | ) |
| Business  combinations, net of cash acquired                                     |       | —                                           |       | (226,196 | ) |
| Net  cash used in investing activities:                                          |       | (13,718                                          | )          | (237,332 | ) |
| Cash  flows from financing activities                                            |       |                                             |       |   |   |
| Proceeds  from issuance of long-term debt, net of financing costs                |       | —                                           |       | 201,612 |   |
| Repayments  of long-term debt                                                    |       | (18,000                                          | )          | (20,000 | ) |
| Proceeds  from stock option exercises, inclusive of tax benefit                  |       | 8,946                                            |       | 381 |   |
| Payment  of long-term debt financing costs                                       |       | (75                                              | )          | (175 | ) |
| Purchase  of treasury stock                                                      |       | (1,561                                           | )          | (812 | ) |
| Net  cash (used in) provided by financing activities                             |       | (10,690                                          | )          | 181,006 |   |
| Effect  of exchange rates on cash and cash equivalents                           |       | (706                                             | )          | (56 | ) |
| Net  increase (decrease) in cash and cash equivalents                            |       | 4,689                                            |       | (15,725 | ) |
| Cash  and cash equivalents, beginning of period                                  |       | 17,805                                           |       | 38,851 |   |
| Cash  and cash equivalents, end of period                                        |       | $                                                | 22,494     |   | $ | 23,126 |   |
|                                                                             |       |                                             |       |   |   |
| Supplemental  disclosures of cash flow information:                              |       |                                             |       |   |   |
| Cash  paid for interest                                                          |       | $                                                | 2,476      |   | $ | 6,761 |   |
| Cash  paid for income taxes                                                      |       | $                                                | 2,748      |   | $ | 1,960 |   |

 

See accompanyingnotes to condensed consolidated financial statements (unaudited).

 

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**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

 

**1.****            ****Description of Business and Basis ofPresentation**

 

TNS, Inc. (TNS orthe Company) is a Delaware corporation. TNS is a leading provider ofbusiness-critical data communications services to processors of credit card,debit card and automated teller machine (ATM) transactions. TNS is also aleading provider of call signaling and database access services to the domestictelecommunications industry and of secure data and voice network services tothe global financial services industry. TNS’ data communication services enablesecure and reliable transmission of time-sensitive, transaction-related informationcritical to its customers’ operations. The Company’s customers outsource theirdata communication requirements to TNS because of the Company’s expertise,comprehensive customer support, and cost-effective services. TNS providesservices to customers in the United States and increasingly to customers in 29countries, including Canada, Mexico and countries in Europe, Latin America andthe Asia-Pacific region.

 

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

 

The Company has fourbusiness divisions: (1) the point-of-sale/point-of-service (POS) division,which provides data communications services to payment processors in the U.S.,Canada and Mexico, (2) the telecommunication services division (TSD),which provides call signaling services, database access services and roamingand clearing services targeting primarily the domestic telecommunicationsindustry, (3) the financial services division (FSD), which provides dataand voice communications services to the financial services community insupport of the Financial Information eXchange (FIX) messaging protocol andother transaction-oriented trading applications, and (4) the internationalservices division (ISD), which markets the Company’s POS and financial servicesin countries outside of the United States, Canada and Mexico.

 

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

 

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements reflect adjustments (all of which are of a normal and recurringnature) that are necessary for the fair presentation of the periods presented.The results of operations for the three and six months ended June 30, 2009are not necessarily indicative of the results to be expected for any subsequentinterim period or for the fiscal year. It is suggested that these unauditedcondensed consolidated financial statements be read in conjunction with theCompany’s annual report on Form 10-K filed with the SEC on March 16,2009, which includes consolidated financial statements and the notes theretofor the year ended December 31, 2008.

 

*CapitalStructure*

 

During the six monthsended June 30, 2009, the Company issued 30,717 shares of common stockfollowing the exercise of stock options and 265,422 shares of common stockfollowing the vesting of restricted stock units, of which 90,306 shares weresurrendered by employees to satisfy payroll tax withholding obligations andheld by the Company as treasury shares. During the six months ended June 30,2008, the Company issued 487,250 shares of common stock following the exerciseof stock options and 281,487 shares of common stock following the vesting ofrestricted stock units, of which 83,912 shares were surrendered by employees tosatisfy payroll tax withholding obligations and held by the Company as treasuryshares.

 

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**Acquisitions**

 

On March 2, 2009,the Company entered into an Asset Purchase Agreement, dated March 2, 2009(the Purchase Agreement), by and between the Company and VeriSign, Inc.(the Seller) pursuant to which the Company agreed to purchase certain assetsand assume certain liabilities of the Seller’s Communications Services Group(CSG).  On May 1, 2009, the Company completed the acquisition inaccordance with the terms and conditions of the Purchase Agreement.  Theinitial purchase price was approximately $226.2 million in cash and is subjectto a post-closing working capital adjustment. The Company funded thetransaction through a new $230 million term loan facility as part of its 2009Credit Facility (see Note 2). CSG provides call signaling services andintelligent database services such as caller ID, toll-free call routing andlocal number portability to the U.S. telecommunications industry.  Inaddition, CSG provides wireless roaming and clearing services to mobile phoneoperators.  The Company will integrate CSG into its telecommunicationsservices division. The statements of operations for the three and six monthsended June 30, 2009 include the results of CSG from May 1, 2009. In conjunctionwith the CSG acquisition, the Company incurred total acquisition related costsof $2.5 million. During the three and six months ended June 30, 2009,acquisition related costs of $1.6 million were included in selling, general andadministrative expenses in the accompanying consolidated statement ofoperations.

 

The acquisition of CSGhas been accounted for as a business combination under SFAS No. 141(R)“Business combinations, a revision of SFAS No. 141”. We have commenced theappraisals necessary to assess the fair values of the tangible and intangibleassets acquired and liabilities assumed and the amount of goodwill to berecognized as of the acquisition date. As the values of certain assets andliabilities are preliminary in nature, they are subject to adjustment asadditional information is obtained about the facts and circumstances thatexisted as of the acquisition date. The valuations will be finalized within 12months of the close of the acquisition. When the valuations are finalized, anychanges to the preliminary valuation of assets acquired and liabilities assumedmay result in significant adjustments to the fair value of net identifiableassets acquired and goodwill.

 

The fair values of theassets acquired and liabilities assumed were preliminarily determined using theincome, cost and market approaches. The fair value measurements were primarilybased on significant inputs that are not observable in the market and thereforerepresent a Level 3 measurement as defined by SFAS No. 157 “Fair ValueMeasurements”.  Existing technology,in-process research and development and customer contracts were valued usingthe excess earnings method, a variation on the income method. The excessearnings method considers the use of other assets in the generation of theprojected cash flows in order to determine the economic benefit generated bythe subject intangible asset. Non competition agreements were valued using theincome approach. The income approach indicates value for a subject asset basedon the present value of cash flows projected to be generated by the asset.Projected cash flow is discounted at a rate of return that reflects therelative risk of achieving the cash flow and the time value of money.  Fixed assets and real estate were valuedusing the market and cost approaches, as appropriate. The market approachindicates value for a subject asset based on available market pricing forcomparable assets. The cost approach indicates value by determining the currentcost of replacing an asset with another of equivalent economic utility. Thecost to replace a given asset reflects the estimated reproduction orreplacement cost for the property, less an allowance for loss in value due todepreciation.

 

The purchase price forCSG was allocated, on a preliminary basis, as follows (in thousands):

 
| ** **                                                             | ** ** | **Amount** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|
| **Purchase price allocation:**                                         |       |       |       |
| Accounts receivable, net of allowance for doubtful  accounts of $2,673 |       | $          | 33,852     |   |
| Prepaid expenses                                                       |       | 2,963      |       |
| Property and equipment                                                 |       | 43,633     |       |
| Land and buildings                                                     |       | 10,034     |       |
| Goodwill                                                               |       | 3,984      |       |
| Identifiable intangible assets                                         |       |       |       |
| Customer relationships                                                 |       | 141,500    |       |
| Developed technology                                                   |       | 4,800      |       |
| Non competition agreements                                             |       | 600        |       |
| In-process research and development                                    |       | 300        |       |
| Total assets                                                           |       | 241,666    |       |
| Accounts payable, accrued expenses and other current  liabilities      |       | (15,469    | )          |
| Total purchase price                                                   |       | 226,197    |       |
|                                                                        |            |            |            |  |

 

The amounts allocated to property and equipment arebeing depreciated on a straight line basis over their weighted averageestimated useful lives of 4 years. The amounts allocated to land and buildingsare being depreciated on a straight line basis over their estimated useful livesof 39 years. The customer relationships included in intangible assets are beingamortized on a straight line basis over 9 years and other intangible assets arebeing amortized on a straight line basis over 2 to 4 years. The goodwill of $4.0 millionis expected to be deductible for tax purposes.

 

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* *

*ProForma Information*

 

Theunaudited pro forma information presents the combined operating results of TNSand CSG, with the results prior to the acquisition date adjusted to include thepro forma impact of: the elimination of transactions between TNS and CSG; theadjustment of amortization of intangibles assets and depreciation of fixedassets based on the preliminary purchase price allocation; and the adjustmentof interest expense to reflect the incremental borrowings incurred by TNS tocomplete the acquisition of CSG.

 

Theunaudited pro forma results are presented for illustrative purposes only and donot reflect the realization of potential cost savings, or any relatedintegration costs. Certain cost savings may result from the merger; howeverthere can be no assurance that these cost savings will be achieved.

 

The followingunaudited pro forma consolidated results of operations assume that theacquisition of CSG was completed as of January 1, for each of therespective periods presented (dollars in thousands, except per share amounts):

 
| ** **                             | ** ** | **Three months ended********June 30,** | ** ** | **Six  months ended********June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                              | ** ** | **2009**                                        | ** ** | **2008** | ** ** | **2009** | ** ** |
| Operating  revenues                    |       | $                                                     | 154,908    |                                            | $          | 142,845 |   | $ | 304,015 |   | $ | 279,007 |   |
| Net (loss)  income attributable to TNS |       | (908                                                  | )          | 2,487                                           |       | (2,661 | ) | 239 |   |
|                                   |       |                                                  |       |                                            |       |   |   |   |   |
| Earnings  per common share:            |       |                                                  |       |                                            |       |   |   |   |   |
| Basic                                  |       | $                                                     | (0.04      | )                                               | $          | 0.10 |   | $ | (0.11 | ) | $ | 0.01 |   |
| Diluted                                |       | $                                                     | (0.04      | )                                               | $          | 0.10 |   | $ | (0.11 | ) | $ | 0.01 |   |

 

The CSG historicaloperating results include the direct costs related to the business and certainallocated costs for services and support functions provided by Verisign, Inc. Includedin net (loss) income attributable to TNS for the three months ended June 30,2008 and 2009 are allocated costs of $4.8 million and $1.6 millionrespectively. Included in net (loss) income attributable to TNS for the sixmonths ended June 30, 2008 and 2009 are allocated costs of $9.2 million and$5.0 million, respectively. Because the selected unaudited pro formaconsolidated results of operations are based on CSG’s operating results duringthe period when CSG was not under the control, influence or management of TNS,the information presented may not be representative of the results for theperiods indicated that would have actually occurred had the acquisition beenconsumated as of January 1, 2008, nor is it indicative of the future financialor operating results of the combined entity.

 

Since theacquisition date on May 1, 2009 through the second quarter of 2009, the impactof CSG on revenues and net income was $42.2 million and ($1.6) million,respectively.

 

**Use ofEstimates**

 

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

 

**RevenueRecognition**

 

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

 

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

 

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

 

**Cost ofNetwork Services**

 

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

 

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**Fair Value of Financial Instruments**

 

The fair value of theCompany’s long-term debt is based upon quoted market prices for the same andsimilar issues giving consideration to quality, interest rates, maturity andother characteristics. As of May 1, 2009, the closing date of the 2009 creditfacility, and June 30, 2009, the Company believes the carrying amount of itslong-term debt approximates its fair value.

 

**Stock-BasedCompensation**

 

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

 

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

 
| ** **                           | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                           | ** ** | **2008**                         | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** |
| Cost  of network services            |       | $                                | 249        |                           | $          | 229 |   | $ | 576 |   | $ | 481 |   |
| Engineering  and development         |       | 300                              |       | 325                            |       | 755 |   | 695 |   |
| Selling,  general and administrative |       | 2,536                            |       | 1,973                          |       | 4,719 |   | 3,356 |   |
|                                 |       | $                                | 3,085      |                           | $          | 2,527 |   | $ | 6,050 |   | $ | 4,532 |   |

 

As of June 30, 2009,there was a total of $11.7 million of deferred compensation cost related tostock-based awards, which is expected to be recognized over a weighted averageperiod of approximately two years.

 

*Time-VestedAwards*

 

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

 

During the three months endedJune 30, 2008, the Company granted 9,500 stock options and 2,550restricted stock units at weighted average estimated fair values of $9.68 and$23.00, respectively. During the six months ended June 30, 2008, theCompany granted 25,000 stock options and 20,100 restricted stock units atweighted average estimated fair values of $7.92 and $17.00, respectively.During the three months ended June 30, 2009, the Company granted no stockoptions and restricted stock units. During the six months ended June 30, 2009,the Company granted 2,000 stock options and 5,050 restricted stock units atweighted average estimated fair values of $3.33 and $7.00, respectively.

 

*Performance-BasedAwards*

 

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

 

In May 2007, theCompany put in place a long-term performance-based stock compensation plan (the2007 Equity Performance Plan). The total performance-based awards issued underthe Company’s 2007 Equity Incentive Plan were 576,076 stock options and 236,341restricted stock units. The weighted average grant date fair value of performance-basedstock options and restricted stock units granted was $6.23 and $12.39,respectively.  As of June 30, 2009, there was a total of $0.4 millionof deferred compensation expense related to these performance-based awardswhich is included in the $11.7 million total deferred compensation costmentioned previously.

 

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In February 2008,the Company put in place a long-term performance-based stock compensation plan(the 2008 Equity Performance Plan). The potential payout under the 2008 EquityIncentive Plan ranged from 0% to 100% of an employee’s target payout. Based upon the Company’s performance in 2008, the results of which wereapproved by the Company’s board of directors in February 2009, the planparticipants earned 50% of the potential payout under the Company’s 2008 EquityIncentive Plan.  The total performance based awards issued under theCompany’s 2008 equity incentive plan were 121,269 stock options and 118,817restricted stock units. The weighted average grant date fair value ofperformance-based stock options and restricted stock units granted was $6.78and $16.15, respectively.  As of June 30, 2009, there was a total of$0.7 million of deferred compensation expense related to these performancebased awards which is included in the $11.7 million total deferred compensationcost mentioned above.

 

In April 2009 theCompany put in place a long-term performance-based stock compensation plan (the2009 Equity Performance Plan). The total number of awards that would be issuedunder the Company’s 2009 Equity Performance Plan, assuming that the targetpayout level was achieved, would be 312,375 restricted stock units. Thepotential payout under the 2009 Equity Incentive Plan will range from 0% to100% of an employee’s target payout. The weighted average grant date fair valueof restricted stock units granted was $16.85. The Company recognized expense of$0.7 million related to restricted stock units during the three monthsended June 30, 2009, which is included in the $2.5 million ofstock-based compensation mentioned above. As of June 30, 2009, there was a total of $4.5 million of deferredcompensation expense related to these performance based awards which isincluded in the $11.7 million total deferred compensation cost mentioned above.

 

**IncomeTaxes**

 

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

 

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

 

The Company recordsinterest and penalties related to income taxes as components of the income taxprovision, which totaled $40,000 and $0 for the six months ended June 30,2008 and 2009, respectively. Of the $5.4 million liability for unrecognizedincome tax benefits as of June 30, 2009, the Company’s accrual forpotential interest and penalties associated with uncertain tax positions was $377,000.To the extent interest and penalties are not assessed with respect to uncertaintax positions, amounts accrued will be reversed and reflected as a reduction ofthe overall income tax provision.

 

The Company remainssubject to examination by U.S. Federal, state, local and foreign taxauthorities for tax years 2005 through 2008.  With few exceptions, theCompany is no longer subject to U.S. Federal, state, local or foreign taxexaminations for the tax years prior to 2005.

 

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

 
| Balance  as of January 1, 2009                        |   | $   | 4,749  |   |
|------------------------------------------------------------|--------|-----|--------|--------|
| Additions  for tax positions related to the current period |   | 326 |   |
| Balance  as of June 30, 2009                               |   | $   | 5,075  |   |

 

The entire balance ofunrecognized tax benefits as of June 30, 2009 would impact the effectivetax rate if recognized.

 

The Company’s effectivetax rate for the six months ended June 30, 2008 and 2009 of 50.0% and 83.2%,respectively, differ from the U.S. Federal statutory rate primarily due tostock-based compensation expense not deductible for income tax purposes,profits of our international subsidiaries being taxed at rates different thanthe U.S. statutory rate and the effect of adjustments for the six months endingJune 30, 2009 to the provision resulting from the finalization of taxreturns in the United Kingdom.

 

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**RecentAccounting Pronouncements**

 

In June 2008, theFASB issued FSP EITF No. 03-6-1, “Determining Whether Instruments Grantedin Share-Based Payment Transactions Are Participating Securities.” This FSPprovides that unvested share-based payment awards that contain nonforfeitablerights to dividends or dividend equivalents (whether paid or unpaid) areparticipating securities and shall be included in the computation of earningsper share pursuant to the two-class method. The FSP is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those years. The adoption of FSP No. EITF 03-6-1on January 1, 2009 did not have a material effect on the Company’sconsolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 141 (R), “Business Combinations, a revision ofSFAS No. 141”. SFAS No. 141 (R) establishes principles and requirementsfor how the acquirer of a business recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree. The statement also provides guidancefor recognizing and measuring the goodwill acquired in the business combinationand determines what information to disclose to enable users of the financialstatement to evaluate the nature and financial effects of the businesscombination. The Company adopted SFAS No. 141(R) on January 1,2009. Accordingly, any business combination we engage in beginning January 1,2009 will be recorded and disclosed following SFAS No. 141(R). Theapplication of SFAS No. 141(R) to the CSG acquisition is detailed in theacquisition section above.

 

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (SFAS No. 157) which is effective for fiscal yearsbeginning after November 15, 2007. The Company adopted SFAS No. 157on January 1, 2008. SFAS No. 157 defines fair value, establishes aframework for measuring fair value in GAAP, and expands disclosures about fairvalue measurements. The adoption of SFAS 157 to the Company’s financialassets and liabilities did not have a material effect on the Company’sconsolidated financial statements. In November 2007, the FASB agreed to aone-year deferral of the effective date for nonfinancial assets and liabilitiesthat are recognized or disclosed at fair value on a nonrecurring basis.Accordingly, for nonfinancial assets and liabilities, SFAS No. 157 becameeffective on January 1, 2009 and the Company has applied its disclosureand measurement provisions prospectively whenever applicable, such as indetermining fair values of the assets acquired and liabilities assumed as partof the CSG acquisition described above.

 

In May 2009, the FASBissued SFAS No. 165, “Subsequent Events,” which is effective for interim orannual periods beginning on or after June 15, 2009. The standard establishesprinciples and requirements for subsequent events, including disclosure of thedate through which an entity has evaluated subsequent events. We have adoptedSFAS No. 165 in this period and the adoption of the standard did notsignificantly impact our financial statements.

 

In June 2009, the FASBissued SFAS No. 168, “The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles – a replacement of FASBStatement No. 162”. This statement is effective for financial statements issuedfor interim and annual periods ending after September 15, 2009. This standardis not expected to materially impact the Company’s results of operations,financial position or related disclosures.

 

**2.****            ****Long-term Debt**

 

Debt consists of thefollowing (in thousands):

 
| ** **                     | ** ** | **June 30, 2009** | ** ** | **December  31, 2008** | ** ** |
|--------------------------------|------------|-------------------|------------|------------------------|------------|
| Existing  Term Loan Facility   |       | $                 | 170,153    |                   | $          | 178,500 |   |
| New  Term Loan Facility        |       | 218,347           |       | —                 |       |
|                           |       | 388,500           |       | 178,500                |       |
| Less:  Current portion         |       | (20,850           | )          | —                 |       |
|  Original  issue discount |       | (20,702           | )          | —                 |       |
|  Long-term  portion       |       | $                 | 346,948    |                   | $          | 178,500 |   |
|                                |            |                   |            |                        |            |  |  |  |  |

 

**2009Credit Facility**

 

On May 1, 2009, theCompany entered into a $423.5 million amended and restated senior securedcredit facility (2009 Credit Facility) to finance the acquisition of theCommunications Services Group assets from Verisign, Inc. (see Note 1) andto refinance the 2007 Credit Facility.  The 2009 Credit Facility consistsof a fully funded term loan facility with an outstanding principal amount equalto $178.5 million (the Existing Term Loan Facility), a new fully funded termloan facility with an outstanding principal amount equal to $230.0 million (theNew Term Loan Facility) and a senior secured revolving credit facility in anaggregate principal amount of $15.0 million (the Existing RevolvingFacility), under which there have been no borrowings as of the date of thisfiling. The Existing Revolving Facility matures March 27, 2013. Paymentson the Existing Term Loan Facility and the New Term Loan Facility are due inquarterly installments over the term beginning June 30, 2009, with theremainder payable on March 28, 2014. Voluntary prepayments on the New andExisting Term Facilities are applied as directed by the Company. In July 2009,the Company made additional voluntary loan prepayments of $15 million whichwill be applied to the next scheduled loan repayments.

 

The total scheduledremaining payments on the New and Existing Term Facilities are as follows (inthousands):

 
| Six  months ending December 31, 2009 |   | $       | 2,978   |   |
|-------------------------------------------|--------|---------|---------|--------|
| 2010                                      |   | 38,297  |    |
| 2011                                      |   | 40,850  |    |
| 2012                                      |   | 48,509  |    |
| 2013                                      |   | 51,063  |    |
| Thereafter                                |   | 206,803 |    |
|                                      |   | $       | 388,500 |   |

 

Interest on theoutstanding balances under the Existing Revolving Facility is payable, at theCompany’s option, at a rate equal to the higher of the prime rate announced bySunTrust Bank, the federal funds rate plus 50 basis points, or the one-month LondonInterbank Offered Rate (“LIBOR”) rate plus 100 basis points (the “Base Rate”),in each case, plus a margin of 5.0% or at LIBOR, plus a margin of 6.0%. Theapplicable margins on the Existing Revolving Credit Facility are subject tostep-downs based on the Company’s leverage ratio.  Interest on theoutstanding balances under the New and Existing Term Loan Facilities ispayable, at the

 

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Company’s option, at theBase Rate plus a margin of 5.0%, or at LIBOR plus a margin of 6.0%. Additionally, in no event will the LIBOR rate be less than 3.5%.  TheExisting Revolving Credit Facility is subject to an annual commitment fee in anamount equal to between 0.375% and 0.5% (based on the Company’s leverage ratio)per annum multiplied by the amount of funds available for borrowing under theRevolving Facility. Interest payments on the 2009 Credit Facility are duebiweekly, monthly, bimonthly or quarterly at the Company’s option.

 

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

 

The obligations under the2009 Credit Facility are unconditionally and irrevocably guaranteed, subject tocertain exceptions, by the Company and each existing and future direct andindirect domestic subsidiary of the Company.  In addition, the 2009 CreditFacility is secured, subject to certain exceptions, by a first priority perfectedsecurity interest in substantially all of the present and future property andassets (real and personal) of the Company and a pledge of 100% of the Company’scapital stock of its respective domestic subsidiaries and 65% of the Company’scapital stock of its respective first-tier foreign subsidiaries.

 

The terms of the 2009Credit Facility require the Company to comply with financial and nonfinancialcovenants, including maintaining a maximum specified leverage ratio at the endof each fiscal quarter and a minimum consolidated fixed charge coverage ratioand complying with specified annual limits on capital expenditures. Beginning June 30,2009, the Company is required to maintain a leverage ratio of less than 3.25 to1.0. The Company’s leverage ratio as of June 30, 2009 was 2.4 to 1.0. Themaximum leverage ratio declines over the term of the 2009 Credit Facility. Alsobeginning June 30, 2009 and as of the end of each subsequent quarter forthe twelve month period then ended, the Company is required to maintain aconsolidated fixed charge coverage ratio of not less than 1.20 to 1.0.  TheCompany’s consolidated fixed charge coverage ratio as of June 30, 2009 was 1.70to 1.0.  The 2009 Credit Facility alsocontains nonfinancial covenants that restrict some of the Company’s corporateactivities, including its ability to dispose of assets, incur additional debt,pay dividends, create liens, make investments, make capital expenditures andengage in specified transactions with affiliates. Noncompliance with any of thefinancial or nonfinancial covenants without cure or waiver would constitute anevent of default under the 2009 Credit Facility. An event of default resultingfrom a breach of a financial or nonfinancial covenant may result, at the optionof the lenders, in an acceleration of the principal and interest outstanding,and a termination of the Revolving Facility. The 2009 Credit Facility alsocontains other customary events of default (subject to specified graceperiods), including defaults based on events of bankruptcy and insolvency,nonpayment of principal, interest or fees when due, breach of specifiedcovenants, change in control and material inaccuracy of representations andwarranties. The Company was in compliance with the financial and non-financialcovenants of the 2009 Credit Facility as of June 30, 2009.

 

In connection with the closing of the 2009 CreditFacility, the Company incurred approximately $5.4 million in financingcosts and $23.0 million in Original Issue Discount. These financing costs and debtdiscount were deferred and are being amortized using the effective interestmethod over the life of the 2009 Credit Facility.   In connection with the refinancing of the2009 Credit Facility in May 2009, the Company wrote-off approximately $1.7million in unamortized deferred financing costs related to the 2007 CreditFacility.  This write-off has beenincluded in interest expense in the accompanying condensed consolidatedstatement of operations for the three and six months ended June 30, 2009.

 

**3.****            ****Comprehensive Income**

 

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

 
| ** **                                | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                | ** ** | **2008**                         | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** |
| Net  income                               |       | $                                | 1,026      |                           | $          | 453 |   | $ | 2,626 |   | $ | 429 |   |
| Foreign  currency translation adjustments |       | 452                              |       | 6,425                          |       | 2,892 |   | 4,173 |   |
| Total  comprehensive income               |       | $                                | 1,478      |                           | $          | 6,878 |   | $ | 5,518 |   | $ | 4,602 |   |

 

**4.****            ****Net Income Per Common Share**

 

SFAS No. 128, “EarningsPer Share”, requires the presentation of basic and diluted earnings per share.Basic earnings per common share is computed by dividing income attributable tocommon stockholders by the weighted average number of common shares outstandingfor the period. The diluted earnings 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.

 

The treasury stock effect of options to purchase1,100,129 shares of common stock and 169,678 restricted stock units that wereoutstanding as of June 30, 2009, and options to purchase 264,981 shares ofcommon stock and 2,640 restricted stock units that were outstanding as of June30, 2008 were excluded from the computation of diluted net loss per common sharefor the three months ended June 30, 2008 and 2009, respectively, as theireffect would have been anti-dilutive. 

 

The treasury stock effect of options to purchase1,237,053 shares of common stock and 79,429 restricted stock units that wereoutstanding as of June 30, 2009, and options to purchase 264,959 shares ofcommon stock and 1,911 restricted stock units that were outstanding as of June30, 2008 were excluded from the computation of diluted net loss per commonshare for the six months ended June 30, 2008 and 2009, respectively, as theireffect would have been anti-dilutive.

 

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| ** **                                                | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                | ** ** | **2008**                         | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** |
| Net  income                                               |       | $                                | 1,026      |                           | $          | 453 |   | $ | 2,626 |   | $ | 429 |   |
| Weighted  average common share calculation:               |       |                             |       |                           |       |   |   |   |   |
| Basic  weighted average common shares outstanding         |       | 24,699,262                       |       | 25,228,319                     |       | 24,504,459 |   | 25,177,974 |   |
| Treasury  stock effect of outstanding options to purchase |       | 271,081                          |       | 145,583                        |       | 296,941 |   | 83,976 |   |
| Treasury  stock effect of unvested restricted stock units |       | 303,898                          |       | 148,531                        |       | 200,674 |   | 183,268 |   |
| Diluted  weighted average common shares outstanding       |       | 25,274,241                       |       | 25,522,433                     |       | 25,002,074 |   | 25,445,218 |   |
|                                                      |       |                             |       |                           |       |   |   |   |   |
| Net  income per common share:                             |       |                             |       |                           |       |   |   |   |   |
| Basic  and diluted net income per common share            |       | $                                | 0.04       |                           | $          | 0.02 |   | $ | 0.11 |   | $ | 0.02 |   |

 

**5.****            ****Segment Information**

 

The Company classifiesits business into two segments: North America and ISD. In addition, the Company’smanagement evaluates revenues for its four business divisions: POS, TSD, FSDand ISD. A significant portion of the Company’s North American operatingexpenses are shared between POS, TSD and FSD divisions, and, therefore, managementanalyzes operating results for these three business divisions on a combinedbasis.

 

Management evaluates theNorth American and ISD performance on EBITDA before stock compensation expensebecause operating expenses are distinguishable between North American and ISDoperations. The Company defines EBITDA before stock compensation expense asincome from operations before depreciation, amortization and stock compensationexpense. 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 believes thatthis measure, viewed in addition to and not in lieu of the Company’s reportedGAAP results, provides additional useful information to the investors regardingthe Company’s performance and overall operating results exclusive of selectedsignificant non-cash items, as described below. This metric is frequentlyrequested by investors and is also an integral part of the Company’s internalreporting to measure the performance of reportable segments and the overalleffectiveness of senior management. The Company’s definition of EBITDA beforestock compensation expense may not be comparable to similarly titled measuresused by other entities.

 

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

 
| ** **           | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **           | ** ** | **2008**                         | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** |
| Revenues:            |       |                             |       |                           |       |   |   |   |   |
| POS                  |       | $                                | 19,145     |                           | $          | 19,609 |   | $ | 37,500 |   | $ | 37,576 |   |
| TSD                  |       | 16,814                           |       | 56,917                         |       | 34,668 |   | 71,936 |   |
| FSD                  |       | 11,581                           |       | 12,149                         |       | 22,327 |   | 24,205 |   |
| Total  North America |       | 47,540                           |       | 88,675                         |       | 94,495 |   | 133,717 |   |
| ISD                  |       | 42,608                           |       | 33,275                         |       | 79,778 |   | 63,500 |   |
| Total  revenues      |       | $                                | 90,148     |                           | $          | 121,950 |   | $ | 174,273 |   | $ | 197,217 |   |

 

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

 
| ** **                                      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                      | ** ** | **2008**                         | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** |
| ISD                                             |       | $                                | 16,718     |                           | $          | 11,646 |   | $ | 29,597 |   | $ | 21,184 |   |
| North  America                                  |       | 5,666                            |       | 19,838                         |       | 12,526 |   | 26,618 |   |
| Total  EBITDA before stock compensation expense |       | $                                | 22,384     |                           | $          | 31,484 |   | $ | 42,123 |   | $ | 47,802 |   |

 

(i)                                         Management evaluates the performance ofits segments before consideration of certain intercompany transactions.Accordingly, these transactions are not reflected in EBITDA by segment. Inaddition, certain corporate expenses are reflected in the North Americansegment, consistent with information reviewed by our chief operating decisionmaker.

 

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

 
| ** **                                                                      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                      | ** ** | **2008**                         | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** |
| EBITDA  before stock compensation expense                                       |       | $                                | 22,384     |                           | $          | 31,484 |   | $ | 42,123 |   | $ | 47,802 |   |
| Reconciling  items:                                                             |       |                             |       |                           |       |   |   |   |   |
| Depreciation  and amortization of property and equipment                        |       | (6,094                           | )          | (7,994                         | )          | (12,061 | ) | (13,828 | ) |
| Amortization  of intangible assets                                              |       | (6,359                           | )          | (8,153                         | )          | (12,457 | ) | (13,757 | ) |
| Stock  compensation expense                                                     |       | (3,085                           | )          | (2,527                         | )          | (6,050 | ) | (4,532 | ) |
| Interest  expense                                                               |       | (2,631                           | )          | (11,417                        | )          | (6,340 | ) | (12,869 | ) |
| Interest  income and other income (expense), net                                |       | (142                             | )          | (284                           | )          | 106 |   | (213 | ) |
| Income  before income taxes and equity in net loss of unconsolidated affiliates |       | $                                | 4,073      |                           | $          | 1,109 |   | $ | 5,321 |   | $ | 2,603 |   |

 

**GeographicInformation**

 

The Company sells itsservices through foreign subsidiaries in Australia, Austria, Bermuda, Canada,France, Germany, Hong Kong, India, Ireland, Italy, Japan, Malaysia, Mexico, theNetherlands, New Zealand, Poland, Romania, Singapore, South Korea, Spain,Sweden, Thailand and the United Kingdom. Information regarding revenues andlong-lived tangible assets attributable to each geographic region is statedbelow.

 

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

 
| ** **      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **      | ** ** | **2008**                         | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** |
| North  America  |       | $                                | 47,540     |                           | $          | 88,675 |   | $ | 94,495 |   | $ | 133,717 |   |
| Europe          |       | 33,842                           |       | 26,556                         |       | 63,441 |   | 50,055 |   |
| Asia-Pacific    |       | 8,766                            |       | 6,719                          |       | 16,337 |   | 13,445 |   |
| Total  revenues |       | $                                | 90,148     |                           | $          | 121,950 |   | $ | 174,273 |   | $ | 197,217 |   |

 

Revenues from the Company’ssubsidiaries in the United Kingdom were $19.9 million and$14.3 million for the three months ended June 30, 2008 and 2009,respectively. Revenues from the Company’s subsidiaries in the United Kingdomwere $37.2 million and $26.6 million for the six months ended June 30,2008 and 2009, respectively. On a constant dollar basis, revenue from theUnited Kingdom subsidiaries for the three months and six months ended June 30,2009, was $18.3 million and $35.1 million, respectively.

 

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

 
| ** **               | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|--------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **               | ** ** | **2008**              | ** ** | **2009**          | ** ** |
| North  America           |       | $                     | 182,990    |              | $          | 363,554 |   |
| Europe                   |       | 23,408                |       | 35,129            |       |
| Asia-Pacific             |       | 15,162                |       | 15,289            |       |
| Total  long lived assets |       | $                     | 221,560    |              | $          | 413,972 |   |

 

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Total assets are locatedin the following reporting segments (in thousands):

 
| ** **     | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|----------------|------------|-----------------------|------------|-------------------|------------|
| ** **     | ** ** | **2008**              | ** ** | **2009**          | ** ** |
| North  America |       | $                     | 260,213    |              | $          | 473,936 |   |
| ISD            |       | 101,701               |       | 100,380           |       |
| Total  assets  |       | 361,914               |       | 574,316           |       |
|                |            |                       |            |                   |            |  |  |

 

Goodwill and intangibleassets are located in the following reporting segments (in thousands):

 
| ** **                            | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2008**              | ** ** | **2009**          | ** ** |
| North  America                        |       | $                     | 123,668    |              | $          | 268,681 |   |
| ISD                                   |       | 39,097                |       | 33,752            |       |
| Total  goodwill and intangible assets |       | 162,765               |       | 302,433           |       |
|                                       |            |                       |            |                   |            |  |  |

 

**6.             Litigation and Claims**

 

The Company isperiodically involved in disputes arising from normal business activities. Inthe opinion of management, resolution of these matters will not have a materialadverse effect upon the financial position or future operating results of theCompany, and adequate provision for any potential losses has been made in theaccompanying consolidated financial statements.

 

Certain states in whichthe Company operates assess sales taxes on certain services provided by theCompany. The Company believes it has no liability because its customercontracts contain terms that stipulate the customer, not the Company, isresponsible for any sales tax liability. In jurisdictions where the customermay be liable for sales taxes, the Company either includes sales tax on itsinvoice or has obtained an exemption certificate from the customer. Certainstates have audited the Company from 1996 to early 2001. On April 25,2008, the Company entered into a settlement agreement with the remaining state’sCommissioner of Revenue to settle the only state sales tax assessment remainingfor the period from 1996 to early 2000. In the settlement, the Company agreedto settle the outstanding sales tax assessment in the amount of $942,000 for asettlement payment in the amount of $250,000. The Company’s customer paid$212,500 of the settlement payment with the remaining $37,500 paid by theCompany. Based on the final executed settlement, the Company reduced its netliability for this matter by $0.9 million. This $0.9 million benefit,related to the reduction in the sales tax liability, is included in selling,general and administrative expenses in the accompanying consolidated statementof operations for the six months ended June 30, 2008.

 

**7.             Subsequent Events**

 

In preparing these financial statements, the Company’smanagement has evaluated subsequent events through August 10, 2009, the datethe financial statements were filed.

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**Item2.   Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

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

 

There are statements madeherein which may not address historical facts and, therefore, could beinterpreted to be forward-looking statements within the meaning of The PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements arebased on current expectations, forecasts and assumptions that are subject torisks and uncertainties that could cause actual results to differ materiallyfrom those set forth in, or implied by, the forward-looking statements. TheCompany has attempted, whenever possible, to identify these forward-lookingstatements using words such as “may,” “will,” “should,” “projects,” “estimates,”“expects,” “plans,” “intends,” “anticipates,” “believes,” and variations ofthese words and similar expressions. Similarly, statements herein that describethe Company’s business strategy, prospects, opportunities, outlook, objectives,plans, intentions or goals are also forward-looking statements. Actual resultsmay differ materially from those indicated by such forward-looking statementsas a result of various important factors, including: the Company’s relianceupon a small number of customers for a significant portion of its revenue;competitive factors such as pricing pressures; our customer’s ability to directtheir data communications from the Company’s networks to other networks; theCompany’s ability to grow its business domestically and internationally bygenerating greater transaction volumes, acquiring new customers or developingnew service offerings; current difficulties in the financial services sectormay continue to have a negative impact on our future growth rates in ourfinancial services division; fluctuations in the Company’s quarterly resultsbecause of the seasonal nature of the business; unfavorable fluctuations inforeign exchange rates; the Company’s substantial debt could adversely affectits financial health because the Company may be unable to obtain additionalfinancing for working capital, capital expenditures, acquisitions and generalcorporate purposes, the Company may not generate sufficient cash flow to repaythe debt on a timely basis or to pre-pay the debt, and a significant portion ofthe Company’s cash flow from operations will be dedicated to the repayment orservicing of indebtedness, thereby reducing the amount of cash available forother purposes; the Company’s ability to identify, execute or effectivelyintegrate acquisitions including the acquisition of CSG; the Company’s abilityto realize additional overall cost savings from the acquisition of CSG,including consolidating SS7 call signaling networks, eliminating duplicateintelligent database platforms and eliminating duplicate facilities; increasesin the prices charged by telecommunication providers for services used by theCompany; uncertainties related to the updated international tax planningstrategy implemented by the Company; the Company’s ability to identify, executeor effectively integrate future acquisitions; the Company’s ability to adapt tochanging technology; additional costs related to compliance with theSarbanes-Oxley Act of 2002, any revised New York Stock Exchange listingstandards, SEC rule changes or other corporate governance issues; andother risk factors described in the Company’s annual report on Form 10-Kfiled with the SEC on March 16, 2009 and in the Company’s quarterly reporton Form 10-Q filed with the SEC on May 11, 2009. In addition, the statements inthis quarterly report are made as of the date of this filing. The Companyexpects that subsequent events or developments will cause its views to change.The Company undertakes no obligation to update any of the forward-lookingstatements made herein, whether as a result of new information, future events,changes in expectations or otherwise. These forward-looking statements shouldnot be relied upon as representing the Company’s views as of any datesubsequent to the date of this filing. The forward-looking statements in thisdocument are intended to be subject to the safe harbor protection provided bySections 27A of the Securities Act and 21E of the Exchange Act.

 

**Overview**

 

We are an internationaldata communications company which provides networking, data communications andvalue added services to many of the world’s leading retailers, banks andpayment processors. We are also a leading provider of secure data and voicenetwork services to the global financial services industry. We operate one ofthe largest unaffiliated Signaling System No. 7 networks in the UnitedStates capable of providing services nationwide, and we utilize this network toprovide call signaling and database access services to the domestictelecommunications industry. Our data communications services enable secure andreliable transmission of time-sensitive, transaction-related informationcritical to our customers’ operations. Our customers outsource their datacommunications requirements to us because of our substantial expertise,comprehensive customer support and cost-effective services. We provide servicesto customers in the United States and increasingly to international customersin 29 countries, including Canada and Mexico and countries in Europe, LatinAmerica and the Asia-Pacific region.

 

We provide servicesthrough our multiple data networks, each designed specifically for transactionapplications. Our networks support a variety of widely accepted communicationsprotocols and are designed to be scalable and accessible by multiple methods,including dial-up, dedicated, wireless, broadband and internet connections.

 

We generate revenuesthrough four business divisions:

 

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

 

·       ***Telecommunicationservices. ***We provide call signaling services that enable telecommunications serviceproviders to establish and terminate telephone calls placed by theirsubscribers. We also provide database access services that enable our customersto provide intelligent network services, such as caller identification,toll-free call routing and local number portability, and validation services,such as credit card, calling card, third- party billing and collect calling. In

 

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addition, we provideroaming and clearing services to mobile phone operators.  Our telecommunication services divisiongenerates revenues primarily from fixed monthly fees charged for our callsignaling  and roaming and clearingservices and per-query fees charged for our database access and validationservices.

 

·       ***Financialservices. ***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.

 

·       ***Internationalservices. ***We sell our POS and financial services through our international servicesdivision. We are one of the leading providers of data communications servicesto the POS industry in the United Kingdom. Our international services divisionalso provides POS and financial services in Australia, Austria, Belgium,Bermuda, Finland, France, Gibraltar, Germany, Greece, Hong Kong, India,Ireland, Italy, Japan, Malaysia, the Netherlands, New Zealand, Norway, Poland,Romania, Singapore, South Korea, Spain, Sweden, Taiwan and Thailand.

 

Our most significantexpense is cost of network services, which is comprised primarily oftelecommunications charges, including data transmission and database access,leased digital capacity charges, circuit installation charges and activationcharges. The cost of data transmission is based on a contract or tariff rateper minute of usage in addition to a prescribed rate per transaction for somevendors. The costs of database access, circuits, installation charges andactivation charges are based on fixed fee contracts with local exchangecarriers and interexchange carriers. The cost of network services also includessalaries, equipment maintenance and other costs related to the ongoingoperation of our data networks. Depreciation expense on our network equipmentand amortization of developed technology are excluded from our cost of networkservices and included in depreciation and amortization of property andequipment and amortization of intangible assets in our consolidated statementsof operations.

 

Our engineering anddevelopment expenses include salaries and other costs related to productdevelopment, engineering, hardware maintenance and materials. The majority ofthese costs are expensed as incurred, including costs related to thedevelopment of internal use software in the preliminary project, thepost-implementation and operation stages. Development costs we incur during thesoftware application development stage are capitalized and amortized over theestimated useful life of the developed software.

 

Our selling, general andadministrative expenses include costs related to sales, marketing,administrative and management personnel, as well as external legal, accountingand consulting services.

 

**Acquisitionof the Communications Services Group of VeriSign, Inc.**

 

On March 2, 2009,TNS entered into an asset purchase agreement, dated March 2, 2009, betweenTNS and VeriSign, Inc. pursuant to which TNS agreed to purchase fromVerisign, Inc. certain assets and assume certain liabilities of CSG. On May 1, 2009, TNS completed the acquisition in accordance with theterms and conditions of the asset purchase agreement.  The initialpurchase price was approximately $226.2 million in cash and is subject to apost-closing working capital adjustment.  We funded the transactionthrough a new $230 million term loan facility as part of the 2009 CreditFacility (see Note 2 to the condensed consolidated financial statementsincluded elsewhere in this report).  CSG provides call signaling services,intelligent database services such as caller ID, toll-free call routing andlocal number portability to the U.S. telecommunications industry.  Inaddition, CSG provides wireless roaming and clearing services to mobile phoneoperators.  We will integrate CSG into our telecommunications servicesdivision.  Our statements of operationsfor the three and six month periods ended June 30, 2009 include theresults of CSG from May 1, 2009 and are therefore not comparable to theyear-ago periods.  Please refer to our amendedCurrent Report on Form 8-K/A filed with the SEC on July 15, 2009 for moredetail on the historical and pro-forma results of CSG and Note 1 to thecondensed consolidated financial statements included elsewhere in this report.

 

We expect to experienceoperational benefits from the acquisition primarily through consolidating ourtwo SS7 call signaling networks and eliminating duplicate intelligent databaseplatforms and duplicate telecommunications facilities.  We also expectreduced overall combined capital expenditures as a result of greater economiesof scale and the rationalization of network assets.  The timing and extent of these cost savingshave not yet been determined and there can be no assurances that these costsavings will be achieved.

 

**Resultsof Operations**

 

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

 

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| ** **                                                                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                            | ** ** | **2008**                         | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** |
| Revenues                                                                              |       | $                                | 90,148     |                           | $          | 121,950 |   | $ | 174,273 |   | $ | 197,217 |   |
| Operating  expenses:                                                                  |       |                             |       |                           |       |   |   |   |   |
| Cost  of network services, exclusive of the items shown separately below              |       | 42,225                           |       | 58,314                         |       | 82,932 |   | 95,104 |   |
| Engineering  and development                                                          |       | 7,669                            |       | 10,507                         |       | 14,868 |   | 16,914 |   |
| Selling,  general, and administrative                                                 |       | 20,955                           |       | 24,172                         |       | 40,400 |   | 41,929 |   |
| Depreciation  and amortization of property and equipment                              |       | 6,094                            |       | 7,994                          |       | 12,061 |   | 13,828 |   |
| Amortization  of intangible assets                                                    |       | 6,359                            |       | 8,153                          |       | 12,457 |   | 13,757 |   |
| Total  operating expenses                                                             |       | 83,302                           |       | 109,140                        |       | 162,718 |   | 181,532 |   |
| Income  from operations                                                               |       | 6,846                            |       | 12,810                         |       | 11,555 |   | 15,685 |   |
| Interest  expense                                                                     |       | (2,631                           | )          | (11,417                        | )          | (6,340 | ) | (12,869 | ) |
| Interest  income                                                                      |       | 148                              |       | 61                             |       | 327 |   | 239 |   |
| Other  (expense) income, net                                                          |       | (290                             | )          | (345                           | )          | (221 | ) | (452 | ) |
| Income  before income tax benefit and equity in net loss of unconsolidated affiliates |       | 4,073                            |       | 1,109                          |       | 5,321 |   | 2,603 |   |
| Income  tax provision                                                                 |       | (2,977                           | )          | (633                           | )          | (2,625 | ) | (2,121 | ) |
| Equity  in net loss of unconsolidated affiliates                                      |       | (70                              | )          | (23                            | )          | (70 | ) | (53 | ) |
| Net  income                                                                           |       | $                                | 1,026      |                           | $          | 453 |   | $ | 2,626 |   | $ | 429 |   |

 

**Threemonths ended June 30, 2009 compared to the three months ended June 30,2008**

 

***Revenues.*** Total revenues increased $31.9 million, or 35.3%, to$122.0 million for the three months ended June 30, 2009, from $90.1millionfor the three months ended June 30, 2008. On a constant dollar basis,total revenues would have increased $39.1 million, or 43.5%, to $129.2 million.We generate revenues through four operating divisions.

 

***International services division.*** Revenues from the international servicesdivision decreased $9.3 million, or 21.9%, to $33.3 million for the threemonths ended June 30, 2009, from $42.6 million for the three months ended June 30,2008. The adverse effect of foreign exchange translation on a year-over-yearbasis was $7.2 million.  In addition, we had $1.1 million of incrementalsoftware development revenue in the three months ended June 30, 2008.  Excluding the adverse impact of foreignexchange rates and the incremental software development revenue, internationalservices division decreased $1.0 million, or 2.4%, to $41.6 million from $42.6million for the three months ended June 30, 2009 and 2008, respectively.The decrease was primarily due to reductions in dial-up POS transaction volumesin Europe and to a lesser extent from the loss of two processing customers inthe U.K., one of which was nationalized and the other of which was acquired bya larger entity.  These declines werepartially offset by increases in dial-up transaction volumes in the AsiaPacific region and to a lesser extent from the increased sales of our IPservices to POS customers. Revenues from our United Kingdom subsidiariesdecreased $5.6 million, or 28.1%, to $14.3 million for the threemonths ended June 30, 2009, from $19.9 million for the three monthsended June 30, 2008. On a constant dollar basis, revenue from the UnitedKingdom subsidiaries for the three months ended June 30, 2009 would havedecreased $1.6 million, or 8.2%, to $18.3 million due primarily to the loss oftwo processing customers, as mentioned above, and to a lesser extent from adecrease in dial-up transaction volumes. This was partially offset by increasedrevenue from sales of our payment gateway and IP services.

 

Future revenue growth inthe international services division depends on a number of factors includingthe success of our POS and financial service products in countries we haverecently entered, the total number of POS transactions that we transport, thesuccess of our new product offerings, the successful expansion of ourcard-not-present service offerings and the effects of foreign currencytranslation.  In recent months, we have seen a reduction in the growthrates of our dial-up transaction volumes in most of the markets we operate,which we attribute to the overall weakness of the global economy. As wegenerate the majority of our revenue in the international services divisionfrom transaction volumes our future revenue may be adversely affected by thecontinued weakness of the global economy.

 

In our internationalservices division we enter into arrangements with our customers in the currencyof the markets we operate in. As a result, our reported results are affected byfluctuations in the value of the U.S. dollar as compared to foreign currencies,predominantly the British Pound, the Euro and the Australian dollar. Thefollowing table shows the currency composition of our revenues in the internationalservices division for the three months ended June 30, 2009 and 2008 andweighted average exchange rates used to translate our local currency results tothe U.S. dollar:

 
| ** **         | ** ** | **2009**                              | ** ** | **2008**                                             | ** ** |
|--------------------|------------|---------------------------------------|------------|------------------------------------------------------|------------|
| ** **         | ** ** | **% of ISD********Revenue** | ** ** | **Weighted Average********Exchange Rates** | ** ** | **% of ISD********Revenue** | ** ** | **Weighted Average********Exchange Rates** | ** ** |
| British  Pound     |       | 43                                    | %          | 1.55                                                 |       | 47 | % | 1.97 |   |
| Euro               |       | 34                                    | %          | 1.36                                                 |       | 30 | % | 1.56 |   |
| Australian  Dollar |       | 17                                    | %          | 0.76                                                 |       | 18 | % | 0.94 |   |

 

For further details onthe effects of foreign exchange on our annual reported revenues, please referto the Outlook section on page 23.

 

***POS division.*** Revenues from the POS division increased$0.5 million, or 2.4%, to $19.6 million for the three months ended June 30,2009, from $19.1 million for the three months ended June 30, 2008. Theincrease in revenue was due to a $1.5 million increase in revenue from ourmanaged broadband products and  a $1.2million increase from sales of our ATM processing products, primarily inCanada. This was partially offset by a $2.2 million decrease 

 

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in dial revenue as aresult of  an 8.6% decline in transactionvolumes, which we primarily attribute to softness in the economy, and to alesser extent from a decrease in revenue per transaction for our dial-up POSoffering mainly resulting from the renewal of certain customer contracts. The trendtowards IP services, which enjoy a recurring revenue model rather than a pertransaction model, continues to help mitigate this decline.

 

***Telecommunication services division.*** Revenues from the telecommunicationservices division increased $40.1 million to $56.9 million for the threemonths ended June 30, 2009, from $16.8 million for the three months ended June 30,2008. Revenues increased $42.2 million as a result of the revenue contributionfrom the CSG acquisition.  This waspartially offset by a decrease of $2.2 million due to volume declines from acustomer following the announcement in March 2009 of our agreement toacquire CSG, based on the expectation that we will compete with the customerfollowing the acquisition. Future revenue growth in the telecommunicationservices division depends on a number of factors including the number of databaseaccess queries we transport, the number of call signaling routes our customerspurchase, the success of our new product offerings, which potentially may beoffset by customers seeking pricing discounts due to industry consolidation orother reasons and the successful integration of the business acquired throughour purchase of CSG.

 

***Financial services division.*** Revenues from the financial servicesdivision increased $0.6 million, or 4.9%, to $12.2 million for thethree months ended June 30, 2009, from $11.6 million for the threemonths ended June 30, 2008. The increase in revenues was primarily due toincreases in new customer endpoint installations. We have recently seen adecline in connections between endpoints, which we believe is a result of theconsolidation and contraction of the financial services industry over thecourse of the last year. We expect connections between endpoints to continue totrend down in the third quarter. Future revenue growth in the financialservices division depends on a number of factors including the number ofconnections to and through our networks as well as the success of our newproduct offerings. We have begun to see an increased demand from our customersfor larger bandwidth connections to our network and while these connectionscreate greater revenue per physical endpoint, they require longer sales andinstallation lead-times.  We also expect that the current difficulties inthe financial services sector may continue to have a negative impact on ourfuture growth rates in this division.

 

***Cost of network services.*** Cost of network services increased$16.1 million, or 38.1%, to $58.3 million for the three months ended June 30,2009, from $42.2 million for the three months ended June 30, 2008. Ona constant dollar basis, cost of network services would have increased$19.0 million, or 45.1%, to $61.1 million. Cost of network serviceswere 47.8% of revenues for the three months ended June 30, 2009, comparedto 46.8% of revenues for the three months ended June 30, 2008. Excludingthe effect of foreign exchange, the increase in cost of network services wasprimarily from costs related to increased revenues in our telecommunicationsservices division resulting from the CSG acquisition and to a lesser extentfrom increased broadband connections in our POS division.  This was partially offset by reductions indial-up transaction volumes in our POS division and reductions in the cost ofservices provided to us in our POS division through negotiated price decreasesfrom our vendors.

 

Gross profit represented52.2% of total revenues for the three months ended June 30, 2009, comparedto 53.2% for the three months ended June 30, 2008. On a constant dollarbasis, gross margins for the three months ended June 30, 2009 decreased 50basis points to 52.7%.

 

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

 

***Engineering and development expense.*** Engineering and development expenseincreased $2.8 million, or 37.0%, to $10.5 million for the three monthsended June 30, 2009, from $7.7 million for the three months ended June 30,2008. On a constant dollar basis, engineering and development expenses wouldhave increased $3.4 million, or 44.2%, to $11.1 million. Engineering anddevelopment expense represented 8.6% of revenues for both the three monthsended June 30, 2009 and 2008.  Capitalized software developmentcosts, which are offset against engineering and development costs, increased$0.4 million to $1.7 million from $1.3 million for the three month period endedJune 30, 2009 and 2008, respectively. The increase in capitalized softwaredevelopment costs is primarily due to investment in our roaming and clearingplatform as well as our IP registry platform.  Excluding the increase incapitalized software and the effects of foreign exchange, engineering anddevelopment expense would have increased $3.8 million to $11.5 million, or 9.4%of revenues, for the three months ended June 30, 2009 from $7.7 million,or 8.6% of revenues, for the three months ended June 30, 2008.  The increase relates primarily to additionalheadcount required to support our acquisition of CSG and to a lesser extentfrom an increase in maintenance expense of $0.6 million to support the systemswe acquired through the CSG acquisition.

 

***Selling, general and administrative expense.*** Selling, general and administrativeexpenses increased $3.2 million, or 15.4%, to $24.2 million for thethree months ended June 30, 2009, from $21.0 million for the three monthsended June 30, 2008. On a constant dollar basis, selling, general andadministrative expenses would have increased $4.7 million, or 22.5%, to $25.7million. Included in selling, general and administrative expenses for the threemonths ended June 30, 2009 and 2008 is $2.5 million and$3.0 million of stock compensation expense, respectively. The decrease instock compensation expense is due to a reduction in performance related stockcompensation as a result of fewer grants. Included in selling, general and administrative expenses for the threemonths ended June 30, 2009 are $1.6 million in professional fees relatedto our acquisition of CSG that were expensed in accordance with the provisionsof SFAS No. 141(R). Excluding these items and the effects of foreignexchange, selling, general and administrative expenses would have increased$3.6 million to $21.6 million, or 17.7% of revenues, for the three months endedJune 30, 2009 from $18.0 million, or 20.0% of revenues, for the threemonths ended June 30, 2008.  Thisincrease was primarily attributable to additional headcount and other costsnecessary to support the acquired CSG operations and to a lesser extent anincrease in professional fees related to the CSG integration effort.

 

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***Depreciation and amortization of property and equipment.*** Depreciation and amortization ofproperty and equipment increased $1.9 million, or 31.2%, to$8.0 million for the three months ended June 30, 2009, from$6.1 million for the three months ended June 30, 2008. On a constantdollar basis, depreciation and amortization of property and equipment wouldhave increased $2.2 million, or 36.4% to $8.3 million.  Depreciation andamortization of property and equipment represented 6.8% of revenues for boththe three month periods ended June 30, 2009 and 2008. The increase indepreciation expense was primarily due to an incremental $1.9 million relatedto the acquired CSG assets.

 

***Amortization of intangible assets.*** Amortization of intangible assetsincreased $1.8 million, or 28.2%, to $8.2 million for the threemonths ended June 30, 2009, from $6.4 million for the three months ended June 30,2008 and relates solely to intangible assets resulting from acquisitions. On aconstant dollar basis, amortization of intangible assets would have increased$2.1 million, or 33.5% to $8.5 million. The increase primarily relates to additional amortization expense of$2.9 million related to the CSG acquisition. This was partially offset by a decrease of $0.8 million as certainintangible assets reached the end of their economic useful lives.   For purposes of measuring and recognizingimpairment of long-lived assets including intangibles, we assess whetherseparate cash flows can be attributed to an individual asset. For our customerrelationship intangible assets, we recognize and measure impairment upon thesignificant loss of revenue from a customer. Beginning in 2005, we experiencedrevenue and transaction volume declines with a major customer. The intangibleasset value attributable to the customer relationship was approximately $18.6million as of June 30, 2009.  We assessed the recoverability of thiscustomer relationship asset based upon undiscounted anticipated future cashflows and concluded that no impairment existed as of June 30, 2009.

 

***Interest expense.*** Interest expense increased $8.8 million to$11.4 million for the three months ended June 30, 2009, from$2.6 million for the three months ended June 30, 2008. Included ininterest expense for the three months ended June 30, 2009 was a $1.7million charge related to the write-off of the deferred financing fees relatedto the 2007 Credit Facility in connection with the closing of the 2009 CreditFacility.  Excluding this charge, cashinterest expense increased $4.4 million primarily as a result of the increasedborrowings under our 2009 Credit Facility, used to fund the CSG acquisition,and an increase in the weighted average interest rate.  In addition, amortization of deferredfinancing fees and debt discount increased $2.6 million to $2.9 million from$0.3 million as a result of the fees and debt discount associated with the 2009Credit Facility.  The immediatelypreceding amounts exclude the $1.7 million write-off of deferred financing feesdescribed above.

 

***Income tax provision.*** For the three months ended June 30, 2009, ourincome tax provision was approximately $0.6 million compared to $3.0 millionfor the three months ended June 30, 2008. The decrease in our income taxprovision is primarily related to lower international income. Our effective taxrate was 57% and 74% for the three months ended June 30, 2009 and 2008,respectively. Our effective tax rate differs from the U.S. Federal statutoryrate primarily due to stock-based compensation expense not deductible forincome tax purposes and profits of our international subsidiaries being taxedat rates different than the U.S. Federal statutory rate.

 

**Sixmonths ended June 30, 2009 compared to the six months ended June 30,2008**

 

***Revenues.*** Total revenues increased $22.9 million, or13.2%, to $197.2 million for the six months ended June 30, 2009, from$174.2 million for the six months ended June 30, 2008. On a constantdollar basis, total revenues would have increased $38.5 million, or 22.1%, to$212.8 million. We generate revenues through four operating divisions.

 

***International services division.*** Revenues from the international servicesdivision decreased $16.3 million, or 20.4%, to $63.5 million for the sixmonths ended June 30, 2009, from $79.8 million for the six monthsended June 30, 2008. The adverse effect of foreign exchange translation ona year-over-year basis was $15.6 million.  Excluding the adverse impact offoreign exchange rates, international services division revenue decreased $0.7million, or 1%, to $79.2 million from $79.9 million for the six months ended June 30,2009 and 2008, respectively. The decrease was primarily due to reductions indial-up POS transaction volumes in Europe and to a lesser extent from the lossof two processing customers in the U.K. These declines were partially offset by increases in dial-up transactionvolumes in the Asia Pacific region and to a lesser extent from the increasedsales of our IP services to POS customers and from additional connections fromfinancial services customers. Revenues from our United Kingdom subsidiariesdecreased $10.6 million, or 28.5 %, to $26.6 million for the sixmonths ended June 30, 2009, from $37.2 million for the six monthsended June 30, 2008. On a constant dollar basis, revenue from the UnitedKingdom subsidiaries for the six months ended June 30, 2009 would havedecreased $2.1 million, or 5.6%, to $35.1 million due primarily to the loss oftwo processing customers, as mentioned above, and to a lesser extent from adecrease in dial-up transaction volumes. This was partially offset by increasedrevenue from sales of our payment gateway and IP services.

 

In our internationalservices division we enter into arrangements with our customers in the currencyof the markets we operate in. As a result, our reported results are affected byfluctuations in the value of the U.S. dollar as compared to foreign 

 

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currencies, predominantlythe British Pound, the Euro and the Australian dollar. The following tableshows the currency composition of our revenues in the international servicesdivision for the six months ended June 30, 2009 and 2008 and weightedaverage exchange rates used to translate our local currency results to the U.S.dollar:

 
| ** **         | ** ** | **2009**                              | ** ** | **2008**                                             | ** ** |
|--------------------|------------|---------------------------------------|------------|------------------------------------------------------|------------|
| ** **         | ** ** | **% of ISD********Revenue** | ** ** | **Weighted Average********Exchange Rates** | ** ** | **% of ISD********Revenue** | ** ** | **Weighted Average********Exchange Rates** | ** ** |
| British  Pound     |       | 42                                    | %          | 1.49                                                 |       | 47 | % | 1.98 |   |
| Euro               |       | 34                                    | %          | 1.33                                                 |       | 31 | % | 1.53 |   |
| Australian  Dollar |       | 17                                    | %          | 0.71                                                 |       | 17 | % | 0.92 |   |

 

For further details onthe effects of foreign exchange on our annual reported revenues, please referto the Outlook section on page 23.

 

***POS division.*** Revenues from the POS division increased$0.1 million, or 0.2%, to $37.6 million for the six months ended June 30,2009, from $37.5 million for the six months ended June 30, 2008. Thisis increase is due to a $2.7 million increase in revenue from our managedbroadband products and a $1.9 million increase from sales of our ATM processingproducts, primarily in Canada. This was partially offset by a $4.5 milliondecrease in dial revenue as a result of an 8.9% decline in transaction volumes, which we primarily attribute tosoftness in the economy, and to a lesser extent from a decrease in revenue pertransaction for our dial-up POS offering mainly resulting from the renewal ofcertain customer contracts. The trend towards IP services, which enjoy arecurring revenue model rather than a per transaction model, continues to helpmitigate this decline.

 

***Telecommunication services division.*** Revenues from the telecommunicationservices division increased $37.3 million to $71.9 million for the sixmonths ended June 30, 2009, from $34.7 million for the six months ended June 30,2008. Revenues increased $42.2 million as a result of the revenue contributionfrom the CSG acquisition from May 1, 2009. Revenue from cable customers increased $1.6 million and revenue fromother customers increased $1.1 million due to increased demand for our networkand database access services. These increases were partially offset by adecrease in revenue of $4.7 million due to the loss of two customers caller IDbusiness and $2.9 million due to volume declines from a customer following theannouncement in March 2009 of our agreement to acquire CSG, based on theexpectation that we will compete with the customer following theacquisition. 

 

***Financial services division.*** Revenues from the financial servicesdivision increased $1.9 million, or 8.4%, to $24.2 million for thesix months ended June 30, 2009, from $22.3 million for the six monthsended June 30, 2008. The increase in revenues was primarily due to increasesin new customer endpoint installations and to a lesser extent from increases inbandwidth requirements from existing customers that results in increasedrevenue per endpoint. We have recently seen a decline in connections betweenendpoints, which we believe is a result of the consolidation and contraction ofthe financial services industry over the course of the last year. We expectconnections between endpoints to continue to trend down in the third quarter. 

 

***Cost of network services.*** Cost of network services increased$12.2 million, or 14.7%, to $95.1 million for the six months ended June 30,2009, from $82.9 million for the six months ended June 30, 2008. On aconstant dollar basis, cost of network services would have increased$18.3 million, or 22.0%, to $101.2 million. Cost of network serviceswere 48.2% of revenues for the six months ended June 30, 2009, compared to47.6% of revenues for the six months ended June 30, 2008. Excluding theeffect of foreign exchange, the increase in cost of network services wasprimarily from costs related to increased revenues in our telecommunicationsservices division resulting from the CSG acquisition and to a lesser extentfrom increased broadband connections in our POS and international servicesdivisions.  This was partially offset byreductions in dial-up transaction volumes in our POS division and reductions inthe cost of services provided to us in our POS division through negotiatedprice decreases from our vendors.

 

Gross profit represented51.8% of total revenues for the six months ended June 30, 2009, comparedto 52.4% for the six months ended June 30, 2008. On a constant dollarbasis, gross margins for the six months ended June 30, 2009 were flat at52.4% compared to the six months ended June 30, 2008.

 

***Engineering and development expense.*** Engineering and development expenseincreased $2.0 million, or 13.8%, to $16.9 million for the six monthsended June 30, 2009, from $14.9 million for the six months ended June 30,2008. On a constant dollar basis, engineering and development expenses wouldhave increased $3.3 million, or 23.7%, to $17.5 million. Engineering anddevelopment expense represented 8.6% and 8.5% of revenues for the six monthsended June 30, 2009 and 2008, respectively.  Capitalized softwaredevelopment costs, which are offset against engineering and development costs,increased $0.8 million to $3.3

 

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million from $2.5 millionfor the three month period ended June 30, 2009 and 2008, respectively. Theincrease in capitalized software development costs is primarily due to ourplanned investment to enhance our card-not-present payment gateway, and to alesser extent from development of our roaming and clearing and IP registryplatforms.  Excluding the increase in capitalize software and the effectsof foreign exchange, engineering and development expense would have increased$4.1 million to $19.0 million for the six months ended June 30, 2009 from$14.9 million for the three months ended June 30, 2008.  The increase relates primarily to additionalheadcount required to support our acquisition of CSG and to a lesser extentfrom an increase in maintenance expense of $0.6 million to support the systemswe acquired through the CSG acquisition.

 

***Selling, general and administrative expense.*** Selling, general and administrativeexpenses increased $1.5 million, or 3.8%, to $41.9 million for thesix months ended June 30, 2009, from $40.4 million for the six monthsended June 30, 2008. On a constant dollar basis, selling, general andadministrative expenses would have increased $6.4 million, or 15.9%, to $46.8million. Included in selling, general and administrative expenses for the sixmonths ended June 30, 2009 and 2008 is $3.4 million and$4.7 million of stock compensation expense, respectively. The decrease instock compensation expense is due to a reduction in performance related stockcompensation as a result of fewer grants. Included in selling, general and administrative expenses for the sixmonths ended June 30, 2009 are $2.2 million in professional fees relatedto our acquisition of CSG that were expensed in accordance with the provisionsof SFAS No. 141(R). Included in selling, general and administrativeexpenses for the six months ended June 30, 2008 was a $0.9 millionpre-tax benefit associated with the settlement of a state sales tax liability.Excluding these items and the effects of foreign exchange, selling, general andadministrative expenses would have increased $4.6 million to $41.1 million, or19.3% of revenues, for the six months ended June 30, 2009 from $36.6million, or 21.0% of revenues, for the six months ended June 30,2008.  This increase was primarilyattributable to additional headcount and other costs necessary to support theacquired CSG operations and to a lesser extent an increase in professional feesrelated to the CSG integration effort.

 

***Depreciation and amortization of property and equipment.*** Depreciation and amortization ofproperty and equipment increased $1.8 million, or 14.7%, to$13.8 million for the six months ended June 30, 2009, from $12.1 millionfor the six months ended June 30, 2008. On a constant dollar basis,depreciation and amortization of property and equipment would have increased$3.1 million, or 25.3% to $15.1 million.  Depreciation and amortization ofproperty and equipment represented 7.0% and 6.9% of revenues for the six monthperiods ended June 30, 2009 and 2008, respectively. The increase indepreciation expense was primarily due to an incremental $1.9 million relate tothe acquired CSG assets and to a lesser extent from increases in capitalexpenditures made to support our revenue growth.

 

***Amortization of intangible assets.*** Amortization of intangible assetsincreased $1.3 million, or 10.4%, to $13.8 million for the six monthsended June 30, 2009, from $12.5 million for the six months ended June 30,2008 and relates solely to intangible assets resulting from acquisitions. On aconstant dollar basis, amortization of intangible assets would have increased$2.1 million, or 17.2% to $14.6 million. The increase primarily relates to additional amortization expense of$2.9 million related to the CSG acquisition. This was partially offset by a decrease of $0.8 million as certainintangible assets reached the end of their economic useful lives.   For purposes of measuring and recognizingimpairment of long-lived assets including intangibles, we assess whetherseparate cash flows can be attributed to an individual asset. For our customerrelationship intangible assets, we recognize and measure impairment upon thesignificant loss of revenue from a customer. Beginning in 2005, we experiencedrevenue and transaction volume declines with a major customer. The intangibleasset value attributable to the customer relationship was approximately $18.6million as of June 30, 2009.  We assessed the recoverability of thiscustomer relationship asset based upon undiscounted anticipated future cashflows and concluded that no impairment existed as of June 30, 2009.

 

***Interest expense.*** Interest expense increased $6.5 million to$12.9 million for the six months ended June 30, 2009, from$6.3 million for the six months ended June 30, 2008. Included ininterest expense for the six months ended June 30, 2008 was a $1.7 millioncharge related to the write-off of the deferred financing fees related to the2007 Credit Facility in connection with the closing of the 2009 CreditFacility.  Excluding this charge, cashinterest expense increased $3.9 million primarily as a result of the increasedborrowings under our 2009 Credit Facility, used to fund the CSG acquisition,and an increase in the weighted average interest rate.  In addition, amortization of deferredfinancing fees and debt discount increased $2.6 million to $3.0 million from$0.4 million as a result of the fees and debt discount associated with the 2009Credit Facility.  The immediatelypreceding amounts exclude the $1.7 million write-off of deferred financing feesdescribed above.

 

***Income tax provision.*** For the six months ended June 30, 2009, ourincome tax provision was approximately $2.1 million compared to$2.6 million for the six months ended June 30, 2008. The decrease inour income tax provision is primarily related to lower international income andwas partially offset by the effect of adjustments to the provision resultingfrom the finalization of tax returns in the U.K. Our effective tax rate was83.2% and 50.0% for the six months ended June 30, 2009 and 2008,respectively. Our effective tax rate differs from the U.S. Federal statutoryrate primarily due to stock-based compensation expense not deductible forincome tax purposes and profits of our international subsidiaries being taxedat rates different than the U.S. Federal statutory rate, and the effect ofadjustments to the provision noted above.

 

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**Liquidityand Capital Resources**

 

Our primary liquidity andcapital resource needs are to finance the costs of our operations, to makecapital expenditures and to service our debt. Based upon our current level ofoperations, we expect that our cash flow from operations, together with the amountswe are able to borrow under our 2009 Credit Facility, will be adequate to meetour anticipated needs for the foreseeable future.

 

Our operations providedus cash of $40.6 million for the six months ended June 30, 2009, which wasattributable to net income of $0.4 million, depreciation, amortization andother non-cash charges of $39.6 million and an decrease in working capital of$0.7 million. Our operations provided us cash of $29.8 million for the sixmonths ended June 30, 2008, which was attributable to net income of $2.6million, depreciation, amortization and other non-cash charges of $27.8 millionand an increase in working capital of $0.6 million.

 

We used cash of$237.3 million in investing activities for the six months ended June 30,2009 which consisted of $11.1 million in capital expenditures to support ourrevenue growth and $226.2 million for the acquisition of the CSG business. Weused cash of $13.7 million in investing activities for the six monthsended June 30, 2008, which comprised solely of capital expenditures tosupport our revenue growth.

 

Our financing activitiesprovided us cash of $181.0 million for the six months ended June 30, 2008.This consisted of proceeds from the new term loan from the 2009 Credit Facilityof $230.0 million less original issue discount of $23.0 million and financingfees of $5.4 million.  The net proceedsfrom the 2009 Credit Facility were used to partially fund the CSGacquisition.  In addition, we made $20.0million of repayments on our 2009 Credit Facility.  We used cash of $10.7 million fromfinancing activities for the six months ended June 30, 2008, whichincludes $18.0 million of voluntary pre-payments on our 2007 Credit Facilityand used $1.6 million to purchase treasury shares for the satisfaction ofemployee’s payroll tax obligations upon the vesting of restricted stock units.This was offset by $8.9 million in proceeds from stock options exercised duringthe six months ended June 30, 2008.

 

**Commitments**

 

The following table summarizes our contractualobligations as of June 30, 2009 that require us to make future cashpayments (dollars in thousands):

 
| ** **                                               | ** ** | ** ** | ** ** | **Year ending  December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **Total**  | ** ** | **2009**                           | ** ** | **2010**   | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** |
| **Contractual Cash Obligations by  Period:**             |       |       |       |                               |       |       |       |   |   |   |   |   |   |   |   |
| Long-term debt under the senior secured credit  facility |       | $          | 388,500    |                               | $          | 2,978      |       | $ | 38,297 |   | $ | 40,850 |   | $ | 48,509 |   | $ | 51,063 |   | $ | 206,803 |   |
| Supplier commitments                                     |       | 42,442     |       | 10,526                             |       | 15,362     |       | 13,920 |   | 2,634 |   | — |   | — |   |
| Operating lease obligations                              |       | 40,521     |       | 4,483                              |       | 9,126      |       | 7,385 |   | 6,366 |   | 4,026 |   | 9,135 |   |
|                                                     |       | $          | 471,463    |                               | $          | 17,987     |       | $ | 62,785 |   | $ | 62,155 |   | $ | 57,509 |   | $ | 55,089 |   | $ | 215,938 |   |

 

Due to uncertainty with respect to the timing offuture cash flows associated with unrecognized tax benefits at December 31,2008, the Company is unable to make reasonably reliable estimates of the periodof cash settlement. Therefore $5.4 million of unrecognized tax benefitshave been excluded from the contractual obligations table above. SeeNote 1 to the condensed consolidated financial statements for furtherdiscussion of income tax.

 

Not included in the table above are commitments tomake interest payments under the terms of our 2009 senior secured creditfacility due to the variable nature of the interest rates.  See note 2 to the condensed consolidatedfinancial statements for further details on interest rates and other terms andconditions of this facility.

 

We expect that we will be able to fund our remainingobligations and commitments with cash flow from operations. To the extent weare unable to fund these obligations and commitments with cash flow fromoperations, we intend to fund these obligations and commitments with proceeds fromborrowings under our 2009 senior secured credit facility or future debt orequity financings.

 

**Outlook**

 

In our foreign operationswe conduct business in each of our foreign jurisdictions local currency. Due tothe recent strengthening of the U.S. Dollar relative to several major foreigncurrencies, we expect revenues and operating income to be negatively impactedby foreign currency translation. As a point of reference, for the year ended December 31,2008, the weighted average exchange rate used to translate the Company’sStatement of Operations (U.S. Dollar rate for one unit of foreign currency) was$1.85 for the British Pound, $1.47 for the Euro, and $0.84 for the Australiandollar. For the year ended December 31, 2008, approximately 21%, 14% and8% of our consolidated revenues were generated in the British Pound, Euro andAustralian dollar, respectively. For the year ended December 31, 2008,approximately 16%, 11% and 6% of our consolidated operating expenses weregenerated in the British Pound, Euro and Australian dollar, respectively. A$0.01 change in exchange rates for each of the major foreign currencies weoperate in would have the following impact on revenue for the year ended December 31,2008: British Pound, $0.4 million, Euro, $0.4 million and AustralianDollar, $0.3 million. The foreign currency exchange rates which impact ourrevenues and operating income have been volatile recently and are beyond ourcontrol. See Item 3. Foreign Currency Risk below

 

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**Seasonality**

 

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

 

**Effectsof Inflation**

 

Our monetary assets,consisting primarily of cash and receivables, and our non-monetary assets,consisting primarily of intangible assets and goodwill, are not affectedsignificantly by inflation. We believe that replacement costs of equipment,furniture and leasehold improvements will not materially affect our operations.However, the rate of inflation affects our expenses, such as those for employeecompensation and costs of network services, which may not be readilyrecoverable in the price of services offered by us.

 

**Item3. Quantitative and Qualitative Disclosures About Market Risk**

 

***Interest rates***

 

Our principal exposure tomarket risk relates to changes in interest rates. As of June 30, 2009 wehad $388.5 million outstanding under our 2009 Credit Facility withinterest rates tied to changes in the lender’s base rate or the LIBOR rate.Interest on outstanding balances under the 2009 Credit Facility is payable, atthe Company’s option, at the Base Rate plus a margin of 5.0%, or at LIBOR plusa margin of 6.0%.  Additionally, in no event will the LIBOR rate be lessthan 3.5% or the Base Rate less than 4.5%.  At June 30, 2009 the1 month LIBOR rate was 0.30875%. Based upon the outstanding borrowings on June 30,2009 and assuming repayment of the Term Loan in accordance with scheduledmaturities, each 1.0% increase or decrease in these rates, once the LIBOR rateexceeds the 3.5% minimum, could affect our annual interest expense by$3.9 million.

 

As of June 30, 2009,we did not hold derivative financial or commodity instruments and all of ourcash and cash equivalents were 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. (See Part II Item 2, Outlook,above.)

 

We have operations in 23countries outside of the U.S., including the United Kingdom, Austria,Australia, Bermuda, Canada, France, Germany, Hong Kong, India, Ireland, Italy,Japan, Malaysia, Mexico, New Zealand, Poland, Romania, Singapore, South Korea,Spain, Sweden, Thailand and the Netherlands. We provide services in thesecountries using networks deployed in each country. We manage foreign exchangerisk through the structure of our business. In the substantial majority of ourtransactions, we receive payments denominated in the U.S. dollar, BritishPound, Euro or Australian dollar. Therefore, we do not rely on internationalcurrency markets to obtain and pay illiquid currencies. The foreign currencyexposure that does exist is limited by the fact that the majority of transactionsare paid according to our standard payment terms, which are generallyshort-term in nature. Our policy is not to speculate in foreign currencies, andwe promptly buy and sell foreign currencies as necessary to cover our netpayables and receivables, which are denominated in foreign currencies. For the sixmonths ended June 30, 2009, we recorded a loss on foreign currencyrevaluation of approximately $0.6 million.

 

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**Item4. Controls and Procedures**

 

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

 

**Evaluation**

 

The Company carried outan evaluation, under the supervision, and with the participation, of theCompany’s management, including the Company’s Chief Executive Officer and theCompany’s Chief Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures as of June 30, 2009. Based on theforegoing, the Company’s Chief Executive Officer and principal financialofficers concluded that the Company’s disclosure controls and procedures wereeffective as of June 30, 2009 at the reasonable assurance level.

 

On May 1, 2009, theCompany completed its acquisition of CSG. Management has considered the CSG acquisition material to the results ofoperations, cash flows and financial position from the date of acquisitionthrough June 30, 2009 and believes that the internal controls andprocedures of CSG have a material effect on internal controls over financialreporting.  In accordance with SECguidance, management has elected to exclude CSG from its December 31, 2009assessment of and report on internal controls over financial reporting.  The Company is currently in the process ofincorporating the internal controls and procedures of CSG into the internalcontrols over financial reporting for our assessment of and report on internalcontrols over financial reporting for December 31, 2010.  There have been no other changes during thethree months ended June 30, 2009 covered by this report in the Company’sinternal control over financial reporting or in other factors that couldmaterially affect or are reasonably likely to materially affect the internalcontrol over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**Item 1.****                                  ****Legal Proceedings**

 

None.

 

**Item 1A.****                         ****Risk Factors**

 

None.

 

**Item 2.****                                  ****Unregistered Sales ofEquity Securities and Use of Proceeds**

 

None.

 

**Item 3.****                                  ****Default Upon SeniorSecurities**

 

None.

 

**Item 4.****                                  ****Submission of Matters toa Vote of Security Holders**

 

The Annual Meeting ofStockholders was held on May 27, 2009. The stockholders voted on the followingmatters as set forth in the proxy statement:

 

1.  ELECTION OF DIRECTORS. The stockholders votedto elect five directors to a one-year term expiring at the annual meeting ofstockholders in 2010. The voting tabulation for each nominee was as follows:

 
| **Director**          | ** ** | **Votes in  Favor** | ** ** | **Votes  Withheld** | ** ** |
|-----------------------|------------|---------------------|------------|---------------------|------------|
|                  |       |                |       |                |       |
| John B. Benton        |       | 23,290,277          |       | 568,970             |       |
|                  |       |                |       |                |       |
| Stephen X.  Graham    |       | 23,292,845          |       | 566,402             |       |
|                  |       |                |       |                |       |
| Henry H. Graham,  Jr. |       | 23,502,377          |       | 356,870             |       |
|                  |       |                |       |                |       |
| Jay E. Ricks          |       | 23,292,845          |       | 566,402             |       |
|                  |       |                |       |                |       |
| John V. Sponyoe       |       | 22,626,351          |       | 1,232,896           |       |

 

 

2.  RATIFICATION OF INDEPENDENT ACCOUNTANTS. Thestockholders ratified the selection of Ernst & Young LLP as the Company’sindependent registered public accounting firm for the current 2009 fiscal year.The voting tabulation was as follows: 23,740,732 votes in favor of theratification; 116,661 against the ratification; and 1,854 abstentions.

 

3.  APPROVAL OF THE TNS, INC. ANNUAL INCENTIVEPLAN. The stockholders approved the TNS, Inc. Annual Incentive Plan.  The voting tabulation was as follows:20,941,529 votes in favor of the increase; 1,372,637 votes against theincrease; and 19,380 abstentions.

 

**Item 5.****                                  ****Other Information**

 

**Item 6.****                                  ****Exhibits**

 
| (31.1) |   | Certification—Chief  Executive Officer                               |
|--------|--------|---------------------------------------------------------------------------|
| (31.2) |   | Certification — Chief  Financial Officer                             |
| (32.1) |   | Written Statement of  Chief Executive Officer and Chief Financial Officer |

 

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**SIGNATURES**

 

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

 
|                        | TNS, Inc.  |
|-----------------------------|-----------------|
|                        | (Registrant)    |
|                        |            |   |
| Date: August 10,  2009 | By:   | /s/ HENRY H. GRAHAM, JR. |
|                        |            |   |
|                        |            | Henry H.  Graham, Jr. |
|                        |            | Chief Executive Officer |
|                        |            |   |
| Date: August 10,  2009 | By:             | /s/ DENNIS L. RANDOLPH,  JR. |
|                        |            |   |
|                        |            | Dennis L.  Randolph, Jr. |
|                        |            | Executive Vice  President, Chief Financial Officer & Treasurer |

 

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