**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10–Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**Forthe quarter ended March 31, 2005**

 

**CommissionFile Number: 001–32033**

 

**TNS, INC.**

(Exact name of registrant asspecified in its charter)

 

| **DELAWARE**                                                    | ** ** | **36-4430020**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or  jurisdiction of incorporation or organization)       |       | (I.R.S.  Employer Identification Number) |
|                                                            |       |                                     |
| **11480 Commerce Park Drive, Suite 600  Reston, VA 20191** |
| (Address of  principal executive offices)                       |
|                                                            |
| **(703) 453-8300**                                         |
| (Registrant’s  telephone number, including area code)      |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirement for the past90 days.   ý Yes    o No

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b–2 of the Exchange Act).   o Yes    ý No

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of Common Stock, as of the latest practicabledate.

 
| ** **                                          | **Shares  Outstanding as of April 1, 2005** | ** ** |
|-----------------------------------------------------|--------------------------------------------------|------------|
| 28,074,438 Shares of Common Stock, $0.001 par value |

 

 

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**TNS, INC.INDEX**

 
| **Part I:**  |   | **FINANCIAL INFORMATION** |
|-------------------|--------|---------------------------|
|              |   |                      |   |   |
|              |   | Item 1.              |   | Condensed Consolidated Financial Statements  (Unaudited) |
|              |   |                      |   | Condensed Consolidated Balance Sheets as of  December 31, 2004 and March 31, 2004 |
|              |   |                      |   | Condensed Consolidated Statements of  Operations for the three months ended March 31, 2004 and 2005 |
|              |   |                      |   | Condensed Consolidated Statements of Cash  Flows for the three months ended March 31, 2004 and 2005 |
|              |   |                      |   | Notes to Condensed Consolidated Financial  Statements |
|              |   | Item 2.              |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|              |   | Item 3.              |   | Quantitative and Qualitative Disclosures  About Market Risk |
|              |   | Item 4.              |   | Controls and Procedures |
|              |   |                      |   |   |
| **Part II:** |   | **OTHER INFORMATION**     |
|              |   |                      |   |   |
|              |   | Item 1.              |   | Legal Proceedings |
|              |   | Item 2.              |   | Changes in Securities, Use of Proceeds and  Issuer Purchases of Equity Securities |
|              |   | Item 3.              |   | Default Upon Senior Securities |
|              |   | Item 4.              |   | Submission of Matters to a Vote of Security  Holders |
|              |   | Item 5.              |   | Other Information |
|              |   | Item 6.              |   | Exhibits |

 

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**PART I—FINANCIALINFORMATION**

 

**Item 1. Condensed Consolidated Financial Statements (Unaudited)**

 

**TNS, INC.CONDENSED CONSOLIDATEDBALANCE SHEETS(dollars in thousands, except share and per share data)**

 
| ** **                                                                                                                             | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                                                             | ** ** | ** **                  | ** ** | **(unaudited)**          | ** ** |
| **ASSETS**                                                                                                                             | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Current  assets:                                                                                                                       |       |                        |       |                     |       |
| Cash and  cash equivalents                                                                                                             |       | $                           | 19,788     |                     | $          | 24,561 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $4,756 and $4,894,  respectively                                       |       | 47,896                      |       | 45,879                   |       |
| Other  current assets                                                                                                                  |       | 9,349                       |       | 10,516                   |       |
| Total  current assets                                                                                                                  |       | 77,033                      |       | 80,956                   |       |
| Property and  equipment, net                                                                                                           |       | 50,587                      |       | 49,315                   |       |
| Identifiable  intangible assets, net                                                                                                   |       | 205,208                     |       | 198,260                  |       |
| Goodwill                                                                                                                               |       | 5,386                       |       | 5,849                    |       |
| Other assets                                                                                                                           |       | 18,198                      |       | 18,617                   |       |
| Total assets                                                                                                                           |       | $                           | 356,412    |                     | $          | 352,997 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                         |       |                        |       |                     |       |
| Current  liabilities:                                                                                                                  |       |                        |       |                     |       |
| Current  portion of long-term debt                                                                                                     |       | $                           | 9,000      |                     | $          | 9,250 |   |
| Accounts  payable, accrued expenses and other current liabilities                                                                      |       | 43,528                      |       | 46,050                   |       |
| Deferred  revenue                                                                                                                      |       | 14,419                      |       | 11,260                   |       |
| Total  current liabilities                                                                                                             |       | 66,947                      |       | 66,560                   |       |
| Long-term  debt, net of current portion                                                                                                |       | 42,000                      |       | 38,750                   |       |
| Other  liabilities                                                                                                                     |       | 4,967                       |       | 4,505                    |       |
| Total  liabilities                                                                                                                     |       | 113,914                     |       | 109,815                  |       |
| Commitments  and contingencies                                                                                                         |       |                        |       |                     |       |
| Stockholders’  equity:                                                                                                            |       |                        |       |                     |       |
| Common  stock, $0.001 par value; 130,000,000 shares authorized; 27,996,053 and  28,074,438 shares issued and outstanding, respectively |       | 28                          |       | 28                       |       |
| Treasury  stock                                                                                                                        |       | —                      |       | (462                     | )          |
| Additional  paid-in capital                                                                                                            |       | 281,766                     |       | 281,795                  |       |
| Accumulated  deficit                                                                                                                   |       | (37,333                     | )          | (35,879                  | )          |
| Deferred  stock compensation                                                                                                           |       | (4,766                      | )          | (4,292                   | )          |
| Accumulated  other comprehensive income                                                                                                |       | 2,803                       |       | 1,992                    |       |
| Total  stockholders’ equity                                                                                                       |       | 242,498                     |       | 243,182                  |       |
| Total  liabilities and stockholders’ equity                                                                                       |       | $                           | 356,412    |                     | $          | 352,997 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

 

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**TNS, INC.CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)(dollars in thousands, except share and per share data)**

 
| ** **                                                                             | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                             | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| **Revenues**                                                                           |       | $                                      | 60,156     |   | $ | 63,132 |   |
| Operating  expenses:                                                                   |       |                                   |       |   |   |
| Cost of  network services, exclusive of the items shown separately below               |       | 30,692                                 |       | 30,230 |   |
| Engineering  and development                                                           |       | 3,439                                  |       | 3,906 |   |
| Selling,  general, and administrative                                                  |       | 11,019                                 |       | 13,094 |   |
| Depreciation  and amortization of property and equipment                               |       | 4,806                                  |       | 4,863 |   |
| Amortization  of intangible assets                                                     |       | 8,508                                  |       | 6,265 |   |
| Total  operating expenses                                                              |       | 58,464                                 |       | 58,358 |   |
| Income from  operations                                                                |       | 1,692                                  |       | 4,774 |   |
| Interest  expense                                                                      |       | (4,433                                 | )          | (811 | ) |
| Interest  income                                                                       |       | 36                                     |       | 116 |   |
| Other income  (expense), net                                                           |       | 101                                    |       | (304 | ) |
| Income  (loss) before income taxes and equity in net loss of unconsolidated affiliates |       | (2,604                                 | )          | 3,775 |   |
| Income tax  (provision) benefit                                                        |       | 982                                    |       | (1,905 | ) |
| Equity in  net loss of unconsolidated affiliates                                       |       | (37                                    | )          | (416 | ) |
| Net income  (loss)                                                                     |       | (1,659                                 | )          | 1,454 |   |
| Dividends on  preferred stock                                                          |       | (3,428                                 | )          | — |   |
| Net income  (loss) attributable to common stockholders                                 |       | $                                      | (5,087     | ) | $ | 1,454 |   |
| Basic net  income (loss) per common share                                              |       | $                                      | (0.34      | ) | $ | 0.05 |   |
| Diluted net  income (loss) per common share                                            |       | $                                      | (0.34      | ) | $ | 0.05 |   |
| Basic  weighted average common shares outstanding                                      |       | 14,906,191                             |       | 28,007,946 |   |
| Diluted  weighted average common shares outstanding                                    |       | 14,906,191                             |       | 28,384,837 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

 

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**TNS, INC.CONDENDSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)(dollars in thousands)**

 
| ** **                                                                       | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                       | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| Cash flows  from operating activities:                                           |       |                                  |       |   |   |
| Net income  (loss)                                                               |       | $                                     | (1,659     | ) | $ | 1,454 |   |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |                                  |       |   |   |
| Depreciation  and amortization of property and equipment                         |       | 4,806                                 |       | 4,863 |   |
| Amortization  of intangible assets                                               |       | 8,508                                 |       | 6,265 |   |
| Deferred  income tax (benefit) provision                                         |       | (1,244                                | )          | 1,244 |   |
| Amortization  and write-off of deferred financing costs                          |       | 2,486                                 |       | 150 |   |
| Equity in  net loss of unconsolidated affiliates                                 |       | 37                                    |       | 416 |   |
| Stock  compensation                                                              |       | 76                                    |       | 490 |   |
| Changes in  operating assets and liabilities, net of effect of acquisitions:     |       |                                  |       |   |   |
| Accounts  receivable, net                                                        |       | (2,939                                | )          | 2,016 |   |
| Other  current and noncurrent assets                                             |       | (586                                  | )          | (654 | ) |
| Accounts  payable, accrued expenses and other current and noncurrent liabilities |       | (5,763                                | )          | 2,060 |   |
| Deferred  revenue                                                                |       | 1,367                                 |       | (3,159 | ) |
| Net cash  provided by operating activities:                                      |       | 5,089                                 |       | 15,145 |   |
| Cash flows  from investing activities:                                           |       |                                  |       |   |   |
| Purchases of  property and equipment                                             |       | (3,120                                | )          | (4,136 | ) |
| Investments  in unconsolidated affiliates                                        |       | —                                |       | (2,802 | ) |
| Net cash  used in investing activities:                                          |       | (3,120                                | )          | (6,938 | ) |
| Cash flows  from financing activities:                                           |       |                                  |       |   |   |
| Proceeds  from issuance of long-term debt, net of financing costs of $1,979      |       | 79,031                                |       | — |   |
| Repayment of  long-term debt                                                     |       | (153,146                              | )          | (3,000 | ) |
| Payment of  long-term debt financing costs                                       |       | —                                |       | (75 | ) |
| Payment of  dividends on preferred stock                                         |       | (173                                  | )          | — |   |
| Proceeds  from stock option exercises                                            |       | 5                                     |       | 14 |   |
| Purchase of  treasury stock                                                      |       | —                                |       | (462 | ) |
| Proceeds  from issuance of common stock, net                                     |       | 71,598                                |       | — |   |
| Net cash  used in financing activities:                                          |       | (2,685                                | )          | (3,523 | ) |
| Effect of  exchange rates on cash and cash equivalents                           |       | 559                                   |       | 89 |   |
| Net  (decrease) increase in cash and cash equivalents                            |       | (157                                  | )          | 4,773 |   |
| Cash and  cash equivalents, beginning of period                                  |       | 11,074                                |       | 19,788 |   |
| Cash and  cash equivalents, end of period                                        |       | $                                     | 10,917     |   | $ | 24,561 |   |
| Supplemental  disclosures of cash flow information:                              |       |                                  |       |   |   |
| Cash paid  for interest                                                          |       | $                                     | 2,581      |   | $ | 682 |   |
| Cash paid  for income taxes                                                      |       | $                                     | 1,784      |   | $ | 913 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

 

4

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**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

 

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

 

TNS, Inc. (TNS or the Company) is aDelaware corporation. TNS is a leading provider of business–critical datacommunications services to processors of credit card, debit card and automatedteller machine (ATM) transactions. TNS is also a leading provider of callsignaling and database access services to the domestic telecommunicationsindustry and of secure data and voice network services to the global financialservices industry. TNS’ data communication services enable secure and reliabletransmission of time–sensitive, transaction–related information critical to itscustomers’ operations. The Company’s customers outsource their datacommunication requirements to TNS because of the Company’s expertise,comprehensive customer support, and cost–effective services. TNS providesservices to customers in the United States and increasingly to internationalcustomers.  Internationally, TNS operatesnetworks in 12 countries, including Canada and countries in Europe and theAsia–Pacific region, and uses these networks to provide services to customersin these and neighboring countries.

 

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

 

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

 

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance with UnitedStates generally accepted accounting principles (GAAP) for interim financialinformation and in conjunction with the rules and regulations of theSecurities and Exchange Commission (SEC). Certain information and notedisclosures normally included in the annual financial statements, required byGAAP, have been condensed or omitted pursuant to those rules andregulations, although the Company believes that the disclosures made areadequate to make the information presented not misleading.

 

In the opinion of management, theaccompanying unaudited condensed consolidated financial statements reflect allnecessary adjustments (all of which are of a normal and recurring nature) thatare necessary for fair presentation for the periods presented. The results ofoperations for the three months ended March 31, 2005 are not necessarilyindicative of the results to be expected for any subsequent interim period orfor the fiscal year. It is suggested that these unaudited condensedconsolidated financial statements be read in conjunction with the Company’sannual report on Form 10-K filed with the SEC on March 31,2005, which includes consolidated financial statements and the notes theretofor the year ended December 31, 2004.

 

**Use of Estimates**

 

The preparation of financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of certain assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements.Significant estimates affecting the consolidated financial statements includemanagement’s judgments regarding the allowance for doubtful accounts, reservesfor excess and obsolete inventories, future cash flows from long–lived assets,and accrued expenses for probable losses. Actual results could differ fromthose estimates.

 

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**Revenue Recognition**

 

The Company recognizes revenue whenpersuasive evidence of an agreement exists, the terms are fixed anddeterminable, services are performed, and collection is probable. Cash receivedin advance of revenue recognition is recorded as deferred revenue. POS servicesrevenue is derived primarily from per transaction fees paid by the Company’scustomers for the transmission of transaction data, through the Company’snetworks, between payment processors and POS or ATM terminals.Telecommunication services revenue is derived primarily from fixed monthly feesfor call signaling services and per query fees charged for database access andvalidation services. Financial services revenue is derived primarily frommonthly recurring fees based on the number of customer connections to and throughthe Company’s networks. Incentives granted to new customers or upon contractrenewals are deferred and recognized ratably as a reduction of revenue over thecontract period to the extent that the incentives are recoverable against thecustomer’s minimum purchase commitments under the contract. In addition, theCompany receives installation fees related to the configuration of thecustomers’ systems. Revenue from installation fees is deferred and recognizedratably over the customer’s contractual service period, generally three years.

 

**Cost of Network Services**

 

Cost of network services is comprisedprimarily of telecommunications charges, which include data transmission anddatabase access charges, leased digital capacity charges, circuit installationcharges and activation charges. The cost of data transmission is based on acontract or tariff rate per minute of usage in addition to a prescribed rateper transaction for certain vendors. The costs of database access, circuits,installation and activation charges are based on fixed fee contracts with localexchange carriers and interexchange carriers. The cost of network services alsoincludes salaries, equipment maintenance and other costs related to the ongoingoperation of the Company’s data networks. These costs are expensed by theCompany as incurred. Direct costs of installations are deferred and amortizedover three years. The Company records its accrual for telecommunication chargesbased upon network services utilized at historical invoiced rates. Depreciationexpense on our network equipment and amortization of developed technology areexcluded from our cost of network services and included in depreciation andamortization of property and equipment and amortization of intangible assets inour condensed consolidated statement of operations.

 

**Stock Based Compensation**

 

In February 2004, the Board of Directorsof the Company adopted the TNS, Inc. 2004 Long–Term Incentive Plan (thePlan) and the Company’s stockholders approved the Plan in March 2004. ThePlan reserves 1,586,384 shares of common stock for grants of incentive stockoptions, nonqualified stock options, restricted stock awards and performanceshares to employees, non–employee directors and consultants performing servicesfor the Company. Options granted under the Plan have an exercise price equal toor greater than the fair market value of the underlying common stock at thedate of grant and become exercisable based on a vesting schedule determinedat the date of grant, generally in equal monthly installments over four years.The options expire 10 years from the date of grant. Restricted stockawards and performance shares granted under the Plan are subject to a vestingperiod determined at the date of grant, generally in equal annual installmentsover four years. As of March 31, 2005, the Company has granted 324,149shares of restricted stock and recorded approximately $4.2 million ofdeferred compensation related to these shares of restricted stock. The deferredcompensation is being amortized over the four–year vesting period of the sharesof restricted stock. For the three months ended March 31, 2004 and 2005,the Company recorded compensation expense of approximately $55,000 and $0.5million respectively, related to these shares of restricted stock.  During the three months ended March 31,2005, 173 shares and 78,212 shares of common stock were issued from optionexercises and upon the vesting of restricted stock, respectively.

 

The Company continues to account for employeestock options or similar equity instruments to employees under the intrinsicvalue method prescribed by Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees.” Under the intrinsic value method,compensation cost is the excess, if any, of the fair value of the stock at thegrant date or other measurement date over the amount an employee must pay toacquire the stock. Statement of Financial Accounting Standards (SFAS) No. 123,“Accounting for Stock–Based Compensation” defines a fair value method ofaccounting for employee stock options or similar equity instruments. Under thefair value method, compensation cost is measured at the grant date based on thevalue of the award and is recognized over the service period. SFAS No. 123allows an entity to continue to use the intrinsic value method. However,

 

6

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entities electing to account for employee stock options or similarinstruments pursuant to APB Opinion No. 25 must make pro forma disclosuresof net income, as if the fair value method of accounting had been applied.

 

If stock compensation expense hadbeen determined based upon the fair value method at the grant dates, theCompany’s net income (loss) attributable to common stockholders would haveincreased to the pro forma amounts indicated below (in thousands, except pershare data):

 
| ** **                                                                                                                                    | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Net income  (loss) attributable to common stockholders, as reported                                                                           |       | $                                      | (5,087     | ) | $ | 1,454 |   |
| Add:  Stock-based employee compensation expense included in reported net loss, net  of related tax effects                                    |       | 46                                     |       | 294 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |       | (260                                   | )          | (731 | ) |
| Pro forma  net income (loss) attributable to common stockholders                                                                              |       | $                                      | (5,301     | ) | $ | 1,017 |   |
| Basic and  diluted net income (loss) per common share, as reported                                                                            |       | $                                      | (0.34      | ) | $ | 0.05 |   |
| Pro forma  basic and diluted net income (loss) per common share                                                                               |       | $                                      | (0.36      | ) | $ | 0.04 |   |

 

##### **Recent Accounting Pronouncements**

##### ** **

In December 2004,the Financial Accounting Standards Board (FASB) issued SFAS No. 123(revised 2004), “Share-Based Payment” (SFAS No. 123R), which is a revisionof SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123Rsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”,and amends SFAS No. 95, “Statement of Cash Flows”. The Company will adoptSFAS No. 123R on January 1, 2006. SFAS No. 123R requires allshare-based payments to employees, including grants of employee stock options,to be recorded as an expense based on their fair values. The Company iscurrently evaluating the impact of adopting SFAS No. 123R. Informationabout the fair value of stock options under the Black-Scholes model and its proforma impact on its net income (loss) and basic and diluted net income (loss)per common share for the three months ended March 31, 2004 and 2005 (whichmay differ from the ultimate impact of adopting the new standard) can be foundin this Note 1.

 

**2.****                                      Long-termInvestments**

 

In August 2004, TNS made an investment in WAYSystems, Inc. (WAY), which provides mobile POS transaction infrastructureand solutions for mobile merchants. TNS purchased 5,952,381 shares or 38.5percent of WAY’s Series B convertible preferred stock for $2.5 million andbecame entitled to representation on WAY’s board of directors. As of December 31,2004, TNS owned 18.1 percent of WAY’s total outstanding shares. In March 2005,TNS made an additional investment of $0.8 million to purchase 1,910,401 sharesof WAY’s Series B convertible preferred stock for an additional 1.9percent of WAY’s outstanding shares. TNS owned 20.0 percent of Way’soutstanding shares as of March 31, 2005. TNS is accounting for its investment under the equity method ofaccounting. Due to timing of the receipt of WAY’s financial statements, TNS isaccounting for the income or loss in this equity method investment on aone-month lag.  For the three monthsended March 31, 2005, the Company recognized a net loss in the equity ofan unconsolidated affiliate of approximately $0.3 million.

 

In January 2005, TNS made aninvestment in IP Commerce, a company that provides operating software tofacilitate the authorization of IP-based retail payment transactions. TNS purchased2,368,545 Series A preferred shares or 39.9 percent of IP Commerce’s totaloutstanding shares for $2.0 million and became entitled to representation on IPCommerce’s board of directors. TNS is accounting for its investment under theequity method of accounting. Due to timing of the receipt of IP Commerce’sfinancial statements, TNS is accounting for the income or loss in this equitymethod investment on a one-month lag. For the three months ended March 31, 2005, the Company recognized anet loss in the equity of an unconsolidated affiliate of approximately $0.1million.

 

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**3.****                                      Long–termDebt**

 

Debt consists of the following (inthousands):

 
| ** **                 | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|----------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Term Loan                  |       | $                           | 51,000     |                     | $          | 48,000 |   |
| Revolving  Credit Facility |       | —                      |       | —                   |       |
|                       |       | 51,000                      |       | 48,000                   |       |
| Less:  Current portion     |       | (9,000                      | )          | (9,250                   | )          |
| Long-term  portion         |       | $                           | 42,000     |                     | $          | 38,750 |   |

 

On March 19, 2004, the Company enteredinto a senior secured credit facility (the Credit Facility) to replace itsprior credit facility. The Credit Facility consists of a $65.0 millionterm loan (Term Loan) and a revolving credit facility of $30.0 million(Revolving Credit Facility). The Credit Facility matures March 19, 2009.Payments on the Term Loan are due in quarterly installments over the five–yearterm, beginning on March 31, 2004. As of March 31, 2005 totalremaining payments on the Term Loan are as follows (in thousands):

 
| Nine months  ending December 31, 2005 |   | $      | 6,188  |   |
|--------------------------------------------|--------|--------|--------|--------|
| 2006                                       |   | 12,812 |   |
| 2007                                       |   | 14,000 |   |
| 2008                                       |   | 15,000 |   |
|                                       |   | $      | 48,000 |   |

 

For the period through June 30, 2004,borrowings on the Revolving Credit Facility and the Term Loan bore interest ata rate of 2.50 percent over the LIBOR rate.  For the period from July 1, 2004 throughMarch 31, 2005, borrowings on the Revolving Credit Facility and the TermLoan bore interest at a rate of 2.25 percent over the LIBOR rate (5.13percent as of March 31, 2005). Thereafter, if the Company achieves aleverage ratio of less than one, the borrowings on the Revolving CreditFacility and the Term Loan generally will bear interest at a rate, at theCompany’s option, of either 0.75 percent over the lender’s base rate or2.0 percent over the LIBOR rate. If the Company achieves a leverage ratioof less than 1.5 but more than or equal to one, the borrowings on the RevolvingCredit Facility and the Term Loan generally will bear interest at a rate, atthe Company’s option, of either 1.0 percent over the lender’s base rate or2.25 percent over the LIBOR rate. If the Company achieves a leverage ratioof less than 2.2 but more than or equal to 1.5, the borrowings on the RevolvingCredit Facility and the Term Loan generally will bear interest at a rate, atthe Company’s option, of either 1.25 percent over the lender’s base rateor 2.5 percent over the LIBOR rate. The Company’s leverage ratio as of March 31,2005 was 0.7 to 1.0. The Revolving Credit Facility is subject to an annualcommitment fee in an amount equal to 0.5 percent per annum multiplied bythe amount of funds available for borrowing under the Revolving CreditFacility. Interest payments on the Credit Facility are due monthly, bimonthly,or quarterly at the Company’s option.

 

The terms of the Credit Facility require theCompany to comply with financial and nonfinancial covenants, includingmaintaining certain leverage, interest and fixed charge coverage ratios at theend of each fiscal quarter. As of March 31, 2005, the Company was requiredto maintain a leverage ratio of less than 2.0 to 1.0, an interest coverageratio of greater than 5.0 to 1.0 and a fixed charge ratio of greater than 2.0to 1.0. Certain of the financial covenants will become more restrictive overthe term of the Credit Facility. The Credit Facility also contains nonfinancialcovenants that restrict some of the Company’s corporate activities, includingthe Company’s ability to dispose of assets, incur additional debt, paydividends, create liens, make investments, make capital expenditures and engagein specified transactions with affiliates. The Company’s future results ofoperations and its ability to comply with the covenants could be adverselyimpacted by increases in the general level of interest rates since the intereston a majority of the Company’s debt is variable. Noncompliance with any of thefinancial or nonfinancial covenants without cure or waiver would constitute anevent of default under the Credit Facility. An event of default resulting froma breach of a financial or nonfinancial covenant may result, at the option ofthe lenders, in an acceleration of the principal and interest outstanding, anda termination of the Revolving Credit Facility. The 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 specified

 

8

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covenants, change in control and material inaccuracy of representationsand warranties. The Company was in compliance with the financial andnonfinancial covenants of the Credit Facility as of March 31, 2005.

 

In connection with the closing of the CreditFacility, the Company incurred approximately $2.0 million in financingcosts. These financing costs were deferred and are being amortized using theeffective interest method over the life of the Credit Facility. In connectionwith the termination of the prior credit facility in March 2004, theCompany wrote–off approximately $2.0 million in unamortized deferred financingcosts related to the prior credit facility. Such write–off has been included ininterest expense in the accompanying condensed consolidated statement ofoperations for the three months ended March 31, 2004.

 

**4.****                                      ComprehensiveIncome (Loss)**

 

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

 
| ** **                         | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Net income  (loss)                 |       | $                                      | (1,659     | ) | $ | 1,454 |   |
| Foreign  currency translation      |       | 915                                    |       | (811 | ) |
| Total  comprehensive income (loss) |       | $                                      | (744       | ) | $ | 643 |   |

 

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

 

SFAS No. 128, “Earnings Per Share”,requires the presentation of basic and diluted earnings per share. Basicearnings (loss) per common share is computed by dividing income (loss)attributable to common stockholders by the weighted average number of commonshares outstanding for the period. The diluted earnings (loss) per common sharedata is computed using the weighted average number of common shares outstandingplus the dilutive effect of common stock equivalents, unless the common stockequivalents are anti–dilutive. For the period prior to the Company’s initialpublic offering on March 16, 2004, the effect of the Class APreferred Stock converting into shares of common stock was not included in the computationof diluted net loss per common share as the effect would be anti–dilutive. Inaddition, options to purchase 1,013,341 shares of common stock that wereoutstanding as of March 31, 2004, and the treasury stock effect of 295,500shares of unvested common stock held by executives and employees as of March 31,2004 was not included in the computation of diluted net loss per common sharefor the three months ended March 31, 2004 as the effect would beanti–dilutive.

 

The following details the computation of thenet income (loss) per common share (dollars in thousands, except share and pershare data):

 
| ** **                                             | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Net income (loss)                                      |       | $                                      | (1,659     | ) | $ |  1,454 |   |
| Dividends on  preferred stock                          |       | (3,428                                 | )          | — |   |
| Net income  (loss) attributable to common stockholders |       | $                                      | (5,087     | ) | $ | 1,454 |   |
| Weighted  average common share calculation:            |       |                                   |       |   |   |
| Basic  weighted average common shares outstanding      |       | 14,906,191                             |       | 28,007,946 |   |
| Treasury  stock effect of unvested common stock        |       | —                                 |       | 311,181 |   |
| Treasury  stock effect of options                      |       | —                                 |       | 65,710 |   |
| Diluted  weighted average common shares outstanding    |       | 14,906,191                             |       | 28,384,837 |   |
| Net income  (loss) per common share:                   |       |                                   |       |   |   |
| Basic income  (loss) per common share                  |       | $                                      | (0.34      | ) | $ | 0.05 |   |
| Diluted  income (loss) per common share                |       | $                                      | (0.34      | ) | $ | 0.05 |   |

 

9

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**6.****                                      SegmentInformation**

 

The Company’s reportable segments arestrategic business units that offer different products and services. TheCompany classifies its business into four segments: POS, TSD, FSD and ISD.However, the Company’s management only evaluates revenues for these foursegments. A significant portion of the Company’s North American operatingexpenses are shared between the POS, TSD and FSD segments, and therefore, managementanalyzes operating results for these three segments on a combined basis.

 

Management evaluates the North American andISD performance on EBITDA before stock compensation expense because operatingexpenses are distinguishable between North American and ISD operations. TheCompany defines EBITDA before stock compensation expense as income fromoperations before depreciation, amortization and stock compensation expense.EBITDA before stock compensation expense is not a generally accepted accountingprinciple measure, but rather a measure employed by management to viewoperating results adjusted for major noncash items. The Company’s definition ofEBITDA before stock compensation expense may not be comparable to similarlytitled measures used by other entities. Assets are not segregated betweenreportable segments, and management does not use asset information by segmentsto evaluate segment performance. As such, no information is presented relatedto fixed assets by reportable segment and capital expenditures for eachsegment.

 

Revenue for the Company’s four business unitsis presented below (in thousands):

 
| ** **      | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------|------------|----------------------------------------|------------|
| ** **      | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Revenues:       |       |                                   |       |   |   |
| POS             |       | $                                      | 28,885     |   | $ | 23,159 |   |
| TSD             |       | 8,611                                  |       | 10,037 |   |
| FSD             |       | 5,994                                  |       | 7,307 |   |
| ISD             |       | 16,666                                 |       | 22,629 |   |
| Total  revenues |       | $                                      | 60,156     |   | $ | 63,132 |   |

 

EBITDA before stock compensation expense forNorth American and ISD operations is reflected below (in thousands):

 
| ** **                                      | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| EBITDA  before stock compensation expense:      |       |                                   |       |   |   |
| North  America                                  |       | $                                      | 10,733     |   | $ | 9,195 |   |
| ISD                                             |       | 4,349                                  |       | 7,197 |   |
| Total EBITDA  before stock compensation expense |       | $                                      | 15,082     |   | $ | 16,392 |   |

 

EBITDA before stock compensation expensediffers from (loss) income before income taxes and equity in net loss ofunconsolidated affiliate reported in the condensed consolidated statements ofoperations as follows (in thousands):

 
| ** **                                                                            | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| EBITDA  before stock compensation expense                                             |       | $                                      | 15,082     |   | $ | 16,392 |   |
| Reconciling  items:                                                                   |       |                                   |       |   |   |
| Depreciation  and amortization of property and equipment and intangible assets        |       | (13,314                                | )          | (11,128 | ) |
| Stock  compensation                                                                   |       | (76                                    | )          | (490 | ) |
| Interest  expense                                                                     |       | (4,433                                 | )          | (811 | ) |
| Interest and  other income (expense), net                                             |       | 137                                    |       | (188 | ) |
| Income  (loss) before income taxes and equity in net loss of unconsolidated affiliate |       | $                                      | (2,604     | ) | $ | 3,775 |   |

 

10

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Goodwill and identifiable intangible assets,net are located in the following reporting segments (in thousands):

 
| ** **                                              | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| POS                                                     |       | $                           | 147,936    |                     | $          | 143,127 |   |
| TSD                                                     |       | 5,117                       |       | 4,959                    |       |
| FSD                                                     |       | 28,233                      |       | 27,717                   |       |
| ISD                                                     |       | 29,308                      |       | 28,306                   |       |
| Total  goodwill and identifiable intangible assets, net |       | $                           | 210,594    |                     | $          | 204,109 |   |

 

**Geographic Information**

 

The Company sells its services throughforeign subsidiaries in the United Kingdom, Australia, Canada, France, Germany,Ireland, Italy, Japan, New Zealand, Spain, Sweden and The Netherlands.Information regarding revenues and long–lived tangible assets attributable toeach geographic region is stated below.

 

The Company’s revenues were generated in thefollowing geographic regions (in thousands):

 
| ** **      | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------|------------|----------------------------------------|------------|
| ** **      | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Revenues:       |       |                                   |       |   |   |
| North  America  |       | $                                      | 43,490     |   | $ | 40,503 |   |
| Europe          |       | 14,830                                 |       | 19,853 |   |
| Asia-Pacific    |       | 1,836                                  |       | 2,776 |   |
| Total  revenues |       | $                                      | 60,156     |   | $ | 63,132 |   |

 

The Company’s long–lived assets includinggoodwill and identifiable intangible assets, net were located as follows (inthousands):

 
| ** **               | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|--------------------------|------------|-----------------------------|------------|--------------------------|------------|
| North America            |       | $                           | 231,570    |                     | $          | 225,494 |   |
| Europe                   |       | 42,441                      |       | 41,399                   |       |
| Asia-Pacific             |       | 5,368                       |       | 5,148                    |       |
| Total  long-lived assets |       | $                           | 279,379    |                     | $          | 272,041 |   |

 

**7.****                                      Litigationand Claims**

 

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

 

On August 26, 2002, an action was filedin the Superior Court of the State of Delaware by persons alleging that theCompany breached an agreement to purchase an unrelated entity. On February 28,2005, the court denied the Company’s motion for summary judgement filed in June 2004.  After considering the defense costs,potential damages should the plaintiffs prevail, and continued diversion ofmanagement resources, the Company determined in March 2005 that asettlement was warranted. In April 2005, the Company made the payment of$3.25 million in cash to the plaintiffs and received the dismissal of allclaims, with prejudice, by the plaintiffs, thereby settling this dispute.  This $3.25 million settlement is included inselling, general and administrative expenses in the accompanying condensedconsolidated statement of operations for the three months ended March 31,2005.

 

Certain states in which the Company operatesassess sales taxes on certain services provided by the Company. The Companybelieves it has no liability because its customer contracts contain terms thatstipulate the

 

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customer, not the Company, is responsible for any sales tax liability.In jurisdictions where the customer may be liable for sales taxes, the Companyeither includes sales tax on its invoice or has obtained an exemptioncertificate from the customer. Certain states have audited the Company from1996 to early 2001 and originally proposed $6.7 million in assessments on thebasis that sales taxes are owed. In March 2005, the Company receivedverbal notification from a state sales tax auditor that one of the states waslikely to reduce its proposed assessment by $4.4 million.  In April 2005, the Company received writtenconfirmation from that state’s Department of Revenue that the state’sassessment would be reduced.  Based inpart on this written confirmation, the Company reduced its liability for thismatter by $4.3 million.  This $4.3million reduction in the liability is included in selling, general andadministrative expenses in the accompanying condensed consolidated statement ofoperations for the three months ended March 31, 2005. Both the Company andthe customers involved are vigorously defending the remaining proposedassessments by the sales tax authorities. In the opinion of management,resolution of these matters will not have a material adverse effect upon thefinancial position or future operating results of the Company.

 

Included in net income in the accompanyingcondensed consolidated statement of operations for the three months ended March 31,2005 is a net $0.6 million benefit, or $0.02 per share, related to the legalsettlement and reduced state sales tax assessment.

 

**8.****                                      SubsequentEvents**

 

##### **Tender Offer**

##### ** **

On April 5, 2005, TNS commenced amodified Dutch auction tender offer to purchase up to 9 million shares of itsoutstanding common stock at a price per share of not less than $18.00 norgreater than $18.50 per share net to the seller in cash, for an aggregatepurchase price of up to $166.5 million. The tender offer will expire, unless extended, at 5:00 pm, New York Citytime, on May 3, 2005.

 

TNS’ controlling stockholder, GTCR GolderRanuner L.L.C. and its affiliated investment funds (which are collectivelyreferred to as GTCR), has committed to tender 6 million shares pursuant to thetender offer.  GTCR beneficially ownsapproximately 12.6 million shares of TNS’ outstanding common stock.  TNS has obtained a commitment letter fromGeneral Electric Capital Corporation for a $240 million credit facility, aportion of which will be used to finance the tender offer.  Accordingly, the tender offer will beconditioned upon the closing of this financing pursuant to the terms andconditions contained in the commitment letter and on terms satisfactory to TNSon or prior to the expiration of the tender offer and other customaryconditions.

 

##### **Income Taxes**

##### ** **

The American JobsCreation Act of 2004 (the Jobs Act), enacted on October 22, 2004, providesfor a temporary 85 percent dividends received deduction on certain foreignearnings repatriated during a one-year period. The deduction would result in anapproximate 5.25 percent federal tax rate on the repatriated earnings. Toqualify for the deduction, the earnings must be reinvested in the United Statespursuant to a domestic reinvestment plan established by a company’s chiefexecutive officer and approved by the company’s board of directors. Certainother criteria in the Jobs Act must be satisfied as well. For the Company, theone-year period during which the qualifying distributions can be made iscalendar year 2005.

 

In April 2005, the Company decided torepatriate $10.0 million of foreign earnings under the repatriation provisionsof the Jobs Act. Repatriation of these earnings will result in recognition ofadditional income tax expense in the second quarter of 2005, which we currentlyestimate to be $0.5 million. The status of pending technical correctionlegislation and expected guidance that will clarify certain provisions willdetermine the ultimate amount recognized. The Company intends to reinvest theremaining undistributed foreign earnings indefinitely and, therefore, noprovision for U.S. income taxes has been provided against these undistributedearnings.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

You should read the following discussion ofthe financial condition and results of operations of TNS, Inc. in conjunctionwith the consolidated financial statements and the related notes included inour annual report on Form 10-K filed with the SEC on March 31,2005 and available directly from the SEC at www.sec.gov and the condensedconsolidated financial statements and the related notes of TNS, Inc.,included elsewhere in this quarterly report.

 

There are statements made herein which maynot address historical facts and, therefore, could be interpreted to beforward–looking statements within the meaning of The Private SecuritiesLitigation Reform Act of 1995. These forward–looking statements are based oncurrent expectations, forecasts and assumptions that are subject to risks anduncertainties that could cause actual results to differ materially from thoseset forth in, or implied by, the forward–looking statements. The Company hasattempted, whenever possible, to identify these forward–looking statementsusing words such as “may,” “will,” “should,” “projects,” “estimates,”“expects,” “plans,” “intends,” “anticipates,” “believes,” and variations 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; fluctuations in the Company’s quarterly results becauseof the seasonal nature of the business and other factors outside of the Company’scontrol; the Company’s ability to identify, execute or effectively integratefuture acquisitions; the Company’s ability to adapt to changing technology;additional costs related to compliance with the Sarbanes–Oxley Act of 2002, anyrevised New York Stock Exchange listing standards, SEC rule changes or othercorporate governance issues; and other risk factors described in the Company’sannual report on Form 10-K filed with the SEC on March 31,2005. In addition, the statements in this quarterly report are made as of thedate of this filing. The Company expects that subsequent events or developmentswill cause its views to change. The Company undertakes no obligation to updateany of the forward–looking statements made herein, whether as a result of newinformation, future events, changes in expectations or otherwise. Theseforward–looking statements should not be relied upon as representing theCompany’s views as of any date subsequent 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 a leadingprovider of business-critical data communications services to processors ofcredit card, debit card and ATM transactions. We are also a leading provider ofsecure data and voice network services to the global financial servicesindustry. We operate one of four unaffiliated Signaling System No. 7networks in the United States capable of providing services nationwide, and weutilize this network to provide call signaling and database access services tothe domestic telecommunications industry. Our data communications servicesenable secure and reliable transmission of time-sensitive, transaction-relatedinformation critical to our customers’ operations. Our customers outsourcetheir data communications requirements to us because of our substantialexpertise, comprehensive customer support and cost-effective services.Internationally, we operate networks in 12 countries, including Canada andcountries in Europe and the Asia-Pacific region, and we use these networks toprovide services to customers in these and neighboring countries.

 

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

 

We generate revenues through four businessdivisions:

 

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

 

•                  ***International services***.We are one of the leading providers of data communications services to the POSindustry in the United Kingdom. Our international services division also hasoperations in Australia, France, Germany, Ireland, Italy, Japan, theNetherlands, New Zealand, Spain, and Sweden. We provide services in thesecountries using networks deployed in each country. We also provide services inother countries such as Finland, Hong Kong, Norway and Singapore throughconnections from the customer’s location to our networks. Our internationalservices division generates revenues primarily from our POS and financialservices offerings abroad.

 

•                  ***Telecommunication services***.We provide call signaling services that enable telecommunications carriers toestablish and terminate telephone calls placed by their subscribers. We alsoprovide database access services that enable our customers to provideintelligent network services, such as caller identification and local numberportability, and credit card, calling card, third-party billing and collectcalling. Our telecommunication services division generates revenues primarilyfrom fixed monthly fees charged for our call signaling services and per-queryfees charged for our database access and validation services.

 

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

 

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

 

Our engineering and development expensesinclude salaries and other costs related to product development, engineeringand materials. The majority of these costs are expensed as incurred, includingcosts related to the development of internal use software in the preliminaryproject, the post-implementation and operation stages. Development costs weincur during the software application development stage are capitalized andamortized over the estimated useful life of the developed software.

 

Our selling, general and administrativeexpenses include costs related to sales, marketing, administrative andmanagement personnel, as well as outside legal, accounting and consultingservices. We believe that selling, general and administrative expenses as apercentage of revenues will remain constant or increase to support expansion ofthe international services division, as well as from the additional costs ofbeing a publicly traded company, including the legal, audit, insurance andboard of directors compensation costs needed to establish and maintaincompliance with the Sarbanes-Oxley Act of 2002.

 

In March 2004, we completed our initialpublic offering (IPO) of common stock issuing 4,420,000 common shares at $18.00per share, which generated proceeds, net of offering costs, of approximately$71.5 million. The net proceeds of the IPO were used to repay a portion of theoutstanding debt under our then-existing

 

14

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senior secured credit facility. Concurrent with the closing of the IPO,we entered into a new senior secured credit facility and used the net proceedsfrom borrowings to repay the remaining debt outstanding under our then-existingsenior secured credit facility. In connection with the termination of ourprevious senior secured credit facility, we recognized a charge ofapproximately $2.0 million related to the write-off of unamortized deferredfinancing costs. Such write-off was included in interest expense in theaccompanying condensed consolidated statement of operations for the year ended December 31,2004.

 

Upon the completion of the IPO, all of theoutstanding shares of our Class A redeemable convertible preferred stock,including accrued and unpaid dividends, converted at $18.00 per share into 9,984,712shares of common stock.

 

On October 1, 2004, we completed afollow-on offering of common stock issuing 1,084,744 common shares at $20.00per share, which generated proceeds, net of offering costs, of approximately$19.9 million. On November 1, 2004, in connection with the follow-onoffering, the underwriters exercised a portion of their over-allotment optionand we issued an additional 118,232 common shares at $20.00 per share, whichgenerated proceeds, net of offering costs of approximately $2.3 million. Thenet proceeds from the follow-on offering were used to repay a portion of ourlong-term debt outstanding under our existing credit facility.

 

**Long–term Investments**

 

In August 2004, we made an investment in WAYSystems, Inc. (WAY), which provides mobile POS transaction infrastructureand solutions for mobile merchants. we purchased 5,952,381 shares or 38.5percent of WAY’s Series B convertible preferred stock for $2.5 million andbecame entitled to representation on WAY’s board of directors. As of December 31,2004, we owned 18.1 percent of WAY’s total outstanding shares. In March 2005,we made an additional investment of $0.8 million to purchase 1,910,401 sharesof WAY’s Series B convertible preferred stock for an additional 1.9percent of WAY’s outstanding shares. As of March 31, 2005, we owned 20.0percent of WAY’s outstanding shares. We are accounting for this investmentunder the equity method of accounting. Due to timing of the receipt of WAY’sfinancial statements, we are accounting for the income or loss in this equitymethod investment on a one-month lag. For the three months ended March 31, 2005, we recognized a net lossin the equity of an unconsolidated affiliate of approximately $0.3 million.

 

In January 2005,we made an investment in IP Commerce, a company that provides operatingsoftware to facilitate the authorization of IP-based retail paymenttransactions. We purchased 2,368,545 Series A preferred shares or 39.9percent of IP Commerce’s total outstanding shares for $2.0 million and becameentitled to representation on IP Commerce’s board of directors. We areaccounting for this investment under the equity method of accounting.  Due to timing of the receipt of IP Commerce’sfinancial statements, TNS is accounting for the income or loss in this equitymethod investment on a one-month lag. For the three months ended March 31, 2005, we recognized a net lossin the equity of an unconsolidated affiliate of approximately $0.1 million.

 

15

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**Results of Operations**

 

The following table sets forth, for the periods indicated, selectedstatement of operations data (dollars in thousands):

 
| ** **                                                                              | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                              | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Revenues                                                                                |       | $                                      | 60,156     |   | $ | 63,132 |   |
| Operating  expenses:                                                                    |       |                                   |       |   |   |
| Cost of  network services, exclusive of the items shown separately below                |       | 30,692                                 |       | 30,230 |   |
| Engineering  and development                                                            |       | 3,439                                  |       | 3,906 |   |
| Selling,  general, and administrative                                                   |       | 11,019                                 |       | 13,094 |   |
| Depreciation  and amortization of property and equipment                                |       | 4,806                                  |       | 4,863 |   |
| Amortization  of intangible assets                                                      |       | 8,508                                  |       | 6,265 |   |
| Total  operating expenses                                                               |       | 58,464                                 |       | 58,358 |   |
| Income from  operations                                                                 |       | 1,692                                  |       | 4,774 |   |
| Interest  expense                                                                       |       | (4,433                                 | )          | (811 | ) |
| Interest and  other income (expense), net                                               |       | 137                                    |       | (188 | ) |
| Income  (loss) before income taxes and equity in net loss of unconsolidated  affiliates |       | (2,604                                 | )          | 3,775 |   |
| Income tax  (provision) benefit                                                         |       | 982                                    |       | (1,905 | ) |
| Equity in  net loss of unconsolidated affiliates                                        |       | (37                                    | )          | (416 | ) |
| Net income  (loss)                                                                      |       | $                                      | (1,659     | ) | $ | 1,454 |   |

 

**Three months ended March 31, 2005compared to the three months ended March 31, 2004**

 

***Revenues.***  Total revenues increased $3.0 million, or4.9%, to $63.1 million for the three months ended March 31, 2005, from$60.1 million for the three months ended March 31, 2004. We generaterevenues through four operating divisions.

 

***POSdivision.*** Revenues from the POS division decreased $5.7 million, or 19.8%, to$23.2 million for the three months ended March 31, 2005, from $28.9million for the three months ended March 31, 2004. The $5.7 milliondecrease in POS revenues resulted from a decline in transaction volumesprimarily from our largest customer and to a lesser extent a decrease inrevenue per transaction as a result of negotiated price reductions upon renewalof certain contracts. POS transaction volumes decreased 18.8% to 1.5 billiontransactions for the three months ended March 31, 2005, from 1.9 billiontransactions for the three months ended March 31, 2004. In 2004, wenegotiated contract renewals with some of our POS customers, and in severalinstances we agreed to pricing discounts in exchange for maintaining orincreasing their minimum transaction or revenue commitments. As a result, it islikely our revenue per transaction will decrease and, depending upon the numberof transactions we transport, our POS revenues may continue to decrease. Inaddition, we recently amended our contract with our largest customer to extendthe term of the agreement for two years. The amended contract does not containany minimum transaction or revenue commitments. Based on the amended contract,we believe that revenues and related transaction volumes from this customer maycontinue to decline in 2005 and thereafter.

 

***Internationalservices division.*** Revenues from the international services division increased $6.0million, or 35.8%, to $22.6 million for the three months ended March 31,2005, from $16.7 million for the three months ended March 31, 2004. Theincrease was primarily due to additional revenues generated from our POScustomers in the U.K., Australia, France, Spain and Italy and to a lesserextent we benefited from favorable foreign exchange. Revenues from our U.K.subsidiary increased $3.0 million, or 27.7%, to $13.8 million for the threemonths ended March 31, 2005, from $10.8 million for the three months endedMarch 31, 2004.

 

***Telecommunicationservices division.*** Revenues from the telecommunication services division increased $1.4million, or 16.6%, to $10.0 million for the three months ended March 31,2005, from $8.6 million for the three months ended March 31, 2004. Thegrowth in revenues was primarily due to increased usage of our call signalingservices.

 

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***Financialservices division.*** Revenues from the financial services division increased $1.3 million, or21.9%, to $7.3 million for the three months ended March 31, 2005, from$6.0 million for the three months ended March 31, 2004. The increase inrevenues was due to the growth in the number of customer connections to andthrough our networks.

 

***Costof network services.***  Cost of network services decreased $0.5million, or 1.5%, to $30.2 million for the three months ended March 31,2005, from $30.7 million for the three months ended March 31, 2004. Costof network services were 47.9% of revenues for the three months ended March 31,2005, compared to 51.0% of revenues for the three months ended March 31,2004. The decrease in cost of network services resulted primarily from adecrease in usage-based vendor telecommunications charges in our POS division,and to a lesser extent, lower usage charges from decreased POStransactions.  The lower usage chargesfrom our POS services were partially offset by higher usage charges from ourTSD, FSD and ISD services. Gross profit represented 52.1% of total revenues forthe three months ended March 31, 2005, compared to 49.0% for the threemonths ended March 31, 2004. The increase in gross profit as a percentageof total revenues resulted primarily from increased contribution of ourfinancial services division and international services division, and to alesser extent the decrease in usage-based vendor telecommunications chargesassociated with our POS services.

 

Future cost of network services depends on anumber of factors including total transaction and query volume, the relativegrowth and contribution to total transaction volume of each of our customers,the success of our new service offerings, the timing and extent of our networkexpansion and the timing and extent of any network cost reductions. Inaddition, any significant loss or significant reduction in transaction volumescould lead to a decline in gross margin since significant portions of ournetwork costs are fixed costs.

 

***Engineeringand development expense.***  Engineering and development expense increased$0.5 million, or 13.6%, to $3.9 million for the three months ended March 31,2005, from $3.4 million for the three months ended March 31, 2004.Engineering and development expense represented 6.2% of revenues for the threemonths ended March 31, 2005 and 5.7% of revenues for the three monthsended March 31, 2004. Engineering and development expense increasedprimarily from an increase in engineering expenses required to support ourinternational expansion.

 

***Selling,general and administrative expense.***  Selling, general and administrative expenseincreased $2.1 million, or 18.8%, to $13.1 million for the three months ended March 31,2005, from $11.0 million for the three months ended March 31, 2004.Selling, general and administrative expense represented 20.7% of revenues forthe three months ended March 31, 2005, compared to 18.3% of revenues forthe three months ended March 31, 2004. Included in selling, general andadministrative expenses for the three months ended March 31, 2005 is a $3.2million charge related to a legal settlement and a $4.2 million benefit from areduced state sales tax liability assessment. Excluding these items, selling, general and administrative expenseincreased primarily from the expenses required to support our revenue growth,mainly within the international services division, and to a lesser extent, theincremental costs necessary to operate as a public company and stockcompensation expense.

 

***Depreciationand amortization of property and equipment.***  Depreciation and amortization of property andequipment increased $57,000 to $4.9 million for the three months ended March 31,2005, from $4.8 million for the three months ended March 31, 2004.Depreciation and amortization of property and equipment represented 7.7% ofrevenues for the three months ended March 31, 2005, compared to 8.0% ofrevenues for the three months ended March 31, 2004.

 

***Amortizationof intangible assets.***  Amortization of intangible assets decreased$2.2 million, or 26.4%, to $6.3 million for the three months ended March 31,2005, from $8.5 million for the three months ended March 31, 2004. Theamortization of intangible assets for the three months ended March 31,2005 and 2004 relates solely to the intangible assets resulting fromacquisitions. The decrease was attributable to accelerated amortization on aportion of our customer relationship intangible assets in connection with theloss of certain customers during the first quarter of 2004. For purposes ofmeasuring and recognizing impairment of long-lived assets includingintangibles, we assess whether separate cash flows can be attributed to theindividual asset. For our customer relationship intangible assets, we recognizeand measure impairment upon the termination or loss of a customer that resultsin a loss of revenue. Based upon the outcome of our contract negotiations withour largest customer, we believe that revenues and related transaction volumesfrom this customer may continue to decline in 2005 and

 

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thereafter. The intangible asset value attributable to this customerrelationship is approximately $24.8 million as of March 31, 2005. We willcontinue to assess the recoverability of this customer relationship asset basedupon anticipated future cash flows.

 

***Interestexpense.*** Interest expense decreased $3.6 million to $0.8 million for the threemonths ended March 31, 2005, from $4.4 million for the three months ended March 31,2004. This decrease was primarily due to the repayment of a portion of our termdebt with the net proceeds from our initial public offering in March 2004and our follow-on offering in the fourth quarter of 2004, as well as thewrite-off on March 19, 2004 of $2.0 million of deferred financing costs inconnection with the termination of our previous senior secured credit facility.

 

***Interestand other income (expense), net.***  Interest and other income (expense), net wasan expense of $0.2 million for the three months ended March 31, 2005compared to income of $0.1 million for the three months ended March 31,2004. Included in other income (expense), net for the three months ended March 31,2005 is a loss on foreign currency translation of $0.4 million due tofluctuations in the value of the U.S. dollar as compared with foreigncurrencies, predominately, the euro, the British pound and the Australiandollar, versus a gain on foreign currency translation of $0.1 million for thethree months ended March 31, 2004.

 

***Incometax (provision) benefit.***  For the three months ended March 31,2005, our income tax provision was $1.9 million compared to a benefit of $1.0million for the three months ended March 31, 2004. Our effective tax ratefor the three months ended March 31, 2005 is 50.5% versus the U.S. federalstatutory tax rate of 35.0%, due primarily to the fact that we have losses fromcertain of our international subsidiaries that cannot be used to offset incomein other jurisdictions.

 

***Equityin net loss of unconsolidated affiliates.***  For the three months ended March 31,2005, our equity in net loss of unconsolidated affiliates was $0.4 millioncompared to $37,000 for the three months ended March 31, 2004. As of March 31,2005, we have $5.6 million of long-term investments in unconsolidatedaffiliates, and we expect to incur additional losses on these investments in2005 and we may continue to incur losses thereafter.

 

**Seasonality**

 

Credit card and debit card transactionsaccount for a major percentage of the transaction volume processed by ourcustomers. The volume of these transactions on our networks generally isgreater in the third and fourth quarter vacation and holiday seasons thanduring the rest of the year. Consequently, revenues and earnings from creditcard and debit card transactions in the first quarter generally are lower thanrevenues and earnings from credit card and debit card transactions in the thirdand fourth quarters of the immediately preceding year. We expect that ouroperating results in the foreseeable future will be significantly affected byseasonal trends in the credit card and debit card transaction market.

 

**Liquidity and Capital Resources**

 

Our primary liquidity and capital resourceneeds are to finance the costs of our operations, to make capital expendituresand to service our debt. The proceeds from our initial public offering in March 2004,along with the proceeds from borrowings under our new senior secured creditfacility, were used to repay the amounts outstanding under our previous seniorsecured credit facility. Based upon our current level of operations, we expectthat our cash flow from operations, together with the amounts we are able toborrow under our existing credit facility, will be adequate to meet ouranticipated needs for the foreseeable future. Although we have no specificplans to do so, to the extent we decide to pursue one or more significantstrategic acquisitions, we will likely need to incur additional debt or selladditional equity to finance those acquisitions.

 

Our operations provided us cash of$15.2 million for the three months ended March 31, 2005, which wasattributable to net income of $1.5 million, depreciation, amortization andother non–cash charges of $13.4 million and a decrease in working capitalof $0.3 million. Our operations provided us cash of $5.1 million forthe three months ended March 31, 2004, which was attributable to a netloss of $1.7 million, depreciation, amortization and other non–cashcharges of $14.7 million and a increase in working capital of$7.9 million.

 

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We used cash of $6.9 million ininvesting activities for the three months ended March 31, 2005, whichincludes capital expenditures of $4.1 million. In addition, we madeinvestments for $0.8 million in WAY Systems, Inc., a company that providesmobile POS transaction infrastructure and solutions to mobile merchants, and$2.0 million in IP Commerce, a company that provides operating software tofacilitate the authorization of IP-based retail payment transactions.  We used cash of $3.1 million in investingactivities for the three months ended March 31, 2004, which consisted ofcapital expenditures of $3.1 million.

 

We used cash of $3.5 million for financingactivities for the three months ended March 31, 2005, which includes$3.0 million of long–term debt repayments on our senior secured creditfacility.  We used cash of$2.7 million for financing activities for the three months ended March 31,2004, which consisted primarily of $2.7 million of long–term debtrepayments. In addition, we repaid $150.4 million of long–term debt underour previous senior secured credit facility with the net proceeds generatedfrom our IPO in March 2004 of $71.6 million and borrowings under ournew credit facility, net of financing costs, of $79.0 million.

 

***Senior Secured CreditFacility***

 

On March 19, 2004, we entered into a newsenior secured credit facility (the Credit Facility) to replace our existingsenior secured credit facility. The Credit Facility consists of a$65.0 million term loan (Term Loan) and a revolving credit facility of$30.0 million (Revolving Credit Facility). The Credit Facility matures March 19,2009. Payments on the Term Loan are due in quarterly installments over thefive–year term, beginning on March 31, 2004.

 

As of March 31, 2005, total remaining paymentson the Term Loan are as follows (in thousands):

 
| Nine months  ending December 31, 2005 |   | $      | 6,188  |   |
|--------------------------------------------|--------|--------|--------|--------|
| 2006                                       |   | 12,812 |   |
| 2007                                       |   | 14,000 |   |
| 2008                                       |   | 15,000 |   |
|                                       |   | $      | 48,000 |   |

 

For the period through June 30, 2004,borrowings on the Revolving Credit Facility and the Term Loan generally boreinterest at a rate of 2.50 percent over the LIBOR rate.  For the period from July 1, 2004 throughMarch 31, 2005, borrowings on the Revolving Credit Facility and the TermLoan bore interest at a rate of 2.25 percent over the LIBOR rate(5.13 percent as of March 31, 2005). Thereafter, if we achieve aleverage ratio of less than one, the borrowings on the Revolving CreditFacility and the Term Loan will generally bear interest at a rate, at ouroption, of either 0.75 percent over the lender’s base rate or2.0 percent over the LIBOR rate. If we achieve a leverage ratio of lessthan 1.5 but more than or equal to one, the borrowings on the Revolving CreditFacility and the Term Loan will generally bear interest at a rate, at ouroption, of either 1.0 percent over the lender’s base rate or2.25 percent over the LIBOR rate. If we achieve a leverage ratio of lessthan 2.2 but more than or equal to 1.5, the borrowings on the Revolving CreditFacility and the Term Loan will generally bear interest at a rate, at ouroption, of either 1.25 percent over the lender’s base rate or2.5 percent over the LIBOR rate. Our leverage ratio as of March 31,2005 was 0.7 to 1.0. The Revolving Credit Facility is subject to an annualcommitment fee in an amount equal to 0.5 percent per annum multiplied bythe amount of funds available for borrowing under the Revolving CreditFacility. Interest payments on the Credit Facility are due monthly, bimonthly,or quarterly at our option.

 

The terms of the Credit Facility require usto comply with financial and nonfinancial covenants, including maintainingcertain leverage, interest and fixed charge coverage ratios at the end of eachfiscal quarter. As of March 31, 2005, we are required to maintain aleverage ratio of less than 2.0 to 1.0, an interest coverage ratio of greaterthan 5.0 to 1.0 and a fixed charge ratio of greater than 2.0 to 1.0. Certain ofthe financial covenants will become more restrictive over the term of theCredit Facility. The Credit Facility also contains nonfinancial covenants thatrestrict some of our corporate activities, including our ability to dispose ofassets, incur additional debt, pay dividends, create liens, make investments,make capital expenditures and engage in specified transactions with affiliates.Our future results of operations and our ability to comply with the covenantscould be adversely impacted by increases in the general level of interest ratessince the interest on a majority of our debt is variable. Noncompliance withany of the financial or nonfinancial covenants without cure or waiver wouldconstitute an event of default under the Credit Facility. An event of defaultresulting from a breach of a financial or nonfinancial covenant may result, atthe option of the lenders, in an acceleration of the principal and interestoutstanding, and a

 

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termination of the Revolving Credit Facility. The Credit Facility alsocontains other customary events of default, including defaults based on eventsof bankruptcy and insolvency, nonpayment of principal, interest or fees whendue, subject to specified grace periods, breach of specified covenants, changein control and material inaccuracy of representations and warranties. We are incompliance with our financial and nonfinancial covenants as of March 31,2005.

 

##### **Recent Accounting Pronouncements**

##### ** **

In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payment” (SFAS No. 123R), which is a revisionof SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123Rsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”,and amends SFAS No. 95, “Statement of Cash Flows.” We will adopt SFAS No. 123Ron January 1, 2006. SFAS No. 123R requires all share-based paymentsto employees, including grants of employee stock options, to be recorded as anexpense based on their fair values. We are currently evaluating the impact ofadopting SFAS No. 123R. Information about the fair value of stock optionsunder the Black-Scholes model and its pro forma impact on its net income andbasic and diluted net income per common share for the three months ended March 31,2004 and 2005 (which may differ from the ultimate impact of the new standard)can be found in Note 1 to the condensed consolidated financialstatements in this Form 10–Q.

 

**Other Matters**

 

On April 5,2005, TNS commenced a modified Dutch auction tender offer to purchase up to 9million shares of its outstanding common stock at a price per share of not lessthan $18.00 nor greater than $18.50 per share net to the seller in cash, for anaggregate purchase price of up to $166.5 million.  The tender offer will expire, unlessextended, at 5:00 pm, New York City time, on May 3, 2005.

 

TNS’ controlling stockholder, GTCR Golder Ranuner L.L.C. and itsaffiliated investment funds (which are collectively referred to as GTCR), hascommitted to tender 6 million shares pursuant to the tender offer.  GTCR beneficially owns approximately 12.6million shares of TNS’ outstanding common stock.  TNS has obtained a commitment letter fromGeneral Electric Capital Corporation for a $240 million credit facility, aportion of which will be used to finance the tender offer.  Accordingly, the tender offer will beconditioned upon the closing of this financing pursuant to the terms andconditions contained in the commitment letter and on terms satisfactory to TNSon or prior to the expiration of the tender offer and other customaryconditions.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

***Interest rates***

 

Our principal exposure to market risk relatesto changes in interest rates. As of March 31, 2005, we had$48.0 million outstanding under our new senior secured credit facilitywith interest rates tied to changes in the lender’s base rate or the LIBORrate. Based upon the outstanding borrowings on March 31, 2005 and assumingrepayment of the Term Loan in accordance with scheduled maturities, each 1.0%increase in these rates could add an additional $0.4 million to our annualinterest expense.

 

As of March 31, 2005, we did not holdderivative financial or commodity instruments and all of our cash and cashequivalents were held in money market or commercial accounts.

 

***Foreign currencyrisk***

 

Our earnings are affected by fluctuations inthe value of the U.S. dollar as compared with foreign currencies, predominatelythe euro, the British pound and the Australian dollar due to our operations inEurope and Australia.

 

We have operations in 12 countries outside ofthe U.S., including the United Kingdom, Australia, Canada, France, Germany,Ireland, Italy, Japan, The Netherlands, New Zealand, Spain and Sweden. Wemanage foreign

 

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exchange risk through the structure of our business. In the substantialmajority of our transactions, we receive payments denominated in the U.S.dollar, British pound, euro or Australian dollar. Therefore, we do not rely oninternational currency markets to obtain and pay illiquid currencies. Theforeign currency exposure that does exist is limited by the fact that themajority of transactions are paid according to our standard payment terms,which are generally short–term in nature. Our policy is not to speculate inforeign currencies, and we promptly buy and sell foreign currencies asnecessary to cover our net payables and receivables, which are denominated inforeign currencies. For the three months ended March 31, 2005, we recordeda loss on foreign currency translation of approximately $0.4 million.

 

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**Item 4. Controls and Procedures**

 

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

 

**Evaluation**

 

The Company carried out an evaluation, underthe supervision, and with the participation, of the Company’s management,including the Company’s Chief Executive Officer and the Company’s ChiefFinancial Officer, of the effectiveness of the Company’s disclosure controlsand procedures as of March 31, 2005. Based on the foregoing, the Company’sChief Executive Officer and principal financial officers concluded that theCompany’s disclosure controls and procedures were effective as of March 31,2005.

 

There have been no significant changes duringthe quarter covered by this report in the Company’s internal control overfinancial reporting or in other factors that could significantly affect theinternal control over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**Item 1.****           LegalProceedings**

 

On August 26, 2002, an action was filedin the Superior Court of the State of Delaware by persons alleging that theCompany breached an agreement to purchase an unrelated entity. On February 28,2005, the court denied the Company’s motion for summary judgement filed in June 2004.  After considering the defense costs,potential damages should the plaintiffs prevail, and continued diversion ofmanagement resources, the Company determined in March 2005 that asettlement was warranted. In April 2005, the Company made the payment of$3.25 million in cash to the plaintiffs and received the dismissal of allclaims, with prejudice, by the plaintiffs, thereby settling this dispute.  

 

We also are party to various legalproceedings in the normal course of business. Please see the description underthe caption “Legal Proceedings” in the annual report on Form 10-Kfiled with the Commission on March 31, 2005.

 

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

 

None.

 

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

 

None.

 

**Item 4.****           Submission of Mattersto a Vote of Security Holders**

 

None

 

**Item 5.****           OtherInformation**

 

None.

 

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

##### ** **

(31.1)                 Certification—Chief Executive Officer

 

(31.2)                 Certification—Chief Financial Officer

 

(32.1)                 Written Statement of Chief ExecutiveOfficer and Chief Financial Officer

 

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                   | TNS, Inc.  (Registrant) |
|------------------------|------------------------------|
|                   |                         |   |
| Date: May 2, 2005 | By:                          | /s/ JOHN J. MCDONNELL, JR. |   |
|                   |                         | John J. McDonnell, Jr.  Chairman and Chief  Executive Officer |
|                   |                         |   |
| Date: May 2, 2005 | By:                          | /s/ HENRY H. GRAHAM, JR. |   |
|                   |                         | Henry H. Graham, Jr.  Executive Vice President, Chief Financial Officer & Treasurer |

 

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