Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

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

 

**For the quarterly period ended March 31, 2010**

 

**OR**

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

 

**For the transition period from          to            **

 

**Commission File Number: 001-32033**

 

**TNS,INC.**

(Exact name of registrant as specified in 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 markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementfor the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post suchfiles).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of CommonStock, as of the latest practicable date.

 

**Shares Outstanding as of April 1, 2010**

26,064,284 Shares of Common Stock, $0.001 par value

 

 

 

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Table of Contents

 

**TNS, INC.**

 

**INDEX**

 
| ** **                             | ** **                                                                                                | **Page** |
|----------------------------------------|-----------------------------------------------------------------------------------------------------------|----------|
| **Part I: FINANCIAL INFORMATION** |                                                                                                      |
| Item 1.                                | Condensed Consolidated  Financial Statements (Unaudited)                                                  | 3        |
|                                   | Condensed  Consolidated Balance Sheets as of December 31, 2009 and March 31,  2010              | 3        |
|                                   | Condensed  Consolidated Statements of Operations for the three months ended  March 31, 2009 and 2010 | 4        |
|                                   | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2009 and 2010 | 5        |
|                                   | Notes to Condensed  Consolidated Financial Statements                                                     | 6        |
| Item 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations               | 17       |
| Item 3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                               | 24       |
| Item 4.                                | Controls and  Procedures                                                                                  | 25       |
| **Part II: OTHER  INFORMATION**   |                                                                                                      |
| Item 1.                                | Legal Proceedings                                                                                         | 26       |
| Item 1A.                               | Risk Factors                                                                                              | 26       |
| Item 2.                                | Unregistered Sales  of Equity Securities and Use of Proceeds                                              | 26       |
| Item 3.                                | Default Upon  Senior Securities                                                                           | 26       |
| Item 4.                                | Removed and Reserved                                                                                      | 26       |
| Item 5.                                | Other Information                                                                                         | 26       |
| Item 6.                                | Exhibits                                                                                                  | 26       |

 

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**PART I—FINANCIALINFORMATION**

 

**Item 1. Condensed Consolidated Financial Statements**

 

**TNS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(dollars in thousands, except share and per sharedata)**

 
| ** **                                                                                                                                                                                                           | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                           | ** ** | **2009**              | ** ** | **2010**           | ** ** |
| ** **                                                                                                                                                                                                           | ** ** | ** **            | ** ** | **(UNAUDITED)**    | ** ** |
| **ASSETS**                                                                                                                                                                                                           |       |                  |       |               |       |
| Current assets:                                                                                                                                                                                                      |       |                  |       |               |       |
| Cash and cash equivalents                                                                                                                                                                                            |       | $                     | 32,480     |               | $          | 32,357 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $6,019 and $4,159, respectively                                                                                                                      |       | 97,834                |       | 83,903             |       |
| Prepaid expenses                                                                                                                                                                                                     |       | 8,207                 |       | 8,249              |       |
| Deferred tax assets                                                                                                                                                                                                  |       | 7,355                 |       | 7,349              |       |
| Other receivables                                                                                                                                                                                                    |       | 12,180                |       | 5,587              |       |
| Other current assets                                                                                                                                                                                                 |       | 4,872                 |       | 4,168              |       |
| Total current assets                                                                                                                                                                                                 |       | 162,928               |       | 141,613            |       |
| Property and equipment, net                                                                                                                                                                                          |       | 125,596               |       | 123,198            |       |
| Identifiable intangible assets, net                                                                                                                                                                                  |       | 268,925               |       | 257,437            |       |
| Goodwill                                                                                                                                                                                                             |       | 16,581                |       | 16,361             |       |
| Deferred tax assets, net                                                                                                                                                                                             |       | 24,720                |       | 24,619             |       |
| Other assets                                                                                                                                                                                                         |       | 4,427                 |       | 4,543              |       |
| Total assets                                                                                                                                                                                                         |       | $                     | 603,177    |               | $          | 567,771 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                       |       |                  |       |               |       |
| Current liabilities:                                                                                                                                                                                                 |       |                  |       |               |       |
| Accounts payable, accrued expenses and other  current liabilities                                                                                                                                                    |       | $                     | 89,740     |               | $          | 68,200 |   |
| Deferred revenue                                                                                                                                                                                                     |       | 13,970                |       | 12,751             |       |
| Current portion of long-term debt, net of discount                                                                                                                                                                   |       | 15,119                |       | 5,233              |       |
| Total current liabilities                                                                                                                                                                                            |       | 118,829               |       | 86,184             |       |
| Long-term debt, net of current portion and  discount                                                                                                                                                                 |       | 354,594               |       | 349,890            |       |
| Deferred tax liabilities                                                                                                                                                                                             |       | 3,416                 |       | 3,281              |       |
| Other liabilities                                                                                                                                                                                                    |       | 4,998                 |       | 9,565              |       |
| Total liabilities                                                                                                                                                                                                    |       | 481,837               |       | 448,920            |       |
|                                                                                                                                                                                                                 |       |                  |       |               |       |
| Stockholders’ equity:                                                                                                                                                                                           |       |                  |       |               |       |
| Common stock, $0.001 par value; 130,000,000 shares  authorized; 25,957,444 shares issued and 25,795,767 shares outstanding  and  26,122,963 shares issued and  26,064,284 shares outstanding, respectively |       | 26                    |       | 26                 |       |
| Treasury stock, 161,677 shares and 58,679 shares,  respectively                                                                                                                                                      |       | (2,439                | )          | (1,373             | )          |
| Additional paid-in capital                                                                                                                                                                                           |       | 168,780               |       | 168,360            |       |
| Accumulated deficit                                                                                                                                                                                                  |       | (42,859               | )          | (41,750            | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                 |       | (2,168                | )          | (6,412             | )          |
| Total stockholders’ equity                                                                                                                                                                                      |       | 121,340               |       | 118,851            |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                      |       | $                     | 603,177    |               | $          | 567,771 |   |

 

See accompanying notes to condensed consolidated financial statements(unaudited).

 

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**TNS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

**(dollars in thousands, except share and per sharedata)**

 
| ** **                                                                             | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2009**                                         | ** ** | **2010** | ** ** |
| Revenues                                                                               |       | $                                                | 75,266     |   | $ | 129,575 |   |
| Operating expenses:                                                                    |       |                                             |       |   |   |
| Cost of network services, exclusive of the items  shown separately below               |       | 36,790                                           |       | 63,138 |   |
| Engineering and development                                                            |       | 6,407                                            |       | 9,471 |   |
| Selling, general, and administrative                                                   |       | 17,756                                           |       | 27,607 |   |
| Depreciation and amortization of property and  equipment                               |       | 5,834                                            |       | 10,252 |   |
| Amortization of intangible assets                                                      |       | 5,605                                            |       | 11,329 |   |
| Total operating expenses                                                               |       | 72,392                                           |       | 121,797 |   |
| Income from operations                                                                 |       | 2,874                                            |       | 7,778 |   |
| Interest expense                                                                       |       | (1,451                                           | )          | (6,140 | ) |
| Interest income                                                                        |       | 50                                               |       | 136 |   |
| Other income, net                                                                      |       | 20                                               |       | 2,801 |   |
| Income before income tax provision and equity in  net loss of unconsolidated affiliate |       | 1,493                                            |       | 4,575 |   |
| Income tax provision                                                                   |       | (1,487                                           | )          | (3,401 | ) |
| Equity in net loss of unconsolidated affiliate                                         |       | (30                                              | )          | (65 | ) |
| Net (loss) income                                                                      |       | $                                                | (24        | ) | $ | 1,109 |   |
|                                                                                   |       |                                             |       |   |   |
| Basic and diluted net (loss) income per common  share                                  |       | $                                                | (0.00      | ) | $ | 0.04 |   |
| Basic weighted average common shares outstanding                                       |       | 25,127,069                                       |       | 25,926,603 |   |
| Diluted weighted average common shares outstanding                                     |       | 25,127,069                                       |       | 26,717,477 |   |

 

See accompanying notes to condensed consolidated financial statements(unaudited).

 

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** **

**TNS, INC.**

 

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

**(dollars in thousands)**

 
| ** **                                                                       | ** ** | **Three months ended March 31** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2009**                                            | ** ** | **2010** | ** ** |
| Cash flows from operating activities:                                            |       |                                                |       |   |   |
| Net (loss) income                                                                |       | $                                                   | (24        | ) | $ | 1,109 |   |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                                                |       |   |   |
| Non-cash items:                                                                  |       |                                                |       |   |   |
| Depreciation and amortization of property and  equipment                         |       | 5,834                                               |       | 10,252 |   |
| Amortization of intangibles                                                      |       | 5,605                                               |       | 11,329 |   |
| Loss on disposal of property and equipment                                       |       | (1                                                  | )          | 107 |   |
| Deferred income tax provision (benefit)                                          |       | 2,951                                               |       | (455 | ) |
| Amortization of deferred financing costs                                         |       | 106                                                 |       | 653 |   |
| Equity in net loss of unconsolidated affiliate                                   |       | 30                                                  |       | 65 |   |
| Stock compensation expense                                                       |       | 2,004                                               |       | 2,215 |   |
| Changes in operating assets and liabilities:                                     |       |                                                |       |   |   |
| Accounts receivable, net                                                         |       | (537                                                | )          | 14,491 |   |
| Other current assets                                                             |       | 292                                                 |       | 7,437 |   |
| Other noncurrent assets                                                          |       | (185                                                | )          | (418 | ) |
| Accounts payable and accrued expenses                                            |       | (10,234                                             | )          | (13,184 | ) |
| Deferred revenue                                                                 |       | (943                                                | )          | (1,257 | ) |
| Other noncurrent liabilities                                                     |       | (1,220                                              | )          | (4,394 | ) |
| Net cash provided by operating activities:                                       |       | 3,678                                               |       | 27,950 |   |
|                                                                             |       |                                                |       |   |   |
| Cash flows from investing activities:                                            |       |                                                |       |   |   |
| Purchases of property and equipment                                              |       | (5,824                                              | )          | (7,969 | ) |
| Net cash used in investing activities:                                           |       | (5,824                                              | )          | (7,969 | ) |
|                                                                             |       |                                                |       |   |   |
| Cash flows from financing activities:                                            |       |                                                |       |   |   |
| Repayments of long-term debt                                                     |       | —                                              |       | (15,000 | ) |
| Proceeds from stock option exercises, inclusive of  tax benefit                  |       | —                                              |       | 938 |   |
| Payment of long-term debt financing costs                                        |       | (75                                                 | )          | — |   |
| Purchase of treasury stock                                                       |       | (590                                                | )          | (2,507 | ) |
| Net cash used in financing activities:                                           |       | (665                                                | )          | (16,569 | ) |
| Effect of exchange rates on cash and cash  equivalents                           |       | (1,012                                              | )          | (3,535 | ) |
| Net decrease   in cash and cash equivalents                                 |       | (3,823                                              | )          | (123 | ) |
| Cash and cash equivalents, beginning of period                                   |       | 38,851                                              |       | 32,480 |   |
| Cash and cash equivalents, end of period                                         |       | $                                                   | 35,028     |   | $ | 32,357 |   |
|                                                                             |       |                                                |       |   |   |
| Supplemental disclosures of cash flow information:                               |       |                                                |       |   |   |
| Cash paid for interest                                                           |       | $                                                   | 1,484      |   | $ | 5,949 |   |
| Cash paid for income taxes                                                       |       | $                                                   | 1,523      |   | $ | 1,159 |   |

 

See accompanying notes to condensed consolidated financial statements(unaudited).

 

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

 

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

 

TNS, Inc. (TNS or the Company) is a Delaware corporation. TNS is aleading provider of business-critical data communications services toprocessors of credit card, debit card and automated teller machine (ATM)transactions. TNS is also a leading provider of call signaling and databaseaccess services to the domestic telecommunications industry and of secure datanetwork services to the global financial services industry. TNS’ datacommunication services enable secure and reliable transmission oftime-sensitive, transaction-related information critical to its customers’operations. The Company’s customers outsource their data communicationrequirements to TNS because of the Company’s expertise, comprehensive customersupport, and cost-effective services. TNS provides services to customers in theUnited States and increasingly to customers in 40 countries includingCanada, Mexico and countries in Europe, Latin America and the Asia-Pacificregion.

 

The company provides services to customers through a data network. Thenetwork supports a variety of widely accepted communications protocols and isdesigned to be scalable and accessible by multiple methods, including dial-up,dedicated, wireless, fixed broadband and internet connections. The company hascustomers in over 40 countries, including the United States, Canada and Mexicoand countries in Europe, Latin America and the Asia-Pacific region.

 

Thecompany provides networking, data communications and other application-basedservices to the payment, telecommunication, and financial services industries. The payment division delivers data network connectivity, includingbroadband and IP connectivity, as well as card-present and card-not-presentservices in support of various card-based transactions to payment processors,banks and other financial institutions throughout the world.  Thetelecommunication services division provides call signaling network services,and database access services, including caller-name identification to domestic telecommunication companies.  The telecommunicationsservice division also provides roaming and clearing services to both domesticand international mobile phone operators.  The financial services divisionprovides data networking connectivity to the global financial community insupport of the Financial Information eXchange (FIX) messaging protocol andother transaction-oriented trading applications.

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with United States generally accepted accountingprinciples (GAAP) for interim financial information and in conjunction with therules and regulations of the Securities and Exchange Commission (SEC).Certain information and note disclosures normally included in the annualfinancial statements, required by GAAP, have been condensed or omitted pursuantto those rules and regulations, although the Company believes that thedisclosures made are adequate to make the information presented not misleading.

 

Inthe opinion of management, the accompanying unaudited condensed consolidatedfinancial statements reflect adjustments (all of which are of a normal andrecurring nature) that are necessary for the fair presentation of the periodspresented. The results of operations for the three months ended March 31,2010 are not necessarily indicative of the results to be expected for anysubsequent interim period or for the fiscal year. It is suggested that theseunaudited condensed consolidated financial statements be read in conjunctionwith the Company’s annual report on Form 10-K filed with the SEC on March 16,2010, which includes audited consolidated financial statements and the notesthereto for the year ended December 31, 2009.

 

*Capital Structure*

 

Duringthe three months ended March 31, 2010, the Company issued 69,145 shares ofcommon stock following the exercise of stock options and 301,871 shares ofcommon stock following the vesting of restricted stock units, of which 102,499shares were surrendered by employees to satisfy payroll tax withholdingobligations and held by the Company as treasury shares. The Company retired205,497 treasury shares during the three months ended March 31, 2010.During the three months ended March 31, 2009, the Company issued 220,453shares of common stock following the vesting of restricted stock units, of which76,377 shares were surrendered by employees to satisfy payroll tax withholdingobligations and held by the Company as treasury shares.

 

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**Acquisitions**

 

On March 2, 2009, the Company entered into an Asset PurchaseAgreement (the Purchase Agreement), by and between the Company and VeriSign, Inc.(the Seller) pursuant to which the Company agreed to purchase certain assetsand assume certain liabilities of the Seller’s Communications Services Group(CSG). On May 1, 2009, the Company completed the acquisition in accordancewith the terms and conditions of the Purchase Agreement. The initial purchaseprice was approximately $226.2 million in cash and subject to apost-closing working capital adjustment. During the third quarter of 2009 andfourth quarter of 2009, working capital and other adjustments were maderesulting in a $4.5 million increase in the purchase price to$230.7 million. The Company funded the transaction through a new$230 million term loan facility as part of its 2009 Credit Facility (seeNote 2). CSG provides call signaling services and intelligent databaseservices such as caller ID, toll-free call routing and local number portabilityto the U.S. telecommunications industry. In addition, CSG provides wirelessroaming and clearing services to mobile phone operators. The Company isintegrating CSG into its telecommunications services division. In conjunctionwith the CSG acquisition, the Company incurred total acquisition related costsof $2.5 million, of which $0.6 million were incurred during the threemonths ended March 31, 2009. Such costs are included in selling, generaland administrative expenses in the accompanying consolidated statement ofoperations.

 

The acquisition of CSG has been accounted for as a business combinationunder FASB ASC 805, Business Combinations. The Company has commenced theappraisals necessary to assess the fair values of the tangible and intangibleassets acquired and liabilities assumed and the amount of goodwill to berecognized as of the acquisition date. As the values of certain assets andliabilities are preliminary in nature, they are subject to adjustment as additionalinformation is obtained about the facts and circumstances that existed as ofthe acquisition date. The valuations will be finalized withintwelve months of the close of the acquisition. When the valuations arefinalized, any changes to the preliminary valuation of assets acquired andliabilities assumed may result in significant adjustments to the fair value ofnet identifiable assets acquired and goodwill.

 

The fair values of the assets acquired and liabilities assumed werepreliminarily determined using the income, cost and market approaches. The fairvalue measurements were primarily based on significant inputs that are notobservable in the market and therefore represent a Level 3 measurement asdefined in FASB ASC 820, Fair Value Measurements and Disclosures. Developedtechnology, research and development and customer relationships were valuedusing the excess earnings method, a variation on the income method. The excessearnings method considers the use of other assets in the generation of the projectedcash flows in order to determine the economic benefit generated by the subjectintangible asset. Non competition agreements were valued using the incomeapproach. The income approach indicates value for a subject asset based on thepresent value of cash flows projected to be generated by the asset. Projectedcash flow is discounted at a rate of return that reflects the relative risk ofachieving the cash flow and the time value of money. Fixed assets and realestate were valued using the market and cost approaches, as appropriate. Themarket approach indicates value for a subject asset based on available marketpricing for comparable assets. The cost approach indicates value by determiningthe current cost of replacing an asset with another of equivalent economicutility. The cost to replace a given asset reflects the estimated reproductionor replacement cost for the property, less an allowance for loss in value dueto depreciation.

 

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

 
| ** **                                                        | ** ** | **Amount** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|
| **Purchase price allocation:**                                    |       |       |       |
| Accounts receivable                                               |       | $          | 34,766     |   |
| Prepaid expenses                                                  |       | 2,963      |       |
| Property and equipment                                            |       | 44,287     |       |
| Land and buildings                                                |       | 10,034     |       |
| Goodwill                                                          |       | 4,633      |       |
| Identifiable intangible assets                                    |       |       |       |
| Customer relationships                                            |       | 141,500    |       |
| Developed technology                                              |       | 4,800      |       |
| Non competition agreements                                        |       | 600        |       |
| Research and development                                          |       | 300        |       |
| Total assets                                                      |       | 243,883    |       |
| Accounts payable, accrued expenses and other  current liabilities |       | (13,227    | )          |
| Total purchase price                                              |       | $          | 230,656    |   |

 

The amounts allocated to property and equipment are being depreciatedon a straight line basis over their weighted average estimated useful lives of4 years. The amount allocated to buildings is being depreciated on astraight line basis over their estimated useful lives of 39 years. Thecustomer relationships included in intangible assets are being amortized on astraight line basis over 9 years and other intangible assets are beingamortized on a straight line basis over 2 to 4 years. The goodwill of$4.6 million is expected to be deductible for income tax purposes.

 

Theweighted average amortization period by each major class of assets and in totalis as follows (in years):

 
| ** **                                 | ** ** | **Weighted average  amortization period** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| Customer relationships                     |       | 9                                         |       |
| Developed technology                       |       | 4                                         |       |
| Non competition agreements                 |       | 2                                         |       |
| Research and development                   |       | 4                                         |       |
| Total weighted average amortization period |       | 8.8                                       |       |

 

The allocation of the purchase price for CSG has not been finalized asof March 31, 2010 as certain information required to confirm the assumptionsused in the initial valuation of the acquired assets and liabilities remainsoutstanding.

 

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*Pro Forma Information*

 

The unaudited pro forma information presents the combined operatingresults of TNS and CSG, with the results prior to the acquisition date adjustedto include the pro forma impact of: the elimination of transactions between TNSand CSG; the adjustment of amortization of intangibles assets and depreciationof fixed assets based on the preliminary purchase price allocation; and theadjustment of interest expense to reflect the incremental borrowings incurredby TNS to complete the acquisition of CSG.

 

The unaudited pro forma results are presented for illustrative purposesonly and do not reflect the realization of potential cost savings, or anyrelated integration costs.

 

The following unaudited pro forma consolidated results of operationsassume that the acquisition of CSG was completed as of January 1, 2009 (dollarsin thousands, except per share amounts):

 
| ** **                        | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2009**                               | ** ** | **2010** | ** ** |
| Operating revenues                |       | $                                      | 135,165    |   | $ | 129,575 |   |
| Net income (loss)                 |       | (1,944                                 | )          | 1,109 |   |
| Earnings (loss) per common share: |       |                                   |       |   |   |
| Basic                             |       | $                                      | (0.08      | ) | $ | 0.04 |   |
| Diluted                           |       | $                                      | (0.08      | ) | $ | 0.04 |   |

 

The CSG historical operating results include the direct costs relatedto the business and certain allocated costs for services and support functionsprovided by Verisign, Inc. Included in net income for the quarter ended March31, 2009 are allocated after tax costs of $4.2 million, or ($0.16) per sharerelated to those functions. These pro forma results do not purport to beindicative of the results that would have actually been obtained if theacquisition had occurred as of January 1, 2009, nor does the pro forma dataintend to be a projection of results that may be obtained in the future.

 

Due to the extent and nature of the integration of CSG’s operationsinto the operations of TNS as well as the overlap with the Company’stelecommunication services division, amounts related to the contribution of CSGto the Company’s consolidated results are not separately identifiable.Accordingly, the stand alone results of CSG for the three months ended March31, 2010 have not been disclosed.

 

***Goodwill, intangible and otherlong-lived assets***

 

The Company accounts for goodwill and intangible assets in accordancewith FASB ASC 350, Intangibles—Goodwill and Other (ASC 350). Under this standard,goodwill and intangible assets deemed to have indefinite lives are notamortized and are subject to annual impairment tests. The Company has electedto perform the impairment test annually as of October 1 of each year. Aninterim goodwill impairment test is performed if an event occurs orcircumstances change between annual tests that would more likely than notreduce the fair value of a reporting unit below its carrying amount. If factsand circumstances indicate goodwill may be impaired, the Company performs arecoverability evaluation based upon a determination of fair value.

 

In accordance with FASB ASC 360, Property, Plant and Equipment (ASC360) and ASC 350, the Company reviews long-lived assets including property andequipment, capitalized software development costs and definite-lived intangibleassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of the assets may not be fully recoverable. To determinethe recoverability of long-lived assets, the Company evaluates the probabilitythat future estimated undiscounted net cash flows will be less than thecarrying amount of the assets. If the Company estimates that assets areimpaired, the assets are written down to their fair value. For purposes ofmeasuring and recognizing impairment of long-lived assets, the Company willassess whether separate cash flows can be attributed to the individual asset.The Company groups long-lived assets where separately identifiable cash flowsare available. In the event that long-lived assets, including intangibles areabandoned or otherwise disposed of, the Company recognizes an impairment chargeupon disposition. For the Company’s customer relationship intangible assets,the Company evaluates impairment upon the significant loss of revenue from acustomer. The fair value measurement of a customer relationship intangible isprimarily based on an income approach using significant inputs that are notobservable in the market, therefore representing a Level 3 measurement asdefined in FASB ASC 820, Fair Value Measurements and Disclosures. The incomeapproach indicates value for a subject asset based on the present value of cashflows projected to be generated by the asset. Projected cash flow is discountedat 

 

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arate of return that reflects the relative risk of achieving the cash flow andthe time value of money. During the three months ended March 31, 2009 and 2010,the Company accelerated amortization on a portion of customer relationship intangibleassets by $0.2 million and $1.9 million, respectively, due to the loss ofcertain customers or certain declines in expected revenues. As a result, thesecustomer relationship intangible assets held as of March 31, 2009 and2010, with carrying amounts of $0.2 million and $2.8 million,respectively,  were written down to theirfair values of $0.0 million and $0.9 million.

 

The calculation of fair value in accordance with ASC 350 and 360contains uncertainties due to judgment in estimates and assumptions, includingprojections of future income and cash flows, the identification of appropriatemarket multiples and the choice of an appropriate discount rate. The Company’sestimates of anticipated future income and cash flows used in determining fairvalue contain uncertainties due to uncontrollable events that could positivelyor negatively impact the anticipated future economic and operating conditions.Therefore, those estimates could be reduced significantly in the future due tochanges in technologies, regulation, available financing, competition or othercircumstances. As a result, the carrying amount of the Company’s long-livedassets could be reduced through impairment charges in the future. Additionally,changes in estimated future cash flows could result in a shortening ofestimated useful lives for long-lived assets including intangibles.

 

**Use of Estimates**

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of certainassets and liabilities and the disclosure of contingent assets and liabilitiesat the date of the financial statements. Significant estimates affecting theconsolidated financial statements include management’s judgments regarding theallowance for doubtful accounts, future cash flows from long-lived assets,accrued expenses for probable losses and estimates of the fair value of assetsand liabilities assumed in business acquisitions. Actual results could differfrom those estimates.

 

**Revenue Recognition**

 

TheCompany recognizes revenue when persuasive evidence of an agreement exists, theterms are fixed and determinable, services are performed, and collection isprobable. Cash received in advance of revenue recognition is recorded asdeferred revenue.

 

Payments revenue is derived primarily from per transaction fees paid bythe Company’s customers for the transmission of transaction data, through theCompany’s network, between payment processors and Point of Sale (POS) or ATMterminals and monthly recurring fees for broadband and wireless offerings. TSDrevenue is derived primarily from fixed monthly fees for call signalingservices and per message fees charged for database access, call validation androaming and clearing services. FSD revenue is derived primarily from monthlyrecurring fees based on the number of customer connections to and through theCompany’s network as well as dedicated bandwidth usage.

 

The Company considers the criteria established primarily by FASBASC 605-45, “Reporting Revenue Gross as a Principal versus Net as anAgent,” in determining whether revenue should be recognized on a gross versus anet basis. Factors considered in determining if gross or net basis recognitionis appropriate include whether the Company is primarily responsible to theclient for the services, has discretion on vendor selection, or bears creditrisk.

 

Incentivesgranted to new customers or upon contract renewals are deferred and recognizedratably as a reduction of revenue over the contract period to the extent thatthe incentives are recoverable against the customer’s minimum purchasecommitments under the contract. In addition, the Company receives installationfees related to the configuration of the customers’ systems. Revenue frominstallation fees is deferred and recognized ratably over the customer’scontractual service period, generally three years. The Company performsperiodic evaluations of its customer base and establishes allowances forestimated credit losses.

 

**Cost of Network Services**

 

Costof network services is comprised primarily of telecommunications charges, whichinclude data transmission and database access charges, leased digital capacitycharges, circuit installation charges, activation charges and compensation paidto the providers of calling name and line information database records. Thecost of data transmission is based on a contract or tariff rate per minute of usagein addition to a prescribed rate per transaction for certain vendors. The costsof database access, circuits, installation and activation charges are based onfixed fee contracts with local exchange carriers and interexchange carriers.The compensation charges paid to the providers of calling name and lineinformation database records are based on a percentage of query revenuegenerated from the Company’s customers accessing those records. The cost ofnetwork services also includes salaries, equipment maintenance and other costsrelated to the ongoing operation of the Company’s data networks. These costsare expensed by the Company as incurred. The Company recognizes a liability fortelecommunications charges based upon network services utilized at historicalinvoiced rates. Direct costs of installations are deferred and amortized overthe customer’s contracted service period, generally three years.

 

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**FairValue of Financial Instruments**

 

Thefair value of the Company’s long-term debt is based upon quoted market pricesfor the same and similar issues giving consideration to quality, interestrates, maturity and other characteristics. As of March 31, 2010, theCompany believes the carrying amount of its long-term debt approximates itsfair value since the variable interest rate of the debt approximates a marketrate.

 

**Stock-Based Compensation**

 

TheCompany accounts for stock-based compensation under FASB ASC 718,Compensation-Stock Compensation, using the modified prospective transitionmethod. FASB ASC 718 requires all stock-based compensation to employees bemeasured at fair value and expensed over the requisite service period and alsorequires an estimate of forfeitures when calculating compensation expense.Stock-based compensation for all non-vested awards outstanding as of January 1,2006, are being recognized based on the grant date fair value estimated inaccordance with the provisions of SFAS No. 123 “Accounting for Stock-BasedCompensation” and in accordance with FASB ASC 718 for all awards granted ormodified after January 1, 2006.

 

Stock-basedcompensation expense has been included in the following categories in theaccompanying condensed consolidated statements of operations (in thousands):

 
| ** **                          | ** ** | **Three months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** |
| ** **                          | ** ** | **2009**                         | ** ** | **2010** | ** ** |
| Cost of network services            |       | $                                | 252        |   | $ | 199 |   |
| Engineering and development         |       | 370                              |       | 311 |   |
| Selling, general and administrative |       | 1,382                            |       | 1,705 |   |
|                                |       | $                                | 2,004      |   | $ | 2,215 |   |

 

Asof March 31, 2010, there was a total of $10.9 million of unrecognizedcompensation cost related to stock-based awards, which is expected to berecognized over a weighted average period of approximately two years.

 

*Time-Vested Awards*

 

Time-vestedawards are subject to a vesting period determined at the date of the grant,generally in equal installments over three or four years. The Company uses theBlack Scholes option pricing model to determine the grant date fair value ofany time-vested stock options. The Company uses the market price of the Company’sstock on the date of grant to determine the fair value of any time-vestedrestricted stock units. The Company recognizes compensation cost on thesetime-vested awards in equal installments over the vesting period.

 

During the three monthsended March 31, 2010 the Company granted 669 stock options and 11,561restricted stock units at weighted average estimated fair values of  $11.43 and $24.02, respectively. During thethree months ended March 31, 2009, the Company granted 2,000 options and5,050 restricted stock units at weighted average estimated fair values of $3.33and $7.00, respectively. As of March 31, 2010, there was a total of $3.5million of unrecognized compensation expense related to these awards, which isincluded in the $10.9 million total unrecognized compensation cost mentionedabove.

 

*Performance-Based Awards*

 

Performance-basedawards are tied to the Company’s annual performance against pre-establishedinternal targets for revenues and adjusted earnings per share, based upon theCompany’s actual performance over the performance period. The Company uses theBlack Scholes option pricing model to determine the grant date fair value ofany performance-based stock options. The Company uses the market price of theCompany’s stock on the date of grant to determine the fair value of anyperformance-based restricted stock units. Performance-based awards are also subjectto vesting requirements, and generally vest in installments over three or four years.Compensation cost is based on the expected payout level that will be achievedand is adjusted in subsequent periods as changes in the estimates occur untilthe performance criteria have been satisfied. The Company recognizescompensation cost on these performance based awards using an acceleratedattribution method.

 

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InApril 2009 the Company put in place a long-term performance-based stockcompensation plan (the 2009 Equity Performance Plan). Based upon the Company’sperformance in 2009, the results of which were approved by the Company’s boardof directors in February 2010, the plan participants earned 100% of thepotential payout under the Company’s 2009 Equity Incentive Plan.  Thetotal number of awards issued under the Company’s 2009 Equity Performance Plan was311,500 restricted stock units which represented 100% of an employee’s targetpayout. The weighted average grant date fair value of restricted stock unitsgranted was $16.85.  As of March 31,2010, there was a total of $1.9 million of unrecognized compensation expenserelated to these performance based awards which is included in the $10.9million total unrecognized compensation cost mentioned above.

 

InFebruary 2010 the Company put in place a long-term performance-based stockcompensation plan (the 2010 Equity Performance Plan). The total number ofawards that would be issued under the Company’s 2010 Equity Performance Plan,assuming that the target payout level was achieved, would be 235,086 restrictedstock units. The potential payout under the 2010 Equity Incentive Plan willrange from 0% to 150% of an employee’s target payout. The weighted averagegrant date fair value of restricted stock units granted was $23.66. As of March 31,2010, there was a total of $5.2 million of unrecognized compensation expenserelated to these performance based awards which is included in the $10.9million total unrecognized compensation cost mentioned above.

 

**Income Taxes**

 

TheCompany accounts for income taxes in accordance with FASB ASC 740, IncomeTaxes. Under FASB ASC 740, deferred tax assets or liabilities are computedbased upon the difference between financial statement and income tax bases ofassets and liabilities using the enacted marginal tax rate. The Companyprovides a valuation allowance on its net deferred tax assets when it is morelikely than not that such assets will not be realized. Deferred income taxexpense or benefits are based upon the changes in the asset or liability fromperiod to period. The Company also recognizes interest and penalties related touncertain tax positions in income tax expense.

 

EffectiveJanuary 1, 2007, the Company adopted an amendment to FASB ASC 740, IncomeTaxes, which prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken, orexpected to be taken, in a tax return, and provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. The adoption of the amendment did not result in a cumulativeadjustment to the Company’s accumulated deficit.

 

Areconciliation of the beginning and ending balance for liabilities associatedwith unrecognized tax benefits, excluding interest and penalties, is as follows(in thousands) as of March 31, 2009 and 2010, respectively.

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

 
| Balance as of January 1, 2010                         |   | $     | 4.294  |   |
|------------------------------------------------------------|--------|-------|--------|--------|
| Additions for tax positions related to the current  period |   | 3,549 |   |
| Balance as of March 31, 2010                          |   | $     | 7,843  |   |

 

Theentire balance of unrecognized tax benefits as of March 31, 2010 wouldimpact the effective tax rate if recognized.

 

TheCompany records interest and penalties related to income taxes as components ofthe income tax provision, which totaled $0 and $47,000 for the three monthsended March 31, 2009 and 2010, respectively. Of the $7.9 million liabilityfor unrecognized income tax benefits as of March 31, 2010, the Company’saccrual for potential interest and penalties associated with uncertain taxpositions was $381,000. To the extent interest and penalties are not assessedwith respect to uncertain tax positions, amounts accrued will be reversed andreflected as a reduction of the overall income tax provision.

 

Itis reasonably possible that the Company’s liability for unrecognized taxbenefits will decrease in the next 12 months by $0.8 million as aresult of the expiration of certain statutes of limitation.

 

TheCompany’s effective tax rate for the three months ended March 31, 2009 and2010 of 101.7% and 75.4%, respectively, differ from the U.S. Federal statutoryrate primarily due to stock-based compensation expense not deductible forincome tax purposes, U.S. tax expense on undistributed foreign earnings,increases in FASB ASC 740 reserves due to certain income tax exposures, and profitsof our international subsidiaries being taxed at rates different than the U.S.Federal statutory rate.

 

Withfew exceptions, the Company remains subject to examination by U.S. Federal,state, local and foreign tax authorities for tax years 2003 through 2009.

 

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**Recent Accounting Pronouncements**

 

InMay 2009, the FASB issued FASB ASC 855, Subsequent Events, which iseffective for interim or annual periods beginning on or after June 15,2009. The standard establishes principles and requirements for subsequentevents, including disclosure of the date through which an entity has evaluatedsubsequent events. We adopted FASB ASC 855 effective September 30, 2009and the adoption of the standard did not significantly impact our financialstatements.

 

EffectiveJune 30, 2009, the Company adopted ASC 825-10, Financial Instruments,which requires an entity to provide disclosures about fair value of financialinstruments in interim financial statements. See note (1).

 

EffectiveSeptember 30, 2009, the Company adopted Accounting Standards Update No. 2009-01,“Statement of Financial Accounting Standards No. 168 - The FASB AccountingStandards Codification and Hierarchy of Generally Accepted AccountingPrinciples,” (ASU 2009-01). ASU 2009-01 is not expected to change U.S.generally accepted accounting principles but combines all nongovernmentalauthoritative standards into a comprehensive, topically organized onlinedatabase. All other accounting literature excluded from ASU 2009-01 will be considerednonauthoritative. All references to authoritative accounting literature havebeen made in accordance with ASU 2009-01.

 

EffectiveMarch 31, 2010, the Company adopted Accounting Standards Update No. 2010-09,which is included “Statement of Financial Accounting Standards No, 855 —Subsequent Events.” (ASU 2010-09).  ASU2010-09 was issued on February 24, 2010 and removes the requirement forSEC filers to disclose the date through which an entity has evaluatedsubsequent events, due to potential conflicts with current SEC guidance. ASU2010-10 is effective upon issuance for interim and annual reporting periods.The adoption of this standard did not significantly impact our financialstatements.

 

EffectiveMarch 31, 2010, the Company adopted Accounting Standards Update No. 2010-06,which is included “Statement of Financial Accounting Standards No, 820 — FairValue Measurement and Disclosures.” (ASU 2010-06).  ASU 2010-06 requires new disclosures on theamount and reason for transfers in and out of Level 1 and 2 fair valuemeasurements. ASU 2010-06 also requires disclosure of activities, includingpurchases, sales, issuances, and settlements within the Level 3 fair valuemeasurements and clarifies existing disclosure requirements on levels ofdisaggregation and disclosures about inputs and valuation techniques. ASU2010-06 is effective for interim and annual reporting periods beginning after December 15,2009. The adoption of this standard on January 1, 2010 did not significantlyimpact our financial statements.

 

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

 

Debtconsists of the following (in thousands):

 
| ** **                             | ** ** | **December 31,  2009** | ** ** | **March 31,  2010** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Revolving credit facility              |       | $                           | 49,371     |                     | $          | 49,371 |   |
| Term Loan                              |       | 325,000                     |       | 310,000                  |       |
| Total credit facility outstanding      |       | 374,371                     |       | 359,371                  |       |
| Unamortized discount                   |       | (4,658                      | )          | (4,248                   | )          |
|                                   |       | 369,713                     |       | 355,123                  |       |
| Less: Current portion, net of discount |       | (15,119                     | )          | (5,233                   | )          |
| Long-term portion                      |       | $                           | 354,594    |                     | $          | 349,890 |   |

 

**November 2009 Credit Facility**

 

On November 19, 2009 the Company entered into a new secured creditfacility (the November 2009 Credit Facility) and refinanced the May 2009Credit Facility primarily to take advantage of a more favorable interest rateenvironment. The November 2009 Credit Facility consists of a seniorsecured term loan facility in an aggregate principal amount of$325 million (the “Term 

 

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Facility”)and a senior secured revolving credit facility in an aggregate principal amountof $75 million (the “Revolving Facility”) of which $49.4 million wasfunded at closing and outstanding as of December 31, 2009 and March 31,2010.

 

Payments on the Term Facility are due in quarterly installments overthe term beginning March 31, 2010, with the remainder payable on November 18,2015. Voluntary prepayments on the Term Facility are applied as directed by theCompany. In January 2010, the Company made a voluntary payment of$15 million on the Term Facility. In April 2010 the Company made avoluntary payment of $9 million on the Revolving Facility. The outstandingbalance on the Revolving Facility is due on November 18, 2014.

 

The total scheduled remaining payments on the November 2009 CreditFacility are as follows (in thousands):

 
| 2010       |   | $       | 1,250   |   |
|------------|--------|---------|---------|--------|
| 2011       |   | 16,250  |    |
| 2012       |   | 16,250  |    |
| 2013       |   | 16,250  |    |
| 2014       |   | 65,621  |    |
| Thereafter |   | 243,750 |    |
|       |   | $       | 359,371 |   |

 

Interest on the outstanding balances under the Revolving Facility ispayable, at the Company’s option, at a rate equal to the higher of the primerate announced by SunTrust Bank, the federal funds rate plus 50 basis points,or the one-month London Interbank Offered Rate (“LIBOR”) rate plus 100 basispoints (the “Base Rate”), in each case, plus a margin of 3.0% or at LIBOR, plusa margin of 4.0%. Interest on the outstanding balances under the Term Facilityis payable, at the Company’s option, at the Base Rate plus a margin of 3.0%, orat LIBOR plus a margin of 4.0%. Additionally, in no event will the LIBOR ratebe less than 2.0%. The applicable margins on the Revolving Facility and TermFacility are subject to step-downs based on the Company’s leverage ratio. TheRevolving Facility is subject to an annual commitment fee in an amount equal tobetween 0.375% and 0.50% (based on the Company’s leverage ratio) per annummultiplied by the amount of funds available for borrowing under the RevolvingFacility. Interest payments on the November 2009 Credit Facility are duebiweekly, monthly, bimonthly or quarterly at the Company’s option.

 

The terms of the November 2009 Credit Facility require the Companyto make an annual prepayment in an amount that may range from 0% to 50% of theCompany’s “excess cash flow” (as such term is defined in the Credit Agreement)depending on the Company’s Leverage Ratio for any fiscal year. Prepayments arealso required to be made in other circumstances, including upon asset sales andsale-leaseback transaction in excess of $2 million. The Company ispermitted to repay borrowings under the November 2009 Credit Facility atany time in whole or in part without premium or penalty.

 

The obligations under the November 2009 Credit Facility areunconditionally and irrevocably guaranteed, subject to certain exceptions, bythe Company and each existing and future direct and indirect domesticsubsidiary of the Company. In addition, the November 2009 Credit Facilityis secured, subject to certain exceptions, by a first priority perfectedsecurity interest in substantially all of the present and future property andassets (real and personal) of the Company and a pledge of 100% of the Company’scapital stock of its respective domestic subsidiaries and 65% of the Company’scapital stock of its respective first-tier foreign subsidiaries.

 

The terms of the November 2009 Credit Facility require the Companyto comply with financial and nonfinancial covenants, including maintaining amaximum specified leverage ratio at the end of each fiscal quarter and aminimum consolidated fixed charge coverage ratio and complying with specifiedannual limits on capital expenditures. As of March 31, 2010, the Companyis required to maintain a leverage ratio of less than 3.0 to 1.0. The Company’sleverage ratio as of March 31, 2010 was 2.4 to 1.0. The maximum leverageratio declines over the term of the 2009 Credit Facility. Also beginning December 31,2009 and as of the end of each subsequent quarter for the twelve month periodthen ended, the Company is required to maintain a consolidated fixed chargecoverage ratio of not less than 1.2 to 1.0. The Company’s consolidated fixedcharge coverage ratio as of March 31, 2010 was 2.5 to 1.0. The November 2009Credit Facility also contains nonfinancial covenants that restrict some of theCompany’s corporate activities, including its ability to dispose of assets,incur additional debt, pay dividends, create liens, make investments, makecapital expenditures and engage in specified transactions with affiliates. Non compliancewith any of the financial or nonfinancial covenants without cure or waiverwould constitute an event of default under the November 2009 CreditFacility. An event of default resulting from a breach of a financial ornonfinancial covenant may result, at the option of the lenders, in anacceleration of the principal and interest outstanding, and a termination ofthe Revolving Facility. The November 2009 Credit Facility also containsother customary events of default (subject to specified grace periods),including defaults based on events of bankruptcy and insolvency, nonpayment ofprincipal, interest or fees when due, breach of specified covenants, change incontrol and material inaccuracy of representations and warranties. The Companywas in compliance with the financial and non-financial covenants of the November 2009Credit Facility as of March 31, 2010.

 

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On closing of the November 2009 Credit Facility, the Companyincurred approximately $2.9 million in financing costs. These financingcosts were deferred and are being amortized using the effective interest methodover the life of the November 2009 Credit Facility.

 

**3.****            ****ComprehensiveIncome**

 

Thecomponents of comprehensive income, net of tax effect are as follows (inthousands):

 
| ** **                               | ** ** | **Three months ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **March 31,**               | ** ** |
| ** **                               | ** ** | **2009**                         | ** ** | **2010** | ** ** |
| Net (loss) income                        |       | $                                | (24        | ) | $ | 1,109 |   |
| Foreign currency translation adjustments |       | (2,252                           | )          | (4,244 | ) |
| Total comprehensive loss                 |       | $                                | (2,276     | ) | $ | (3,135 | ) |

 

**4.****            ****Net IncomePer Common Share**

 

FASB ASC 260, Earnings Per Share, requires thepresentation of basic and diluted earnings per share. Basic earnings per commonshare is computed by dividing income attributable to common stockholders by theweighted average number of common shares outstanding for the period. Thediluted earnings per common share data is computed using the weighted averagenumber of common shares outstanding plus the dilutive effect of common stockequivalents, unless the common stock equivalents are anti-dilutive.

 

The treasury stock effectof options to purchase 41,400 shares of common stock and 93,900 restrictedstock units that were outstanding as of March 31, 2010, and options topurchase 1,872,050 shares of common stock and 615,667 restricted stock unitsthat were outstanding as of March 31, 2009 were excluded from thecomputation of diluted net loss per common share for the three months ended March 31,2009 and 2010, respectively, as their effect would have been anti-dilutive.

 

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| ** **                                                | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **March 31,**               | ** ** |
| ** **                                                | ** ** | **2009**                         | ** ** | **2010** | ** ** |
| Net (loss) income                                         |       | $                                | (24        | ) | $ | 1,109 |   |
| Weighted average common share calculation:                |       |                             |       |   |   |
| Basic weighted average common shares outstanding          |       | 25,127,069                       |       | 25,926,603 |   |
| Treasury stock effect of outstanding options to  purchase |       | —                           |       | 358,062 |   |
| Treasury stock effect of unvested restricted stock  units |       | —                           |       | 432,812 |   |
| Diluted weighted average common shares outstanding        |       | 25,127,069                       |       | 26,717,477 |   |
|                                                      |       |                             |       |   |   |
| Net income per common share:                              |       |                             |       |   |   |
| Basic and diluted net (loss) income per common  share     |       | $                                | (0.00      | ) | $ | 0.04 |   |

 

**5.****            ****SegmentInformation**

 

Prior to 2010, the Companyevaluated revenue in four divisions. In connection with a reorganization of theCompany’s divisional management team structure in 2010, the Company no longerreports or evaluates operating results for the international services division.The Company’s management evaluates revenues for three business divisions:payments, telecommunication services and financial services, and, therefore,management analyzes operating results for these divisions on a combined basis.Revenues from the former international services division are included in thepayments and financial services division in accordance with the types ofservices the Company provides. The Company operates as one reportable segmentsince the chief operating decision maker allocates resources based on theconsolidated financial results.

 

Revenuefor the Company’s three business divisions is presented below (in thousands):

 
| ** **                 | ** ** | **Three months ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **March 31,**               | ** ** |
| ** **                 | ** ** | **2009**                         | ** ** | **2010** | ** ** |
| Revenues:                  |       |                             |       |   |   |
| Payments                   |       | $                                | 44,365     |   | $ | 47,702 |   |
| Telecommunication services |       | 15,019                           |       | 65,461 |   |
| Financial services         |       | 15,882                           |       | 16,412 |   |
| Total revenues             |       | $                                | 75,266     |   | $ | 129,575 |   |

 

Managementevaluates  the Company’s performance onEBITDA before stock compensation expense. The Company defines EBITDA beforestock compensation expense as income from operations before depreciation,amortization and stock compensation expense. EBITDA before stock compensationexpense is not a generally accepted accounting principle measure, but rather ameasure employed by management to view operating results adjusted for majornoncash items. The Company believes that this measure, viewed in addition toand not in lieu of the Company’s reported GAAP results, provides additionaluseful information to the investors regarding the Company’s performance andoverall operating results exclusive of selected significant non-cash items, asdescribed below. This metric is frequently requested by investors and is alsoan integral part of the Company’s internal reporting to measure the performanceof senior management. The Company’s definition of EBITDA before stockcompensation expense may not be comparable to similarly titled measures used byother entities.

 

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EBITDAbefore stock compensation expense was approximately $16.3 million and $31.6million for the three months ended March 31, 2009 and 2010, respectively.Management evaluates performance before consideration of certain intercompanytransactions. Accordingly, these transactions are not reflected in EBITDA. Inaddition, certain corporate expenses are reflected consistent with informationreviewed by our chief operating decision maker.

 

EBITDAbefore stock compensation expense differs from income before income taxes andequity in net loss of unconsolidated affiliate reported in the condensedconsolidated statements of operations as follows (in thousands):

 
| ** **                                                                      | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **March 31,**               | ** ** |
| ** **                                                                      | ** ** | **2009**                         | ** ** | **2010** | ** ** |
| EBITDA before stock compensation expense                                        |       | $                                | 16,318     |   | $ | 31,574 |   |
| Reconciling items:                                                              |       |                             |       |   |   |
| Depreciation and amortization of property and  equipment                        |       | (5,834                           | )          | (10,252 | ) |
| Amortization of intangible assets                                               |       | (5,605                           | )          | (11,329 | ) |
| Stock compensation expense                                                      |       | (2,005                           | )          | (2,215 | ) |
| Interest expense                                                                |       | (1,451                           | )          | (6,140 | ) |
| Interest income and other income (expense), net                                 |       | 70                               |       | 2,937 |   |
| Income before income taxes and equity in net loss  of unconsolidated affiliates |       | $                                | 1,493      |   | $ | 4,575 |   |

 

**Geographic Information**

 

TheCompany sells its services through foreign subsidiaries in Australia, Austria,Bermuda, Canada, France, Germany, Hong Kong, India, Ireland, Italy, Japan,Malaysia, Mexico, the Netherlands, New Zealand, Poland, Romania, Singapore,South Korea, Spain, Sweden, Thailand and the United Kingdom. Informationregarding revenues and long-lived tangible assets attributable to eachgeographic region is stated below.

 

TheCompany’s revenues were generated in the following geographic regions (inthousands):

 
| ** **                                | ** ** | **Three months ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **March 31,**     | ** ** |
| ** **                                | ** ** | **2009**               | ** ** | **2010** | ** ** |
|                                      |       |                   |       |   |   |
| **Payments Division**                     |       |                   |       |   |   |
| North America                             |       | $                      | 17,729     |   | $ | 17,082 |   |
| Europe                                    |       | 21,203                 |       | 24,037 |   |
| Asia - Pacific                            |       | 5,433                  |       | 6,583 |   |
|                                      |       | $                      | 44,365     |   | $ | 47,702 |   |
|                                      |       |                   |       |   |   |
| **Financial Services Division**           |       |                   |       |   |   |
| North America                             |       | $                      | 12,050     |   | $ | 11,517 |   |
| Europe                                    |       | 2,372                  |       | 3,130 |   |
| Asia - Pacific                            |       | 1,460                  |       | 1,765 |   |
|                                      |       | $                      | 15,882     |   | $ | 16,412 |   |
|                                      |       |                   |       |   |   |
| **Telecommunications Services  Division** |       |                   |       |   |   |
| North America                             |       | $                      | 15,019     |   | $ | 65,461 |   |
|                                      |       |                   |       |   |   |
| Total                                     |       | $                      | 75,266     |   | $ | 129,275 |   |
|                                      |       |                   |       |   |   |
| North America                             |       | $                      | 44,798     |   | $ | 94,060 |   |
| Europe                                    |       | 23,575                 |       | 27,167 |   |
| Asia - Pacific                            |       | 6,893                  |       | 8,348 |   |
| Total Revenues                            |       | $                      | 75,266     |   | $ | 129,575 |   |

 

TheCompany’s long-lived assets, including goodwill and intangible assets, werelocated as follows (in thousands):

 
| ** **              | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **              | ** ** | **2009**              | ** ** | **2010**           | ** ** |
| North America           |       | $                     | 369,905    |               | $          | 358,520 |   |
| Europe                  |       | 22,527                |       | 19,846             |       |
| Asia-Pacific            |       | 18,670                |       | 18,630             |       |
| Total long lived assets |       | $                     | 411,102    |               | $          | 396,996 |   |

 

**6.             Litigationand Claims**

 

                We are from time to time a partyto legal proceedings, which arise in the normal course of business. We are notcurrently involved in any material legal proceedings or litigation, andmanagement is not aware of any legal proceedings or material litigationthreatened against us that could have a material adverse effect on thefinancial condition or the future operating results of the Company.

 

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**Item 2.    Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

You should read the following discussion of the financial condition andresults of operations of TNS, Inc. in conjunction with the consolidatedfinancial statements and the related notes included in our annual report on Form 10-Kfiled with the SEC on March 16, 2010 and available directly from the SECat www.sec.gov and the condensed consolidated financial statements and therelated notes of TNS, Inc., included elsewhere in this quarterly report.

 

There are statements made herein which may not address historical factsand, therefore, could be interpreted to be forward-looking statements withinthe meaning of The Private Securities Litigation Reform Act of 1995. Theseforward-looking statements are based on current expectations, forecasts andassumptions that are subject to risks and uncertainties that could cause actualresults to differ materially from those set forth in, or implied by, theforward-looking statements. The Company has attempted, whenever possible, toidentify these forward-looking statements using words such as “may,” “will,” “should,”“projects,” “estimates,” “expects,” “plans,” “intends,” “anticipates,” “believes,”and variations of these words and similar expressions. Similarly, statementsherein that describe the Company’s business strategy, prospects, opportunities,outlook, objectives, plans, intentions or goals are also forward-lookingstatements. Actual results may differ materially from those indicated by suchforward-looking statements as a result of various important factors, including:the Company’s reliance upon a small number of customers for a significantportion of its revenue; competitive factors such as pricing pressures; ourcustomer’s ability to direct their data communications from the Company’snetworks to other networks; the Company’s ability to grow its businessdomestically and internationally by generating greater transaction volumes,acquiring new customers or developing new service offerings; currentdifficulties in the financial services sector may continue to have a negativeimpact on our future growth rates in our financial services division;fluctuations in the Company’s quarterly results because of the seasonal natureof the business; unfavorable fluctuations in foreign exchange rates; the continuingimpact of the current economic conditions; the Company’s substantial debt couldadversely affect its financial health because the Company may be unable toobtain additional financing for working capital, capital expenditures,acquisitions and general corporate purposes, the Company may not generatesufficient cash flow to repay the debt on a timely basis or to pre-pay thedebt, and a significant portion of the Company’s cash flow from operations willbe dedicated to the repayment or servicing of indebtedness, thereby reducingthe amount of cash available for other purposes; the Company’s ability torefinance its senior secured credit facility; the Company’s ability toidentify, execute or effectively integrate acquisitions including theacquisition of CSG; the Company’s ability to realize additional overall costsavings from the acquisition of CSG, including consolidating SS7 call signalingnetworks, eliminating duplicate intelligent database platforms and eliminatingduplicate facilities; increases in the prices charged by telecommunicationproviders for services used by the Company; uncertainties related to theupdated international tax planning strategy implemented by the Company; theCompany’s ability to identify, execute or effectively integrate futureacquisitions; the Company’s ability to adapt to changing technology; additionalcosts related to compliance with the SEC rule changes or other corporategovernance issues; and other risk factors described in the Company’s annualreport on Form 10-K filed with the SEC on March 16, 2010. Inaddition, the statements in this quarterly report are made as of the date ofthis filing. The Company expects that subsequent events or developments willcause its views to change. The Company undertakes no obligation to update anyof 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. Theforward-looking statements in this document are intended to be subject to thesafe harbor protection provided by Sections 27A of the Securities Act and 21Eof the Exchange Act.

 

**Overview**

 

We are an international data communicationscompany which provides networking, data communications and value added servicesto many of the world’s leading retailers, banks, payment processors, financialinstitutions and telecommunication firms. Our data communication 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. Weprovide services to customers in the United States and increasingly tointernational customers in over 40 countries including Canada, Mexico andcountries in Europe, Latin America and the Asia-Pacific region. We currentlymaintain operations and/or employees in 28 countries.

 

We provide services through our data network,which is designed specifically for transaction-oriented applications. Ournetwork supports a variety of widely accepted communications protocols and isdesigned to be scalable, interoperable and accessible by multiple methods,including dial-up, dedicated, wireless, broadband and Internet connections.

 

We generate revenues through three business divisions:

 

·                    ***Payments. *** Weprovide fast, secure and reliable data communications services to paymentprocessors and financial institutions. We also provide managed broadbandsolutions and dial to IP conversion devices to merchants who desire to migratetheir infrastructure from dial to IP technology. Payments services revenue isderived primarily from per transaction fees and recurring monthly charges paidby our customers for the transmission of transaction data through our network.

 

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

 

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addition, we provide roaming and clearing services to mobile phoneoperators.  Our telecommunicationservices division generates revenues primarily from fixed monthly fees chargedfor our call signaling services and per- message fees charged for our databaseaccess, roaming and clearing 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 network supports 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, activation charges, and compensationpaid to providers of calling name and line information database records. Thecost of data transmission is based on a contract or tariff rate per minute ofusage in addition to a prescribed rate per transaction for some vendors. Thecosts of database access, circuits, installation charges and activation chargesare based on fixed fee contracts with local exchange carriers and interexchangecarriers. The compensation charges paid to providers of calling name and lineinformation database records are based on a percentage of query revenuegenerated from our customers accessing those records. The cost of networkservices also includes salaries, equipment maintenance and other costs relatedto the ongoing operation of our data networks. Depreciation expense on ournetwork equipment and amortization of developed technology are excluded fromour cost of network services and included in depreciation and amortization ofproperty and equipment and amortization of intangible assets in ourconsolidated statements of operations.

 

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

 

Our selling, general and administrative expenses include costs relatedto sales, marketing, administrative and management personnel, as well asexternal legal, accounting and consulting services.

 

**Acquisition of the Communications ServicesGroup  (CSG)**

 

On March 2, 2009, we entered into anasset purchase agreement with VeriSign, Inc. pursuant to which we agreedto purchase from Verisign, Inc. certain assets and assume certainliabilities of CSG. On May 1, 2009, we completed the acquisition inaccordance with the terms and conditions of the asset purchase agreement. Theinitial purchase price was approximately $226.2 million in cash and wassubject to a post-closing working capital adjustment. During the third andfourth quarters of 2009, working capital and other adjustments were negotiatedresulting in a $4.5 million increase in the purchase price to$230.7 million. We funded the transaction through a new$230.0 million term loan facility as part of the May 2009 CreditFacility. CSG provides call signaling services, intelligent database servicessuch as caller ID, toll-free call routing and local number portability to theU.S. telecommunications industry. In addition, CSG provides wireless roamingand clearing services to mobile phone operators. We are integrating CSG intoour telecommunication services division. Our statement of operations for thethree months ended March 31, 2010 includes the results of CSG and istherefore not comparable to the three months ended March 31, 2009. Pleaserefer to our amended Current Report on Form 8-K/A filed with the SEC on July 15,2009 for more detail on the historical and pro-forma results of CSG andNote 1 to the consolidated financial statements included elsewhere in thisreport.

 

**Results of Operations**

 

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

 

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| ** **                                                                              | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                              | ** ** | **March 31,**               | ** ** |
| ** **                                                                              | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Revenues                                                                                |       | $                                | 129,575    |   | $ | 75,266 |   |
| Operating expenses:                                                                     |       |                             |       |   |   |
| Cost of network services, exclusive of the  items shown separately below                |       | 63,138                           |       | 36,790 |   |
| Engineering and development                                                             |       | 9,471                            |       | 6,407 |   |
| Selling, general, and administrative                                                    |       | 27,607                           |       | 17,756 |   |
| Depreciation and amortization of property  and equipment                                |       | 10,252                           |       | 5,834 |   |
| Amortization of intangible assets                                                       |       | 11,329                           |       | 5,605 |   |
| Total operating expenses                                                                |       | 121,797                          |       | 72,392 |   |
| Income from operations                                                                  |       | 7,778                            |       | 2,874 |   |
| Interest expense                                                                        |       | (6,140                           | )          | (1,451 | ) |
| Interest income                                                                         |       | 136                              |       | 50 |   |
| Other income, net                                                                       |       | 2,801                            |       | 20 |   |
| Income before income tax provision and  equity in net loss of unconsolidated affiliates |       | 4,575                            |       | 1,493 |   |
| Income tax provision                                                                    |       | (3,401                           | )          | (1,487 | ) |
| Equity in net loss of unconsolidated  affiliates                                        |       | (65                              | )          | (30 | ) |
| Net (loss) income                                                                       |       | $                                | 1,109      |   | $ | (24 | ) |

 

**Three months ended March 31, 2010 comparedto the three months ended March 31, 2009**

 

***Revenues.***Total revenues increased $54.3 million, or 72.2%, to $129.6 million for thethree months ended March 31, 2010, from $75.3 million for the three monthsended March 31, 2009. The positive effect of foreign exchange translationon a year-over-year basis was $3.8 million. Excluding the effect offoreign exchange rates, total revenues increased $50.4 million, or 67.1%, to$125.7 million for the three months ended March 31, 2010.

 

We enter into arrangements with our customersin the currency of the markets we operate in. As a result, our reported resultsare affected by fluctuations in the value of the U.S. dollar as compared toforeign currencies, predominantly the British Pound, the Euro and the Australiandollar. The following table shows the currency composition of our revenues forthe three months ended March 31, 2010 and 2009 and the weighted averageexchange rates used to translate our local currency results to the U.S. dollar:

 
| ** **        | ** ** | **2010**    | ** ** | **2009**             | ** ** |
|-------------------|------------|-------------|------------|----------------------|------------|
| ** **        | ** ** | **% of**    | ** ** | **Weighted Average** | ** ** | **% of** | ** ** | **Weighted Average** | ** ** |
| ** **        | ** ** | **Revenue** | ** ** | **Exchange Rates**   | ** ** | **Revenue** | ** ** | **Exchange Rates** | ** ** |
| British Pound     |       | 11          | %          | 1.56                 |       | 16 | % | 1.44 |   |
| Euro              |       | 9           | %          | 1.39                 |       | 14 | % | 1.31 |   |
| Australian Dollar |       | 5           | %          | 0.90                 |       | 7 | % | 0.66 |   |

 

We generate revenues through three businessdivisions; the payments division, the telecommunication services division(TSD), and the financial services division (FSD).  A $0.01 change in exchange rates for each ofthe major foreign currencies we operate in would have the following annualimpact on revenue: British Pound, $0.04 million, Euro, $0.03 million andAustralian Dollar $0.03 million.

 

***Payments division.***Revenues from the payments division increased $3.3 million, or 7.5%, to $47.7million for the three months ended March 31, 2010, from $44.4 million for thethree months ended March 31, 2009. The positive effect of foreign exchangetranslation on a year-over-year basis was $3.4 million. Excluding the impact offoreign exchange rates, payments revenue decreased $0.1 million, or 0.2% to$44.3 million for the three months ended March 31, 2010. This decrease was dueto a $1.2 million reduction in dial up transaction revenue in the US andFrance, a decrease of $0.3 million related to lower development revenue fromour Dialect subsidiary and a decrease of $0.3 million in revenue from our ATMswitching business which we discontinued in the fourth quarter of 2009. Thesedecreases were partially offset by an increase of $0.7 million in ATMprocessing revenue, primarily from our Canadian subsidiary, an increase of $0.8million from our subsidiaries in Italy and Spain due to market share gains inthose countries and an increase of $0.2 million from the sale of our managedbroadband products, primarily in the US and UK. 

 

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Future revenue growth in the paymentsdivision depends on a number of factors including the success of our managedbroadband products and payment gateway applications, the success of ourcard-not-present service offerings, the success of payments products incountries we have recently entered, the total number of payments dial-uptransactions we transport and global economic conditions. Smaller merchants, whichrepresent a large portion of the customer base for our dial-up services in theUS, in our opinion have been more adversely impacted by recent global economicconditions than the larger merchants and may take longer to recover if and whenthe economy improves. We have continued to see a reduction in the growth ratesof our dial-up transaction volumes in many of the markets in which we operate,which we attribute to the overall weakness of the global economy. We are seeingsome signs that transaction volumes are beginning to improve in some markets,though no stable trend has yet emerged. As we disclosed last quarter, ourAustralian telecommunications partner has indicated that they have lostbusiness from one of their largest customers. Traffic from this Australian entitywas substantially transitioned off of our network by the end of the firstquarter of 2010 which we anticipate will reduce our revenues by approximately$3.0 million in 2010.

 

***Telecommunicationservices division.*** Revenues from the telecommunicationservices division increased $50.4 million, or 335.9%,  to $65.5 million for the three months ended March 31,2010, from $15.0 million for the three months ended March 31, 2009.Included in revenues were pass-through charges of $7.1 million and $1.2million for the three months ended March 31, 2010 and 2009, respectively.Excluding the increase in pass through charges, revenues increased $44.5million to $59.5 million for the three months ended March 31, 2010primarily due to the inclusion of acquired CSG operations. This increase waspartially offset by a decrease in revenue of $1.4 million due to volumedeclines from a customer following the acquisition of CSG based on theexpectation that we will compete with the customer and a decrease of $0.6 milliondue to a reduction in volumes in our payphone fraud and validation service.

 

Future revenue growth in thetelecommunication services division depends on a number of factors includingthe number of database access queries we transport, the number of callsignaling routes our customers purchase, and the success of our new productofferings, which potentially may be offset by customers seeking pricingdiscounts due to industry consolidation or other reasons, as well as thesuccessful integration of the business acquired through our purchase of CSG. Subsequentto the end of the quarter we lost a wireless customer who decided toconsolidate their calling name access and storage services under an alternativeprovider. We anticipate that this loss will negatively impact revenue byapproximately $3.0 million in 2010 and approximately $4.0 million on an annualbasis thereafter.

 

***Financial servicesdivision.*** Revenues from the financial servicesdivision increased $0.5 million, or 3.3%, to $16.4 million for the threemonths ended March 31, 2010, from $15.9 million for the three monthsended March 31, 2009. The positive effect of foreign exchange translationon a year-over-year basis was $0.5 million. Excluding the impact offoreign exchange rates, financial services revenue remained flat for the threemonths ended March 31, 2010. Revenues increased $0.4 million in Europe and$0.1 million in Asia Pacific due to an increase in customer endpoints in thoseregions which was offset by a decrease of $0.5 million due to the continuedrationalization of market data access services by our customers in NorthAmerica.

 

Future revenue growth in the financialservices division depends on a number of factors including the number ofconnections to and through our network which have been declining due to what webelieve is a result of the consolidation in the financial services industry aswell as the success of our new product offerings.

 

***Cost of network services.***Cost of network services increased $26.3 million, or 71.6%, to $63.1 millionfor the three months ended March 31, 2010, from $36.8 million for the threemonths ended March 31, 2009. On a constant dollar basis, cost of networkservices would have increased $25.1 million, or 68.2%, to $61.9 million. Costof network services were 48.7% of revenues for the three months ended March 31,2010, compared to 48.9% of revenues for the three months ended March 31, 2009. Thiswas primarily due to increased costs related to the operation of the assetsacquired from CSG and to a lesser extent costs associated with supporting ourfinancial services revenue and growth in our ATM processing business. This waspartially offset by decreased costs due to lower transaction volumes in ourpayments and legacy telecommunications services business.

 

Gross profitrepresented 51.3% of total revenues for the three months ended March 31, 2010,compared to 51.1% for the three months ended March 31, 2009. On a constantdollar basis, gross margins for the three months ended March 31, 2010 decreased30 basis points to 50.8%.

 

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Future cost of network services depends on a number of factorsincluding total transaction and query volumes, the relative growth andcontribution to total transaction volume of each of our customers, the successof our new service offerings, the timing and extent of our network expansionand the timing and extent of any network cost increases or reductions.

 

***Engineering anddevelopment expense.*** Engineering and developmentexpense increased $3.1 million, or 47.8%, to $9.5  million for the threemonths ended March 31, 2010, from $6.4 million for the three monthsended March 31, 2009. On a constant dollar basis, engineering anddevelopment expenses would have increased $2.6 million, or 40.7%, to $9.0million. Engineering and development expense represented 7.3% and 8.5% ofrevenues for the three months ended March 31, 2010 and 2009, respectively.Capitalized software development costs, which are offset against engineeringand development costs, increased $1.0 million to $2.6 million from $1.6 millionfor the three months ended March 31, 2010 and 2009, respectively. Theincrease in capitalized software development costs is primarily due toinvestment in our roaming and clearing and IP registry platforms and to alesser extent from development of our payment gateway platforms. Included inengineering and development expense for the three months ended March 31,2010 and 2009 is stock compensation expense of $0.3 million and$0.4 million, respectively. Excluding stock compensation, the increase incapitalized software and the effects of foreign exchange, engineering anddevelopment expense would have increased $3.7 million to $11.3 million forthe three months ended March 31, 2010 from $7.6 million for the threemonths ended March 31, 2009. The increase relates primarily to additionalheadcount and other costs required to support our acquisition of CSG.

 

***Selling, general and administrative expense.*** Selling, general and administrative expensesincreased $9.8 million, or 55.5%, to $27.6 million for the three months ended March 31,2010, from $17.8 million for the three months ended March 31, 2009. On aconstant dollar basis, selling, general and administrative expenses would haveincreased $9.0 million, or 50.8%, to $26.8 million. Selling, general andadministrative expenses represented 21.3% of revenues for the three monthsended March 31, 2010, compared to 23.6% of revenues for the three monthsended March 31, 2009. Included in selling, general and administrativeexpenses for the three months ended March 31, 2010 and 2009 is $1.7million and $1.4 million of stock compensation expense, respectively.Included in selling, general and administrative expenses for the three monthsended March 31, 2010 is $0.5 million in severance expenses. Excludingthese items and the effects of foreign exchange, selling, general andadministrative expenses increased $8.3 million to $24.6 million for thethree months ended March 31, 2010 from $16.4 million for the three monthsended March 31, 2009. This increase was primarily attributable to additionalheadcount and other costs necessary to support the acquired CSG operations andto a lesser extent an increase in costs incurred to support our Canadian ATMprocessing business.

 

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***Depreciation and amortizationof property and equipment.*** Depreciation andamortization of property and equipment increased $4.5 million, or 75.7%,to $10.3 million for the three months ended March 31, 2010, from$5.8 million for the three months ended March 31, 2009. On a constantdollar basis, depreciation and amortization of property and equipment wouldhave increased $4.2 million, or 72.1% to $10.0 million.  Depreciation andamortization of property and equipment represented 7.9% and 7.8% of revenue forthe three months ended  March 31,2010 and 2009, respectively. The increase in depreciation expense was due to anincremental $2.9 million related to the acquired CSG assets and to an increaseof $1.3 million related to capital expenditures made to support our revenuegrowth.

 

***Amortization ofintangible assets.*** Amortization of intangibleassets increased $5.7 million, or 102.1%, to $11.3 million for the threemonths ended March 31, 2010, from $5.6 million for the three months ended March 31,2009. On a constant dollar basis, amortization of intangible assets would haveincreased $5.5 million, or 98.5% to $11.1 million.  The increase was due to additionalamortization expense of $4.3 million related to the CSG acquisition and acharge of $1.9 million related to the impairment of certain customerrelationship intangible assets. This was partially offset by a decrease of $0.7million as certain intangible assets reached the end of their useful lives. 

 

***Interest expense.***Interest expense increased $4.7 million to $6.1 million for the threemonths ended March 31, 2010, from $1.5 million for the three monthsended March 31, 2009. Our cashinterest expense was $5.5 million excluding amortization of debt discount and$1.4 million for the three months ended March 31, 2010 and 2009, respectively.This increase was due to higher borrowing levels associated with the CSGacquisition and to a lesser extent from an increase in the weighted averageinterest rate.

 

***Other income.*********Other incomewas a gain of $2.8 million for the three months ended March 31, 2010compared to $20,000 for the three months ended March 31, 2009. Included inother income for the three months ended March 31, 2010, was a foreigncurrency revaluation gain of approximately $2.6 million due to fluctuations inthe value of the U.S. dollar, principally against the Euro.

 

***Income taxprovision.*** For the three months ended March 31,2010, our income tax provision was approximately $3.4 million compared to$1.5 million expense for the three months ended March 31, 2009.  The increase in our income tax provision isprimarily related to higher income from our non-U.S. operations that cannot beoffset by losses in the U.S. and increases in FASB ASC 740 reserves due tocertain income tax exposures, partially offset by the effect of adjustments tothe provision from prior years.  Oureffective tax rate was 75.4% and 101.7% for the three months ended March 31,2010 and 2009, respectively. Our effective tax rate differs from the U.S.Federal statutory rate primarily due to stock-based compensation expense notdeductible for income tax purposes, U.S. tax expense on undistributed foreignearnings, increases in FASB ASC 740 reserves due to certain income taxexposures, and profits of our international subsidiaries being taxed at ratesdifferent than the U.S. Federal statutory rate.

 

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**Liquidity and Capital Resources**

 

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

 

Ouroperations provided us cash of $27.9 million for the three months ended March 31,2010, which was attributable to net income of $1.1 million, depreciation,amortization and other non-cash charges of $24.2 million and a decrease in workingcapital of $2.7 million. Our operations provided us cash of $3.7 million for the three monthsended March 31, 2009, which was attributable to a net loss of $24,000,depreciation, amortization and other non-cash charges of $16.5 million and anincrease in working capital of $12.8 million which related primarily to thetiming of payments to suppliers.

 

We used cash of $8.0million and $5.8 million in investing activities for the three months ended March 31,2010, and March 31, 2009, respectively, which was comprised solely ofcapital expenditures to support our revenue growth. 

 

We used cash of $16.6million from financing activities for the three months ended March 31,2010. This consisted primarily of a $15 million voluntary pre-payment on the November 2009Credit Facility. In addition, $2.5 million was used to repurchase stock tosatisfy employee tax withholding requirements on the vesting of restrictedstock units and we received $0.9 million from the exercise of employeestock options. Weused cash of $0.7 million from financing activities for the three months ended March 31,2009 which included $0.6 million related to repurchased  stock to satisfy employee tax withholdingrequirements on the vesting of restricted stock units.

 

**Outlook**

 

We expect to experience operational benefitsfrom the acquisition of CSG, primarily through consolidating our two SS7 callsignaling networks and eliminating duplicate intelligent database platforms andduplicate telecommunications facilities. We also expect reduced overallcombined capital expenditures as a result of greater economies of scale and therationalization of network assets. We realized incremental pretax operationalcost savings of $1 million in 2009, and expect to realize an additional$5 million to $6 million in 2010, and an additional $2 millionto $3 million in 2011, for total expected annualized pretax operatingexpense reductions of $8 million to $10 million. We anticipate thatthese savings will be fully implemented on a run rate basis by the beginning ofthe fourth quarter of 2010. In addition, we expect to achieve lower interestexpense as a result of the debt refinancing that occurred in November 2009.

 

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**Seasonality**

 

Creditcard and debit card transactions account for a major percentage of thetransaction volume processed by our customers. The volume of these transactionson our networks generally is greater in the third and fourth quarter vacationand holiday seasons than during the rest of the year. Consequently, revenuesand earnings from credit card and debit card transactions in the first andsecond quarter generally are lower than revenues and earnings from credit cardand debit card transactions in the third and fourth quarters of the immediatelypreceding year. We expect that our operating results in the foreseeable futurewill be significantly affected by seasonal trends in the credit card and debitcard transaction market.

 

**Effects of Inflation**

 

Ourmonetary assets, consisting primarily of cash and receivables, and ournon-monetary assets, consisting primarily of intangible assets and goodwill,are not affected significantly by inflation. However, the rate of inflationaffects our expenses, such as those for employee compensation and costs ofnetwork services, which may not be recoverable in the price of services offeredby us.

 

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

 

***Interest rates***

 

Our principal exposure to market risk relates to changes in interestrates. As of March 31, 2010 we had $359.4 million outstanding underour November 2009 Credit Facility with interest rates tied to changes inthe lender’s base rate or the LIBOR rate. Interest on outstanding balancesunder the November 2009 Credit Facility, is payable, at the Company’soption, at the base rate plus a margin of 3%, or at LIBOR plus a margin of 4%.Additionally, in no event will the base rate be less than 3.0% or the LIBORrate be less than 2.0%. At March 31, 2010 the one-month LIBOR rate was0.24%. Based upon the outstanding borrowings on March 31, 2010 andassuming repayment of the Term Loan in accordance with scheduled maturities,each 1.0% increase or decrease in these rates, once the LIBOR rate exceeds the2.0% minimum, could affect our annual interest expense by $3.6 million.

 

As of March 31, 2010, we did not hold derivative financial orcommodity instruments and all of our cash and cash equivalents were held inmoney market or commercial accounts.

 

***Foreign currency risk***

 

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

 

We provide services to customers in the United States and increasinglyto international customers in over 40 countries including Canada and Mexico andcountries in Europe, Latin America and the Asia-Pacific region. We currentlymaintain operations and/or employees in 28 countries. We provide servicesin these countries using networks deployed in each country. We manage foreignexchange 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, denominated in foreigncurrencies. However, in December 2009 our subsidiary in Ireland entered into a$25.8 million loan agreement with our subsidiary in Bermuda to provide it withthe ability of making loans and working capital funding to our subsidiaries aswell as making distributions to its parent (TNS, Inc.). As this loan agreementis of a long-term nature we are exposed to movements in the euro compared tothe U.S. dollar. As it relates to this specific loan agreement, each $0.01movement in the euro to U.S. dollar exchange rate could affect our other income(loss) by $0.2 million. For the three months ended March 31, 2010, werecorded a gain on foreign currency revaluation of approximately$2.6 million.

 

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**Item 4. Controls and Procedures**

 

TheCompany maintains disclosure controls and procedures that are designed toensure that information required to be disclosed in the Company’s reports underthe Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management necessarily was required to apply its judgmentin evaluating the cost-benefit relationship of possible controls andprocedures.

 

**Evaluation**

 

TheCompany carried out an evaluation, under the supervision, and with theparticipation, of the Company’s management, including the Company’s ChiefExecutive Officer and the Company’s Chief Financial Officer, of theeffectiveness of the Company’s disclosure controls and procedures as of March 31,2010. Based on the foregoing, the Company’s Chief Executive Officer andprincipal financial officers concluded that the Company’s disclosure controlsand procedures were effective as of March 31, 2010 at the reasonableassurance level.

 

On May 1, 2009, the Company completed itsacquisition of CSG. Management has considered the CSG acquisition material tothe results of operations, cash flows and financial position from the date ofacquisition through March 31, 2010 and believes that the internal controlsand procedures of CSG have a material effect on internal controls overfinancial reporting. The Company is currently in the process of incorporatingthe internal controls and procedures of CSG into the overall assessment of, andreport on, internal controls over financial reporting for December 31,2010. There have been no other changes during the three months ended March 31,2010 covered by this report in the Company’s internal control over financialreporting or in other factors that could materially affect or are reasonablylikely to materially affect the internal control over financial reporting.

 

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**PART II—OTHERINFORMATION**

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

**Item 3.****                                ****Default Upon Senior Securities**

 

None.

 

**Item 4.****                                  ****Removed and Reserved**

 

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

 

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

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

 

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** **

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                     | TNS, Inc. |                                                                    |
|--------------------------|----------------|-------------------------------------------------------------------------|
|                     | (Registrant)   |                                                                    |
|                     |           |
| Date:  May 10, 2010 | By:            | /s/ HENRY H. GRAHAM, JR.                                                |
|                     |           |                                                                    |
|                     |           | Henry  H. Graham, Jr.                                              |
|                     |           | Chief  Executive Officer                                                |
|                     |           |                                                                    |
| Date:  May 10, 2010 | By:            | /s/  DENNIS L. RANDOLPH, JR.                                            |
|                     |           |                                                                    |
|                     |           | Dennis  L. Randolph, Jr.                                           |
|                     |           | Executive  Vice President, Chief Financial Officer & Treasurer |
|                          |                |                                                                         |  |

 

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