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 September 30,  2008**                                                                                                    |
| ** **                                                                                                                                                     | ** **                                                                                                         | ** ** |
| **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 itscharter)

 

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

 

**11480 Commerce Park Drive, Suite 600**

**Reston, VA 20191**

(Address of principal executive offices)

 

**(703) 453-8300**

(Registrant’s telephone number, includingarea code)

 

Indicate by 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.  x  Yes  o  No

 

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

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

 

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

 

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

 

**Shares Outstanding as of October 1, 2008**

 

25,020,220 Shares of Common Stock, $0.001 parvalue

 

 

 

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**TNS, INC.**

 

**INDEX**

 
| ** **                             | ** **                                                                                                            | **Page** |
|----------------------------------------|-----------------------------------------------------------------------------------------------------------------------|----------|
| **Part I: FINANCIAL INFORMATION** |                                                                                                                  |
| Item 1.                                | Condensed Consolidated Financial Statements (Unaudited)                                                               | 3        |
|                                   | Condensed Consolidated Balance Sheets as of  December 31, 2007 and September 30, 2008                       | 3        |
|                                   | Condensed Consolidated Statements of  Operations for the three and nine months ended September 30, 2007 and 2008 | 4        |
|                                   | Condensed Consolidated Statements of Cash  Flows for the nine months ended September 30, 2007 and 2008           | 5        |
|                                   | Notes to  Condensed Consolidated Financial Statements                                                                 | 6        |
| Item 2.                                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                           | 16       |
| Item 3.                                | Quantitative and Qualitative Disclosures  About Market Risk                                                           | 25       |
| Item 4.                                | Controls and Procedures                                                                                               | 25       |
| **Part II: OTHER INFORMATION**    |                                                                                                                  |
| Item 1.                                | Legal Proceedings                                                                                                     | 26       |
| Item 1A.                               | Risk Factors                                                                                                          | 26       |
| Item 2.                                | Unregistered Sales of Equity Securities and  Use of Proceeds                                                          | 26       |
| Item 3.                                | Default Upon Senior Securities                                                                                        | 26       |
| Item 4.                                | Submission of Matters to a Vote of Security  Holders                                                                  | 26       |
| Item 5.                                | Other Information                                                                                                     | 26       |
| Item 6.                                | Exhibits                                                                                                              | 26       |

 

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**PART I—FINANCIALINFORMATION**

 

**Item 1. Condensed Consolidated FinancialStatements**

 

**TNS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                                               | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **2007**              | ** ** | **2008**               | ** ** |
| ** **                                                                                                                                                                                               | ** ** | ** **            | ** ** | **(UNAUDITED)**        | ** ** |
| **ASSETS**                                                                                                                                                                                               |       |                  |       |                   |       |
| Current assets:                                                                                                                                                                                          |       |                  |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                |       | $                     | 17,805     |                   | $          | 23,016 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $3,093 and $4,098, respectively                                                                                                          |       | 75,112                |       | 73,628                 |       |
| Prepaid expenses                                                                                                                                                                                         |       | 6,765                 |       | 5,852                  |       |
| Deferred tax assets                                                                                                                                                                                      |       | 2,800                 |       | 2,386                  |       |
| Other current assets                                                                                                                                                                                     |       | 5,952                 |       | 5,411                  |       |
| Total current assets                                                                                                                                                                                     |       | 108,434               |       | 110,293                |       |
| Property and equipment, net                                                                                                                                                                              |       | 55,376                |       | 61,390                 |       |
| Identifiable intangible assets, net                                                                                                                                                                      |       | 180,330               |       | 161,932                |       |
| Goodwill                                                                                                                                                                                                 |       | 13,513                |       | 12,345                 |       |
| Deferred tax assets, net                                                                                                                                                                                 |       | 21,110                |       | 20,062                 |       |
| Other assets                                                                                                                                                                                             |       | 4,335                 |       | 4,255                  |       |
| Total assets                                                                                                                                                                                             |       | $                     | 383,098    |                   | $          | 370,277 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                           |       |                  |       |                   |       |
| Current liabilities:                                                                                                                                                                                     |       |                  |       |                   |       |
| Accounts payable, accrued expenses and  other current liabilities                                                                                                                                        |       | $                     | 57,069     |                   | $          | 58,626 |   |
| Deferred revenue                                                                                                                                                                                         |       | 18,521                |       | 17,406                 |       |
| Total current liabilities                                                                                                                                                                                |       | 75,590                |       | 76,032                 |       |
| Long-term debt, net of current portion                                                                                                                                                                   |       | 205,500               |       | 180,500                |       |
| Deferred tax liability                                                                                                                                                                                   |       | 5,537                 |       | 1,025                  |       |
| Other liabilities                                                                                                                                                                                        |       | 4,199                 |       | 2,467                  |       |
| Total liabilities                                                                                                                                                                                        |       | 290,826               |       | 260,024                |       |
| Commitments and contingencies                                                                                                                                                                            |       |                  |       |                   |       |
| Stockholders’ equity:                                                                                                                                                                               |       |                  |       |                   |       |
| Common stock, $0.001 par value; 130,000,000  shares authorized; 24,274,195 shares issued and 24,258,942 shares outstanding  and 25,034,903 shares issued and 25,020,220 shares outstanding, respectively |       | 24                    |       | 25                     |       |
| Treasury stock, 15,253 shares and 14,683  shares, respectively                                                                                                                                           |       | (239                  | )          | (335                   | )          |
| Additional paid-in capital                                                                                                                                                                               |       | 131,485               |       | 148,550                |       |
| Accumulated deficit                                                                                                                                                                                      |       | (44,278               | )          | (39,765                | )          |
| Accumulated other comprehensive income                                                                                                                                                                   |       | 5,280                 |       | 1,778                  |       |
| Total stockholders’ equity                                                                                                                                                                          |       | 92,272                |       | 110,253                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                          |       | $                     | 383,098    |                   | $          | 370,277 |   |

 

See accompanying notes to condensedconsolidated financial statements (unaudited).

 

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**TNS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

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

 
| ** **                                                                                   | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenues                                                                                     |       | $                                                    | 84,542     |                                                | $          | 88,629 |   | $ | 236,564 |   | $ | 262,903 |   |
| Operating expenses:                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of network services, exclusive of the  items shown separately below                     |       | 42,109                                               |       | 41,274                                              |       | 121,154 |   | 124,206 |   |
| Engineering and development                                                                  |       | 6,943                                                |       | 7,252                                               |       | 19,946 |   | 22,120 |   |
| Selling, general, and administrative                                                         |       | 20,108                                               |       | 20,965                                              |       | 54,863 |   | 61,364 |   |
| Depreciation and amortization of property  and equipment                                     |       | 5,977                                                |       | 6,140                                               |       | 17,214 |   | 18,201 |   |
| Amortization of intangible assets                                                            |       | 6,282                                                |       | 5,869                                               |       | 18,365 |   | 18,327 |   |
| Total operating expenses                                                                     |       | 81,419                                               |       | 81,500                                              |       | 231,542 |   | 244,218 |   |
| Income from operations                                                                       |       | 3,123                                                |       | 7,129                                               |       | 5,022 |   | 18,685 |   |
| Interest expense                                                                             |       | (4,299)                                              |       | (2,390                                              | )          | (12,488 | ) | (8,730 | ) |
| Interest income                                                                              |       | 227                                                  |       | 214                                                 |       | 901 |   | 541 |   |
| Other income (expense), net                                                                  |       | 1,139                                                |       | (902                                                | )          | 2,274 |   | (1,123 | ) |
| Income (loss) before income tax benefit and  equity in net loss of unconsolidated affiliates |       | 190                                                  |       | 4,051                                               |       | (4,291 | ) | 9,373 |   |
| Income tax (provision) benefit                                                               |       | (69                                                  | )          | (2,141                                              | )          | 1,361 |   | (4,766 | ) |
| Equity in net income (loss) of  unconsolidated affiliates                                    |       | 135                                                  |       | (23                                                 | )          | 634 |   | (94 | ) |
| Net income (loss)                                                                            |       | $                                                    | 394        |                                                | $          | 1,887 |   | $ | (2,296 | ) | $ | 4,513 |   |
|                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Basic net income (loss) per common share                                                     |       | $                                                    | 0.02       |                                                | $          | 0.08 |   | $ | (0.09 | ) | $ | 0.18 |   |
| Diluted net income (loss) per common share                                                   |       | $                                                    | 0.02       |                                                | $          | 0.07 |   | $ | (0.09 | ) | $ | 0.18 |   |
| Basic weighted average common shares  outstanding                                            |       | 24,217,031                                           |       | 24,989,865                                          |       | 24,187,316 |   | 24,667,442 |   |
| Diluted weighted average common shares  outstanding                                          |       | 24,339,155                                           |       | 25,549,865                                          |       | 24,187,316 |   | 25,176,857 |   |
| Dividends declared per common share                                                          |       | $                                                    | —     |                                                | $          | — |   | $ | 4.00 |   | $ | — |   |

 

See accompanying notes to condensedconsolidated financial statements (unaudited).

 

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**TNS, INC.**

 

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

**(dollars in thousands)**

 
| ** **                                                                       | ** ** | **Nine  months ended September 30** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                      | ** ** | **2008** | ** ** |
| Cash flows from operating activities:                                            |       |                                          |       |   |   |
| Net (loss) income                                                                |       | $                                             | (2,296     | ) | $ | 4,513 |   |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                          |       |   |   |
| Non-cash items                                                                   |       | 36,966                                        |       | 45,472 |   |
| Working capital items                                                            |       | 637                                           |       | (1,497 | ) |
| Net cash provided by operating activities:                                       |       | 35,307                                        |       | 48,488 |   |
| Cash flows from investing activities                                             |       |                                          |       |   |   |
| Purchases of property and equipment                                              |       | (15,297                                       | )          | (25,269 | ) |
| Proceeds from sale of property and  equipment                                    |       | 2,164                                         |       | — |   |
| Proceeds from sale of investment in  unconsolidated affiliate                    |       | 888                                           |       | — |   |
| Cash paid for business acquisitions, net of  cash acquired                       |       | (4,166                                        | )          | — |   |
| Net cash used in investing activities:                                           |       | (16,411                                       | )          | (25,269 | ) |
| Cash flows from financing activities                                             |       |                                          |       |   |   |
| Proceeds from issuance of long-term debt,  net of issuance costs of $3,051       |       | 221,949                                       |       | — |   |
| Payment of special dividend, $4 per common  share                                |       | (98,294                                       | )          | — |   |
| Repayments of long-term debt                                                     |       | (137,812                                      | )          | (25,000 | ) |
| Proceeds from stock option exercises,  inclusive of tax benefit                  |       | 51                                            |       | 9,589 |   |
| Payment of long-term debt financing costs                                        |       | —                                        |       | (75 | ) |
| Purchase of treasury stock                                                       |       | (720                                          | )          | (1,919 | ) |
| Net cash used in financing activities                                            |       | (14,826                                       | )          | (17,405 | ) |
| Effect of exchange rates on cash and cash  equivalents                           |       | (1,943                                        | )          | (603 | ) |
| Net increase in cash and cash equivalents                                        |       | 2,127                                         |       | 5,211 |   |
| Cash and cash equivalents, beginning of  period                                  |       | 17,322                                        |       | 17,805 |   |
| Cash and cash equivalents, end of period                                         |       | $                                             | 19,449     |   | $ | 23,016 |   |
|                                                                             |       |                                          |       |   |   |
| Supplemental disclosures of cash flow  information:                              |       |                                          |       |   |   |
| Cash paid for interest                                                           |       | $                                             | 10,377     |   | $ | 7,719 |   |
| Cash paid for income taxes                                                       |       | $                                             | 6,608      |   | $ | 3,818 |   |

 

See accompanying notes to condensedconsolidated financial statements (unaudited).

 

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

 

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

 

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

 

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

 

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

 

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

 

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements reflect adjustments (all of which are of a normal and recurringnature) that are necessary for the fair presentation of the periods presented.The results of operations for the three and nine months ended September 30,2008 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 17,2008, which includes consolidated financial statements and the notes theretofor the year ended December 31, 2007.

 

*Dividends and Recapitalization*

 

On March 28, 2007,the Company’s board of directors declared a special dividend of $4.00 percommon share, which was paid on April 12, 2007. Also, on March 28,2007, the Company entered into a secured credit facility, which consists of twofacilities: a senior secured term loan facility in an aggregate principalamount of $225 million (the Term Facility) and a senior secured revolvingcredit facility in an aggregate principal amount of $15 million (theRevolving Facility). The Company used approximately $98.3 million of theproceeds from the Term Facility to pay the special dividend. The remainder ofthe proceeds from the Term Facility were used to refinance existing debt, topay fees related to the senior secured credit facility and the specialdividend, and for general corporate purposes.

 

*Capital Structure*

 

During the nine monthsended September 30, 2008, the Company issued 523,286 shares of commonstock following the exercise of stock options and 337,565 shares of commonstock following the vesting of restricted stock units. During the nine monthsended September 30, 2007, the Company issued 3,320 shares of common stockfollowing the exercise of stock options and 149,426 shares of common stockfollowing the vesting of restricted stock units. The Company purchased 99,573and 43,710 of treasury shares following the vesting of restricted stock unitsduring the nine months ended September 30, 2008 and 2007, respectively.The Company retired 100,143 and 73,878 treasury shares during the nine monthsended September 30, 2008 and 2007, respectively.

 

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**Use of Estimates**

 

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

 

**Revenue Recognition**

 

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

 

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

 

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

 

**Cost of Network Services**

 

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

 

**Stock-Based Compensation**

 

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

 

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

 
| ** **                          | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2008**                        | ** ** | **2007** | ** ** | **2008** | ** ** |
| Cost of network services            |       | $                                | 324        |                            | $          | 282 |   | $ | 798 |   | $ | 858 |   |
| Engineering and development         |       | 479                              |       | 394                             |       | 1,656 |   | 1,148 |   |
| Selling, general and administrative |       | 3,009                            |       | 2,650                           |       | 6,780 |   | 7,368 |   |
|                                |       | $                                | 3,812      |                            | $          | 3,326 |   | $ | 9,234 |   | $ | 9,374 |   |

 

On March 28, 2007the Company’s Board of Directors decided to allow the outstanding restrictedstock units to receive dividend equivalent payments. As a result of thisdecision, the Company recorded $1.5 million of stock-based compensation,which is included in the $9.2 million of stock-based compensationmentioned above for the nine months ended September 30, 2007. The$1.5 million charge related to this decision is reported as follows in theaccompanying condensed consolidated statement of operations for the nine monthsended September 30, 2007: $0.1 million is included in cost of networkservices, $0.4 million is included in engineering and development and$1.0 million is included in selling, general and administrative expenses.This modification increased net loss per share by $0.04 per share. As of September 30,2008, there was a total of $15.8 million of unrecognized compensation costrelated to stock-based awards, which is expected to be recognized over aweighted average period of approximately two years.

 

*Time-Vested Awards*

 

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

 

During the three monthsended September 30, 2007, the Company granted 10,500 stock options and150,766 restricted stock units at weighted average estimated fair values of$6.76 and $13.30, respectively. During the nine months ended September 30,2007, the Company granted 342,824 stock options and 615,693 restricted stockunits at weighted average estimated fair values of $6.28 and $14.10,respectively. During the three months ended September 30, 2008, theCompany granted 17,520 stock options and 114,176 restricted stock units atweighted average estimated fair values of $9.95 and $23.30, respectively.During the nine months ended September 30, 2008, the Company granted42,520 stock options and 134,276 restricted stock units at weighted averageestimated fair values of $8.75 and $22.36, respectively.

 

*Performance-Based Awards*

 

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

 

In May 2007, theCompany put in place a long-term performance-based stock compensation plan (the2007 Equity Performance Plan). The actual payout under the Company’s 2007Equity Performance Plan was 147% of the targeted payout, the results of which wereapproved by the Company’s board of directors in February 2008. The totalperformance-based awards issued under the Company’s 2007 Equity PerformancePlan were 576,076 stock options and 236,341 restricted stock units. Theweighted average grant date fair value of performance-based stock options andrestricted stock units granted was $6.23 and $12.39, respectively.  As of September 30, 2008, there was a totalof $1.4 million of unrecognized compensation expense related to theseperformance-based awards which is included in the $15.8 million totalunrecognized compensation cost mentioned previously.

 

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In February 2008,the Company put in place a long-term performance-based stock compensation plan(the 2008 Equity Performance Plan). The target payout under the 2008 EquityPerformance Plan may range from 0% to 100% of an employee’s target payout. Thetotal number of awards that would be issued under the Company’s 2008 EquityPerformance Plan, assuming that the target payout level was achieved, would be253,266 stock options and 248,142 restricted stock units. The weighted averagegrant date fair value of performance-based stock options and restricted stockunits granted was $6.78 and $16.15, respectively.  As of September 30, 2008, there was atotal of $3.3 million of unrecognized compensation expense related tothese performance based awards which is included in the $15.8 million total unrecognizedcompensation cost mentioned above.

 

**Income Taxes**

 

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

 

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

 

The Company recordsinterest and penalties related to income taxes as components of the income taxprovision, which totaled $59,000 and $60,000 for the nine months ended September 30,2007 and September 30, 2008, respectively. Of the $4.7 million liabilityfor unrecognized income tax benefits as of September 30, 2008, the Company’saccrual for potential interest and penalties associated with uncertain taxpositions was $205,000. 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.

 

The Company remainssubject to examination by U.S. Federal, state, local and foreign taxauthorities for tax years 2004 through 2007.  With few exceptions, theCompany is no longer subject to U.S. Federal, state, local or foreign taxexaminations for the tax years prior to 2004.

 

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

 
| Balance as of January 1, 2008                         |   | $   | 3,863  |   |
|------------------------------------------------------------|--------|-----|--------|--------|
| Additions for tax positions related to the  current period |   | 756 |   |
| Reductions for tax positions related to  prior years       |   | (90 | )      |
| Balance as of September 30, 2008                      |   | $   | 4,529  |   |

 

The entire balance ofunrecognized tax benefits as of September 30, 2008 would impact theeffective tax rate if recognized.

 

The Company’s effectivetax rate for the nine months ended September 30, 2007 and September 30,2008 of 37.2% and 51.4%, respectively, differ from the U.S. Federal statutoryrate primarily due to stock-based compensation expense not deductible forincome tax purposes and increases in FIN 48 reserves due to certain income tax exposures,offset by profits of our international subsidiaries being taxed at ratesdifferent than the U.S. statutory rate.

 

**Recent Accounting Pronouncements**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157defines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles, and expands

 

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disclosures about fair value measurements. In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities.” SFAS No. 159 permits entities to choose to measuremany financial assets and financial liabilities at fair value. Forfinancial assets and financial liabilities, SFAS 157 was effective for theCompany on January 1, 2008. The adoption of SFAS 157 to the Company’sfinancial assets and financial liabilities did not have a material effect onthe Company’s consolidated financial statements. As we did not elect to fairvalue any of our financial instruments under the provisions of SFAS 159, theadoption of this statement did not have any impact on our financial position orresults of operations.

 

In December 2007,the FASB issued SFAS No. 141 (R), “Business Combinations, a revision ofSFAS No. 141”. SFAS No. 141 (R) establishes principles and requirements for how theacquirer of a business recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree. The statement also provides guidance for recognizingand measuring the goodwill acquired in the business combination and determineswhat information to disclose to enable users of the financial statement toevaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008. Accordingly, any business combinationswe engage in will be recorded and disclosed following existing GAAP until January 1,2009. The Company expects SFAS No. 141 (R) will have an impact on itsconsolidated financial statements when effective, but the nature and magnitudeof the specific effects will depend upon the nature, terms and size of theacquisitions the Company consummates after the effective date. The Company isstill assessing the full impact of this standard on its future consolidatedfinancial statements.

 

**2.****                                      Acquisitionand Long-term Investments**

 

**TNS Payment Technologies, Pty LimitedAcquisition (formerly Dialect Payment Technologies, Pty Limited)**

 

On June 8, 2007, theCompany acquired all of the outstanding shares of Dialect Payment TechnologiesPty Limited (Dialect), an Australian provider of internet payment gatewayservices to the card-not-present transaction market, for a purchase price of$4.2 million, plus direct acquisition costs of approximately$0.4 million. The purchase price includes approximately $0.9 millionwhich is currently held in escrow and which may be refundable to the Companydepending on the performance of a particular customer contract. The Companyaccounted for the transaction as a purchase under the provisions of SFAS No. 141.The Company purchased Dialect primarily to expand its current suite of POSproduct offerings. The purchase price for Dialect was allocated as follows (inthousands):

 
| Current assets                                            |   | $      | 580    |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Accounts receivable                                       |   | 964    |   |
| Property and equipment                                    |   | 866    |   |
| Developed technology                                      |   | 6,315  |   |
| Customer relationships                                    |   | 5,132  |   |
| Tradename                                                 |   | 168    |   |
| Non-compete agreements                                    |   | 946    |   |
| Deferred tax asset                                        |   | 206    |   |
| Accounts payable, accrued expenses and  other liabilities |   | (1,983 | )      |
| Deferred revenue                                          |   | (8,608 | )      |
| Net assets acquired                                       |   | $      | 4,586  |   |

 

The amounts allocated tothe customer relationships and developed technology are being amortized overtheir estimated useful life of seven years. The amounts allocated to thenon-compete agreements and tradename are being amortized over their estimateduseful life of three years and two years, respectively. Unaudited pro formaresults of operations are not provided because the historical operating resultswere not significant and pro forma results would not be significantly differentfrom reported results for the periods presented. The Company’s results ofoperations include the operating results of this acquisition beginning June 8,2007.

 

On 22 September 2008,Dialect Payment Technologies Pty Limited changed its name to TNS PaymentTechnologies Pty Limited.

 

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**3.****                                      Long-termDebt**

 

On March 28, 2007,the Company entered into a $240.0 million senior secured credit facility(2007 Credit Facility) to finance the special cash dividend and to refinanceits 2005 amended and restated senior secured credit facility (2005 CreditFacility). The 2007 Credit Facility consists of a senior secured term loanfacility in an aggregate principal amount of $225.0 million (TermFacility) and a senior secured revolving credit facility in an aggregateprincipal amount of $15.0 million (Revolving Facility), under which therewere no borrowings as of September 30, 2008. The Revolving Facilitymatures March 27, 2013. Payments on the Term Facility are due in quarterlyinstallments over the seven year term beginning June 30, 2007, with theremainder payable on March 28, 2014. Voluntary prepayments on the TermFacility are applied as directed by the Company. The Company made voluntarypre-payments on the Term Facility totaling $25.0 million during the ninemonths ended September 30, 2008.

 

As of September 30,2008, the total scheduled remaining payments on the Term Facility are asfollows (in thousands):

 
| Three months ending December 31, 2008 |   | $       | —  |   |
|--------------------------------------------|--------|---------|---------|--------|
| 2009                                       |   | —  |    |
| 2010                                       |   | —  |    |
| 2011                                       |   | —  |    |
| 2012                                       |   | —  |    |
| Thereafter                                 |   | 180,500 |    |
|                                       |   | $       | 180,500 |   |

 

Interest on theoutstanding balances under the Revolving Facility is payable, at the Company’soption, at a rate equal to the higher of the Wall Street Journal published “baserate on corporate loans posted by at least 75% of the nation’s largest banks”or the federal funds rate plus 50 basis points (the “Base Rate”), in each case,plus a margin of 0.75% or at the London Interbank Offered Rate (“LIBOR”), plusa margin of 1.75%. Interest on the outstanding balances under the Term Facilityis payable, at the Company’s option, at the Base Rate plus a margin of 1.0%, orat LIBOR plus a margin of 2.0%. For the nine months ended September 30,2008, borrowings on the Term Facility bore interest at the LIBOR rate (4.8% asof September 30, 2008, inclusive of 2.0% margin).  The weighted average interest rate for thenine months ended September 30, 2008 was 6.03%.  The weighted average interest rate for thenine months ended September 30, 2007 was 7.59%.  The Revolving Credit Facility is subject toan annual commitment fee in an amount equal to 0.5% per annum multiplied by theamount of funds available for borrowing under the Revolving Facility. Interestpayments on the 2007 Credit Facility are due, monthly, bimonthly or quarterlyat the Company’s option.

 

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

 

The terms of the 2007Credit Facility require the Company to comply with financial and nonfinancialcovenants, including maintaining a specified leverage ratio at the end of eachfiscal quarter and complying with specified annual limits on capitalexpenditures. As of September 30, 2008, the Company was required tomaintain a leverage ratio of less than 3.0 to 1.0. The maximum leverage ratiocontinues to decline over the term of the 2007 Credit Facility. The Company’sleverage ratio as of September 30, 2008 was 2.1 to 1.0. The 2007 CreditFacility also contains nonfinancial covenants that restrict some of the Company’scorporate activities, including its ability to dispose of assets, incuradditional debt, pay dividends, create liens, make investments, make capitalexpenditures and engage in specified transactions with affiliates.Noncompliance with any of the financial or nonfinancial covenants without cureor waiver would constitute an event of default under the 2007 Credit Facility.An event of default resulting from a breach of a financial or nonfinancialcovenant may result, at the option of the lenders, in an acceleration of theprincipal and interest outstanding, and a termination of the RevolvingFacility. The 2007 Credit Facility also contains other customary events ofdefault (subject to specified grace periods), including defaults based onevents of bankruptcy and insolvency, nonpayment of principal, interest or feeswhen due, breach of specified covenants, change in control and materialinaccuracy of representations and warranties. The Company was in compliancewith the financial and non-financial covenants of the 2007 Credit Facility asof September 30, 2008.

 

In connection with theclosing of the 2007 Credit Facility, the Company incurred approximately$3.1 million in financing costs. These financing costs were deferred andare being amortized using the effective interest method over the life of the2007 Credit Facility. In connection with the repayment of the 2005 CreditFacility in March 2007, the Company wrote-off approximately $1.4 millionin unamortized deferred financing costs related to the 2005 Credit Facility.Such write-off has been included in interest expense in the accompanyingcondensed consolidated statement of operations for the nine months ended September 30,2007.

 

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**4.****                                      Comprehensive(Loss) Income**

 

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

 
| ** **                               | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Net income (loss)                        |       | $                                                    | 394        |                                                | $          | 1,887 |   | $ | (2,296 | ) | $ | 4,513 |   |
| Foreign currency translation adjustments |       | 934                                                  |       | (6,395                                              | )          | 1,852 |   | (3,502 | ) |
| Total comprehensive income (loss)        |       | $                                                    | 1,328      |                                                | $          | (4,508 | ) | $ | (444 | ) | $ | 1,011 |   |

 

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

 

SFAS No. 128, “EarningsPer Share”, requires the presentation of basic and diluted earnings per share.Basic earnings (loss) per common share is computed by dividing income (loss)attributable to common stockholders by the weighted average number of commonshares outstanding for the period. The diluted earnings (loss) per common sharedata is computed using the weighted average number of common shares outstandingplus the dilutive effect of common stock equivalents, unless the common stockequivalents are anti-dilutive. During the nine months ended September 30,2007, the treasury stock effect of options to purchase 1,973,367 shares ofcommon stock and 83,651 restricted stock units were not included in thecomputation of diluted income (loss) per common share as their effect wouldhave been anti-dilutive.

 
| ** **                                                | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Net income (loss)                                         |       | $                                                    | 394        |                                                | $          | 1,887 |   | $ | (2,296 | ) | $ | 4,513 |   |
| Weighted average common share calculation:                |       |                                                 |       |                                                |       |   |   |   |   |
| Basic weighted average common shares  outstanding         |       | 24,217,031                                           |       | 24,989,865                                          |       | 24,187,316 |   | 24,667,442 |   |
| Treasury stock effect of outstanding  options to purchase |       | —                                               |       | 316,949                                             |       | — |   | 227,885 |   |
| Treasury stock effect of unvested  restricted stock units |       | 122,124                                              |       | 243,051                                             |       | — |   | 281,530 |   |
| Diluted weighted average common shares  outstanding       |       | 24,339,155                                           |       | 25,549,865                                          |       | 24,187,316 |   | 25,176,857 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss) per common share:                       |       |                                                 |       |                                                |       |   |   |   |   |
| Basic net income (loss) per common share                  |       | $                                                    | 0.02       |                                                | $          | 0.08 |   | $ | (0.09 | ) | $ | 0.18 |   |
| Diluted net income (loss) per common share                |       | $                                                    | 0.02       |                                                | $          | 0.07 |   | $ | (0.09 | ) | $ | 0.18 |   |

 

**6.****                                      SegmentInformation**

 

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

 

Management evaluates theNorth American and ISD performance on EBITDA before stock compensation expensebecause operating expenses are distinguishable between North American and ISDoperations. The Company defines EBITDA before stock compensation expense asincome from operations before depreciation, amortization and stock compensationexpense. EBITDA before stock compensation expense is not a generally acceptedaccounting principle measure, but rather a measure employed by management toview operating results adjusted for major noncash items. The Company’sdefinition of EBITDA before stock compensation expense may not be comparable tosimilarly titled measures used by other entities. Assets are not segregatedbetween reportable segments, and management does not use asset information bysegments to evaluate segment performance. As such, no information is presentedrelated to fixed assets by reportable segment and capital expenditures for eachsegment.

 

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Revenue for the Company’sfour business units is presented below (in thousands):

 
| ** **     | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **     | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| ISD            |       | $                                                    | 37,947     |                                                | $          | 41,738 |   | $ | 98,534 |   | $ | 121,516 |   |
| POS            |       | 20,788                                               |       | 18,724                                              |       | 61,341 |   | 56,224 |   |
| TSD            |       | 15,427                                               |       | 16,441                                              |       | 46,449 |   | 51,109 |   |
| FSD            |       | 10,380                                               |       | 11,726                                              |       | 30,240 |   | 34,054 |   |
| Total revenues |       | $                                                    | 84,542     |                                                | $          | 88,629 |   | $ | 236,564 |   | $ | 262,903 |   |

 

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

 
| ** **                                      | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| ISD                                             |       | $                                                    | 14,161     |                                                | $          | 15,755 |   | $ | 34,874 |   | $ | 45,352 |   |
| North Ameirca                                   |       | 5,033                                                |       | 6,709                                               |       | 14,961 |   | 19,235 |   |
| Total EBITDA before stock compensation  expense |       | $                                                    | 19,194     |                                                | $          | 22,464 |   | $ | 49,835 |   | $ | 64,587 |   |

 

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

 
| ** **                                                                             | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| EBITDA before stock compensation expense                                               |       | $                                                    | 19,194     |                                                | $          | 22,464 |   | $ | 49,835 |   | $ | 64,587 |   |
| Reconciling items:                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Depreciation and amortization of property  and equipment                               |       | (5,977                                               | )          | (6,140                                              | )          | (17,214 | ) | (18,201 | ) |
| Amortization of intangible assets                                                      |       | (6,282                                               | )          | (5,869                                              | )          | (18,365 | ) | (18,327 | ) |
| Stock compensation expense                                                             |       | (3,812                                               | )          | (3,326                                              | )          | (9,234 | ) | (9,374 | ) |
| Interest expense                                                                       |       | (4,299                                               | )          | (2,390                                              | )          | (12,488 | ) | (8,730 | ) |
| Interest income                                                                        |       | 227                                                  |       | 214                                                 |       | 901 |   | 541 |   |
| Other income (expense), net                                                            |       | 1,139                                                |       | (902                                                | )          | 2,274 |   | (1,123 | ) |
| Income (loss) before income taxes and  equity in net loss of unconsolidated affiliates |       | $                                                    | 190        |                                                | $          | 4,051 |   | $ | (4,291 | ) | $ | 9,373 |   |

 

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

 
| ** **                                              | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **2007**              | ** ** | **2008**               | ** ** |
| POS                                                     |       | $                     | 114,573    |                   | $          | 106,428 |   |
| ISD                                                     |       | 54,430                |       | 45,349                 |       |
| TSD                                                     |       | 3,760                 |       | 2,913                  |       |
| FSD                                                     |       | 21,080                |       | 19,587                 |       |
| Total goodwill and identifiable intangible  assets, net |       | $                     | 193,843    |                   | $          | 174,277 |   |

 

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**Geographic Information**

 

The Company sells itsservices through foreign subsidiaries in Australia, Austria, Bermuda, Canada,France, Germany, India, Ireland, Italy, Japan, Mexico, the Netherlands, NewZealand, Poland, Romania, South Korea, Spain, Sweden, Thailand and the UnitedKingdom. Information regarding revenues and long-lived tangible assetsattributable to each geographic region is stated below.

 

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

 
| ** **     | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **     | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| North America  |       | $                                                    | 46,595     |                                                | $          | 46,909 |   | $ | 138,030 |   | $ | 141,422 |   |
| Europe         |       | 29,661                                               |       | 32,992                                              |       | 82,241 |   | 96,417 |   |
| Asia-Pacific   |       | 8,286                                                |       | 8,728                                               |       | 16,293 |   | 25,064 |   |
| Total revenues |       | $                                                    | 84,542     |                                                | $          | 88,629 |   | $ | 236,564 |   | $ | 262,903 |   |

 

Revenues from the Company’ssubsidiaries in the United Kingdom were $18.1 million and$18.9 million for the three months ended September 30, 2007 and 2008,respectively. Revenues from the Company’s subsidiaries in the United Kingdomwere $43.2 million and $56.1million for the nine months ended September 30,2007 and 2008, respectively.

 

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

 
| ** **                                         | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **2007**              | ** ** | **2008**               | ** ** |
| North America                                      |       | $                     | 204,177    |                   | $          | 196,041 |   |
| Europe                                             |       | 53,310                |       | 47,975                 |       |
| Asia-Pacific                                       |       | 17,177                |       | 15,968                 |       |
| Total long lived assets, goodwill and  intangibles |       | $                     | 274,664    |                   | $          | 259,984 |   |

 

**7.****                                      RestructuringCosts**

 

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

 

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

 

During the three and ninemonths ended September 30, 2008 the Company incurred an additional $0.7 millionin severance and benefits which was included in selling, general andadministrative expense.

 

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

 
| ** **                                         | ** ** | **2008** | ** ** |
|----------------------------------------------------|------------|----------|------------|
| Balance as of January 1                       |       | $        | 4,216      |   |
| Severance and benefits from executive  departures  |       | 700      |       |
| Accretion of liability due to the passage  of time |       | 52       |       |
| Effects of foreign currency translation            |       | 40       |       |
| Cash paid                                          |       | (3,886   | )          |
| Balance as of September 30                    |       | $        | 1,122      |   |

 

The remaining cashexpenditures relating to the severance and benefits will be paid through June 2009.

 

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**8.****                                      Litigationand Claims**

 

Certain states in whichthe Company operates assess sales taxes on certain services provided by theCompany. The Company believes it has no liability because its customercontracts contain terms that stipulate the customer, not the Company, isresponsible for any sales tax liability. In jurisdictions where the customermay be liable for sales taxes, the Company either includes sales tax on itsinvoice or has obtained an exemption certificate from the customer. Certainstates have audited the Company from 1996 to early 2001. On April 25,2008, the Company entered into a settlement agreement with the remaining state’sCommissioner of Revenue to settle the only state sales tax assessment remainingfor the period from 1996 to early 2001. In the settlement, the Company agreedto settle the outstanding sales tax assessment in the amount of $942,000 for asettlement payment in the amount of $250,000. The Company’s customer paid$212,500 of the settlement payment with the remaining $37,500 paid by theCompany. Based on the final executed settlement, the Company reduced its netliability for this matter by $0.9 million. This $0.9 million benefit, or$0.02 per share, is included in selling, general and administrative expenses inthe accompanying consolidated statements of operations for the nine monthsended September 30, 2008.

 

The Company, John J.McDonnell, Jr., the Company’s former Chief Executive Officer, and Henry H.Graham, Jr., the Company’s Chief Executive Officer, are defendants in aputative class action lawsuit filed in connection with the Company’s publicoffering of common stock in September 2005 (“Secondary Offering”). TheCement Masons and Plasterers Joint Pension Trust, purportedly on behalf ofitself and others similarly situated, filed the class action lawsuit captioned *Cement Masons & Plasterers Joint PensionTrust v. TNS, Inc., et al.,* Case No. 1:06 CV 363, CMH/BRP,on April 4, 2006 in the United States District Court for the EasternDistrict of Virginia. After denying the Company’s motion to dismiss on September 12,2006, the Court ordered the parties to conduct discovery in the case. In March 2007,the parties agreed to stay further discovery in the case with the Court’sapproval pending a mediation designed to reach a settlement resolving thelawsuit. The parties conducted a mediation in April 2007, and subsequentlyentered into a settlement agreement in February 2008. The settlementagreement provides for a cash settlement payment of $3.6 million to be paid bythe Company’s insurer and payment of expenses of plaintiff’s lead counsel notto exceed $50,000. In exchange for the cash settlement payment and expensepayment, the Company and all defendants would be released from all claims ofclass members relating to the action. The Court granted final approval of thesettlement agreement after a fairness hearing on September 20, 2008. We donot expect the final outcome of the lawsuit to have a material adverse affecton our financial condition or operating results. 

 

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

 

You should read thefollowing discussion of the financial condition and results of operations ofTNS, Inc. in conjunction with the consolidated financial statements andthe related notes included in our annual report on Form 10-K filed withthe SEC on March 17, 2008 and available directly from the SEC atwww.sec.gov and the condensed consolidated financial statements and the relatednotes of TNS, Inc., included elsewhere in this quarterly report.

 

There are statements madeherein which may not address historical facts and, therefore, could beinterpreted to be forward-looking statements within the meaning of The PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements arebased on current expectations, forecasts and assumptions that are subject torisks and uncertainties that could cause actual results to differ materiallyfrom those set forth in, or implied by, the forward-looking statements. TheCompany has attempted, whenever possible, to identify these forward-lookingstatements using words such as “may,” “will,” “should,” “projects,” “estimates,”“expects,” “plans,” “intends,” “anticipates,” “believes,” and variations ofthese words and similar expressions. Similarly, statements herein that describethe Company’s business strategy, prospects, opportunities, outlook, objectives,plans, intentions or goals are also forward-looking statements. Actual resultsmay differ materially from those indicated by such forward-looking statementsas a result of various important factors, including: the Company’s relianceupon a small number of customers for a significant portion of its revenue;competitive factors such as pricing pressures; uncertainties related to theupdated international tax planning strategy implemented by the Company; 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; fluctuations inthe Company’s quarterly results because of the seasonal nature of the businessand other factors outside of the Company’s control such as fluctuations inforeign exchange rates; the Company’s substantial debt could adversely affectits financial health because the Company may be unable to obtain additionalfinancing for working capital, capital expenditures, acquisitions and generalcorporate purposes, the Company may not generate sufficient cash flow to repaythe debt on a timely basis or to pre-pay the debt, and a significant portion ofthe Company’s cash flow from operations will be dedicated to the repayment orservicing of indebtedness, thereby reducing the amount of cash available forother purposes; the Company’s ability to identify, execute or effectivelyintegrate acquisitions; the Company’s ability to identify, execute oreffectively integrate future acquisitions; increases in the prices charged bytelecommunication providers for services used by the Company; unfavorableforeign exchange movements; the Company’s ability to adapt to changingtechnology; additional costs related to compliance with the Sarbanes-Oxley Actof 2002, any revised New York Stock Exchange listing standards, SEC rule changesor other corporate governance issues; and other risk factors described in theCompany’s annual report on Form 10-K filed with the SEC on March 17,2008. In addition, the statements in this quarterly report are made as of thedate of this filing. The Company expects that subsequent events or developmentswill cause its views to change. The Company undertakes no obligation to updateany of the forward-looking statements made herein, whether as a result of newinformation, future events, changes in expectations or otherwise. Theseforward-looking statements should not be relied upon as representing theCompany’s views as of any date subsequent to the date of this filing. 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 internationaldata communications company which provides networking, data communications andvalue added services to many of the world’s leading retailers, banks andpayment processors. We are also a leading provider of secure data and voicenetwork services to the global financial services industry. We operate one ofthe largest unaffiliated Signaling System No. 7 networks in the UnitedStates capable of providing services nationwide, and we utilize this network toprovide call signaling and database access services to the domestictelecommunications industry. Our data communications services enable secure andreliable transmission of time-sensitive, transaction-related informationcritical to our customers’ operations. Our customers outsource their datacommunications requirements to us because of our substantial expertise,comprehensive customer support and cost-effective services. We provide servicesto customers in the United States and increasingly to international customersin 29 countries, including Canada and Mexico and countries in Europe, LatinAmerica and the Asia-Pacific region.

 

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

 

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We generate revenuesthrough four business divisions:

 

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

 

·                  ***Telecommunication services.***Weprovide call signaling services that enable telecommunications service providersto establish and terminate telephone calls placed by their subscribers. We alsoprovide database access services that enable our customers to provideintelligent network services, such as caller identification, toll-free callrouting and local number portability, and validation services, such as creditcard, calling card, third- party billing and collect calling. Ourtelecommunication services division generates revenues primarily from fixedmonthly fees charged for our call signaling services and per-query fees chargedfor our database access and validation services.

 

·                  ***Financial services.***Weprovide fast, secure and reliable private data networking services that enableseamless communications and facilitate electronic trading among commercialbanks, mutual funds, pension funds, broker-dealers, alternative tradingsystems, electronic communications networks, securities and commoditiesexchanges and other market participants. Our networks support multiplecommunications protocols including the Financial Information eXchange, or FIX,protocol. Our financial services division generates revenues from monthly recurringfees based on the number of customer connections to and through our networks.

 

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

 

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

 

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

 

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

 

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**Results of Operations**

 

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

 
| ** **                                                                                   | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                   | ** ** | **2007**                         | ** ** | **2008**                        | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenues                                                                                     |       | $                                | 84,542     |                            | $          | 88,629 |   | $ | 236,564 |   | $ | 262,903 |   |
| Operating expenses:                                                                          |       |                             |       |                            |       |   |   |   |   |
| Cost of network services, exclusive of the  items shown separately below                     |       | 42,109                           |       | 41,274                          |       | 121,154 |   | 124,206 |   |
| Engineering and development                                                                  |       | 6,943                            |       | 7,252                           |       | 19,946 |   | 22,120 |   |
| Selling, general, and administrative                                                         |       | 20,108                           |       | 20,965                          |       | 54,863 |   | 61,364 |   |
| Depreciation and amortization of property  and equipment                                     |       | 5,977                            |       | 6,140                           |       | 17,214 |   | 18,201 |   |
| Amortization of intangible assets                                                            |       | 6,282                            |       | 5,869                           |       | 18,365 |   | 18,327 |   |
| Total operating expenses                                                                     |       | 81,419                           |       | 81,500                          |       | 231,542 |   | 244,218 |   |
| Income from operations                                                                       |       | 3,123                            |       | 7,129                           |       | 5,022 |   | 18,685 |   |
| Interest expense                                                                             |       | (4,299                           | )          | (2,390                          | )          | (12,488 | ) | (8,730 | ) |
| Interest income                                                                              |       | 227                              |       | 214                             |       | 901 |   | 541 |   |
| Other income (expense), net                                                                  |       | 1,139                            |       | (902                            | )          | 2,274 |   | (1,123 | ) |
| Income (loss) before income tax benefit and  equity in net loss of unconsolidated affiliates |       | 190                              |       | 4,051                           |       | (4,291 | ) | 9,373 |   |
| Income tax (provision) benefit                                                               |       | 69                               |       | (2,141                          | )          | 1,361 |   | (4,766 | ) |
| Equity in net income (loss) of  unconsolidated affiliates                                    |       | 135                              |       | (23                             | )          | 634 |   | (94 | ) |
| Net income (loss)                                                                            |       | $                                | 394        |                            | $          | 1,887 |   | $ | (2,296 | ) | $ | 4,513 |   |

 

**Three months ended September 30, 2008compared to the three months ended September 30, 2007**

 

***Revenues.***Total revenues increased$4.1 million, or 4.8%, to $88.6 million for the three months ended September 30,2008, from $84.5 million for the three months ended September 30,2007. We generate revenues through four operating divisions.

 

***International services division.***Revenuesfrom the international services division increased $3.8 million, or 10.0%,to $41.7 million for the three months ended September 30, 2008, from$37.9 million for the three months ended September 30, 2007. On a constantdollar basis, revenue for the three months ended September 30, 2008 would haveincreased a further $40,000. Included in revenue for three months ended September 30,2007 was $0.7 million in pass-through revenues. There were no pass-throughrevenues in the three months ended September 30, 2008. Excluding pass-throughrevenues, revenues from the international services division increased $4.5million, or 12.2%, to $41.7 million from $37.2 million for the three monthsended September 30, 2008 and 2007 respectively. The increase was theresult of an additional $3.5 million from higher transaction volumes andincreased broadband connections from POS customers in Europe and Asia Pacificand $1.0 million from additional connections from financial services customers.Revenues from our U.K. subsidiaries increased $0.8 million, or 4.5%, to$18.9 million for the three months ended September 30, 2008, from$18.1 million for the three months ended September 30, 2007. On aconstant dollar basis, revenue from the U.K. subsidiaries for the three monthsended September 30, 2008 would have increased $2.1 million, or 11.6%, to$20.2 million. We have recently seen reductions in POS transaction growth ratesin some of the countries in which we operate, in particular the U.K. andFrance. We attribute this recent trend to the overall weakness in the economy.Future revenue growth in the international services division depends on anumber of factors including the number of POS transactions that we process, thesuccess of our POS and financial services products in countries we haverecently entered, the success of our new product offerings and the successfulintegration of our card-not-present service offerings through our acquisitionof Dialect.

 

***POS division.***Revenues from the POSdivision decreased $2.1 million, or 9.9%, to $18.7 million for thethree months ended September 30, 2008, from $20.8 million for thethree months ended September 30, 2007. Included in POS revenue for thethree months ended September 30, 2008 was $0.5 million inpass-through revenues compared with $0.7 million for the three monthsended September 30, 2007. POS dial-up transaction volumes decreased 11.8%to 1.34 billion transactions for the three months ended September 30,2008, from 1.52 billion transactions for the three months ended September 30,2007. Excluding pass-through revenues, revenues from the POS division decreased9.4% to $18.2 million from $20.1 million for the three months ended September 30,2008 and 2007, respectively, primarily as a result lower dial-up transactionvolumes as a customer moved a portion of its traffic off our network for thestated purpose of increasing its vendor diversification and to a lesser extent wehave recently seen a decrease in transaction volumes which we attribute to thecurrent weakness in the economy and decreases related to price compressionfollowing the renewal of certain customer contracts.

 

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This was partiallyoffset by increased revenue from sales of our managed broadband products.Growth in the POS division depends on a number of factors including the successof our new broadband, wireless and vending service offerings as well as thetotal number of POS dial-up transactions we transport.

 

***Telecommunication services division.***Revenuesfrom the telecommunication services division increased $1.0 million, or6.6%, to $16.4 million for the three months ended September 30, 2008,from $15.4 million for the three months ended September 30, 2007.This increase was primarily due to an increase in network and database accessservices provided to cable customers and to a lesser extent volume growth fromour traditional wireline telecommunications customers which more than offsetthe effects of lower caller name database access volumes and pricingcompression we experienced in connection with the renewal of certain customercontracts. Future revenue growth in the telecommunication services divisiondepends on a number of factors including the number of database access querieswe transport, the number of call signaling routes our customers purchase andthe success of our new product offerings, which potentially may be offset bycustomers seeking pricing discounts due to industry consolidation or otherreasons.

 

***Financial services division.***Revenuesfrom the financial services division increased $1.3 million, or 13.0%, to$11.7 million for the three months ended September 30, 2008, from$10.4 million for the three months ended September 30, 2007. Theincrease in revenues was primarily due to increases in new customer endpointinstallations and increases in connectivity between existing customers and to alesser extent from increased demand for greater bandwidth connectivity whichresults in higher average revenue per customer endpoint. Future revenue growthin the financial services division depends on a number of factors including thenumber of connections to and through our networks as well as the success of ournew product offerings. We continue to see an increased demand from ourcustomers for larger bandwidth connections to our network and while theseconnections create greater revenue per physical endpoint, they require longersales and installation lead-times.  Wealso expect that the current difficulties in the financial services sectors mayhave a negative impact on our future growth rates for the financial servicesdivision.

 

***Cost of network services.***Costof network services decreased $0.8 million, or 2.0%, to $41.3 millionfor the three months ended September 30, 2008, from $42.1 million forthe three months ended September 30, 2007. On a constant dollar basis,cost of network services would have decreased $0.7 million, or 1.8%, to$41.4 million. Cost of network services were 46.6% of revenues for thethree months ended September 30, 2008, compared to 49.8% of revenues forthe three months ended September 30, 2007. Excluding the effect of foreignexchange, the decrease in cost of network services resulted primarily from decreases in POS dial-up transactionvolumes and to a lesser extent from decreases in caller name database accessvolumes in our telecommunication services division. These decreases werepartially offset by the increases in POS transaction volumes and broadbandconnections in our international services division and to a lesser extent fromincreases in customer endpoints in our financial services division. 

 

Gross profit represented53.4% of total revenues for the three months ended September 30, 2008,compared to 50.2% for the three months ended September 30, 2007. Thisimprovement in gross margin from last year is primarily a result of increasedcontributions from our international services and financial services divisions,our highest gross margin divisions, and to a lesser extent from improvements inthe gross margin of the telecommunication services division due to a change inthe product mix towards higher margin products.

 

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

 

***Engineering and development expense.***Engineeringand development expense increased $0.3 million, or 4.4%, to$7.3 million for the three months ended September 30, 2008, from$6.9 million for the three months ended September 30, 2007.Engineering and development expense represented 8.2% of revenues for the threemonths ended September 30, 2008 and 2007. Included in engineering anddevelopment expense for the three months ended September 30, 2008 and 2007is stock compensation expense of $0.4 million and $0.5 million,respectively.  Capitalized softwaredevelopment costs, which are offset against engineering and development costs,increased $0.8 million to $1.8 million from $0.9 million for the three monthperiod ended September 30, 2008 and 2007, respectively. The increase incapitalized software development costs is primarily due to our plannedinvestment to develop our card-not-present payment gateway, and to a lesserextent from development of our back-office systems to enhance our internalreporting and network monitoring capabilities. Excluding the items mentioned above and the effects of foreign exchange,engineering and development expense before the capitalization of software developmentcosts would have increased $1.2 million to $8.6 million, or 9.7% of revenues,for the three months ended September 30, 2008 from $7.4 million, or 8.8%of revenues, for the three months ended September 30, 2007.  This increase is primarily due to increasedheadcount to support our IP financial services and POS division serviceofferings, and to a lesser extent our investment in the development of our card-not-presentpayment gateway.

 

***Selling, general and administrative expense.***Selling,general and administrative expenses increased $0.9 million, or 4.3%, to$21.0 million for the three months ended September 30, 2008, from$20.1 million for the three months ended September 30, 2007. On aconstant dollar basis, selling, general and administrative expenses would haveincreased $0.7 million, or 3.6%, to $20.8 million. Selling, general andadministrative expenses represented 23.7% of revenues for the three monthsended September

 

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30, 2008, compared to 23.8% of revenues for the three months ended September 30,2007. Included in selling, general and administrative expenses for the threemonths ended September 30, 2008 and 2007 is $2.7 million and$3.0 million of stock compensation expense, respectively.  Included in selling, general andadministrative expenses for the three months ended September 30, 2008 and2007 is $0.7 million and $1.1 million in severance charges,respectively.  Excluding these items andthe effects of foreign exchange, selling, general and administrative expenseswould have been increased to $17.5 million, or 19.8% of revenues, from $16.0million, or 18.9% of revenues for the three months ended September 30,2008 and 2007, respectively. This increase relates to our investment to supportour revenue growth, primarily in the international services division.

 

***Depreciation and amortization of property and equipment.***Depreciationand amortization of property and equipment increased $0.1 million, or2.7%, to $6.1 million for the three months ended September 30, 2008,from $6.0 million for the three months ended September 30, 2007.Depreciation and amortization of property and equipment represented 6.9% and7.1% of revenues for the three month periods ended September 30, 2008 and2007, respectively.

 

***Amortization of intangible assets.***Amortizationof intangible assets decreased $0.4 million, or 6.6%, to $5.9 millionfor the three months ended September 30, 2008, from $6.3 million forthe three months ended September 30, 2007 and relates solely to intangibleassets resulting from acquisitions. The decrease is a result of certainintangible balances becoming fully amortized earlier in 2008. For purposes of measuringand recognizing impairment of long-lived assets, including intangibles, weassess whether separate cash flows can be attributed to an individual asset.For our customer relationship intangible assets, we recognize and measureimpairment upon the significant loss of revenue from a customer. Based upon ourcontract with one of our major customers, we believe that revenues and relatedtransaction volumes from this customer will continue to decline in 2008 and maydecline further thereafter. The intangible asset value attributable to thiscustomer relationship was approximately $19.7 million as of September 30,2008. We assessed the recoverability of this customer relationship asset basedupon undiscounted anticipated future cash flows and concluded no impairmentexisted as of September 30, 2008.

 

***Interest expense.***Interest expensedecreased $1.9 million, or 44.4%, to $2.4 million for the threemonths ended September 30, 2008, from $4.3 million for the threemonths ended September 30, 2007. Interest expense decreased primarily as aresult of the lower effective interest rate associated with our 2007 creditfacility and to a lesser extent our reduced debt levels.

 

***Interest income.***Interest income was$0.2 million for the three months ended September 30, 2008 and 2007.

 

***Other income (expense), net.***Otherincome (expense), net was an expense of $0.9 million for the three months endedSeptember 30, 2008 compared to income of $1.1 million for the threemonths ended September 30, 2007. Included in other income (expense), netfor the three months ended September 30, 2008 are foreign currencyrevaluation losses of approximately $0.9 million due to fluctuations in thevalue of the U.S. dollar principally against the Euro and Pound Sterling,versus a gain on foreign currency revaluation of $1.2 million for the threemonths ended September 30, 2007.

 

We haverecently seen the U.S. dollar strengthen against the Euro, Pound Sterling andAustralian dollar, which are the primary currencies we do business in outsidethe U.S. To the extent that the U.S. dollar continues to strengthen against thosecurrencies we may recognize further losses on the revaluation or settlement ofassets and liabilities denominated in currencies other than the local currencyin which our subsidiaries operate.

 

***Income tax provision.***For the threemonths ended September 30, 2008, our income tax provision wasapproximately $2.1 million compared to a credit of $0.1 million forthe three months ended September 30, 2007. The increase in our income taxprovision is primarily related to the increase in our consolidated pre taxincome. Our effective tax rate was 53.2% and (21.2)% for the three months endedSeptember 30, 2008 and 2007, respectively. Our effective tax rate differsfrom the U.S. Federal statutory rate primarily due to stock-based compensationexpense not deductible for income tax purposes and increases in FIN 48 reservesfor certain income tax exposures.

 

***Equity in net income (loss) of unconsolidated affiliates.***Equityin net income (loss) of unconsolidated affiliates for the three months ended September 30,2008 was a loss of $23,000 compared to income of $0.1 million for the threemonths ended September 30, 2007. Equity in net income (loss) ofunconsolidated affiliates relates to our investment in AK Jensen, Inc.  Included in net income (loss) of unconsolidatedaffiliates for the three months ended September 30, 2007 was a gain on thesale of 10% of our interest in AK Jensen, Inc. of $0.1million.  As of September 30, 2008, the carryingvalue of our investment in AK Jensen, Inc. was $0.6 million.

 

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**Nine months ended September 30, 2008 compared to the nine monthsended September 30, 2007**

 

***Revenues.***Total revenues increased$26.3 million, or 11.1%, to $262.9 million for the nine months ended September 30,2008, from $236.6 million for the nine months ended September 30,2007. We generate revenues through four operating divisions.

 

***International services division.***Revenuesfrom the international services division increased $23.0 million, or23.3%, to $121.5 million for the nine months ended September 30,2008, from $98.5 million for the nine months ended September 30,2007. On a constant dollar basis, revenue for the nine months ended September 30,2008 would have increased $17.5 million, or 17.7% to $116.0 million. Includedin revenue for the nine months ended September 30, 2007, was pass-throughrevenue of $0.7 million. Excluding pass-through revenue and the effects offoreign exchange, revenue would have increased $18.2 million, or 18.6%. Thisincrease was the result of $10.1 million from higher transaction volumes andincreased broadband connections from POS customers in Europe and Asia Pacific,an incremental $4.9 million from our Dialect acquisition and $3.1 million fromadditional connections from financial services customers. Revenues from ourU.K. subsidiaries increased $5.6 million, or 11.1%, to $56.1 millionfor the nine months ended September 30, 2008, from $50.5 million forthe nine months ended September 30, 2007. On a constant dollar basis,revenue for the U.K. subsidiary for the nine months ended September 30,2008 would have increased $6.8 million, or 13.5%, to $57.3 million. We haverecently seen reductions in POS transaction growth rates in some of the countriesin which we operate, in particular the U.K. and France.  We attribute this recent trend to the overallweakness in the economy. Future revenue growth in the international servicesdivision depends on a number of factors including the number of POStransactions that we process, the success of our POS and financial serviceproducts in countries we have recently entered, the success of our new productofferings and the successful integration of our card-not-present serviceofferings through our acquisition of Dialect.

 

***POS division.***Revenues from the POSdivision decreased $5.1 million, or 8.3%, to $56.2 million for thenine months ended September 30, 2008, from $61.3 million for the ninemonths ended September 30, 2007. Included in POS revenue for the ninemonths ended September 30, 2008 is $1.4 million in pass-throughrevenues compared with $2.1 million for the nine months ended September 30,2007. POS dial-up transaction volumes decreased 9.5% to 4.03 billiontransactions for the nine months ended September 30, 2008, from 4.45billion transactions for the nine months ended September 30, 2007.Excluding pass-through revenues, revenues for the nine months ended September 30,2008 decreased 7.5% to $54.8 million from $59.3 million for the nine monthsended September 30, 2007 due to lower transaction volumes primarily from acustomer moving a portion of their traffic off our network for the stated purposeof vendor diversification and to a lesser extent we have recently seen adecrease in transaction volumes which we attribute to weakness in the economyand decreases related to price compression following the renewal of certaincustomer contracts.  This was partiallyoffset by increased revenue from sales of our managed broadband products.Growth in the POS division depends on a number of factors including the successof our new broadband, wireless and vending service offerings as well as thetotal number of POS dial-up transactions we transport.

 

***Telecommunication services division.***Revenuesfrom the telecommunication services division increased $4.7 million, or10.0%, to $51.1 million for the nine months ended September 30, 2008,from $46.4 million for the three months ended September 30, 2007.Included in TSD revenue for the nine months ended September 30, 2008 is$4.6 million in pass-through revenues compared with $3.8 million for thenine months ended September 30, 2007. Excluding pass-through revenues,revenues increased $3.9 million, or 9.2% to $46.6 million from $42.6 millionfor the three months ended September 30, 2008 and 2007, respectively. Thiswas due to an increase in network and database access services provided tocable customers and to a lesser extent volume growth from our traditionalwireline telecommunications customers which more than offset the effects ofpricing compression we experienced in connection with the renewal of certaincustomer contracts. Future revenue growth in the telecommunication servicesdivision depends on a number of factors including the number of database accessqueries we transport, the number of call signaling routes our customerspurchase and the success of our new product offerings, which potentially may beoffset by customers seeking pricing discounts due to industry consolidation orother reasons.

 

***Financial services division.***Revenuesfrom the financial services division increased $3.8 million, or 12.6%, to$34.1 million for the nine months ended September 30, 2008, from$30.2 million for the nine months ended September 30, 2007.  The increase in revenues was primarily due toincreases in new customer endpoint installations and increases in connectivitybetween existing customers and to a lesser extent increased demand for greaterbandwidth connectivity which results in higher average revenue per customerendpoint. Future revenue growth in the financial services division depends on anumber of factors including the number of connections to and through our networksas well as the success of our new product offerings. We continue to see anincreased demand from our customers for larger bandwidth connections to ournetwork and while these connections create greater revenue per physicalendpoint, they require longer sales and installation lead-times. We also expectthe current difficulties in the financial services sector may have a negativeimpact on our future growth rates in this division.

 

***Cost of network services.***Cost ofnetwork services increased $3.1 million, or 2.5%, to $124.2 millionfor the nine months ended September 30, 2008, from $121.2 million forthe nine months ended September 30, 2007. On a constant dollar basis, costof network services would have increased $1.5 million, or 1.2%, to$122.7 million. Cost of network services were 47.2% of revenues for thenine months ended September 30, 2008, compared to 51.2% of revenues forthe nine months ended September 30, 2007. Excluding the effect of foreignexchange, the increase in cost of network services resulted primarily fromhigher volumes in our

 

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international services and telecommunications services divisions and toa lesser extent our financial services division. This was partially offset bydeclines in transaction volumes in our POS division, as mentioned above, aswell as reductions in the cost of services provided to us through focus on costcontrol of key suppler contracts in our POS and telecommunication servicesdivisions.

 

Gross profit represented52.8% of total revenues for the nine months ended September 30, 2008,compared to 48.8% for the nine months ended September 30, 2007. Theimprovement in gross margin from last year is primarily a result of increasedcontribution from our international services division, our highest gross margindivision, and to a lesser extent improvement in the gross margins of our POSdivision as we worked to lower the cost of services provided to us and fromimprovements in the gross margin of the telecommunication services division dueto a change in product mix towards our higher margin products.

 

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

 

***Engineering and development expense.***Engineeringand development expense increased $2.2 million, or 10.9%, to$22.1 million for the nine months ended September 30, 2008, from$19.9 million for the nine months ended September 30, 2007. On aconstant dollar basis, engineering and development expense would have increased$1.7 million, or 8.4% to $21.6 million. Engineering and developmentexpense represented 8.4% of revenues for the nine months ended September 30,2008 and 2007 respectively. Included in engineering and development expense forthe nine months ended September 30, 2008 and 2007 is $3.5 million and $1.3million, respectively, relating to Dialect. This increase was due to additionalheadcount to develop our card-not-present gateway application resulting fromour acquisition of Dialect in June 2007. Included in engineering anddevelopment expense for the nine months ended September 30, 2008 and 2007is stock compensation expense of $1.1 million and $1.7 million,respectively. The $0.5 million decrease in stock compensation expense relatedto the decision by the Board of Directors to allow for dividend equivalentpayments on the outstanding restricted stock units as of September 30,2007.  Capitalized software developmentcosts, which are offset against engineering a development costs, for the ninemonths ended September 30, 2008 and 2007 were $4.3 million and $2.8 million,respectively.  The increase in capitalizedsoftware development costs is primarily due to our planned investment todevelop our card-not-present payment gateway and to a lesser extent fromdevelopment of our back-office systems to enhance our internal reporting andnetwork monitoring capabilities. Excluding these items and the effects offoreign exchange, engineering and development expense, before thecapitalization of software development costs, would have increased $1.4 millionto $21.2 million, or 8.2% of revenues, for the nine months ended September 30,2008, from $19.8 million, or 8.4% of revenues, for the nine months ended September 30,2007. This increase is primarily due to increased headcount to support our IPfinancial services and POS division service offerings, and to a lesser extentour investment in the development of our card-not-present payment gateway.

 

***Selling, general and administrative expense.***Selling,general and administrative expenses increased $6.5 million, or 11.8%, to$61.4 million for the nine months ended September 30, 2008, from$54.9 million for the nine months ended September 30, 2007. On aconstant dollar basis, selling, general and administrative expenses would haveincreased $5.2 million, or 9.5%, to $60.1 million. Selling, general andadministrative expenses represented 23.3% of revenues for the nine months endedSeptember 30, 2008, compared to 23.2% of revenues for the nine monthsended September 30, 2007. Included in selling, general and administrativeexpense for the nine months ended September 30, 2008 and 2007 is $2.1million and $0.7 million, respectively, relating to Dialect. This increase isdue to investment in a sales force to drive sales of our card-not-presentgateway application resulting from our acquisition of Dialect in June 2007.  Included in selling, general andadministrative expenses for the nine months ended September 30, 2008 and2007 is $7.4 million and $6.8 million of stock compensation expense,respectively. The increase in stock compensation expense relates primarily toadditional performance-based grants made during the year and was partiallyoffset by expense of $1.0 million related to the decision by the Board ofDirectors to allow for dividend equivalent payments on the outstanding restrictedstock units as of March 31, 2007. Included in selling, general andadministrative expenses for the nine months ended September 30, 2008 is$0.9 million pre-tax benefit associated with the settlement of a statesales tax liability. Included in selling, general and administrative expensesfor the nine months ended September 30, 2008 and 2007 is $0.7 million and$2.0 million in severance expenses, respectively, associated with thedeparture of certain executives. Excluding these items and the effects of foreign exchange, selling,general and administrative expenses would have increased $5.6 million to $50.8million, or 19.3% of revenues, for the nine months ended September 30,2008 from $45.3 million, or 19.1% of revenues, for the nine months ended September 30,2007. This increase relates primarily to our planned investment in our businessdevelopment group that is focused on driving revenue growth from our global customersin our domestic and international POS business and to a lesser extent tosupport our revenue growth primarily in the international services division.

 

***Depreciation and amortization of property and equipment.***Depreciationand amortization of property and equipment increased $1.0 million, or5.7%, to $18.2 million for the nine months ended September 30, 2008,from $17.2 million for the nine months ended September 30, 2007. On aconstant dollar basis, depreciation and amortization of property and equipmentwould have increased $0.3 million, or 1.6% to $17.5 million. Depreciation andamortization of property and equipment represented 6.9% of revenues for thenine months ended September 30, 2008, compared to 7.3% of revenues for thenine months ended September 30, 2007. Depreciation expense increasedprimarily due to capital expenditures made to support our revenue growth.

 

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***Amortization of intangible assets.***Amortizationof intangible assets decreased $0.1 million, or 0.2%, to$18.3 million for the nine months ended September 30, 2008, from$18.4 million for the nine months ended September 30, 2007 andrelates solely to intangible assets resulting from acquisitions. On a constantdollar basis, amortization of intangible assets for the nine months ended September 30,2008 decreased $1.6 million, or 8.7%, to $16.8 million for the nine monthsended September 30, 2008, from $18.4 million for the nine months ended September 30,2007. Included in amortization expense for the nine months ended September 30,2008, was an incremental $1.2 million related to the acquisition of Dialectwhich was offset by a decrease in expense of $2.8 million as certain intangibleassets reached the end of their useful lives.

 

For purposes of measuringand recognizing impairment of long-lived assets including intangibles, weassess whether separate cash flows can be attributed to an individual asset.For our customer relationship intangible assets, we recognize and measureimpairment upon the significant loss of revenue from a customer. Based upon ourcontract with one of our major customers, we believe that revenues and relatedtransaction volumes from this customer will continue to decline in 2008 and maydecline further thereafter. The intangible asset value attributable to thiscustomer relationship was approximately $19.7 million as of September 30,2008. We assessed the recoverability of this customer relationship asset basedupon undiscounted anticipated future cash flows and concluded no impairmentexisted as of September 30, 2008.

 

***Interest expense.***Interest expensedecreased $3.8 million, or 30.1%, to $8.7 million for the nine monthsended September 30, 2008, from $12.5 million for the nine monthsended September 30, 2007. Included in interest expense for the nine monthsended September 30, 2007 is a charge of $1.4 million related to the accelerationof deferred financing costs as a result of the recapitalization in March 2007supporting our special dividend. Excluding this charge, interest expensedecreased $2.4 million due to the lower effective interest rate associated withour 2007 credit facility partially offset by the effects of a higher averagebalance resulting from our recapitalization in March 2007 supporting thespecial dividend.

 

***Interest income.*** Interest income was$0.5 million for the nine months ended September 30, 2008 compared to$0.9 million for the nine months ended September 30, 2007. Thedecrease in interest income is due to the restricted cash on hand, related toour special cash dividend payment made in April 2007.

 

***Other income (expense), net.***Otherincome (expense), net was an expense of $1.1 million for the nine months ended September 30,2008 compared to income of $2.3 million for the nine months ended September 30,2007. Included in other income (expense), net for the nine months ended September 30,2008 are foreign currency revaluation losses of approximately $1.0 million dueto fluctuations in the value of the U.S. dollar, principally against the Euroand Pound Sterling, versus a gain on foreign currency revaluation of $1.9million for the nine months ended September 30, 2007. Included in otherincome (expense), net for the nine months ended September 30, 2007 is again on the sale of an asset of $0.3 million.

 

We have recently seen theU. S. dollar strengthen against the Euro, Pound Sterling and Australian dollar,which are the primary currencies we do business in outside the U. S. To theextent that the U.S. dollar continues to strengthen against those currencies wemay recognize further losses on the revaluation or settlement of assets and liabilitiesdenominated in currencies other than the local currency in which oursubsidiaries operate.

 

***Income tax (provision) benefit.***For the nine months ended September 30,2008, our income tax provision was $4.8 million compared to a benefit of$1.4 million for the nine months ended September 30, 2007.  The increase in our income tax provision isprimarily related to the increase in our consolidated pre tax income.  Our effective tax rate was 51.4% and 37.2%for the nine months ended September 30, 2008 and 2007, 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 and increases in FIN 48 reserves due tocertain income tax exposures, offset by profits of our internationalsubsidiaries being taxed at rates different than the U.S. Federal statutoryrate.

 

***Equity in net income(loss) of unconsolidated affiliates.***Equity in netincome (loss) of unconsolidated affiliates for the nine months ended September 30,2008 was a loss of $0.1 million, compared to income of $0.6 million for thenine months ended September 30, 2007. The decrease was due primarily tothe realized gain of $0.6 million on the sale of all our outstanding shares ofour investment in WAY Systems, Inc. during the nine months ended September 30,2007 and a gain of $0.1 million or the sale of 10% of our interest is AK Jensen, Inc. The loss for the three month periodended September 30, 2008 relates to our investment in AK Jensen, Inc.  As of September 30, 2008, the carryingvalue of our investment in AK Jensen, Inc. was $0.6 million.

 

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**Outlook**

 

Due to the recent strengthening of the U.S. Dollar relative to severalmajor foreign currencies, fourth quarter 2008 revenues and operating income areexpected to be negatively impacted by foreign currency translation. As a pointof reference, for the fourth quarter 2007, the weighted average exchange rateused to translate the Company’s Statement of Operations (U.S. Dollar rate forone unit of foreign currency) was $2.04 for the British Pound, $1.45 for theEuro, and $0.89 for the Australian dollar. For the nine months ended September30, 2008, approximately 21%, 14% and 8% of our consolidated revenues weregenerated in the British Pound, Euro and Australian dollar, respectively. Forthe nine months ended September 30, 2008, approximately 18%, 10% and 7% of ourconsolidated operating expenses were generated in the British Pound, Euro andAustralian dollar, respectively. The foreign currency exchange rates whichimpact our revenues and operating income have been volatile recently and arebeyond our control.

 

**Liquidity and Capital Resources**

 

Our primary liquidity andcapital resource needs are to finance the costs of our operations, to makecapital expenditures and to service our debt. Based upon our current level ofoperations, we expect that our cash flow from operations, together with theamounts we are able to borrow under our 2007 senior secured revolving creditfacility, will be adequate to meet our anticipated needs for the foreseeablefuture. To the extent we decide to pursue one or more significant strategicacquisitions, we will likely need to incur additional debt or sell additionalequity to finance those acquisitions.

 

Our operations providedus cash of $48.5 million for the nine months ended September 30, 2008,which was attributable to net income of $4.5 million, depreciation,amortization and other non-cash charges of $45.5 million and an increase inworking capital of $1.5 million. Our operations provided us cash of$35.3 million for the nine months ended September 30, 2007, which wasattributable to a net loss of $2.3 million, depreciation, amortization andother non-cash charges of $37.0 million and a decrease in working capital of$0.6 million.

 

We used cash of$25.3 million in investing activities for the nine months ended September 30,2008, which comprised solely of capital expenditures to support our revenuegrowth. We used cash of $16.4 million in investing activities for the ninemonths ended September 30, 2007, which includes cash proceeds of$0.9 million from the sale of certain equity investments and $2.1 millionfrom the sale of non-strategic property and equipment less $4.2 millionfor our acquisition of Dialect and $15.3 million in capital expendituresprimarily to support our revenue growth..

 

We used cash of$17.4 million from financing activities for the nine months ended September 30,2008, which includes $25.0 million of voluntary pre-payments on our 2007 seniorsecured credit facility and $9.6 million in proceeds from stock optionsexercised during the nine months ended September 30, 2008. We used cash of$14.8 million from financing activities for the nine months ended September 30,2007, which includes net proceeds of $222 million from our senior securedcredit facility, of which $98.3 million was used for payment of a specialdividend and $123.3 million was used to repay our 2005 amended andrestated senior secured credit facility.

 

**Seasonality**

 

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

 

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**Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk**

 

***Interest rates***

 

Our principal exposure tomarket risk relates to changes in interest rates. As of September 30,2008, we had $180.5 million outstanding under our 2007 senior securedcredit facility with interest rates tied to changes in the lender’s base rateor the LIBOR rate. Based upon the outstanding borrowings on September 30,2008 and assuming repayment of the Term Loan in accordance with scheduledmaturities, each 1.0% change in these rates could result in a change of $1.8million to our annual interest expense.

 

As of September 30,2008, we did not hold derivative financial or commodity instruments and all ofour cash and cash equivalents were held in money market or commercial accounts.

 

***Foreign currencyrisk***

 

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

 

We have operations in 20countries outside of the U.S., including the United Kingdom, Austria,Australia, Bermuda, Canada, France, German, India, Ireland, Italy, Japan,Mexico, New Zealand, Poland, Romania, South Korea, Spain, Sweden, Thailand andthe Netherlands. We provide services in these countries using networks deployedin each country. We manage foreign exchange risk through the structure of ourbusiness. In the substantial majority of our transactions, we receive paymentsdenominated in the U.S. dollar, British Pound, Euro or Australian dollar.Therefore, we do not rely on international currency markets to obtain and payilliquid currencies. The foreign currency exposure that does exist is limitedby the fact that the majority of transactions are paid according to ourstandard payment terms, which are generally short-term in nature. Our policy isnot to speculate in foreign currencies, and we promptly buy and sell foreigncurrencies as necessary to cover our net payables and receivables, which aredenominated in foreign currencies. For the three and nine months ended September 30,2008, we recorded loss on foreign currency revaluation of approximately$0.9 million and $1.0 million, respectively.

 

**Item 4. Controls and Procedures**

 

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

 

**Evaluation**

 

The Company carried outan evaluation, under the supervision, and with the participation, of theCompany’s management, including the Company’s Chief Executive Officer and theCompany’s Chief Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures as of September 30, 2008. Based on theforegoing, the Company’s Chief Executive Officer and principal financial officersconcluded that the Company’s disclosure controls and procedures were effectiveas of September 30, 2008 at the reasonable assurance level.

 

There have been nochanges during the three and nine months ended September 30, 2008 coveredby this report in the Company’s internal control over financial reporting or inother factors that could materially affect or are reasonably likely tomaterially affect the internal control over financial reporting.

 

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**PART II—OTHERINFORMATION**

 

**Item1.****      Legal Proceedings**

 

Information regarding legal proceedings is contained in Note 8 tothe Condensed Consolidated Financial Statements contained in this Report and isincorporated herein by reference.

 

**Item1A.   Risk Factors**

 

There were no material changes from the risk factors previouslydisclosed in “Item 1A. Risk Factors” included in our Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

**Item2.****                 UnregisteredSales of Equity Securities and Use of Proceeds**

 

None.

 

**Item3.****                 DefaultUpon Senior Securities**

 

None.

 

**Item4.****                 Submissionof Matters to a Vote of Security Holders**

 

None.

 

**Item5.****                 OtherInformation**

 

None.

 

**Item6.****                 Exhibits**

 

(31.1)  Certification—ChiefExecutive Officer

 

(31.2)  Certification — ChiefFinancial Officer

 

(32.1)  Written Statement ofChief Executive Officer and Chief Financial Officer

 

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**SIGNATURES**

 

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

 
|                         | TNS, Inc. |
|------------------------------|----------------|
|                         | (Registrant)   |
|                         |           |
| Date: November 10, 2008 | By:            | /s/ HENRY H. GRAHAM, JR. |
|                         |           |   |   |
|                         |           | Henry H. Graham, Jr. |
|                         |           | Chief Executive Officer |
|                         |           |   |   |
| Date: November 10, 2008 | By:            | /s/ DENNIS L. RANDOLPH, JR. |
|                         |           |   |
|                         |           | Dennis L. Randolph, Jr. |
|                         |           | Executive Vice President, Chief Financial Officer &  Treasurer |

 

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