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, 2009**

 

**OR**

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

 

**For the transition period from          to**

 

**Commission File Number: 001-32033**

 

**TNS,INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**11480 Commerce Park Drive, Suite 600**

**Reston, VA 20191**

(Address of principal executive offices)

 

**(703) 453-8300**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirement for the past 90 days.  Yes x  No o

 

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

 

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

 

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

 

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

 

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

 

**Shares Outstanding as of October 1, 2009**

25,712,587 Shares of Common Stock, $0.001 par value

 

 

 

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**TNS, INC.**

 

**INDEX**

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

 

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**PART I—FINANCIALINFORMATION**

 

**Item 1. Condensed Consolidated Financial Statements**

 

**TNS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                                               | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **2008**              | ** ** | **2009**               | ** ** |
| ** **                                                                                                                                                                                               | ** ** | ** **            | ** ** | **(UNAUDITED)**        | ** ** |
| **ASSETS**                                                                                                                                                                                               |       |                  |       |                   |       |
| Current assets:                                                                                                                                                                                          |       |                  |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                |       | $                     | 38,851     |                   | $          | 28,674 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $3,631 and $6,883, respectively                                                                                                          |       | 69,501                |       | 95,314                 |       |
| Prepaid expenses                                                                                                                                                                                         |       | 5,351                 |       | 7,634                  |       |
| Deferred tax assets                                                                                                                                                                                      |       | 1,805                 |       | 2,188                  |       |
| Other current assets                                                                                                                                                                                     |       | 4,965                 |       | 15,793                 |       |
| Total current assets                                                                                                                                                                                     |       | 120,473               |       | 149,603                |       |
| Property and equipment, net                                                                                                                                                                              |       | 58,795                |       | 113,380                |       |
| Identifiable intangible assets, net                                                                                                                                                                      |       | 151,811               |       | 278,282                |       |
| Goodwill                                                                                                                                                                                                 |       | 10,954                |       | 16,534                 |       |
| Deferred tax assets, net                                                                                                                                                                                 |       | 16,141                |       | 11,492                 |       |
| Other assets                                                                                                                                                                                             |       | 3,740                 |       | 6,984                  |       |
| Total assets                                                                                                                                                                                             |       | $                     | 361,914    |                   | $          | 576,275 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                           |       |                  |       |                   |       |
| Current liabilities:                                                                                                                                                                                     |       |                  |       |                   |       |
| Accounts payable, accrued expenses and other  current liabilities                                                                                                                                        |       | $                     | 59,424     |                   | $          | 83,718 |   |
| Deferred revenue                                                                                                                                                                                         |       | 16,360                |       | 13,673                 |       |
| Current portion of long-term debt                                                                                                                                                                        |       | —                |       | 11,063                 |       |
| Total current liabilities                                                                                                                                                                                |       | 75,784                |       | 108,454                |       |
| Long-term debt, net of current portion and discount                                                                                                                                                      |       | 178,500               |       | 339,057                |       |
| Deferred tax liability                                                                                                                                                                                   |       | 2,420                 |       | 1,555                  |       |
| Other liabilities                                                                                                                                                                                        |       | 2,395                 |       | 2,577                  |       |
| Total liabilities                                                                                                                                                                                        |       | 259,099               |       | 451,643                |       |
| Commitments and contingencies                                                                                                                                                                            |       |                  |       |                   |       |
| Stockholders’ equity:                                                                                                                                                                               |       |                  |       |                   |       |
| Common stock, $0.001 par value; 130,000,000 shares  authorized; 25,082,007 shares issued and 25,053,226 shares outstanding and  25,859,495 shares issued and 25,712,587 shares outstanding, respectively |       | 25                    |       | 26                     |       |
| Treasury stock, 28,781 shares and 146,908 shares,  respectively                                                                                                                                          |       | (578                  | )          | (2,036                 | )          |
| Additional paid-in capital                                                                                                                                                                               |       | 150,839               |       | 165,396                |       |
| Accumulated deficit                                                                                                                                                                                      |       | (40,800               | )          | (37,167                | )          |
| Accumulated other comprehensive loss                                                                                                                                                                     |       | (6,671                | )          | (1,587                 | )          |
| Total stockholders’ equity                                                                                                                                                                          |       | 102,815               |       | 124,632                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                          |       | $                     | 361,914    |                   | $          | 576,275 |   |

 

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

 

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**TNS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

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

** **
| ** **                                                                            | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                             | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2009** | ** ** |
| Revenues                                                                              |       | $                                                    | 88,629     |                                                | $          | 140,105 |   | $ | 262,903 |   | $ | 337,322 |   |
| Operating expenses:                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of network services, exclusive of the items  shown separately below              |       | 41,274                                               |       | 64,940                                              |       | 124,206 |   | 160,044 |   |
| Engineering and development                                                           |       | 7,252                                                |       | 10,379                                              |       | 22,120 |   | 25,855 |   |
| Selling, general, and administrative                                                  |       | 20,965                                               |       | 30,942                                              |       | 61,364 |   | 74,309 |   |
| Depreciation and amortization of property and  equipment                              |       | 6,140                                                |       | 9,013                                               |       | 18,201 |   | 22,841 |   |
| Amortization of intangible assets                                                     |       | 5,869                                                |       | 9,102                                               |       | 18,327 |   | 22,859 |   |
| Total operating expenses                                                              |       | 81,500                                               |       | 124,376                                             |       | 244,218 |   | 305,908 |   |
| Income from operations                                                                |       | 7,129                                                |       | 15,729                                              |       | 18,685 |   | 31,414 |   |
| Interest expense                                                                      |       | (2,390                                               | )          | (11,952                                             | )          | (8,730 | ) | (24,821 | ) |
| Interest income                                                                       |       | 214                                                  |       | 90                                                  |       | 541 |   | 329 |   |
| Other (expense) income, net                                                           |       | (902                                                 | )          | 493                                                 |       | (1,123 | ) | 41 |   |
| Income before income tax benefit and equity in net  loss of unconsolidated affiliates |       | 4,051                                                |       | 4,360                                               |       | 9,373 |   | 6,963 |   |
| Income tax provision                                                                  |       | (2,141                                               | )          | (1,129                                              | )          | (4,766 | ) | (3,250 | ) |
| Equity in net loss of unconsolidated affiliates                                       |       | (23                                                  | )          | (27                                                 | )          | (94 | ) | (80 | ) |
| Net income                                                                            |       | $                                                    | 1,887      |                                                | $          | 3,204 |   | $ | 4,513 |   | $ | 3,633 |   |
|                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Basic net income per common share                                                     |       | $                                                    | 0.08       |                                                | $          | 0.13 |   | $ | 0.18 |   | $ | 0.14 |   |
| Diluted net income per common share                                                   |       | $                                                    | 0.07       |                                                | $          | 0.12 |   | $ | 0.18 |   | $ | 0.14 |   |
| Basic weighted average common shares outstanding                                      |       | 24,989,865                                           |       | 25,481,084                                          |       | 24,667,442 |   | 25,279,307 |   |
| Diluted weighted average common shares outstanding                                    |       | 25,549,865                                           |       | 26,149,432                                          |       | 25,176,857 |   | 25,624,200 |   |

 

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

 

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**TNS, INC.**

 

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

**(dollars in thousands)**

 
| ** **                                                                       | ** ** | **Nine months ended September 30** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                                               | ** ** | **2009** | ** ** |
| Cash flows from operating activities:                                            |       |                                                   |       |   |   |
| Net income                                                                       |       | $                                                      | 4,513      |   | $ | 3,633 |   |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                                                   |       |   |   |
| Non-cash items:                                                                  |       |                                                   |       |   |   |
| Depreciation and amortization of property and  equipment                         |       | 18,201                                                 |       | 22,841 |   |
| Amortization of intangibles                                                      |       | 18,327                                                 |       | 22,859 |   |
| Loss on disposal of property and equipment                                       |       | 129                                                    |       | 15 |   |
| Deferred income tax (benefit) provision                                          |       | (1,248                                                 | )          | 2,888 |   |
| Non cash interest and deferred financing fees                                    |       | 596                                                    |       | 7,716 |   |
| Equity in net loss of unconsolidated affiliates                                  |       | 94                                                     |       | 80 |   |
| Stock compensation expense                                                       |       | 9,374                                                  |       | 7,516 |   |
|                                                                             |       | 45,473                                                 |       | 63,915 |   |
| Changes in operating assets and liabilities:                                     |       |                                                   |       |   |   |
| Accounts receivable, net                                                         |       | (665                                                   | )          | 11,403 |   |
| Other current and noncurrent assets                                              |       | 1,375                                                  |       | (9,549 | ) |
| Accounts payable and accrued expenses                                            |       | 3,404                                                  |       | 8,316 |   |
| Deferred revenue                                                                 |       | (3,867                                                 | )          | (3,637 | ) |
| Other current and noncurrent liabilities                                         |       | (1,745                                                 | )          | 183 |   |
| Net cash provided by operating activities:                                       |       | 48,488                                                 |       | 74,264 |   |
| Cash flows from investing activities                                             |       |                                                   |       |   |   |
| Purchases of property and equipment                                              |       | (25,269                                                | )          | (23,804 | ) |
| Business combinations, net of cash acquired                                      |       | —                                                 |       | (230,002 | ) |
| Net cash used in investing activities:                                           |       | (25,269                                                | )          | (253,806 | ) |
| Cash flows from financing activities                                             |       |                                                   |       |   |   |
| Proceeds from issuance of long-term debt, net of  financing costs                |       | —                                                 |       | 201,612 |   |
| Repayments of long-term debt                                                     |       | (25,000                                                | )          | (40,000 | ) |
| Proceeds from stock option exercises, inclusive of  tax benefit                  |       | 9,589                                                  |       | 7,401 |   |
| Payment of long-term debt financing costs                                        |       | (75                                                    | )          | (175 | ) |
| Purchase of treasury stock                                                       |       | (1,919                                                 | )          | (1,458 | ) |
| Net cash (used in) provided by financing  activities                             |       | (17,405                                                | )          | 167,380 |   |
| Effect of exchange rates on cash and cash  equivalents                           |       | (603                                                   | )          | 1,985 |   |
| Net increase (decrease) in cash and cash  equivalents                            |       | 5,211                                                  |       | (10,177 | ) |
| Cash and cash equivalents, beginning of period                                   |       | 17,805                                                 |       | 38,851 |   |
| Cash and cash equivalents, end of period                                         |       | $                                                      | 23,016     |   | $ | 28,674 |   |
|                                                                             |       |                                                   |       |   |   |
| Supplemental disclosures of cash flow information:                               |       |                                                   |       |   |   |
| Cash paid for interest                                                           |       | $                                                      | 7,719      |   | $ | 8,613 |   |
| Cash paid for income taxes                                                       |       | $                                                      | 3,818      |   | $ | 1,826 |   |

 

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

 

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

 

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

 

TNS, Inc.(TNS or the Company) is a Delaware corporation. TNS is 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 31countries, including Canada, Mexico and countries in Europe, Latin America andthe Asia-Pacific region.

 

TheCompany provides its services through multiple data networks, each designedspecifically for transaction applications. These networks support a variety ofwidely accepted communications protocols, are designed to be scalable and areaccessible by multiple methods, including dial-up, dedicated, wireless andInternet connections.

 

TheCompany has four business divisions: (1) thepoint-of-sale/point-of-service (POS) division, which provides datacommunications services to payment processors in the U.S., Canada and Mexico, (2) thetelecommunication services division (TSD), which provides call signalingservices, database access services and roaming and clearing services primarily tothe domestic 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.

 

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

 

Inthe opinion of management, the accompanying unaudited condensed consolidatedfinancial statements reflect adjustments (all of which are of a normal andrecurring nature) that are necessary for the fair presentation of the periodspresented. The results of operations for the three and nine months ended September 30,2009 are not necessarily indicative of the results to be expected for anysubsequent interim period or for the fiscal year. It is suggested that theseunaudited condensed consolidated financial statements be read in conjunctionwith the Company’s annual report on Form 10-K filed with the SEC on March 16,2009, which includes consolidated financial statements and the notes theretofor the year ended December 31, 2008.

 

*Capital Structure*

 

Duringthe nine months ended September 30, 2009, the Company issued 424,588shares of common stock following the exercise of stock options and 352,900shares of common stock following the vesting of restricted stock units, ofwhich 118,127 shares were surrendered by employees to satisfy payroll taxwithholding obligations and held by the Company as treasury shares. During thenine months ended September 30, 2008, the Company issued 523,286 shares ofcommon stock following the exercise of stock options and 337,565 shares ofcommon stock following the vesting of restricted stock units, of which 99,573shares were surrendered by employees to satisfy payroll tax withholdingobligations and held by the Company as treasury shares. The Company retired100,143 treasury shares during the nine months ended September 2008.

 

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**Acquisitions**

 

OnMarch 2, 2009, the Company entered into an Asset Purchase Agreement (thePurchase Agreement), by and between the Company and VeriSign, Inc. (theSeller) pursuant to which the Company agreed to purchase certain assets andassume certain liabilities of the Seller’s Communications Services Group (CSG). On May 1, 2009, the Company completed the acquisition in accordancewith the terms and conditions of the Purchase Agreement.  The initialpurchase price was approximately $226.2 million in cash and subject to apost-closing working capital adjustment. During the third quarter of 2009 theworking capital adjustment was finalized, resulting in a $3.8 million increasein the purchase price to $230.0 million. The Company funded the transactionthrough a new $230 million term loan facility as part of its 2009 CreditFacility (see Note 2). CSG provides call signaling services and intelligentdatabase services such as caller ID, toll-free call routing and local numberportability to the U.S. telecommunications industry.  In addition, CSGprovides wireless roaming and clearing services to mobile phoneoperators.  The Company has integrated CSG into its telecommunications servicesdivision. The statements of operations for the three and nine months ended September 30,2009 include the results of CSG from May 1, 2009.  In conjunction with the CSG acquisition, theCompany incurred total acquisition related costs of $2.5 million. During thenine months ended September 30, 2009, acquisition related costs of $2.2million were included in selling, general and administrative expenses in theaccompanying consolidated statement of operations.

 

Theacquisition of CSG has been accounted for as a business combination under FASBASC 805, Business Combinations. We have commenced the appraisals necessary toassess the fair values of the tangible and intangible assets acquired andliabilities assumed and the amount of goodwill to be recognized as of theacquisition date. As the values of certain assets and liabilities arepreliminary in nature, they are subject to adjustment as additional informationis obtained about the facts and circumstances that existed as of theacquisition date. The valuations will be finalized within 12 months of theclose of the acquisition. When the valuations are finalized, any changes to thepreliminary valuation of assets acquired and liabilities assumed may result insignificant adjustments to the fair value of net identifiable assets acquiredand goodwill.

 

Thefair values of the assets acquired and liabilities assumed were preliminarilydetermined using the income, cost and market approaches. The fair valuemeasurements were primarily based on significant inputs that are not observablein the market and therefore represent a Level 3 measurement as defined in FASBASC 820, Fair Value Measurements and Disclosures.  Existing technology, in-process research anddevelopment and customer relationships were valued using the excess earningsmethod, a variation on the income method. The excess earnings method considersthe use of other assets in the generation of the projected cash flows in orderto determine the economic benefit generated by the subject intangible asset. Noncompetition agreements were valued using the income approach. The incomeapproach indicates value for a subject asset based on the present value of cashflows projected to be generated by the asset. Projected cash flow is discountedat a rate of return that reflects the relative risk of achieving the cash flowand the time value of money.  Fixedassets and real estate were valued using the market and cost approaches, asappropriate. The market approach indicates value for a subject asset based onavailable market pricing for comparable assets. The cost approach indicatesvalue by determining the current cost of replacing an asset with another ofequivalent economic utility. The cost to replace a given asset reflects theestimated reproduction or replacement cost for the property, less an allowancefor loss in value due to depreciation.

 

Thepurchase price for CSG was allocated, on a preliminary basis, as follows (inthousands):

 
| ** **                                                             | ** ** | **Amount** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|
| **Purchase price allocation:**                                         |       |       |       |
| Accounts receivable, net of allowance for doubtful  accounts of $2,315 |       | $          | 34,766     |   |
| Prepaid expenses                                                       |       | 2,963      |       |
| Property and equipment                                                 |       | 43,633     |       |
| Land and buildings                                                     |       | 10,034     |       |
| Goodwill                                                               |       | 4,633      |       |
| Identifiable intangible assets                                         |       |       |       |
| Customer relationships                                                 |       | 141,500    |       |
| Developed technology                                                   |       | 4,800      |       |
| Non competition agreements                                             |       | 600        |       |
| In-process research and development                                    |       | 300        |       |
| Total assets                                                           |       | 243,229    |       |
| Accounts payable, accrued expenses and other  current liabilities      |       | (13,227    | )          |
| Total purchase price                                                   |       | 230,002    |       |
|                                                                        |            |            |            |  |

 

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

 

The weighted average amortization period by each major class of assetsand in total is as follows (in years):

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

 

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*Pro Forma Information*

 

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

 

Theunaudited pro forma results are presented for illustrative purposes only and donot reflect the realization of potential cost savings, or any relatedintegration costs. For details on expected integration related cost savingsplease refer to the Outlook section on page 23.

 

Thefollowing unaudited pro forma consolidated results of operations assume thatthe acquisition of CSG was completed as of January 1, for each of therespective periods presented (dollars in thousands, except per share amounts):

 
| ** **                 | ** ** | **Three months ended********September 30,** | ** ** | **Nine  months ended********September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                                   | ** ** | **2009**                                              | ** ** | **2008** | ** ** | **2009** | ** ** |
| Operating revenues         |       | $                                                          | 154,706    |                                                  | $          | 140,105 |   | $ | 458,721 |   | $ | 419,112 |   |
| Net income                 |       | 33                                                         |       | 3,204                                                 |       | (2,628 | ) | 3,443 |   |
|                       |       |                                                       |       |                                                  |       |   |   |   |   |
| Earnings per common share: |       |                                                       |       |                                                  |       |   |   |   |   |
| Basic                      |       | $                                                          | 0.00       |                                                  | $          | 0.13 |   | $ | (0.11 | ) | $ | 0.14 |   |
| Diluted                    |       | $                                                          | 0.00       |                                                  | $          | 0.12 |   | $ | (0.11 | ) | $ | 0.13 |   |

 

TheCSG historical operating results include the direct costs related to thebusiness and certain allocated costs for services and support functionsprovided by Verisign, Inc. Included in net income for the three monthsended September 30, 2008 are allocated costs of $4.1 million related tothose functions. Included in net income for the nine months ended September 30,2008 and 2009 are allocated costs of $12.7 million and $5.0 million related tothose functions, respectively. Because the selected unaudited pro formaconsolidated results of operations are based on CSG’s operating results duringthe period when CSG was not under the control, influence or management of TNS,the information presented may not be representative of the results for theperiods indicated that would have actually occurred had the acquisition beenconsumated as of January 1, 2008, nor is it indicative of the futurefinancial or operating results of the combined entity.

 

Dueto the extent and nature of the integration of CSG revenue and costs into theoperations of TNS as well as the overlap with the Company’s telecommunicationservices division, the contribution of CSG to the Company’s consolidatedresults has not been separately identified. Accordingly, the stand alone results of CSG for the three and ninemonths ended September 30, 2009 have not been disclosed.

 

**Use of Estimates**

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of certainassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements. Significant estimates affecting theconsolidated financial statements include management’s judgments regarding theallowance for doubtful accounts, future cash flows from long-lived assets,accrued expenses for probable losses, estimates of the fair value of assets andliabilities assumed in business acquisitions and estimates related to the fairvalue of employee stock options, including volatility, expected term andestimates of forfeitures in future periods. Actual results could differ fromthose estimates.

 

**Revenue Recognition**

 

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

 

POSservices revenue is derived primarily from per transaction fees paid by theCompany’s customers for the transmission of transaction data, through theCompany’s networks, between payment processors and POS or ATM terminals andmonthly recurring fees for broadband and wireless offerings. TSD revenue isderived primarily from fixed monthly fees for call signaling services and perquery fees charged for database access, call validation and roaming andclearing services. Financial services revenue is derived primarily from monthlyrecurring fees based on the number of customer connections to and through theCompany’s networks.

 

Incentivesgranted to new customers or upon contract renewals are deferred and recognizedratably as a reduction of revenue over the contract period to the extent that theincentives are recoverable against the customer’s minimum purchase commitmentsunder the contract. In addition, the Company receives installation fees relatedto the configuration of the customers’ systems. Revenue from installation feesis deferred and recognized ratably over the customer’s contractual serviceperiod, generally three years. The Company performs periodic evaluations of itscustomer base and establishes allowances for estimated credit losses.

 

**Cost of Network Services**

 

Costof network services is comprised primarily of telecommunications charges, whichinclude data transmission and database access charges, leased digital capacitycharges, circuit installation charges 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 a liabilityfor telecommunications charges based upon network services utilized athistorical invoiced rates. Depreciation expense on network equipment andamortization expense on developed technology are excluded from cost of networkservices and included in depreciation and amortization of property andequipment and amortization of intangible assets in the accompanying condensedconsolidated statements of operations.

 

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**FairValue of Financial Instruments**

 

Thefair value of the Company’s long-term debt is based upon quoted market pricesfor the same and similar issues giving consideration to quality, interestrates, maturity and other characteristics. As of May 1, 2009, the closingdate of the 2009 credit facility, and September 30, 2009, the Companybelieves the carrying amount of its long-term debt approximates its fair value.

 

**Stock-Based Compensation**

 

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

 

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

 
| ** **                          | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                          | ** ** | **2008**                         | ** ** | **2009**                        | ** ** | **2008** | ** ** | **2009** | ** ** |
| Cost of network services            |       | $                                | 282        |                            | $          | 229 |   | $ | 858 |   | $ | 710 |   |
| Engineering and development         |       | 394                              |       | 318                             |       | 1,148 |   | 1,013 |   |
| Selling, general and administrative |       | 2,650                            |       | 2,438                           |       | 7,368 |   | 5,793 |   |
|                                |       | $                                | 3,326      |                            | $          | 2,985 |   | $ | 9,374 |   | $ | 7,516 |   |

 

Asof September 30, 2009, there was a total of $9.5 million of unrecognizedcompensation cost related to stock-based awards, which is expected to berecognized over a weighted average period of approximately two years.

 

*Time-Vested Awards*

 

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

 

During the three monthsended September 30, 2008, the Company granted 17,520 stock options and114,176 restricted stock units at weighted average estimated fair values of$9.95 and $23.30, respectively. During the nine months ended September 30,2008, the Company granted 42,520 stock options and 134,276 restricted stockunits at weighted average estimated fair values of $8.75 and $22.36,respectively. During the three months ended September 30, 2009, theCompany granted 5,872 options and 38,700 restricted stock units at weightedaverage estimated fair values of $10.54 and $21.90, respectively. During thenine months ended September 30, 2009, the Company granted 7,872 stockoptions and 43,750 restricted stock units at weighted average estimated fairvalues of $6.94 and $14.45 respectively. As of September 30, 2009, there was a total of $5.4 million ofunrecognized compensation expense related to these awards, which is included inthe $9.5 million total unrecognized compensation cost mentioned above.

 

*Performance-Based Awards*

 

Performance-basedawards are tied to the Company’s annual performance against pre-establishedinternal targets for revenues and adjusted earnings per share and may vary fromzero to 200% 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.

 

InMay 2007, the Company put in place a long-term performance-based stock compensationplan (the 2007 Equity Performance Plan). The total performance-based awardsissued under the Company’s 2007 Equity Incentive Plan were 576,076 stockoptions and 236,341 restricted stock units. The weighted average grant datefair value of performance-based stock options and restricted stock unitsgranted was $6.23 and $12.39, respectively.  As of September 30, 2009,there was a total of $0.2 million of unrecognized compensation expense relatedto these performance based awards which is included in the $9.5 million totalunrecognized compensation cost mentioned above.

 

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InFebruary 2008, the Company put in place a long-term performance-basedstock compensation plan (the 2008 Equity Performance Plan). The potentialpayout under the 2008 Equity Incentive Plan ranged from 0% to 100% of anemployee’s target payout.  Based upon the Company’s performance in 2008,the results of which were approved by the Company’s board of directors in February 2009,the plan participants earned 50% of the potential payout under the Company’s2008 Equity Incentive Plan.  The total performance based awards issuedunder the Company’s 2008 equity incentive plan were 121,269 stock options and118,817 restricted stock units. The weighted average grant date fair value ofperformance-based stock options and restricted stock units granted was $6.78and $16.15, respectively.  As of September 30, 2009, there was atotal of $0.5 million of unrecognized compensation expense related to theseperformance based awards which is included in the $9.5 million total unrecognizedcompensation cost mentioned above.

 

InApril 2009 the Company put in place a long-term performance-based stockcompensation plan (the 2009 Equity Performance Plan). The total number ofawards that would be issued under the Company’s 2009 Equity Performance Plan,assuming that the target payout level was achieved, would be 311,500 restrictedstock units. The potential payout under the 2009 Equity Incentive Plan willrange from 0% to 100% of an employee’s target payout. The weighted averagegrant date fair value of restricted stock units granted was $16.85.  As of September 30, 2009, there was atotal of $3.4 million of unrecognized compensation expense related to theseperformance based awards which is included in the $9.5 million total unrecognizedcompensation cost mentioned above.

 

**Income Taxes**

 

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

 

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

 

TheCompany records interest and penalties related to income taxes as components ofthe income tax provision, which totaled $60,000 and $0 for the nine monthsended September 30, 2008 and 2009, respectively. Of the $6.2 millionliability for unrecognized income tax benefits as of September 30, 2009,the Company’s accrual for potential interest and penalties associated withuncertain tax positions was $377,000. To the extent interest and penalties arenot assessed with respect to uncertain tax positions, amounts accrued will bereversed and reflected as a reduction of the overall income tax provision.

 

TheCompany remains subject to examination by U.S. Federal, state, local andforeign tax authorities for tax years 2005 through 2008.  With few exceptions,the Company is no longer subject to U.S. Federal, state, local or foreign taxexaminations for the tax years prior to 2005.

 

Areconciliation of the beginning and ending balance for liabilities associatedwith unrecognized tax benefits, excluding interest and penalties of $0.4million, is as follows (in thousands)

 
| Balance as of January 1, 2009                         |   | $     | 4,749  |   |
|------------------------------------------------------------|--------|-------|--------|--------|
| Additions for tax positions related to the current  period |   | 1,086 |   |
| Balance as of September 30, 2009                      |   | $     | 5,835  |   |

 

Theentire balance of unrecognized tax benefits as of September 30, 2009 wouldimpact the effective tax rate if recognized.

 

TheCompany’s effective tax rate for the nine months ended September 30, 2008and 2009 of 51.4% and 47.2%, respectively, differ from the U.S. Federalstatutory rate primarily due to stock-based compensation expense not deductiblefor income tax purposes, higher income in the U.S. which cannot be offset bylosses from foreign jurisdictions, increases in FASB ASC 740 reserves due tocertain income tax exposures, the recognition of tax benefits relating toresearch credits in the U.S., and profits of our international subsidiariesbeing taxed at rates different than the U.S. Federal statutory rate.

 

**Reclassifications**

 

Certain expenses which werepreviously included in engineering and development costs have been reclassifiedto selling, general and administrative expenses for the nine months endedSeptember 30, 2009.

 

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**Recent Accounting Pronouncements**

 

InJune 2008, the FASB issued an amendment to ASC 260, Earnings Per Share.This amendment provides that unvested share-based payment awards that containnonforfeitable rights to dividends or dividend equivalents (whether paid orunpaid) are participating securities and shall be included in the computationof earnings per share pursuant to the two-class method. The amendment iseffective for financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those years. The adoption of the amendment on January 1,2009 did not have a material effect on the Company’s consolidated financialstatements.

 

InDecember 2007, the FASB issued a revision to ASC 805, BusinessCombinations that 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. TheCompany adopted the revised FASB ASC 805 on January 1, 2009. Accordingly,any business combination we engage in beginning January 1, 2009 will berecorded and disclosed following the revised FASB ASC 805. The application ofFASB ASC 805 to the CSG acquisition is detailed in the acquisition sectionabove.

 

InSeptember 2006, the FASB issued FASB ASC 820, Fair Value Measurements andDisclosures, which is effective for fiscal years beginning after November 15,2007. The Company adopted FASB ASC 820 on January 1, 2008. FASB ASC 820defines fair value, establishes a framework for measuring fair value in GAAP,and expands disclosures about fair value measurements. The adoption of FASB ASC820 to the Company’s financial assets and liabilities did not have a materialeffect on the Company’s consolidated financial statements. In November 2007,the FASB agreed to a one-year deferral of the effective date for nonfinancialassets and liabilities that are recognized or disclosed at fair value on anonrecurring basis. Accordingly, for nonfinancial assets and liabilities, FASBASC 820 became effective on January 1, 2009 and the Company has appliedits disclosure and measurement provisions prospectively whenever applicable,such as in determining fair values of the assets acquired and liabilitiesassumed as part of the CSG acquisition described above. The Company will also apply theprovisions of FASB ASC 820 in its required goodwill and intangibles annualimpairment test to be performed at year-end.

 

InMay 2009, the FASB issued FASB ASC 855, Subsequent Events, which iseffective for interim or annual periods beginning on or after June 15,2009. The standard establishes principles and requirements for subsequentevents, including disclosure of the date through which an entity has evaluatedsubsequent events. We have adopted FASB ASC 855 in this period and the adoptionof the standard did not significantly impact our financial statements.

 

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

 

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

 

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

 

Debtconsists of the following (in thousands):

 
| ** **                   | ** ** | **December 31,  2008** | ** ** | **September 30,  2009** | ** ** |
|------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Existing  Term Loan Facility |       | $                           | 178,500    |                         | $          | 161,021 |   |
| New  Term Loan Facility      |       | —                      |       | 207,479                      |       |
|                         |       | 178,500                     |       | 368,500                      |       |
| Less:  Current portion       |       | —                      |       | (11,063                      | )          |
| Original  issue discount     |       | —                      |       | (18,380                      | )          |
| Long-term  portion           |       | $                           | 178,500    |                         | $          | 339,057 |   |

 

**2009 Credit Facility**

 

OnMay 1, 2009, the Company entered into a $423.5 million amended andrestated senior secured credit facility (2009 Credit Facility) to finance theacquisition of the CSG assets from Verisign, Inc. (see Note 1) and torefinance the 2007 Credit Facility.  The 2009 Credit Facility consists ofa fully funded term loan facility with an outstanding principal amount equal to$178.5 million (the Existing Term Loan Facility), a new fully funded term loanfacility with an outstanding principal amount equal to $230.0 million (the NewTerm Loan Facility) and a senior secured revolving credit facility in anaggregate principal amount of $15.0 million (the Existing RevolvingFacility), under which there have been no borrowings as of the date of thisfiling. The Existing Revolving Facility matures March 27, 2013. Paymentson the Existing Term Loan Facility and the New Term Loan Facility are due inquarterly installments over the term beginning June 30, 2009, with theremainder payable on March 28, 2014. Voluntary prepayments on the New andExisting Term Facilities are applied as directed by the Company. In October 2009,the Company made additional voluntary loan prepayments of $5.0 million whichwill be applied to the next scheduled loan repayments.

 

Thetotal scheduled remaining payments on the New and Existing Term Facilities areas follows (in thousands):

 
| Three  months ending December 31, 2009 |   | $       | —  |   |
|---------------------------------------------|--------|---------|---------|--------|
| 2010                                        |   | 21,275  |    |
| 2011                                        |   | 40,850  |    |
| 2012                                        |   | 48,509  |    |
| 2013                                        |   | 51,063  |    |
| Thereafter                                  |   | 206,803 |    |
|                                        |   | $       | 368,500 |   |

 

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

 

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Company’soption, at the Base Rate plus a margin of 5.0%, or at LIBOR plus a margin of6.0%.  Additionally, in no event will the LIBOR rate be less than3.5%.  The Existing Revolving Credit Facility is subject to an annualcommitment fee in an amount equal to between 0.375% and 0.5% (based on theCompany’s leverage ratio) per annum multiplied by the amount of funds availablefor borrowing under the Revolving Facility. Interest payments on the 2009Credit Facility are due biweekly, monthly, bimonthly or quarterly at theCompany’s option.

 

Theterms of the 2009 Credit Facility require the Company to make an annualprepayment in an amount that may range from 0% to 50% of the Company’s “excesscash flow” (as such term is defined in the Credit Agreement) depending on theCompany’s Leverage Ratio for any fiscal year. Prepayments are also required tobe made in other circumstances, including upon asset sales and sale-leasebacktransaction in excess of $2 million.  The Company is permitted to repayborrowings under the 2009 Credit Facility at any time in whole or in partwithout premium or penalty, provided that prepayments made during the firstyear after the closing resulting from any refinancing of the Term LoanFacilities that contains first lien debt financing terms similar to the termsgoverning the 2009 Credit Facility will be subject to a 1% prepayment premium.

 

Theobligations under the 2009 Credit Facility are unconditionally and irrevocablyguaranteed, subject to certain exceptions, by the Company and each existing andfuture direct and indirect domestic subsidiary of the Company.  Inaddition, the 2009 Credit Facility is secured, subject to certain exceptions,by a first priority perfected security interest in substantially all of thepresent and future property and assets (real and personal) of the Company and apledge of 100% of the Company’s capital stock of its respective domesticsubsidiaries and 65% of the Company’s capital stock of its respectivefirst-tier foreign subsidiaries.

 

Theterms of the 2009 Credit Facility require the Company to comply with financialand nonfinancial covenants, including maintaining a maximum specified leverageratio at the end of each fiscal quarter and a minimum consolidated fixed chargecoverage ratio and complying with specified annual limits on capitalexpenditures. As of September 30, 2009, the Company is required tomaintain a leverage ratio of less than 3.25 to 1.0. The Company’s leverageratio as of September 30, 2009 was 2.4 to 1.0. The maximum leverage ratiodeclines over the term of the 2009 Credit Facility. Also beginning June 30,2009 and as of the end of each subsequent quarter for the twelve month periodthen ended, the Company is required to maintain a consolidated fixed chargecoverage ratio of not less than 1.20 to 1.0.  The Company’s consolidatedfixed charge coverage ratio as of September 30, 2009 was 1.8 to 1.0.  The 2009 Credit Facility also containsnonfinancial covenants that restrict some of the Company’s corporateactivities, including its ability to dispose of assets, incur additional debt,pay dividends, create liens, make investments, make capital expenditures andengage in specified transactions with affiliates. Noncompliance with any of thefinancial or nonfinancial covenants without cure or waiver would constitute anevent of default under the 2009 Credit Facility. An event of default resultingfrom a breach of a financial or nonfinancial covenant may result, at the optionof the lenders, in an acceleration of the principal and interest outstanding,and a termination of the Revolving Facility. The 2009 Credit Facility alsocontains other customary events of default (subject to specified graceperiods), including defaults based on events of bankruptcy and insolvency,nonpayment of principal, interest or fees when due, breach of specifiedcovenants, change in control and material inaccuracy of representations andwarranties. The Company was in compliance with the financial and non-financialcovenants of the 2009 Credit Facility as of September 30, 2009.

 

In connection with the closing of the 2009 CreditFacility, the Company incurred approximately $5.4 million in financingcosts and $23.0 million in original issue discount. These financing costs and originalissue discounts were deferred and are being amortized using the effectiveinterest method over the life of the 2009 Credit Facility.  In connection with the refinancing of the2009 Credit Facility in May 2009, the Company wrote-off approximately $1.7million in unamortized deferred financing costs related to the 2007 CreditFacility.  This write-off has beenincluded in interest expense in the accompanying condensed consolidatedstatement of operations for the nine months ended September 30, 2009.

 

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

 

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

 
| ** **                               | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                               | ** ** | **2008**                         | ** ** | **2009**                        | ** ** | **2008** | ** ** | **2009** | ** ** |
| Net income                               |       | $                                | 1,887      |                            | $          | 3,204 |   | $ | 4,513 |   | $ | 3,633 |   |
| Foreign currency translation adjustments |       | (6,395                           | )          | 912                             |       | (3,502 | ) | 5,084 |   |
| Total comprehensive income               |       | $                                | (4,508     | )                               | $          | 4,116 |   | $ | 1,011 |   | $ | 8,717 |   |

 

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

 

FASBASC 260, Earnings Per Share, requires the presentation of basic and dilutedearnings per share. Basic earnings per common share is computed by dividingincome attributable to common stockholders by the weighted average number ofcommon shares outstanding for the period. The diluted earnings per common sharedata is computed using the weighted average number of common shares outstandingplus the dilutive effect of common stock equivalents, unless the common stock equivalentsare anti-dilutive.

 

The treasury stock effectof options to purchase 193,012 shares of common stock that were outstanding asof September 30, 2009, and options to purchase 522,417 shares of commonstock and 83,594 restricted stock units that were outstanding as of September 30,2008 were excluded from the computation of diluted net loss per common sharefor the three months ended September 30, 2008 and 2009, respectively, astheir effect would have been anti-dilutive.

 

The treasury stock effectof options to purchase 833,068 shares of common stock and 186,272 restrictedstock units that were outstanding as of September 30, 2009, and options topurchase 581,928 shares of common stock and 64,672 restricted stock units thatwere outstanding as of September 30, 2008 were excluded from thecomputation of diluted net loss per common share for the nine months ended September 30,2008 and 2009, respectively, as their effect would have been anti-dilutive.

 

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| ** **                                                | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                | ** ** | **2008**                         | ** ** | **2009**                        | ** ** | **2008** | ** ** | **2009** | ** ** |
| Net income                                                |       | $                                | 1,877      |                            | $          | 3,204 |   | $ | 4,513 |   | $ | 3,633 |   |
| Weighted average common share calculation:                |       |                             |       |                            |       |   |   |   |   |
| Basic weighted average common shares outstanding          |       | 24,989,865                       |       | 25,481,084                      |       | 24,667,442 |   | 25,279,307 |   |
| Treasury stock effect of outstanding options to  purchase |       | 316,949                          |       | 379,165                         |       | 227,885 |   | 174,916 |   |
| Treasury stock effect of unvested restricted stock  units |       | 243,051                          |       | 289,183                         |       | 281,530 |   | 169,977 |   |
| Diluted weighted average common shares outstanding        |       | 25,549,865                       |       | 26,149,432                      |       | 25,176,857 |   | 25,624,200 |   |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| Net income per common share:                              |       |                             |       |                            |       |   |   |   |   |
| Basic net income per common share                         |       | $                                | 0.08       |                            | $          | 0.13 |   | $ | 0.18 |   | $ | 0.14 |   |
| Diluted net income per common share                       |       | $                                | 0.07       |                            | $          | 0.12 |   | $ | 0.18 |   | $ | 0.14 |   |

 

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

 

TheCompany classifies its business into two segments: North America and ISD. Inaddition, the Company’s management evaluates revenues for its four businessdivisions: POS, TSD, FSD and ISD. A significant portion of the Company’s NorthAmerican operating expenses are shared between the POS division, TSD and FSD,and, therefore, management analyzes operating results for these three businessdivisions on a combined basis.

 

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

 

Revenuefor the Company’s two segments is presented below (in thousands):

 
| ** **          | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **          | ** ** | **2008**                         | ** ** | **2009**                        | ** ** | **2008** | ** ** | **2009** | ** ** |
| Revenues:           |       |                             |       |                            |       |   |   |   |   |
| POS                 |       | $                                | 18,724     |                            | $          | 19,792 |   | $ | 56,224 |   | $ | 57,368 |   |
| TSD                 |       | 16,441                           |       | 72,418                          |       | 51,109 |   | 144,354 |   |
| FSD                 |       | 11,726                           |       | 12,011                          |       | 34,054 |   | 36,215 |   |
| Total North America |       | 46,891                           |       | 104,221                         |       | 141,387 |   | 237,937 |   |
| ISD                 |       | 41,738                           |       | 35,884                          |       | 121,516 |   | 99,385 |   |
| Total revenues      |       | $                                | 88,629     |                            | $          | 140,105 |   | $ | 262,903 |   | $ | 337,322 |   |

 

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EBITDAbefore stock compensation expense for the North American and ISD operations isreflected below (in thousands):

 
| ** **                                     | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                     | ** ** | **2008**                         | ** ** | **2009**                        | ** ** | **2008** | ** ** | **2009** | ** ** |
| ISD                                            |       | $                                | 15,755     |                            | $          | 11,378 |   | $ | 45,352 |   | $ | 32,563 |   |
| North America                                  |       | 6,709                            |       | 25,481                          |       | 19,235 |   | 52,067 |   |
| Total EBITDA before stock compensation expense |       | $                                | 22,464     |                            | $          | 36,829 |   | $ | 64,587 |   | $ | 84,630 |   |

 

(i)                                         Management evaluates theperformance of its segments before consideration of certain intercompanytransactions. Accordingly, these transactions are not reflected in EBITDA bysegment. In addition, certain corporate expenses are reflected in the NorthAmerican segment, consistent with information reviewed by our chief operatingdecision maker.

 

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

 
| ** **                                                                      | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                      | ** ** | **2008**                         | ** ** | **2009**                        | ** ** | **2008** | ** ** | **2009** | ** ** |
| EBITDA before stock compensation expense                                        |       | $                                | 22,464     |                            | $          | 36,829 |   | $ | 64,587 |   | $ | 84,630 |   |
| Reconciling items:                                                              |       |                             |       |                            |       |   |   |   |   |
| Depreciation and amortization of property and  equipment                        |       | (6,140                           | )          | (9,013                          | )          | (18,201 | ) | (22,841 | ) |
| Amortization of intangible assets                                               |       | (5,869                           | )          | (9,102                          | )          | (18,327 | ) | (22,859 | ) |
| Stock compensation expense                                                      |       | (3,326                           | )          | (2,985                          | )          | (9,374 | ) | (7,516 | ) |
| Interest expense                                                                |       | (2,390                           | )          | (11,952                         | )          | (8,730 | ) | (24,821 | ) |
| Interest income and other income (expense), net                                 |       | (688                             | )          | 583                             |       | (582 | ) | 370 |   |
| Income before income taxes and equity in net loss  of unconsolidated affiliates |       | $                                | 4,051      |                            | $          | 4,360 |   | $ | 9,373 |   | $ | 6,963 |   |

 

**Geographic Information**

 

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

 

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

 
| ** **     | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------|------------|----------------------------------|------------|----------------------------|------------|
| ** **     | ** ** | **September 30,**           | ** ** | **September 30,**     | ** ** |
| ** **     | ** ** | **2008**                         | ** ** | **2009**                   | ** ** | **2008** | ** ** | **2009** | ** ** |
| North America  |       | $                                | 46,909     |                       | $          | 104,221 |   | $ | 141,422 |   | $ | 237,937 |   |
| Europe         |       | 32,992                           |       | 28,357                     |       | 96,417 |   | 78,412 |   |
| Asia-Pacific   |       | 8,728                            |       | 7,527                      |       | 25,064 |   | 20,973 |   |
| Total revenues |       | $                                | 88,629     |                       | $          | 140,105 |   | $ | 262,903 |   | $ | 337,322 |   |

 

Revenuesfrom the Company’s subsidiaries in the United Kingdom were $18.9 millionand $15.1million for the three months ended September 30, 2008 and 2009,respectively. Revenues from the Company’s subsidiaries in the United Kingdomwere $56.1 million and $41.7 million for the nine months ended September 30,2008 and 2009, respectively. On a constant dollar basis, revenue from theUnited Kingdom subsidiaries for the three months and nine months ended September 30,2009, was $17.5 million and $52.6 million, respectively.

 

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

 
| ** **              | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **              | ** ** | **2008**              | ** ** | **2009**               | ** ** |
| North America           |       | $                     | 182,990    |                   | $          | 369,072 |   |
| Europe                  |       | 23,408                |       | 22,044                 |       |
| Asia-Pacific            |       | 15,162                |       | 17,120                 |       |
| Total long lived assets |       | $                     | 221,560    |                   | $          | 408,196 |   |

 

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Totalassets are located in the following reporting segments (in thousands):

 
| ** **    | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|---------------|------------|-----------------------|------------|------------------------|------------|
| ** **    | ** ** | **2008**              | ** ** | **2009**               | ** ** |
| North America |       | $                     | 260,213    |                   | $          | 475,750 |   |
| ISD           |       | 101,701               |       | 100,525                |       |
| Total assets  |       | 361,914               |       | 576,275                |       |
|               |            |                       |            |                        |            |  |  |

 

Goodwilland intangible assets are located in the following reporting segments (inthousands):

 
| ** **                           | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                           | ** ** | **2008**              | ** ** | **2009**               | ** ** |
| North America                        |       | $                     | 123,668    |                   | $          | 272,060 |   |
| ISD                                  |       | 39,097                |       | 22,756                 |       |
| Total goodwill and intangible assets |       | 162,765               |       | 294,816                |       |
|                                      |            |                       |            |                        |            |  |  |

 

**6.**             **RestructuringCosts**

 

DuringSeptember 2009, the Company incurred $1.7 million in severance in itsISD segment, which was included in selling, general and administrative expense.

 

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

 
| ** **                                    | ** ** | **2009** | ** ** |
|-----------------------------------------------|------------|----------|------------|
| Balance at January 1                          |       | 953      |       |
| Severance and benefits                        |       | 1,978    |       |
| Accretion of liability due to passage of time |       | 3        |       |
| Effects of foreign currency translation       |       | (12      | )          |
| Cash paid                                     |       | (943     | )          |
| Balance at September 30                       |       | 1,979    |       |

 

Theabove severance and benefits expenses are based on estimates that are subjectto change. The remaining cash expenditures relating to the severance andbenefits will be paid in 2009. This liability is classified as accountspayable, accrued expenses and other liabilities in the accompanyingconsolidated balance sheet.

 

**7.             Litigationand Claims**

 

TheCompany is periodically involved in disputes arising from normal businessactivities. In the opinion of management, resolution of these matters will nothave a material adverse effect upon the financial position or future operatingresults of the Company, and adequate provision for any potential losses hasbeen made in the accompanying consolidated financial statements.

 

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

 

**8.             Subsequent Events**

 

Inpreparing these financial statements, the Company’s management has evaluatedsubsequent events through November 9, 2009, the date the financialstatements were filed.

 

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**Item 2.   Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

Youshould read the following discussion of the financial condition and results ofoperations of TNS, Inc. in conjunction with the consolidated financialstatements and the related notes included in our annual report on Form 10-Kfiled with the SEC on March 16, 2009 and available directly from the SECat www.sec.gov and the condensed consolidated financial statements and therelated notes of TNS, Inc., included elsewhere in this quarterly report.

 

Thereare statements made herein which may not address historical facts and,therefore, could be interpreted to be forward-looking statements within themeaning of The Private Securities Litigation Reform Act of 1995. Theseforward-looking statements are based on current expectations, forecasts andassumptions that are subject to risks and uncertainties that could cause actualresults to differ materially from those set forth in, or implied by, theforward-looking statements. The Company has attempted, whenever possible, toidentify these forward-looking statements using words such as “may,” “will,” “should,”“projects,” “estimates,” “expects,” “plans,” “intends,” “anticipates,” “believes,”and variations of these words and similar expressions. Similarly, statementsherein that describe the Company’s business strategy, prospects, opportunities,outlook, objectives, plans, intentions or goals are also forward-lookingstatements. Actual results may differ materially from those indicated by suchforward-looking statements as a result of various important factors, including:the Company’s reliance upon a small number of customers for a significantportion of its revenue; competitive factors such as pricing pressures; ourcustomer’s ability to direct their data communications from the Company’snetworks to other networks; the Company’s ability to grow its businessdomestically and internationally by generating greater transaction volumes,acquiring new customers or developing new service offerings; currentdifficulties in the financial services sector may continue to have a negativeimpact on our future growth rates in our financial services division;fluctuations in the Company’s quarterly results because of the seasonal natureof the business; unfavorable fluctuations in foreign exchange rates; theCompany’s substantial debt could adversely affect its financial health becausethe Company may be unable to obtain additional financing for working capital,capital expenditures, acquisitions and general corporate purposes, the Company maynot generate sufficient cash flow to repay the debt on a timely basis or topre-pay the debt, and a significant portion of the Company’s cash flow fromoperations will be dedicated to the repayment or servicing of indebtedness,thereby reducing the amount of cash available for other purposes; the Company’sability to refinance its senior secured credit facility; the Company’s abilityto identify, execute or effectively integrate acquisitions including theacquisition of CSG; the Company’s ability to realize additional overall costsavings from the acquisition of CSG, including consolidating SS7 call signalingnetworks, eliminating duplicate intelligent database platforms and eliminatingduplicate facilities; increases in the prices charged by telecommunicationproviders for services used by the Company; uncertainties related to theupdated international tax planning strategy implemented by the Company; theCompany’s ability to identify, execute or effectively integrate futureacquisitions; the Company’s ability to adapt to changing technology; additionalcosts related to compliance with the Sarbanes-Oxley Act of 2002, any revisedNew York Stock Exchange listing standards, SEC rule changes or othercorporate governance issues; and other risk factors described in the Company’sannual report on Form 10-K filed with the SEC on March 16, 2009 andin the Company’s quarterly reports on Form 10-Q filed with the SEC on May 11,2009 and August 10, 2009. In addition, the statements in this quarterlyreport are made as of the date of this filing. The Company expects thatsubsequent events or developments will cause its views to change. The Companyundertakes no obligation to update any of the forward-looking statements madeherein, whether as a result of new information, future events, changes inexpectations or otherwise. These forward-looking statements should not berelied upon as representing the Company’s views as of any date subsequent tothe date of this filing. The forward-looking statements in this document are intendedto be subject to the safe harbor protection provided by Sections 27A of theSecurities Act and 21E of the Exchange Act.

 

**Overview**

 

Weare an international data communications company which provides networking,data communications and value added services to many of the world’s leadingretailers, banks and payment processors. We are also a leading provider ofsecure data and voice network services to the global financial servicesindustry. We operate the largest unaffiliated Signaling System No. 7 networksin the United States capable of providing services nationwide, and we utilizethis network to provide call signaling and database access services to thedomestic telecommunications industry. We also provide data roaming and clearingservices to both domestic and international mobile phone operators. Our datacommunications services enable secure and reliable transmission oftime-sensitive, transaction-related information critical to our customers’operations. Our customers outsource their data communications requirements tous because of our substantial expertise, comprehensive customer support andcost-effective services. We provide services to customers in the United Statesand increasingly to international customers in 31 countries, including Canadaand Mexico and countries in Europe, Latin America and the Asia-Pacific region.

 

Weprovide services through our multiple data networks, each designed specificallyfor transaction applications. Our networks support a variety of widely acceptedcommunications protocols and are designed to be scalable and accessible bymultiple methods, including dial-up, dedicated, wireless, broadband andinternet connections.

 

Wegenerate revenues through four business divisions:

 

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

 

·                    ***Telecommunication services. *** We providecall signaling services that enable telecommunications service providers toestablish and terminate telephone calls placed by their subscribers. We alsoprovide database access services that enable our customers to provideintelligent network services, such as caller identification, toll-free callrouting and local number portability, and validation services, such as creditcard, calling card, third- party billing and collect calling. In

 

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

 

·                    ***Financial services. *** We providefast, secure and reliable private data networking services that enable seamlesscommunications and facilitate electronic trading among commercial banks, mutualfunds, pension funds, broker-dealers, alternative trading systems, electroniccommunications networks, securities and commodities exchanges and other marketparticipants. Our networks support multiple communications protocols includingthe Financial Information eXchange, or FIX, protocol. Our financial servicesdivision generates revenues from monthly recurring fees based on the number ofcustomer connections to and through our networks.

 

·                    ***International services. *** We sell ourPOS and financial services through our international services division. We areone of the leading providers of data communications services to the POSindustry in the United Kingdom. Our international services division alsoprovides POS and financial services in Australia, Austria, Belgium, Bermuda,Finland, France, Gibraltar, Germany, Greece, Hong Kong, India, Ireland, Italy,Japan, Malaysia, the Netherlands, New Zealand, Norway, Poland, Romania,Singapore, South Korea, Spain, Sweden, Taiwan, Thailand and Turkey.

 

Ourmost significant expense is cost of network services, which is comprisedprimarily of telecommunications charges, including data transmission anddatabase access, leased digital capacity charges, circuit installation chargesand activation charges. The cost of data transmission is based on a contract ortariff rate per minute of usage in addition to a prescribed rate pertransaction for some vendors. The costs of database access, circuits,installation charges and activation charges are based on fixed fee contractswith local exchange carriers and interexchange carriers. The cost of networkservices also includes salaries, equipment maintenance and other costs relatedto the ongoing operation of our data networks. Depreciation expense on ournetwork equipment and amortization of developed technology are excluded fromour cost of network services and included in depreciation and amortization ofproperty and equipment and amortization of intangible assets in ourconsolidated statements of operations.

 

Ourengineering and development expenses include salaries and other costs relatedto product development, engineering, hardware maintenance and materials. Themajority of these costs are expensed as incurred, including costs related tothe development 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.

 

Ourselling, general and administrative expenses include costs related to sales,marketing, administrative and management personnel, as well as external legal,accounting and consulting services.

 

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

 

OnMarch 2, 2009, TNS entered into an asset purchase agreement between TNSand VeriSign, Inc. pursuant to which TNS agreed to purchase from Verisign, Inc.certain assets and assume certain liabilities of CSG.  On May 1,2009, we completed the acquisition in accordance with the terms and conditionsof the asset purchase agreement.  The initial purchase price wasapproximately $226.2 million in cash and was subject to a post-closing workingcapital adjustment.  During the third quarter of 2009, the working capitaladjustment was finalized, resulting in a $3.8 million increase in the purchaseprice to $230.0 million. We funded, the transaction through a new $230.0million term loan facility as part of the 2009 Credit Facility (see Note 2 tothe condensed consolidated financial statements included elsewhere in thisreport).  CSG provides call signaling services, intelligent databaseservices such as caller ID, toll-free call routing and local number portabilityto the U.S. telecommunications industry.  In addition, CSG provideswireless roaming and clearing services to mobile phone operators.  We areintegrating CSG into our telecommunications services division.  Our statements of operations for the three andnine month periods ended September 30, 2009 include the results of CSGfrom May 1, 2009 and are therefore not comparable to the year-agoperiods.  Please refer to our amendedCurrent Report on Form 8-K/A filed with the SEC on July 15, 2009 formore detail on the historical and pro-forma results of CSG and Note 1 to thecondensed consolidated financial statements included elsewhere in this report.

 

**Results of Operations**

 

Thefollowing table sets forth, for the periods indicated selected statement ofoperations data (dollars in thousands):

 

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| ** **                                                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                            | ** ** | **2008**                         | ** ** | **2009**                        | ** ** | **2008** | ** ** | **2009** | ** ** |
| Revenues                                                                              |       | $                                | 88,629     |                            | $          | 140,105 |   | $ | 262,903 |   | $ | 337,322 |   |
| Operating expenses:                                                                   |       |                             |       |                            |       |   |   |   |   |
| Cost of network services, exclusive of the items  shown separately below              |       | 41,274                           |       | 64,940                          |       | 124,206 |   | 160,044 |   |
| Engineering and development                                                           |       | 7,252                            |       | 10,379                          |       | 22,120 |   | 25,855 |   |
| Selling, general, and administrative                                                  |       | 20,965                           |       | 30,942                          |       | 61,364 |   | 74,309 |   |
| Depreciation and amortization of property and  equipment                              |       | 6,140                            |       | 9,013                           |       | 18,201 |   | 22,841 |   |
| Amortization of intangible assets                                                     |       | 5,869                            |       | 9,102                           |       | 18,327 |   | 22,859 |   |
| Total operating expenses                                                              |       | 81,500                           |       | 124,376                         |       | 244,218 |   | 305,908 |   |
| Income from operations                                                                |       | 7,129                            |       | 15,729                          |       | 18,685 |   | 31,414 |   |
| Interest expense                                                                      |       | (2,390                           | )          | (11,952                         | )          | (8,730 | ) | (24,821 | ) |
| Interest income                                                                       |       | 214                              |       | 90                              |       | 541 |   | 329 |   |
| Other (expense) income, net                                                           |       | (902                             | )          | 493                             |       | (1,123 | ) | 41 |   |
| Income before income tax benefit and equity in net  loss of unconsolidated affiliates |       | 4,051                            |       | 4,360                           |       | 9,373 |   | 6,693 |   |
| Income tax provision                                                                  |       | (2,141                           | )          | (1,129                          | )          | (4,766 | ) | (3,250 | ) |
| Equity in net loss of unconsolidated affiliates                                       |       | (23                              | )          | (27                             | )          | (94 | ) | (80 | ) |
| Net income                                                                            |       | $                                | 1,887      |                            | $          | 3,204 |   | $ | 4,513 |   | $ | 3,633 |   |

 

**Three months ended September 30, 2009 compared to thethree months ended September 30, 2008**

 

***Revenues.*** Total revenuesincreased $51.4 million, or 58.1%, to $140.1 million for the three months endedSeptember 30, 2009, from $88.6 million for the three months ended September 30,2008. On a constant dollar basis, total revenues would have increased $55.2million, or 62.3%, to $143.8 million. We generate revenues through four businessdivisions.

 

***International services division.*** Revenues fromthe international services division decreased $5.8 million, or 14.0%, to$35.9 million for the three months ended September 30, 2009, from $41.7million for the three months ended September 30, 2008. The adverse effectof foreign exchange translation on a year-over-year basis was $3.7million.  In addition, we had $0.5 million of software development revenuefor the three months ended September 30, 2009 compared to $1.7 million for thethree months ended September 30, 2008.  Excluding the adverse impact of foreignexchange rates and the incremental software development revenue, internationalservices division decreased $1.1 million, or 2.6%, to $40.6 million from $41.7million for the three months ended September 30, 2009 and 2008,respectively. The decrease was primarily due to reductions in dial-up POStransaction volumes in Europe and to a lesser extent from the loss of twoprocessing customers in the U.K.  Thesedeclines were partially offset by increased sales of our IP services to POScustomers. Revenues from our United Kingdom subsidiaries decreased$3.8 million, or 20.0%, to $15.1 million for the three months ended September 30,2009, from $18.9 million for the three months ended September 30,2008. On a constant dollar basis, revenue from the United Kingdom subsidiariesfor the three months ended September 30, 2009 would have decreased $1.4million, or 7.5%, to $17.5 million due primarily to a decrease in dial-uptransaction volumes and the loss of two processing customers as mentionedabove. This was partially offset by increased revenue from sales of our paymentgateway and IP services.

 

Futurerevenue growth in the international services division depends on a number offactors including the success of our POS and financial service products incountries we have recently entered, the total number of POS transactions thatwe transport, the success of our new product offerings, the successfulexpansion of our card-not-present service offerings and the effects of foreigncurrency translation.  In recent months, we have seen a reduction in thegrowth rates of our dial-up transaction volumes in most of the markets in whichwe operate, which we attribute to the overall weakness of the global economy.As we generate the majority of our revenue in the international servicesdivision from transaction volumes our future revenue may be adversely affectedby the continued weakness of the global economy.

 

Inour international services division we enter into arrangements with ourcustomers in the currency of the markets we operate in. As a result, ourreported results are affected by fluctuations in the value of the U.S. dollaras compared to foreign currencies, predominantly the British Pound, the Euroand the Australian dollar. The following table shows the currency compositionof our revenues in the international services division for the three monthsended September 30, 2009 and 2008 and weighted average exchange rates usedto translate our local currency results to the U.S. dollar:

 
| ** **        | ** ** | **2009**                              | ** ** | **2008**                                             | ** ** |
|-------------------|------------|---------------------------------------|------------|------------------------------------------------------|------------|
| ** **        | ** ** | **% of ISD********Revenue** | ** ** | **Weighted Average********Exchange Rates** | ** ** | **% of ISD********Revenue** | ** ** | **Weighted Average********Exchange Rates** | ** ** |
| British Pound     |       | 42                                    | %          | 1.64                                                 |       | 45 | % | 1.89 |   |
| Euro              |       | 35                                    | %          | 1.43                                                 |       | 32 | % | 1.51 |   |
| Australian Dollar |       | 17                                    | %          | 0.83                                                 |       | 18 | % | 0.89 |   |

 

***POS division.*** Revenues fromthe POS division increased $1.1 million, or 5.7%, to $19.8 millionfor the three months ended September 30, 2009, from $18.7 million forthe three months ended September 30, 2008. The increase in revenue is dueto a $1.2 million increase in revenue from our managed broadband productsand  a $1.2 million increase from salesof our ATM processing products, primarily in Canada. This was partially offsetby a $1.6 million decrease

 

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indial revenue primarily from a 6.0% decline in transaction volumes, which weattribute to softness in the economy, and to a lesser extent from a decrease inrevenue per transaction for our dial-up POS offering mainly resulting from therenewal of certain customer contracts. The increase in sales of our IPservices, which enjoy a recurring revenue model rather than a per transactionmodel, continues to help mitigate this decline. Growth in the POS division depends on a number of factors including thesuccess of our managed broadband products, payment gateway applications as wellas the total number of POS dial-up transactions we transport.

 

***Telecommunication services division.*** Revenues fromthe telecommunication services division increased $56.0 million to $72.4million for the three months ended September 30, 2009, from $16.4 millionfor the three months ended September 30, 2008. Revenues increasedprimarily as a result of the revenue contribution from the CSGacquisition.  This was partially offsetby a decrease of $2.3 million due to volume declines from a customer followingthe announcement in March 2009 of our agreement to acquire CSG, based onthe expectation that we will compete with the customer following theacquisition. 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, thesuccess of our new product offerings, which potentially may be offset bycustomers seeking pricing discounts due to industry consolidation or otherreasons and the successful integration of the business acquired through our purchaseof CSG.

 

***Financial services division.*** Revenues fromthe financial services division increased $0.3 million, or 2.4%, to$12.0 million for the three months ended September 30, 2009, from$11.7 million for the three months ended September 30, 2008. Theincrease in revenues was primarily due to an incremental $0.6 million from newcustomer end point installations which was partially offset by a decrease of $0.2million from a reduction in the number of connections between end points whichwe believe is a result of the consolidation and contraction of the financialservices industry over the course of the last year.  Future revenue growth in the financialservices division depends on a number of factors including the number ofconnections to and through our networks as well as the success of our newproduct offerings. We also expect that the current difficulties in thefinancial services sector may continue to have a negative impact on our futuregrowth rates in this division.

 

***Cost of network services.*** Cost ofnetwork services increased $23.7 million, or 57.3%, to $65.0 millionfor the three months ended September 30, 2009, from $41.3 million forthe three months ended September 30, 2008. On a constant dollar basis,cost of network services increased $25.0 million, or 60.7%, to$66.3 million. Cost of network services were 46.3% of revenues for thethree months ended September 30, 2009, compared to 46.6% of revenues forthe three months ended September 30, 2008. Excluding the effect of foreignexchange the increase in cost of network services was due to costs related toincreased revenue in our telecom services division resulting from the CSGacquisition of $26.2 million, an increase in our international servicesdivision of $0.5 million primarily to support additional financial servicesrevenue and an increase in our domestic financial services division of $0.4million primarily to support the increased number of customer endpoints. Thecost of network services in our POS division decreased $1.9 million dueprimarily to reductions in dial up transaction volumes and to a lesser extentnegotiated price decreases from our vendors which was partially offset by anincrease in the cost of broadband connections to support the increased revenuefrom our broadband services.

 

Grossprofit represented 53.7% of total revenues for the three months ended September 30,2009, compared to 53.4% for the three months ended September 30, 2008. Ona constant dollar basis, gross margins for the three months ended September 30,2009 increased 50 basis points to 53.9%.

 

Futurecost of network services depends on a number of factors including totaltransaction and query volumes, the relative growth and contribution to totaltransaction volume of each of our customers, the success of our new serviceofferings, the timing and extent of our network expansion and the timing andextent of any network cost increases or reductions.

 

***Engineering and development expense.*** Engineeringand development expense increased $3.1 million, or 43.1%, to $10.4 millionfor the three months ended September 30, 2009, from $7.3 million forthe three months ended September 30, 2008. On a constant dollar basis,engineering and development expenses would have increased $3.3 million, or46.6%, to $10.6 million. Engineering and development expense represented 7.4%and 8.1% of revenues for the three months ended September 30, 2009 and2008, respectively. Capitalized software development costs, which are offsetagainst engineering and development costs, increased $0.7 million to $2.5million from $1.8 million for the three months ended September 30, 2009and 2008, respectively. The increase in capitalized software development costsis primarily due to investment in our roaming and clearing and IP registryplatforms. Included in engineering and development expenses for the threemonths ended September 30, 2009 and 2008 is $0.3 million and$0.4 million of stock compensation expense, respectively.  Excludingstock compensation, the increase in capitalized software and the effects offoreign exchange, engineering and development expense would have increased $4.2million to $12.9 million, or 9.0% of revenues, for the three months ended September 30,2009 from $8.7 million, or 9.8% of revenues, for the three months ended September 30,2008.  The increase relates primarily toadditional headcount and other costs required to support our acquisition ofCSG.

 

***Selling,general and administrative expense.*** Selling, general and administrative expensesincreased $9.9 million, or 47.6%, to $30.9 million for the three months endedSeptember 30, 2009, from $21.0 million for the three months ended September 30,2008. On a constant dollar basis, selling, general and administrative expenseswould have increased $10.7 million, or 51.1%, to $31.7 million. Included inselling, general and administrative expenses for the three months endedSeptember 30, 2009 and 2008 is $2.4 million and $2.7 million of stockcompensation expense, respectively. The decrease in stock compensation expenseis due to a reduction in performance related stock compensation as a result offewer grants. Included in selling, general and administrative expenses for thethree months ended September 30, 2009 and 2008 is $1.7 million and $0.7 millionof severance expense, respectively. Excluding these items and the effects offoreign exchange, selling, general and administrative expenses would haveincreased $9.8 million for the three months ended September 30, 2009. Thisincrease was primarily attributable to additional headcount and other costsnecessary to support the acquired CSG operations and to a lesser extent costincurred to support the growth or our Canadian ATM processing business.

 

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***Depreciation and amortization ofproperty and equipment.*** Depreciation andamortization of property and equipment increased $2.9 million, or 46.8%,to $9.0 million for the three months ended September 30, 2009, from$6.1 million for the three months ended September 30, 2008. On aconstant dollar basis, depreciation and amortization of property and equipmentwould have increased $3.1 million, or 49.3% to $9.2 million.  Depreciationand amortization of property and equipment represented 6.4% and 6.9% of revenuefor the three months ended September 30, 2009 and 2008, respectively. Theincrease in depreciation expense was primarily due to an incremental $2.9million related to the acquired CSG assets.

 

***Amortization of intangible assets.*** Amortizationof intangible assets increased $3.2 million, or 55.1%, to$9.1 million for the three months ended September 30, 2009, from $5.9million for the three months ended September 30, 2008 and relates solelyto intangible assets resulting from acquisitions. On a constant dollar basis,amortization of intangible assets would have increased $3.3 million, or 57.5%to $9.2 million.  The increase primarilyrelates to additional amortization expense of $4.3 million related to the CSGacquisition.  This was partially offsetby a decrease of $0.8 million as certain intangible assets reached the end oftheir useful economic lives.  Forpurposes of measuring and recognizing impairment of long-lived assets includingintangibles, we assess whether separate cash flows can be attributed to anindividual asset. For our customer relationship intangible assets, we recognizeand measure impairment upon the significant loss of revenue from a customer.Beginning in 2005, we experienced revenue and transaction volume declines witha major customer. The intangible asset value attributable to the customerrelationship was approximately $18.3 million as of September 30,2009.  We assessed the recoverability of this customer relationship assetbased upon undiscounted anticipated future cash flows and concluded that noimpairment existed as of September 30, 2009.

 

***Interest expense.*** Interestexpense increased $9.6 million to $12.0 million for the three monthsended September 30, 2009, from $2.4 million for the three monthsended September 30, 2008. Included in interest expense for the threemonths ended September 30, 2009, was $3.0 million of amortized deferredfinancing fees compared to $0.1 million for the three months ended September 30,2008. The increase of $2.9 million in amortization of deferred financing feeswas due to the fees and debt discount associated with the 2009 CreditFacility.  Excluding this amortization, thebalance of interest expense increased $6.7 million primarily as a result of theincreased borrowings under our 2009 Credit Facility, used to fund the CSGacquisition, and an increase in the weighted average interest rate.

 

***Income tax provision.*** For the threemonths ended September 30, 2009, our income tax provision was approximately$1.1million compared to $2.1 million for the three months ended September 30,2008. The decrease in our income tax provision is primarily related to lowerinternational income and the recognition of tax benefits relating to researchcredits in the U.S. Our effective tax rate was 26.0% and 53.2% for the threemonths ended September 30, 2009 and 2008, respectively. Our effective taxrate differs from the U.S. Federal statutory rate primarily due to stock-basedcompensation expense not deductible for income tax purposes, higher income inthe U.S. which cannot be offset by losses from foreign jurisdictions, increasesin FASB ASC 740 reserves due to certain income tax exposures, the recognitionof tax benefits relating to research credits in the U.S. and profits of ourinternational subsidiaries being taxed at rates different than the U.S. Federalstatutory rate.

 

**Nine months ended September 30, 2009 compared to thenine months ended September 30, 2008**

 

***Revenues.*** Total revenuesincreased $74.4 million, or 28.3%, to $337.3 million for the nine monthsended September 30, 2009, from $262.9 million for the nine monthsended September 30, 2008. On a constant dollar basis, total revenues wouldhave increased $94.0 million, or 35.8%, to $356.9 million. We generate revenuesthrough four business divisions.

 

***International services division.***Revenues from the international servicesdivision decreased $22.1 million, or 18.2%, to $99.4 million for the ninemonths ended September 30, 2009, from $121.5 million for the nine months endedSeptember 30, 2008. The adverse effect of foreign exchange translation on ayear-over-year basis was $19.3 million. Excluding the adverse impact of foreignexchange rates, international services division revenue decreased $2.8 million,or 2.4%, to $118.7 million from $121.5 million for the nine months endedSeptember 30, 2009 and 2008, respectively. The decrease was due to a $3.7million decrease in POS revenue in the UK primarily due to lower transactionvolumes and to a lesser extent the loss of two processing customers, which waspartially offset by increased revenue from sales of our payment gateway and IPservices, and a decrease of $1.6 million from our Dialect subsidiary due to areduction in software development revenue. This was partially offset by anincrease in international financial services revenue of $1.1 million due toadditional customer connections, an increase in revenue from our Europeansubsidiaries excluding the UK of $1.1 million primarily from increasedtransaction volumes and to a lesser extent sales of our IP services and anincrease of $0.3 million due to higher transaction volumes in the Asia Pacificregion. Revenues from our United Kingdom subsidiaries decreased $14.4 million,or 25.6 %, to $41.7 million for the nine months ended September 30, 2009, from$56.1 million for the nine months ended September 30, 2008. On a constantdollar basis, revenue from the United Kingdom subsidiaries for the nine monthsended September 30, 2009 would have decreased $3.5 million, or 6.2%, to $52.6million due to a $3.7 million decrease in POS revenue, primarily due to lowertransaction volumes and to a lesser extent the loss of two processingcustomers, which was partially offset by increased revenue from sales of ourpayment gateway and IP services. UK financial services revenue also increased$0.2 million year over year.

 

Inour international services division we enter into arrangements with ourcustomers in the currency of the markets we operate in. As a result, ourreported results are affected by fluctuations in the value of the U.S. dollaras compared to foreign

 

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currencies,predominantly the British Pound, the Euro and the Australian dollar. Thefollowing table shows the currency composition of our revenues in theinternational services division for the nine months ended September 30,2009 and 2008 and weighted average exchange rates used to translate our localcurrency results to the U.S. dollar:

 
| ** **        | ** ** | **2009**                              | ** ** | **2008**                                             | ** ** |
|-------------------|------------|---------------------------------------|------------|------------------------------------------------------|------------|
| ** **        | ** ** | **% of ISD********Revenue** | ** ** | **Weighted Average********Exchange Rates** | ** ** | **% of ISD********Revenue** | ** ** | **Weighted Average********Exchange Rates** | ** ** |
| British Pound     |       | 42                                    | %          | 1.54                                                 |       | 46 | % | 1.95 |   |
| Euro              |       | 35                                    | %          | 1.37                                                 |       | 31 | % | 1.52 |   |
| Australian Dollar |       | 17                                    | %          | 0.75                                                 |       | 18 | % | 0.91 |   |

 

***POS division.*** Revenues fromthe POS division increased $1.2 million, or 2.0%, to $57.4 millionfor the nine months ended September 30, 2009, from $56.2 million for thenine months ended September 30, 2008. This increase is due to a $3.9million increase in revenue from our managed broadband products and a $2.5million increase from sales of our ATM processing products, primarily inCanada. This was partially offset by a $6.0 million decrease in dial revenue primarilyfrom a 7.9% decline in transaction volumes, which we attribute to softness inthe economy, and to a lesser extent from a decrease in revenue per transactionfor our dial-up POS offering mainly resulting from the renewal of certaincustomer contracts. The increased sale of our IP services, which enjoy arecurring revenue model rather than a per transaction model, continues to helpmitigate this decline.

 

***Telecommunication services division.*** Revenues fromthe telecommunication services division increased $93.3 million to $144.4million for the nine months ended September 30, 2009, from $51.1 millionfor the nine months ended September 30, 2008. Revenues increased primarilyas a result of the revenue contribution from the CSG acquisition from May 1,2009.  Revenue from cable customersincreased $0.4 million and revenue from other customers increased $1.6 milliondue to increased demand for our network and database access services. Theseincreases were partially offset by a decrease in revenue of $3.4 million due tothe loss of two customers caller ID business and $5.2 million due to volumedeclines from a customer following the announcement in March 2009 of ouragreement to acquire CSG, based on the expectation that we will compete withthe customer following the acquisition.

 

***Financial services division.*** Revenues fromthe financial services division increased $2.1 million, or 6.3%, to$36.2 million for the nine months ended September 30, 2009, from$34.1 million for the nine months ended September 30, 2008. The increasein revenues was primarily due to an incremental $2.3 million from new customerendpoints which was partially offset by a decrease of $0.2 million from lowermarket data services revenue and a reduction in the number of connectionsbetween endpoints which we believe is a result of the consolidation andcontraction of the financial services industry over the course of the lastyear.

 

***Cost of network services.*** Cost ofnetwork services increased $35.8 million, or 28.9%, to $160.0 millionfor the nine  months ended September 30,2009, from $124.2 million for the nine months ended September 30,2008. On a constant dollar basis, cost of network services would have increased$43.5 million, or 35.0%, to $167.7 million. Cost of network serviceswere 47.4% of revenues for the nine months ended September 30, 2009,compared to 47.2% of revenues for the nine months ended September 30,2008. Excluding the effect of foreign exchange, the increase in cost of networkservices was primarily related to increased revenues in our telecommunicationsservices division resulting from the CSG acquisition and to a lesser extentfrom increased broadband connections in our POS and international servicesdivisions and increased network costs to support the growth in internationalfinancial services revenue.  This waspartially offset by reductions in dial-up transaction volumes in our POSdivision and reductions in the cost of services provided to us in our POSdivision through negotiated price decreases from our vendors.

 

Grossprofit represented 52.6% of total revenues for the nine months ended September 30,2009, compared to 52.8% for the nine months ended September 30, 2008. On aconstant dollar basis, gross margins for the nine months ended September 30,2009 increased 20 basis points to 53.0% compared to the nine months ended September 30,2008.

 

***Engineering and development expense.*** Engineeringand development expense increased $3.8 million, or 17.2%, to $25.9 millionfor the nine months ended September 30, 2009, from $22.1 million forthe nine months ended September 30, 2008. On a constant dollar basis,engineering and development expenses would have increased $5.3 million, or 24.0%,to $27.4 million. Engineering and development expense represented 7.7% and 8.4%of revenues for the nine months ended September 30, 2009 and 2008,respectively.  Capitalized software development costs, which are offsetagainst engineering and development costs, increased $1.8 million to $6.1

 

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millionfrom $4.3 million for the nine months ended September 30, 2009 and 2008,respectively. The increase in capitalized software development costs isprimarily due to investment in our roaming and clearing and IP registryplatforms, and to a lesser extent from development of our card-not-presentpayment gateway. Included in engineering and development expenses for the ninemonths ended September 30, 2009 and 2008 is $1.0 million and$1.1 million of stock compensation expense, respectively. Excluding stockcompensation, the increase in capitalized software and the effects of foreignexchange, engineering and development expense would have increased $6.3 millionto $30.8 million for the nine months ended September 30, 2009 from $24.5million for the nine months ended September 30, 2008.  The increase relates primarily to additionalheadcount and other costs required to support our acquisition of CSG.

 

***Selling,general and administrative expense.*** Selling, general and administrative expensesincreased $12.9 million, or 21.0%, to $74.3 million for the nine months endedSeptember 30, 2009, from $61.4 million for the nine months ended September 30,2008. On a constant dollar basis, selling, general and administrative expenseswould have increased $17.0 million, or 27.8%, to $78.4 million. Included inselling, general and administrative expenses for the nine months endedSeptember 30, 2009 and 2008 is $5.8 million and $7.4 million of stockcompensation expense, respectively. The decrease in stock compensation expenseis due to a reduction in performance related stock compensation as a result offewer grants. Included in selling, general and administrative expenses for thenine months ended September 30, 2009 and 2008 is $3.4 million and $0.7 millionof severance expense, respectively. Included in selling, general andadministrative expenses for the nine months ended September 30, 2009 are $2.2million in professional fees related to our acquisition of CSG that were expensedin accordance with the provisions of SFAS No. 141(R). Included in selling,general and administrative expenses for the nine months ended September 30,2008 was a $0.9 million pre-tax benefit associated with the settlement of astate sales tax liability. Excluding these items and the effects of foreignexchange, selling, general and administrative expenses would have increased $14.5million for the nine months ended September 30, 2009. This increase wasprimarily attributable to additional headcount and other costs necessary tosupport the acquired CSG operations and to a lesser extent an increase inprofessional fees related to the CSG integration effort.

 

***Depreciation and amortization ofproperty and equipment.*** Depreciation andamortization of property and equipment increased $4.6 million, or 25.5%,to $22.8 million for the nine months ended September 30, 2009, from$18.2 million for the nine months ended September 30, 2008. On aconstant dollar basis, depreciation and amortization of property and equipmentwould have increased $6.1 million, or 33.4% to $24.3 million. Depreciation and amortization of property and equipment represented 6.8% and6.9% of revenues for the nine month periods ended September 30, 2009 and2008, respectively. The increase in depreciation expense was primarily due toan incremental $4.8 million related to the acquired CSG assets and to a lesserextent from increases in capital expenditures made to support our revenuegrowth.

 

***Amortization of intangible assets.*** Amortizationof intangible assets increased $4.6 million, or 24.7%, to$22.9 million for the nine months ended September 30, 2009, from$18.3 million for the nine months ended September 30, 2008 and relatessolely to intangible assets resulting from acquisitions. On a constant dollarbasis, amortization of intangible assets would have increased $5.5 million, or30.1% to $23.8 million.  The increaseprimarily relates to additional amortization expense of $7.2 million related tothe CSG acquisition.  This was partiallyoffset by a decrease of $1.7 million as certain intangible assets reached theend of their economic useful lives.  

 

***Interest expense.*** Interestexpense increased $16.1 million to $24.8 million for the nine monthsended September 30, 2009, from $8.7 million for the nine months endedSeptember 30, 2008. Included in interest expense for the nine months endedSeptember 30, 2009 was a $1.7 million charge related to the write-off ofthe deferred financing fees related to the 2007 Credit Facility in connectionwith the closing of the 2009 Credit Facility. In addition, amortization of deferred financing fees and debt discountincreased $5.5 million to $6.0 million from $0.5 million as a result of thefees and debt discount associated with the 2009 Credit Facility.  The immediately preceding amounts exclude the$1.7 million write-off of deferred financing fees. Excluding the amortizationand write-off of deferred financing fees, the balance of interest expense wouldhave increased $8.9 million to $17.1 million for the nine months ended September 30,2009, from $8.2 million for the nine months ended September 30, 2008,primarily as a result of the increased borrowings under our 2009 CreditFacility, used to fund the CSG acquisition, and an increase in the weightedaverage interest rate.

 

***Income tax provision.*** For the ninemonths ended September 30, 2009, our income tax provision wasapproximately $3.3 million compared to $4.8 million for the ninemonths ended September 30, 2008. The decrease in our income tax provisionis primarily related to lower international income and the recognition of taxbenefits relating to research credits in the U.S. Our effective tax rate was47.2% and 51.4% for the nine months ended September 30, 2009 and 2008, respectively.Our effective tax rate differs from the U.S. Federal statutory rate primarilydue to stock-based compensation expense not deductible for income tax purposes,higher income in the U.S. which cannot be offset by losses from foreignjurisdictions, increases in FASB ASC 740 reserves due to certain income taxexposures, the recognition of tax benefits relating to research credits in theU.S., and profits of our international subsidiaries being taxed at differentrates than the U.S. Federal statutory rate.

 

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**Liquidity and Capital Resources**

 

Ourprimary liquidity and capital resource needs are to finance the costs of ouroperations, to make capital expenditures and to service our debt. Based uponour current level of operations, we expect that our cash flow from operations,together with the amounts we are able to borrow under our 2009 Credit Facility,will be adequate to meet our anticipated needs for the foreseeable future.

 

Ouroperations provided us cash of $74.3 million for the nine months ended September 30,2009, which was attributable to net income of $3.6 million, depreciation,amortization and other non-cash charges of $63.9 million and a decrease inworking capital of $6.7 million. Our operations provided us cash of $48.5million for the nine months ended September 30, 2008, which wasattributable to net income of $4.5 million, depreciation, amortization andother non-cash charges of $45.5 million and an increase in working capital of$1.5 million.

 

Weused cash of $253.8 million in investing activities for the nine monthsended September 30, 2009 which consisted of $23.8 million in capitalexpenditures to support our revenue growth and $230.0 million for the acquisitionof the CSG business. We used cash of $25.3 million in investing activitiesfor the nine months ended September 30, 2008, which comprised solely ofcapital expenditures to support our revenue growth.

 

Ourfinancing activities provided us cash of $167.4 million for the nine monthsended September 30, 2009. This consisted of proceeds from the new termloan from the 2009 Credit Facility of $230.0 million less original issuediscount of $23.0 million and financing fees of $5.4 million.  The net proceeds from the 2009 CreditFacility were used to partially fund the CSG acquisition.  In addition, we made $40.0 million ofrepayments on our 2009 Credit Facility. We used cash of $17.4 million from financing activities for the ninemonths ended September 30, 2008, which includes $25.0 million of repaymentson our 2007 Credit Facility.

 

**Commitments**

 

The following table summarizes our contractual obligations as of September 30,2009 that require us to make future cash payments (dollars in thousands):

 
| ** **                                               | ** ** | ** ** | ** ** | **Year ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|------------|-----------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **Total**  | ** ** | **2009**                          | ** ** | **2010**   | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** |
| **Contractual Cash Obligations by  Period:**             |       |       |       |                              |       |       |       |   |   |   |   |   |   |   |   |
| Long-term debt under the senior secured credit  facility |       | $          | 368,500    |                              | $          | —     |       | $ | 21,275 |   | $ | 40,850 |   | $ | 48,509 |   | $ | 51,063 |   | $ | 206,803 |   |
| Supplier commitments                                     |       | 38,184     |       | 5,657                             |       | 15,927     |       | 13,966 |   | 2,634 |   | — |   | — |   |
| Operating lease obligations                              |       | 41,239     |       | 4,582                             |       | 9,359      |       | 7,487 |   | 6,428 |   | 4,074 |   | 9,309 |   |
|                                                     |       | $          | 447,923    |                              | $          | 10,239     |       | $ | 46,561 |   | $ | 62,303 |   | $ | 57,571 |   | $ | 55,137 |   | $ | 216,112 |   |

 

Due to uncertainty with respect to the timing of future cash flowsassociated with unrecognized tax benefits at December 31, 2008, theCompany is unable to make reasonably reliable estimates of the period of cashsettlement. Therefore $5.8 million of unrecognized tax benefits have beenexcluded from the contractual obligations table above. See Note 1 to thecondensed consolidated financial statements for further discussion of incometax.

 

Not included in the table above are commitments to make interestpayments under the terms of our 2009 senior secured credit facility due to thevariable nature of the interest rates. See note 2 to the condensed consolidated financial statements forfurther details on interest rates and other terms and conditions of thisfacility.

 

We expect that we will be able to fund our remaining obligations andcommitments with cash flow from operations. To the extent we are unable to fundthese obligations and commitments with cash flow from operations, we intend tofund these obligations and commitments with proceeds from borrowings under our2009 senior secured credit facility or future debt or equity financings.

 

**Outlook**

 

Weexpect to experience operational benefits from the acquisition of CSG,primarily through consolidating our two SS7 call signaling networks andeliminating duplicate intelligent database platforms and duplicatetelecommunications facilities.  We also expect reduced overall combinedcapital expenditures as a result of greater economies of scale and therationalization of network assets.  Weanticipate realizing incremental pretax operational cost savings of $1 millionin 2009, an additional $5 million to $6 million in 2010, and an additional $2million to $3 million in 2011, for total expected annualized pretax operatingexpense reductions of $8 million to $10 million. We anticipate that thesesavings will be fully implemented on a run rate basis by the beginning of thefourth quarter of 2010.

 

On October 21, 2009 we announced we are seekingto refinance our existing senior credit facilities with a new $325 million sixyear term loan and a $75 million five year revolving credit facility. We areseeking to have the new credit facility in place before the end of the fourthquarter of 2009. A commitment letter has been received from SunTrust to provideup to $40 million of the new revolving credit facility and $15 million of thenew term loan, on and subject to terms and conditions in the commitment letter.SunTrust, at our direction, has agreed to act as lead arranger for the newcredit facility and has agreed to use its best efforts to seek commitments fromadditional lenders to provide the remaining new term and revolving loanscontemplated under this new credit facility. The terms of the new creditfacility would be similar to the existing senior credit facilities, except thatwe are seeking to improve our interest rate from LIBOR plus 600 bps (with a 350bps floor) to no more than LIBOR plus 400 bps (with a 200 bps floor). We expectto use the borrowings under the new credit facility to repay all amountsoutstanding under the existing senior credit facilities and pay fees andexpenses associated with the new credit facility. The balance of the new creditfacility would be available for general corporate purposes. The new creditfacility is subject to receipt of sufficient lender commitments, thenegotiation, execution and delivery of definitive loan documentation and thesatisfaction of various other conditions, prior to closing.

 

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**Seasonality**

 

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

 

**Effects of Inflation**

 

Ourmonetary assets, consisting primarily of cash and receivables, and ournon-monetary assets, consisting primarily of intangible assets and goodwill,are not affected significantly by inflation. We believe that replacement costsof equipment, furniture and leasehold improvements will not materially affectour operations. However, the rate of inflation affects our expenses, such asthose for employee compensation and costs of network services, which may not bereadily recoverable in the price of services offered by us.

 

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

 

***Interest rates***

 

Ourprincipal exposure to market risk relates to changes in interest rates. As of September 30,2009 we had $368.5 million outstanding under our 2009 Credit Facility withinterest rates tied to changes in the lender’s base rate or the LIBOR rate.Interest on outstanding balances under the 2009 Credit Facility is payable, atthe Company’s option, at the Base Rate plus a margin of 5.0%, or at LIBOR plusa margin of 6.0%.  Additionally, in no event will the Base Rate be lessthan 4.5%, or the LIBOR rate less than 3.5%.  At September 30,2009 the 1 month LIBOR rate was 0.25%. Based upon the outstanding borrowings onSeptember 30, 2009 and assuming repayment of the Term Loan in accordancewith scheduled maturities, each 1.0% increase or decrease in these rates, oncethe LIBOR rate exceeds the 3.5% minimum, could affect our annual interest expenseby $3.7 million.

 

Asof September 30, 2009, we did not hold derivative financial or commodityinstruments and all of our cash and cash equivalents were held in money marketor commercial accounts.

 

***Foreign currency risk***

 

Ourearnings are affected by fluctuations in the value of the U.S. dollar ascompared with foreign currencies, predominately the Euro, the British Pound andthe Australian dollar due to our operations in Europe and Australia. (See Part IIItem 2, Outlook, above.)

 

Wehave operations in 24 countries outside of the U.S., including the UnitedKingdom, Austria, Australia, Bermuda, Canada, France, Germany, Hong Kong,India, Ireland, Italy, Japan, Malaysia, Mexico, New Zealand, Poland, Romania,Singapore, South Korea, Spain, Sweden, Thailand, Netherlands and Turkey. Weprovide services in these countries using networks deployed in each country. Wemanage foreign exchange risk through the structure of our business. In thesubstantial majority of our transactions, we receive payments denominated inthe U.S. dollar, British Pound, Euro or Australian dollar. Therefore, we do notrely on international currency markets to obtain and pay illiquid currencies.The foreign currency exposure that does exist is limited by the fact that themajority of transactions are paid according to our standard payment terms,which are generally short-term in nature. Our policy is not to speculate inforeign currencies, and we promptly buy and sell foreign currencies asnecessary to cover our net payables and receivables, which are denominated inforeign currencies. For the nine months ended September 30, 2009, werecorded a loss on foreign currency revaluation of approximately$0.1 million.

 

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**Item 4. Controls and Procedures**

 

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

 

**Evaluation**

 

TheCompany carried out an evaluation, under the supervision, and with theparticipation, of the Company’s management, including the Company’s ChiefExecutive Officer and the Company’s Chief Financial Officer, of theeffectiveness of the Company’s disclosure controls and procedures as of September 30,2009. Based on the foregoing, the Company’s Chief Executive Officer andprincipal financial officers concluded that the Company’s disclosure controlsand procedures were effective as of September 30, 2009 at the reasonableassurance level.

 

OnMay 1, 2009, the Company completed its acquisition of CSG.  Management has considered the CSG acquisitionmaterial to the results of operations, cash flows and financial position fromthe date of acquisition through September 30, 2009 and believes that theinternal controls and procedures of CSG have a material effect on internalcontrols over financial reporting.  Inaccordance with SEC guidance, management has elected to exclude CSG from its December 31,2009 assessment of and report on internal controls over financialreporting.  The Company is currently inthe process of incorporating the internal controls and procedures of CSG intothe overall assessment of and report on internal controls over financialreporting for December 31, 2010. There have been no other changes during the three months ended September 30,2009 covered by this report in the Company’s internal control over financialreporting or in other factors that could materially affect or are reasonablylikely to materially affect the internal control over financial reporting.

 

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**PART II—OTHERINFORMATION**

 

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

 

None.

 

**Item 1A.****            ****RiskFactors**

 

None.

 

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

 

None.

 

**Item 3.****                 ****DefaultUpon Senior Securities**

 

None.

 

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

 

None.

 

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

 

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

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

 

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**SIGNATURES**

 

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

 
|                         | TNS, Inc. |
|------------------------------|----------------|
|                         | (Registrant)   |
|                         |           |   |
| Date:  November 9, 2009 | By:            | /s/ HENRY H. GRAHAM, JR. |
|                         |           |   |
|                         |           | Henry  H. Graham, Jr. |
|                         |           | Chief  Executive Officer |
|                         |           |   |
| Date:  November 9, 2009 | By:            | /s/  DENNIS L. RANDOLPH, JR. |
|                         |           |   |
|                         |           | Dennis  L. Randolph, Jr. |
|                         |           | Executive  Vice President, Chief Financial Officer & Treasurer |

 

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