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TNS 10-K 2011

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)    

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

OR

o

 

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

For the transition period from                                    to                                   

Commission file number 1-32033

TNS, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
  36-4430020
(IRS Employer Identification No.)

11480 COMMERCE PARK DRIVE,
SUITE 600, RESTON, VIRGINIA

(Address of Principal Executive Offices)

 

20191
(Zip Code)

(703) 453-8300
Registrant's telephone number, including area code

          Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class   Name of Each Exchange on Which Registered
Common Stock   New York Stock Exchange

          Securities registered pursuant to Section 12(g) of the Act: None

          Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o    No ý

          Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or such shorter period that the Registrant was required to file such report) and (2) has been subject to such filing requirements for the past ninety (90) days. Yes ý    No o

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

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

          Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

          As of March 14, 2011, 25,465,046 shares of the Registrant's common stock were outstanding. As of June 30, 2010 (the last business day of the Registrant's most recently completed second fiscal quarter), the aggregate market value of such shares held by non-affiliates of the Registrant was approximately $463 million.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the Registrant's definitive Proxy Statement relating to the 2011 Annual Meeting of Stockholders, filed with the Securities and Exchange Commission, are incorporated by reference in Part III, Items 10 - 14 of this Annual Report on Form 10-K as indicated herein.


Table of Contents


TNS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2010
INDEX

EXPLANATORY NOTE

PART I

       
 

Item 1.

 

Business

  3
 

Item 1A.

 

Risk Factors

  21
 

Item 1B.

 

Unresolved Staff Comments

  31
 

Item 2.

 

Properties

  32
 

Item 3.

 

Legal Proceedings

  32

PART II

       
 

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  33
 

Item 6.

 

Selected Consolidated Financial Data

  34
 

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  36
 

Item 7A.

 

Qualitative and Quantitative Disclosures About Market Risk

  58
 

Item 8.

 

Financial Statements and Supplementary Data

  59
 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  102
 

Item 9A.

 

Controls and Procedures

  102
 

Item 9B.

 

Other Information

  103

PART III

       
 

Item 10.

 

Directors, Executive Officers and Corporate Governance

  104
 

Item 11.

 

Executive Compensation

  106
 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  106
 

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

  106
 

Item 14.

 

Principal Accountant Fees and Services

  106

PART IV

       
 

Item 15.

 

Exhibits and Financial Statement Schedules

  107

SIGNATURES

  111

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PART I

        Throughout this report, we refer to TNS, Inc., together with its subsidiaries, as "we," "us," "our," "TNS" or "the Company." LEConnect and the TNS logo are our registered trademarks, and TNSLink, TNSConnect, Synapse, FusionPoint by TNS, Dialect and Secure Trading Extranet are our service marks. This report contains trade names, trademarks and service marks of other companies. We do not intend our use or display of other parties' trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of, these other parties.

Forward-Looking Statements

        We make forward-looking statements in this report based on the beliefs, expectations, estimates, targets and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations in "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Overview," "Results of Operations," and "Liquidity and Capital Resources," and other sections throughout this report. The forward-looking statements are based on current expectations, forecasts and assumptions that are subject to known and unknown risks, uncertainties and other factors, many of which may be beyond our control, that could cause actual results to differ materially from those set forth in, or implied by, the forward-looking statements. The Company has attempted, whenever possible, to identify 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, statements herein that describe the Company's business strategy, prospects, opportunities, outlook, objectives, plans, intentions or goals are also forward-looking statements.

        Forward-looking statements involve risks, uncertainties and assumptions, including risks described below and other risks that we describe from time to time in our periodic filings with the SEC, and our actual results may differ materially from those expressed in our forward-looking statements. We therefore caution you not to rely unduly on any forward-looking statement. The forward-looking statements in this report speak only as of the date of the report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. The forward-looking statements should not be relied upon as representing the Company's views as of any date subsequent to the date of this filing. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act and 21E of the Securities Exchange Act of 1934, as amended.

Item 1.    Business

Overview

        We are an international data communications company which provides networking, managed connectivity, data communications and value added services to many of the world's leading telecommunication firms, retailers, banks, payment processors and financial institutions. Our services enable secure and reliable transmission of time-sensitive data critical to our customers' operations. Our customers outsource their data communications requirements to us because of our substantial expertise, comprehensive customer support and cost-effective services. We provide services to customers in the United States and increasingly to international customers in over 40 countries including Canada and Mexico and countries in Europe, Latin America and the Asia-Pacific region. We currently maintain operations and/or employees in 26 countries.

        We provide services through our data network, which is designed specifically for data-oriented applications and incorporates multi-protocol label switching, or MPLS, based topology. Our network supports a variety of widely accepted communications protocols and is designed to be scalable,

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interoperable and accessible by multiple methods, including broadband, dedicated, dial-up, wireless and Internet connections.

        In 2010, we reported our revenues from three distinct business divisions. Our Telecommunication Services Division (TSD) principally serves telecommunication customers in North America, but in recent years has started generating revenue outside of North America from certain products. Our Payments Division is focused on the payments industry in North America, Europe and Asia Pacific. Our Financial Services Division (FSD) serves customers in the financial services industry in North America, Europe and Asia Pacific. Prior to 2010, we had a separate International Services Division (ISD) which was focused on selling our payments and financial services outside of North America. In recognition that our business and the customers to whom we provide services had evolved to become more global in scope, our management team determined it was no longer necessary to have a separate ISD business unit and that it was more appropriate to group the ISD payments related business with our North American Payments Division and to group the ISD financial services business with FSD. In 2010, we reorganized our divisional management structure to reflect this decision to operate the company in three business divisions.

        Within TSD we operate the largest unaffiliated Signaling System No. 7 (SS7) network in the United States capable of providing services nationwide, including call signaling and database access services, to the domestic telecommunication industry. We also provide roaming and clearing services to both domestic and international mobile operators. In our Payments Division, we have over a thousand customers and provide services and solutions, both directly and indirectly, to over one million merchants, making us, on the basis of total transactions transmitted, a leading provider of data communications services and other value added services to processors of credit card, debit card and ATM transactions. In FSD, we are a leading provider of secure data network services to the global financial services industry, connecting over 1,700 financial community end-points located at over 625 distinct financial services companies, representing buy and sell-side institutions, market data and software vendors, exchanges and alternative trading venues.

        In each of our divisions, our revenues are generally recurring in nature and we typically enter into multi-year service contracts that require minimum volume or revenue commitments from our customers.

        Our business began operations in 1991 to address the needs of the Point-of-Sale industry in the United States. The strong operating cash flows generated by our business have enabled us to invest in our data network to make our communications services more rapid, secure, reliable and cost efficient. In addition, we have leveraged these investments and used our continued strong operating cash flows to expand our service offerings to related market opportunities in the telecommunications and financial services industries in the United States and abroad. By implementing and executing this strategy, we have grown our revenues every year, from $285,000 for the year ended December 31, 1991, to $527.1 million for the year ended December 31, 2010.

Our Business

Telecommunication Services Division (TSD) Opportunity

        Every wireline and wireless telephone call consists of the content of the call, such as the voice, data or video communication, and the signaling information necessary to establish and close the transmission path over which the call is carried. Currently, most telecommunications carriers in the United States and Canada use Signaling System No. 7, or SS7, as the signaling protocol to identify the network route required to connect individual telephone calls. Additionally, the wireless industry requires signaling information necessary to enable roaming between operators. As a significant number of operators are evolving their networks to next generation IP packet-based networks, the

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interoperability between legacy circuit-based networks and packet-based networks is becoming a critical element of networking solutions.

        SS7 networks are data networks that transport call-signaling information separate from the public switched telecommunication network over which the call content is communicated. Communication service providers require access to an SS7 network connected to the signaling networks of other carriers to be able to provide telecommunication services to their customers. In addition to circuit set-up and tear-down, wireless operators use SS7 signaling to locate and authenticate subscribers, to determine service parameters, and to update location registers. According to Pyramid Research, the market for telecommunication services is expected to grow at a compound annual growth rate, or CAGR, of 2.5% from 2009 to 2014, with most of the growth being attributed to mobile data and IP-based networks. Voice over IP, or VoIP, is expected to grow at a compounded annual growth rate of 18.4% from $8 billion in 2008 to $22 billion in 2014. Mobile broadband is anticipated to be a further source for growth for the United States telecommunications market due to growing popularity of unlimited data and mobile broadband plans. Revenue related to mobile broadband access for laptop computers and Internet access for handsets is estimated to grow rapidly at CAGRs of 28% and 18%, respectively, from 2009 to 2014.

        An opportunity related to the telecommunications industry's evolution to the next generation of Internet protocol, or IP, based networks is the growth of data usage by operators' subscribers. According to Pyramid Research, the telecommunications market in the United States is expected to reach $406 billion in 2014, with mobile data revenue climbing to $94 billion, surpassing fixed voice during the forecast period. This growth is expected to create opportunities associated with the interconnections needed between communication service providers to enable seamless data roaming between disparate operators and networks, and from the focus on applications to drive increased revenue per customer via value-added applications. Additionally, the network evolution of both fixed and mobile service providers next generation networks is expected to provide market participants with new opportunities as the operators will need to extend the life of their current infrastructure in order to experience the benefits of next-generation IP networks.

        SS7 and IP-based networks are also used to retrieve information from centralized databases maintained by communication service providers and other third parties. By accessing this information, communication service providers are able to offer services that enable intelligent network services such as local number portability, line information database, caller identification and toll-free number services, as well as credit card, calling card, third-party billing and collect calling. Companies which provide VoIP and mobility services also use SS7 networks to exchange and maintain subscription and location data on subscribers to support voice and wireless roaming services. Additionally, financial institutions, payment processors, card issuers and others using fraud management and analytical tools to reduce risk rely upon third-party data providers using data obtained from secondary databases not sourced directly from the telecommunications carriers or their representatives. There exists an opportunity for a trusted third-party source to provide that data with the appropriate acceptable use policies in place with telecommunication carriers.

Our TSD Services

        Since our formation of TSD in 1994, we have owned and operated an SS7 network and partnered with other providers to offer services delivered throughout the network. As a result of our acquisition of the Communications Services Group assets from VeriSign, Inc. in May, 2009, we now operate the largest unaffiliated SS7 network in the United States capable of providing call signaling and database access services nationwide. Our SS7 network is connected with the signaling networks of all of the incumbent local exchange carriers and a significant number of wireless operators, competitive local exchange carriers, interexchange carriers, multiple service operators, also known as cable companies, and VoIP service providers. We believe that our independence and neutrality enhance our

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attractiveness as a provider of outsourced SS7 and other network services. Through the acquisition of the Communication Services Group assets we also own proprietary services such as identity and verification, IP-registry and roaming and clearing services.

    Network Solutions

        The deployment, operation and maintenance of a nationwide SS7 network connected to all of the major signaling networks and database providers requires significant capital and specific technical expertise. For these reasons, many communication service providers have chosen not to build the networks and applications necessary to satisfy all of their SS7 signaling requirements. Rather, they turn to outsourced SS7 network service providers such as TNS to obtain the call signaling, database access and value-added services critical to their business in an effort to increase speed to market and to remain competitive.

        Despite the market focus on newer technologies, SS7 presently remains the most common signaling protocol for many operators and competition between service providers has made delivering their services in the most cost-efficient manner critical. For this reason, communication service providers are looking for flexible product offerings which decrease investments in legacy infrastructure, achieve economies of scale and increase speed to market. We believe TNS' SS7 connectivity services fit strategically in this increasingly competitive environment.

        With our MPLS backbone network and our SS7 network, we believe we have an opportunity to assist our customers to evolve their networks and maximize the benefits of the next generation IP-based networks as they are deployed. Through our network we are able to help communication service providers in different phases of their transition to next generation networks while minimizing the effort and expense necessary to support legacy infrastructure and diverse connectivity needs. With the large size of the telecommunications industry's installed base in legacy circuit-switched SS7 networks, we believe that the evolution to IP communications will be gradual. Additionally, service providers that operate purely next-generation networks, must be able to terminate traffic on traditional networks using SS7. We believe these service providers will continue to require SS7 connectivity and intelligent database interoperability services into the foreseeable future.

        Our network solutions include:

    SS7 network services: We provide switching and transport services throughout the United States as well as in the Caribbean and Latin America. Our SS7 network is connected to the SS7 networks of local exchange carriers, wireless carriers and other service providers through various mated pairs of signal transfer points deployed throughout the country. By connecting to our SS7 network, our customers eliminate their need to implement, operate and maintain numerous, complex connections linking their SS7 switches to the signaling networks of other communications providers. We believe our SS7 network enables us to offer our data communications services more reliably and cost-effectively than our competitors or customers deploying in-house solutions.

    IP network services: We provide IP transport services over our global MPLS backbone in support of data roaming for wireless operators. We also utilize our IP network services for next-generation signaling solutions (e.g. SIGTRAN, SIP) and VoIP interoperability solutions. By leveraging our network at any interconnection point across our global MPLS backbone, operators are able to access multiple services through a common IP interface. As with our SS7 network services, this solution allows operators to eliminate the need to implement, operate, and maintain numerous complex connections to other operators and next generation applications.

        We believe our network solutions will continue to play a critical role in delivering necessary intelligence for communication service providers to maintain a sustainable market position.

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Furthermore, we believe that significant opportunities exist for service providers and mobile operators with the technical and commercial strategies to capitalize on the convergence of communications networks. Accordingly, TNS' strategy is to deliver network-based intelligence and infrastructure services that enhance the service distribution capabilities of our telecommunication customers.

    Identification and Verification Services

        Within our identification and verification services, we offer our customers access to databases maintained internally and to those operated by telecommunications carriers and other third parties. These services allow for communications service providers to develop and maintain databases that store subscriber information, including names and addresses. This information is then used to provide enhanced services such as validating subscriber and billing information, caller identification services and providing real-time telephone call billing validation and fraud control services for calling card, credit card, third-party billing and collect calls for various communication service providers.

        Our suite of identification and verification services include: calling name storage and delivery databases, line information databases and validation and fraud control services.

        As demands for services other than voice continue to grow, we believe there are a number of additional factors that contribute favorably to ongoing demand for our identification and verification services including the use of our calling name storage and delivery databases by wireless operators to identify an incoming caller to a mobile handset with an original equipment manufacturer (OEM)-integrated application from our Cequint platform (see below). Additionally, we believe we are in a unique position to properly use the authoritative telecommunication data, which we have historically used to provide caller name identification, to validate various forms of payment and other transactions in order to eliminate fraud and manage risk associated with card issuing and card-not-present transactions in the payments industry. .

    Registry Services

        Within our registry services, we provide for the registration and resolution of addressing information within the telecommunication industry. Wireline and wireless telecommunications carriers are required to provide services that enable a subscriber to change service providers within a particular location and keep the same phone numbers. Telecommunications service providers must access local number portability databases in order to route a call appropriately. Additionally, telecommunications service providers must also access a national database of toll-free numbers in order to route a toll-free call. Our SS7 network provides access to internally managed databases that host all wireline and wireless number portability data and toll-free routing information. As more communication networks are using IP-based connectivity, our carrier electronic numbering service enables applications using IP to communicate with consumer devices addressed by telephone numbers. Our IP-registry is populated with information sourced from industry and regulatory number management systems, along with unique data sourced directly from the mobile virtual network operators (MVNOs) and application service providers delivering text-enabled applications to data only devices. Through a query or number lookup, the IP-registry provides accurate carrier-of-record information and the applicable IP address in order to enable VoIP calls, data messages, and text messages to be terminated to the proper location.

        Our suite of registry services include: Local Number Portability (LNP), Toll-free databases, IP-registry services and LNP Service Order Administration.

        We believe there are a number of additional factors that contribute favorably to ongoing demand for our registry services. The growth of mobile data services requires interoperability between mobile operators' radio networks, private IP networks, and the public Internet. We believe TNS' IP-registry services enable the exchange and accurate routing of mobile data communications between these networks. Additionally, mobile and IP-based communication service providers participate in the porting

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of telephone numbers, which complicates the accurate and efficient routing of communications data. Through our best practices in data management, we believe TNS' IP-registry services resolve these complexities on behalf of service providers in a cost effective and efficient manner.

    Roaming and Clearing Services

        We offer a suite of roaming and clearing services to wireless carriers using the ANSI-41 and GSM Mobile Application Part signaling protocols. Our roaming and clearing services allow carriers to provide support for mobile customers of other carriers visiting their service area, referred to as roamers, and for their customers when they roam outside their service area. Our service also manages signaling conversion and implementation anomalies between different countries to provide activation processing, seamless international roaming, and fraud protection. Our roaming data clearinghouse services facilitate financial settlement between carriers. We provide these services in addition to access to a pre-established international roaming footprint. We offer roaming services for carriers utilizing third Generation Packet Radio Services (3GPRS) and Code Division Multiple Access (CDMA) technologies to offer wireless roaming to their subscribers over broadband wireless networks. We also offer a variety of roaming application and value-added services that help wireless operators better manage and maximize the profitability of their roaming operations. Additionally, we are equipping our roaming service to support next generation wireless networks such as Long Term Evolution (LTE), worldwide interoperability for microwave access (WiMax) as well as providing interoperability between mobile networks and established WiFi communities.

    Cequint Inc.

        In October 2010, we acquired Cequint, Inc., a privately-held company providing caller identification services to wireless operators. Cequint's patented caller identification feature, which is integrated into the operating system of the mobile phone and is called City IDTM, automatically displays the city and state associated with the calling party's phone number. Cequint has also developed and plans to launch a new product that enables mobile operators to deploy carrier-grade caller name identification in mobile phones. This patent pending product, Name ID, will utilize a proprietary architecture and technology that will permit wireless operators to overcome certain network and technology challenges in order to deploy mobile caller-name identification similar to that which is currently available to legacy landline users. The technology supporting Name ID will also provide wireless operators with increased revenue opportunities through the ability to develop additional features and functionality. The City IDTM and Name ID products, which are and will be pre-loaded applications by the OEM at the request of a wireless operator, are and will be offered by Cequint's wireless operator partners to their end user customers.

        For our TSD products and services, we generally enter into multi-year contracts with our customers, many of whom agree to minimum volume commitments. We generally charge fixed monthly fees for network solutions, and per-message fees for our registry services, identification and verification and roaming and clearing. Cequint generates revenue for its products through a revenue share with its wireless operator partners. For the year ended December 31, 2010, we generated $260.7 million of revenue in TSD, which represented 49.5% of our total revenues.

Payments Opportunity

        According to the industry information source, The Nilson Report, the four card-based systems of payments—credit, debit, prepaid, and electronic benefits transfer—generated 69.7 billion transactions, or 47.4% of total payments transactions in the United States in 2009. (© 2010, The Nilson Report) In 2005, these payment types accounted for 38.3% of transaction volume, or 50.1 billion transactions. While these types of payments are growing quickly in the United States, the international market for these payment methods is expanding at an even greater rate. According to Mercator Advisory Group,

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between 2008 and 2009, the total number of general purpose credit and debit card transactions outside of the United States increased by 9.7%, to approximately 77.1 billion transactions. Outside of the United States, the regions with the highest transaction volumes were Europe, Asia-Pacific and Latin America, while Middle East/Africa and Asia-Pacific experienced the fastest growth in 2009. (© 2011, Mercator Advisory Group, Inc.)

        A component of the growth in overall payment transactions is e-commerce. JPMorgan estimates that global e-commerce revenue in 2011 will grow to $680 billion, up 18.9% from 2010 revenue. e-commerce in the U.S. alone is projected to grow 13.2% to $187 billion, and it is forecasted that global e-commerce revenue will reach $963 billion by 2013. From a transaction perspective, the U.S. e-commerce market is expected to grow at a three year CAGR of 8.6% from 2010 to 2013, with transactions growing from 4.3 billion in 2010 to over 5.5 billion in 2013.

        In addition to continued growth in card-based electronic payments, alternative payment methods, such as PayPal, are continuing to gain traction, particularly in the e-commerce channel. While the volumes of alternative payment transactions currently are relatively small compared to other payment methods, they are becoming increasingly significant and represent additional displacement of cash and check transactions, providing incremental growth in electronic payments. Emerging channels such as mobile payments and television commerce are forecasted to contribute to even greater adoption of electronic payments while simultaneously migrating a portion of the existing electronic payments onto newer technologies.

        Along with the growth in electronic transactions, the increase in the number of options for point-of-sale (POS) device connectivity, which now includes wireless, Internet-based and dial-up access, is adding complexity to retailers and processors running large-scale payment networks. Electronic transactions require the two-way transfer of information over a secure, reliable data network. Typically, wherever a credit, debit or ATM card is accepted, whether at a POS and off-premise ATM (an automated teller machine at a location other than a branch office of a financial institution) or online or through mail order-telephone order (MOTO), the customer's account information and transaction amount must be electronically transmitted to a payment processor or financial institution. The payment processor or financial institution then electronically communicates with the entity that issued the card to determine whether to authorize the transaction. After this determination is made, the processor or financial institution returns an authorization or rejection response to the POS, ATM terminal or online or MOTO merchant.

        Financial institutions in the United States and Canada typically outsource the processing of credit and debit card accounts to payment processors who are able to leverage technical expertise and capitalize on economies of scale. Payment processors, in turn, typically have outsourced to third party service providers, such as TNS, the data networking services used to transport transaction data between the processor's host computers and the POS or ATM terminal. Outside of the United States and Canada financial institutions typically process credit and debit card accounts. Recently these institutions have looked to outsource these services to third-party providers.

        POS or off-premise ATM terminals access data network connections to payment processors through a variety of methods, the most common of which are dial-up and dedicated, or leased line, services and increasingly include broadband connections. Dial-up access services allow merchants and off-premise ATMs to connect to payment processors by dialing a telephone number each time a transaction is initiated. Wireless access provides the same capability as dial-up access without a physical connection to the POS device or ATM. A leased line is a dedicated connection provided to a merchant or ATM location for the exclusive purpose of connecting the POS terminal or ATM to the payment processor. Dial-up services are less expensive than leased line services as leased line services impose greater fixed monthly communication service charges, making a leased line economically viable only in high-volume merchant or off-premise ATM locations. A broadband connection such as a digital

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subscriber line, or DSL, or wireless connection is an always-on connection utilized by a merchant or ATM location for various purposes including to connect a POS terminal or ATM to the payment processor. With the introduction of broadband services, merchants and other POS providers have begun to deploy integrated wide-area-network solutions. These solutions may include POS services, inventory management and other back-office solutions utilized by merchants.

        Apart from the payment processors, pre-paid card providers, kiosk operators, loyalty card providers and merchants situated in locations other than brick and mortar stores, such as mobile merchants and merchants on the internet, are expanding their use of electronic transaction processing in an attempt to reduce costs, increase sales through the acceptance of credit and debit cards, and increase the reliability and efficiency of data transmission. As the number of merchants situated in locations other than brick and mortar stores increases, the number of transactions being performed without the cardholder or card present also is increasing, creating a growing need for card-not-present and other gateway services.

        Another significant factor facing the electronic payment processing industry is susceptibility to fraudulent transactions and as the number of electronic payment transactions has increased, the industry's exposure to fraud has increased. Payment processors desire secure and reliable data communications and other transaction related services while merchants desire access to tools to combat fraud. Participants in the electronic payment processing industry which handle payment card information are required to be compliant with industry security standards called the Payment Card Industry Data Security Standard, or PCI-DSS. According to Mercator Advisory Group, the typical mid-size merchant in the United States spends well over one million dollars each year in PCI-DSS compliance efforts. (© 2009, Mercator Advisory Group, Inc.)

Our Payments services

        Our payments division markets services directly to payment processors, financial institutions, card associations and merchants in North America, Europe, and Asia-Pacific. We also market our data communications services to entities responsible for the transmission of state lottery transactions, federal and state electronic benefits transfer, and healthcare transactions as well as directly to select categories of merchants and retailers. Our suite of services includes: network solutions, payment gateway solutions and ATM processing and other solutions:

    Network Solutions

        The core service offering in our payment division is network connectivity which enables transmission of card-based payments data between the POS device or off-premise ATM and the processor's host computer.

        Our private and secure data network was designed specifically to address the data communications requirements of the payment processing industry. Our data communication services provide customized routing technology, built-in redundancy and geographic diversity and are configured to provide fast and reliable call connection and efficient network utilization. Our data network is PCI-DSS certified and is used to connect a merchant's POS terminal, an off-premise ATM or an online or MOTO merchant securely to the payment processor's host computer.

        We provide multiple means for the online and MOTO merchant, POS terminal, and off-premise ATM to access our data network. Merchant POS terminals and off-premise ATMs can connect directly to our network using our dial-up service, which utilizes telephone services obtained from interexchange carriers and local exchange carriers. While our customers primarily choose to access our network using our dial-up services, they are increasingly using other methods we provide of connecting to our network, including fixed broadband, wireless and internet connectivity via our TNSLink product line.

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    Payment Gateway Solutions

        In addition to our network connectivity services, our payments division provides card-present and card- not-present payment gateway solutions to multi-channel merchants as well as to card associations which offer services over the Internet. We have been providing these services from our operations in Australia since 2007. In 2010, we launched our card-not-present platform in the United States and we plan to launch in Western Europe in 2011. Our payment gateway services enable a merchant (whether they be online, traditional brick and mortar, mail order-telephone order—MOTO, or mobile merchants) to authorize and settle card-based payments or other alternative electronic payment methods. Our payment gateway solutions protect card details by encrypting sensitive information, such as credit and debit card numbers, and securely delivering it to the merchant's payment processor(s). Our payment gateways also provide value-added capabilities, such as card data tokenization, that merchants can use to reduce card-related fraud, improve security, and ease efforts to achieve required industry security compliance certifications. As such, our payment gateway acts as a key enabler and distribution channel for a number of merchant facing and acquirer facing applications

        The following chart illustrates the route of a typical card-not-present transaction from an eCommerce merchant using our payment gateway service. The route of a typical call center transaction, where the card is also not physically present for the merchant, is similar.

GRAPHIC

    1.
    Customer inputs credit card information in the merchant's online store.

    2.
    The payment gateway encrypts data and securely sends it to the merchant's processor.

    3.
    The transaction is routed via a card association (e.g. American Express) for authorization by the customer's issuing bank.

    4.
    The result is encrypted and sent back through the gateway to the merchant.

        TNS provides payment gateway services for both cardholder-present and cardholder-not-present merchants through our TNSPay product lines. For "brick and mortar" retail outlets that use ePOS or PC-based payment terminals, TNSPay Retail is our UK-based payment gateway service that enables authorization and settlement of in-store payment transactions. TNSPay Retail also provides other capabilities for merchants, such as support for contactless payments and specialized card encryption security services. Our wireless payment gateway platform, called Synapse, enables merchants to process card transactions using mobile POS terminals or smart-phones that have been adapted to accept payments as well as terminal management and reporting services for independent sales organizations.

        With the increased number of electronic transactions, the increased focus on fraud, evolving compliance requirements, and the need to support an expanding array of payment options, there has been a significant increase in the complexity of the payments industry. Our payment gateway and network connectivity solutions are highly scalable and able to transport and support a wide variety of access methods as well as payment types and channels. With these capabilities, we believe we will be able to increase the number of transactions we transport, the number of connections to our network, and the types of products and services we offer as these and other industries look to outsource the data communications requirements necessary to transmit transactions securely. We believe we have an opportunity to provide services to securely host and manage payments card information on behalf of

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merchants in an effort for the merchants to achieve PCI-DSS compliance and to utilize tools designed to reduce fraud.

    ATM Processing and Other Solutions

        In select markets we operate a software platform that helps ATM owners manage their estate of ATMs, including the processing of transactions by customers. We have been providing ATM processing services in the United Kingdom since 1999 and in Canada since 2009.

        Additionally, we provide services to international payment processors that are not used by payment processors in the United States. These include settlement and offline polling services which enable merchants to store transaction data until the payment processor retrieves the data after business hours.

        Our payments division generally enters into multi-year contracts that usually have minimum transaction or revenue commitments. For dial-up network access services, we typically charge our customers a fixed fee per transaction plus a variable time-based charge for transactions that exceed a specified period of time. Generally, our contracts provide for a reduction in the fixed fee per transaction as our customers achieve higher monthly transaction volumes. For our fixed broadband, wireless and internet connectivity services and our payment gateway solutions we typically charge our customers a per-transaction fee, a minimum monthly fee, or a combination of both. We typically charge our customers fixed monthly fees for leased line and broadband services. In our payments division we also generate revenue from usage charges, leased line circuit charges, charges for access to real-time transaction monitoring and charges for ancillary services. For the year ended December 31, 2010, we generated $200.2 million of revenue in the Payments division, which represented 38.0% of our total revenues.

Financial Services Division (FSD) Opportunity

        The securities trading and investment management industry requires high-speed, reliable, secure data communications services to communicate information among industry participants, including commercial banks, mutual funds, pension funds, broker-dealers, alternative trading systems (ATS), electronic communications networks (ECNs) and securities and commodities exchanges. Participants in the securities trading and investment management industry continuously seek opportunities across global markets as transaction volume in the global equity markets increases.

        The emergence of new electronic trading venues such as ECNs and ATSs and regulatory requirements such as the shift to decimalization have placed increasing emphasis on trading and cost efficiencies. In addition, in recent years financial institutions have reduced the size of their staff even though business and trading demands have increased. In order to continue to meet the need for high quality, fast and secure data communications, market participants are increasingly using outsourced data communications service providers. These providers give industry participants access to other participants through a single, managed access point on the service provider's network. These services allow participants to cost-effectively connect to each other to conduct time-sensitive transactions and communicate real-time information.

        Additionally, the growth, automation and globalization of financial markets have led to increased demand for outsourced, secure, reliable data communications services. Prior trading methods are unable to keep pace in an environment where latency is a critical competitive issue. Banks, mutual funds, pension funds, broker-dealers, ATSs, ECNs, securities and commodities exchanges and other market participants all require systems that enable them to react quickly and, thus, increasingly use data communications services to exchange trading information, distribute research and review trading positions.

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Our FSD Services

        Our fast, private, secure and reliable IP data networks are designed specifically to address the data communications requirements of the financial services industry. Our Financial Services Division connects over 1,700 financial community end-points located at over 625 distinct financial services companies, representing buy and sell-side institutions, market data and software vendors, exchanges and alternative trading venues. Our IP network services allow our customers to access multiple financial services companies through a single network connection, thereby eliminating the need for costly dedicated institution-to-institution leased line connections. Additionally, these services facilitate secure and reliable communications between financial services companies by supporting multiple communications standards and protocols, including the Financial Information eXchange (FIX) protocol. Our network has over 100 points of presence and provides services to customers in 40 countries across the Americas, Europe and the Asia Pacific region, with connections to endpoints in many more. Our financial services customers may have one or more access points to our IP network, depending on the location of their offices and other factors.

        We refer to our primary financial service offering as our Secure Trading Extranet. Our Secure Trading Extranet service links financial services companies through our IP network. Through a single physical network connection, a customer is able to virtually connect with any other entity connected to our IP network. Given the large number of industry participants connected to our network, including commercial banks, mutual funds, pension funds, broker-dealers, alternative trading systems, electronic communications networks, multilateral trading facilities and securities and commodities exchanges, a single customer can use its connection to our IP network to conduct seamless, real-time electronic trading and access a variety of content including news, research and market data.

        The growth of electronic trading in the global market continues to present opportunities for our Financial Services Division. There is increasing demand for low latency connectivity to trading venues and higher bandwidth connectivity as firms expand their use to include more trading partners and additional asset classes such as foreign exchange transactions.

        We generate revenue in our Financial Services Division primarily from monthly recurring fees based on the number of customer connections to and through our IP network as well as the amount of bandwidth the customer requires. For the year ended December 31, 2010, we generated $66.2 million of revenue in FSD, which represented 12.5% of our total revenues.

Our Strengths

        We believe our competitive strengths include:

        Recurring revenues and strong operating cash flows.    Our established customer base enables us to generate high levels of recurring revenues and strong operating cash flows. Our business model is based upon the number of transactions and database queries we transport and the number of connections to our networks. We enter into multi-year service contracts that usually have minimum transaction or revenue commitments from our customers. We believe that our recurring revenues and strong operating cash flows will enable us to continue to invest in the development of new products and services and to continue to expand internationally.

        Established customer base.    We have an established customer base of leading industry participants in each division and have experienced limited customer turnover. For the year ended December 31, 2010, we provided payment-related services to more than 2,000 customers. In addition, for the year ended December 31, 2010, we provided services to more than 800 telecommunication services providers and to more than 625 financial services companies. Internationally we generate revenue in over 40 countries and provide services to some of the largest financial institutions, wireless operators and other services providers in those countries and neighboring countries. Additionally, within some elements of

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our business, the value of our network to our customers increases for every new customer we put onto our network. We believe these communities of interests we have established over the last 20 years differentiates us from our competition.

        Well-positioned to continue international growth.    The solutions we have developed to serve customers in our existing geographic markets are applicable to the data communications needs of the payment processing, telecommunication and financial services industries in other regions. We believe that our data communications services and technologies, our technical expertise and our customer relationships with the largest domestic payment processors, telecommunication carriers and global financial institutions strategically position us to take advantage of substantial international opportunities. We have grown our international revenues from $33.1 million for the year ended December 31, 2002 to $150.3 million for the year ended December 31, 2010.

        Highly customized data network.    We operate a highly customized global network designed and configured for the transmission of time-sensitive data. Our network supports multiple communications protocols and access methods and, as a result, is able to support a wide variety of applications. The flexibility and scalability of our network and our technical expertise allow us to rapidly add new services to our existing offerings in response to emerging technologies with limited service disruptions or capital expenditures. We also believe our ability to leverage our fixed cost base provides us with significant economies of scale, resulting in a competitive advantage.

        Substantial experience in our target markets.    The eleven members of our executive management team have on a combined basis more than 150 years of experience in the transaction services and telecommunications industries as well as experience managing large, multinational corporations, and on average have been employees of the company for more than six years. We have focused on creating data communications services for developing and established markets. We believe this gives us an understanding of the unique needs and risks of our target markets and provides us with a competitive advantage over larger service providers that have a broader market perspective. We also believe our extensive experience provides us with a competitive advantage over service providers of similar or smaller size.

        Proven acquisition strategy.    Our management team has augmented the growth of our business by successfully identifying and integrating strategic acquisitions. We have made a number of acquisitions that have accelerated the growth of the payments and telecommunication services. For example, in 2010 we acquired Cequint, Inc. to expand our caller identification platform to mobile devices. In 2009, we acquired the assets of VeriSign's Communications Services Group (CSG) to increase our market share in call signaling and intelligent database services as well as to expand our product offerings with the addition of identity and verification, wireless roaming and clearing and IP registry services. We also acquired Dialect Payment Technologies in 2007 to provide card-not-present payment gateway services to our customers throughout the world.

Our Strategy

        Our objective is to continue to grow our business and enhance our position as a leading provider of outsourced business-critical data communications services enabling secure and reliable transmission of time-sensitive information for our transaction processing, telecommunications and financial services customers. Key elements of our strategy include:

        Focus on key geographies.    We continue to focus our efforts and resources to expand our business in six countries and their surrounding areas in which we already have operations. These countries are Australia, France, Italy, Spain, the United Kingdom and the United States. We believe concentrating our efforts in this way will enable us to grow our business in these geographic markets as well as in adjacent countries, enabling us to generate growth with less capital investment.

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        Continue to expand our customer base.    We believe our experience, existing customer relationships and our ability to consistently deliver secure and reliable data communications services will enable us to expand our customer base in domestic and international markets. For example, in our payments division we intend to expand our service offerings to certain customer segments in both the traditional and Internet-based retail industries, focusing on selling our broadband managed connectivity solutions and our managed payment gateway products, such as card-not-present services. In our financial services division, we will continue to increase the scope of services and leverage our existing customer base of over 625 financial services companies to acquire new customers. Within our telecommunications division, our expanded set of services including our network evolution, registry, identification and verification and roaming and clearing solutions will help us acquire new customers both domestically and internationally. Additionally our recent acquisition of Cequint expanded our product offerings and we anticipate this will help us acquire new customers.

        Develop new product and service offerings.    We will continue to expand our service offerings to address new markets for secure and reliable transmission of time-sensitive information. We continue to enhance our IP-based network services to payment processors, financial institutions and merchants in connection with the global payment industry's adoption of new technologies. We are currently offering card-not-present payment gateway services to payments division customers through the platforms we have deployed in the Asia-Pacific region and the United States and we intend to launch our card-not-present platform in Western Europe in 2011. In our telecommunication services division we are deploying new products to our customers. Our IP-registry platform is designed to enumerate and resolve IP-traffic for various services including VoIP traffic, SMS and MMS messages and international long distance. Additionally, we are working on several new products that will leverage our existing technology platforms across our payments and telecommunication divisions and focus on revenue-generating products for our customers.

        Increase sales to existing customers.    We will continue our efforts to further expand our existing customer relationships to increase business domestically and abroad. For example, we intend to encourage: our domestic and international payments division customers to increase their number of connections to our networks and to transmit a greater percentage of their transaction volume with us; our telecommunication services customers to increase the number of signaling routes they establish through our SS7 network and to increase the amount of data we store on their behalf in our databases; and our financial services customers to connect more endpoints and virtual connections to, and use greater bandwidth on, our data network.

        Our longstanding relationships with our customers provides us with an opportunity to increase the sales we make to our existing customers as they and we expand internationally. Within payments, our domestic processing customers are looking for growth outside the United States, opening up several new opportunities for cross-border routing of transactions. In TSD, our CSG acquisition gave us several new products and services, such as identity and verification and registry services, roaming and clearing and short messaging services, that we can now offer to our legacy customers on a stand-alone basis or as a bundled service. We also provide managed services to legacy CSG customers, helping them control network costs as they start to focus on building next-generation IP-based networks. We believe we have an opportunity to sell IP-based payment network services along the business chain to new customers currently using the services of our existing TSD customers. We also believe our telecommunication customers will be interested in our managed payment services such as our card-not-present payment gateway. We intend to work closely with our customers to increase our knowledge of their businesses and technical requirements in an effort to identify additional sales opportunities.

        Pursue strategic acquisitions.    We will continue to seek opportunities to acquire businesses that expand our range of services, provide opportunities to increase our customer base and enter into new domestic and international markets. We will need to use operating cash flows or additional financing to

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pursue our strategy. In May 2009 we acquired the CSG assets for $230.7 million. We funded the transaction through a new $230.0 million term loan facility as part of the May 2009 Credit Facility. In October of 2010, we acquired Cequint, Inc. for a potential total purchase price of $102.3 million. We funded the transactions through a new $50 million term loan facility using the accordion feature of the November 2009 Credit Facility.

Our Network

        We operate a highly-customized data network specifically designed and configured for the transmission of time-sensitive data. Our diverse data network architecture supports a variety of widely accepted communications protocols and is accessible through a variety of methods, including dial-up, leased line, wireless and secure Internet connections. We have designed our data network to be scalable and to allow easy adoption of new access technologies. The hardware utilized in our network is installed at 130 points of presence worldwide, 48 of which are in North America. We connect these points of presence with digital circuits leased from multiple telecommunication services providers. In addition, our network control centers allow us to administer our network and enable us to monitor our customers' transactions in real time. We believe that our network provides the following important benefits to our customers:

        Our network is designed specifically to address the data communications needs of our diverse customer base.    Our data network supports multiple communications protocols over our MPLS backbone and includes customized hardware, software and value- added features developed by us or by vendors to our specifications. The following is a description of the various protocols we operate within our network:

    IP.  Internet protocol, or IP, is a communications technology that routes outgoing data messages and recognizes incoming data messages. Our secure IP infrastructure provides the services offered by our financial services division, the IP-based network solutions offered by our payments division and the IP-based network solutions (wireless data and next generation signaling) and registry services offered by our telecommunication services division. We also use our IP infrastructure for our internal processes, such as accounting functions and network monitoring and management. We have designed and implemented this with a high level of system redundancy, dynamic routing and sophisticated security and authorization technologies.

    SS7.  SS7 is a communications protocol used to transmit signaling information to support call setup, provide routing information and enable wireless devices to interconnect with various networks. It also provides access to network databases such as caller name and toll-free routing and to support the transmission of transaction related data used by our payments division's customers. Our SS7 infrastructure is accessed using dedicated SS7 links provided by local exchange carriers and interexchange carriers.

    X.25.  X.25 is a communications protocol used to transmit packets of data. Our domestic and international X.25 protocol transports our customers' POS transactions and is used to provide the validation services offered by our telecommunication services division. This protocol is designed to provide fast call connection times, a high level of system redundancy, dynamic rerouting, wide geographic coverage and value-added features, at a low cost per transaction. Customers may access our X.25 infrastructure using various methods, including dial-up services, leased line services, wireless services, satellite services and secure internet connections.

        Our network is reliable, redundant and secure.    We believe we have configured the major components of our network to eliminate any single point of failure. The reliability of our data network is enhanced significantly because we have deployed our network with redundant hardware installed at geographically diverse facilities connected by multiple telecommunications carriers. Our facilities are deployed with battery back-up and emergency generator power systems. We coordinate the physical

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routing of the digital circuits connecting our facilities with multiple telecommunication service providers to ensure the availability of diverse paths for routing any transaction or data, thereby enhancing network reliability. Due to such physical diversity, minor outages or failures typically do not require the immediate intervention of our technicians. We are able to respond quickly to service problems because the network monitoring, management and troubleshooting systems we use permit our network control centers to correct problems remotely. Our data network contains industry standard firewalls and protections, and security is further enhanced by limiting access. Our network is PCI DSS certified.

        Our IP and X.25 protocols incorporate several customized, value-added features that distinguish our services and performance from our competitors.    We believe that various value-added features we have developed permit our Payments customers accessing our data network through dial-up services to process a greater volume of transactions than other dial-up service providers. These features include:

    the use of equipment that supports and converts transaction data delivered to our data network in multiple protocols and message formats into the protocols employed by our data network, thereby eliminating the need for our customers to incur the high costs associated with reprogramming POS terminals and host computers and performing continuous network enhancements and software upgrades;

    real-time call tracking, which enables us to quickly resolve host, terminal or network problems experienced by our customers and to recommend to our customers ways to improve their systems;

    the ability to convert message protocols within our network, allowing acquiring organizations to bring various transaction types with various message formats into their processing hosts without having to make costly changes within their own infrastructure; and

    a secure Internet-based transaction monitoring system, which permits our customers to monitor the status of their transactions in real-time using the Internet.

        Our network can accommodate growth in our business.    Our network is deployed with sufficient capacity to accommodate significant growth in transaction volumes without incurring delays relating to the provisioning and deployment of additional hardware and telecommunications circuits. We have also designed the network so that we may easily increase capacity as necessary.

        Our network operations centers continuously monitor and manage our network.    We provide 24-hour, seven days a week network control coverage domestically through our network control centers located in Reston, Virginia and Overland Park, Kansas and internationally through our network control centers located in Sheffield, England and Sydney, Australia. Each of these network control centers serves as the backup network control center for the other control center. Our network control centers are staffed with skilled technicians experienced with the services we offer. Our network control centers remotely monitor the components of our data network and manage our network using sophisticated network management tools we have either developed internally or licensed from others.

Customers

        As of December 31, 2010, we provided our services to more than 2,000 customers in our payments division to more than 800 customers in our telecommunications division and to more than 625 financial services division customers. Historically we have experienced limited customer turnover and attribute that to our strong relationships with those customers. For the year ended December 31, 2010, we derived approximately 18.9% of our total revenues from our five largest customers. No customer accounted for more than 10% of our total revenues for the year ended December 31, 2010. We typically enter into multi-year service contracts with our customers with minimum commitments. The

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contracts with our five largest customers contain minimum transaction or revenue commitments on an annual or contract term basis. The contracts with our five largest customers expire from 2011 to 2012

Sales and Marketing

        We sell our services directly to customers through geographically dispersed sales teams. In our telecommunication service divisions, we have a specialized sales team to sell our TSD products in North America and Asia Pacific. Globally we have a specialized sales team for our financial services division. In our payments division, our sales teams are organized geographically with each team responsible for selling all of our payments services in the country in which the team is based and, in some cases, proximate countries. Our payments sales teams are based in Australia, Canada, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Poland, Romania, Singapore, South Korea, Spain, Thailand, the United Kingdom and the United States. Generally, each sales team includes a managing director or sales manager, account representatives, business development personnel, sales engineers and customer service representatives experienced in the industries of our customers and the services we offer.

        We also have dedicated product development and marketing teams for our payments and telecommunications services divisions that specialize in the industries of our customers and the services we offer. These teams are responsible for working with our customers, prospects and other industry specialists to expand our current suite of solutions to address the evolving demands of the industry they serve. These teams also consider the applicability of our solutions outside of the specific industries to which they are dedicated.

        When a customer initially purchases services from us, the customer may purchase some, but not all, of the services we offer. Our sales teams then strive to increase the services purchased by existing customers and to expand the range of services we provide to our customers. Our sales teams consult with our customers to identify the new business-critical services we may provide.

        Our global marketing group works with our sales teams around the world and the product group to promote interest in our services and to generate new sales prospects. In addition they ensure that any news associated with the company is distributed in a timely manner to all of the company's stakeholders.

Suppliers

        The operation of our networks depends upon the capacity, reliability and security of services provided to us by a limited number of telecommunication service providers. We have no control over the operation, quality or maintenance of those services or whether the vendors will improve their services or continue to provide services that are essential to our business. In addition, telecommunication service providers may increase the prices at which they provide services.

        Some key components we use in our networks are available only from a limited number of suppliers. The number of available suppliers of components for our X.25 networks is particularly limited. The Company has entered into long term contracts with two vendors for the provision of network equipment and the maintenance of hardware and software utilized on our network.

Competition

        Telecommunication services division.    Our telecommunication services division competes on the basis of industry expertise, network service quality and reliability, transaction speed, customer support, cost-efficiency and value-added services. The primary competitors of our telecommunication services division include telecommunication carriers such as Verizon Communications, Inc. and AT&T Corp., and CenturyLink, Syniverse Technologies, Inc., and TARGUSinfo.

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        Payments division.    Our payments division competes on the basis of industry expertise, network service quality and reliability, transaction speed, value-added features, customer support and cost-efficiency. In the United States the primary competitors for our Payments dial-up services are interexchange carriers such as Verizon Business Solutions, an operating unit of Verizon Communications, Inc., AT&T Corp, and Phoenix Managed Networks, Inc. The carriers typically do not aggressively pursue transaction-oriented business as a stand-alone service but rather offer it in conjunction with other products and services. The primary competitors of our payment division's counter-top integration and IP-based network services are Cybera, Inc. and broadband access providers such as MegaPath Networks, Inc. The primary competitor of our payment division's wireless services in the United States is APRIVA. Outside the United States our payment division competes on a similar basis as in the United States. Primary competitors of our payment services are incumbent telephone companies in the geographic location, such as BT Group PLC in the United Kingdom, France Telecom in France, Telecom Italia in Italy, Telefonica in Spain and Telstra in Australia. The primary competitor of our processing services in the United Kingdom is Avantra. The primary competitors of our Payment Division's gateway services are other payment gateway offerings from payment service providers, such as Authorize.Net from Cybersource (Visa).

        Financial services division.    Our financial services division competes on the basis of access to multiple financial services companies, security, support services, cost-efficiency and discrete service offerings. The primary competitors of our financial services division are other private communications networks and telecommunications carriers including AT&T Corp. and BT Group PLC, providers of quote terminals and market data services such as Bloomberg, Reuters and Thomson Financial, and other network service providers such as SAVVIS, Inc.

Government Regulation

        The Federal Communications Commission, or FCC, retains general regulatory jurisdiction over the sale of interstate telecommunications services. We believe that TNS' services in general are properly characterized as "information" or "enhanced" services rather than "telecommunications services." Providers of information services are not required to maintain a certificate of public convenience and necessity with the FCC, to contribute directly to the Universal Service Fund, to file tariffs with the FCC, or to comply with any of the other FCC regulations applicable to telecommunications carriers. The application of the "information" and "telecommunications" categories to particular services and activities is an evolving standard with no bright lines of demarcation. TNS continues to monitor its businesses to ensure that its services remain properly characterized for regulatory purposes.

        Further, the FCC has found information (or enhanced) services to be inherently interstate in nature. In addition, nearly all TNS services cross state boundaries and are thus interstate offerings. Consequently, our services are not subject to state public utility commission regulation.

        Even though we provide unregulated services, federal and state regulations can affect the costs of business for us and our competitors by changing the rate structure for access services purchased from local exchange carriers to originate and terminate calls. Under the Telecommunications Act of 1996 ("the 1996 Act"), the FCC implemented rules and regulations known as Access Charge Reform to reform the system of interstate access charges. The FCC's implementation of these rules increased some components of our costs for access while decreasing others. The FCC is currently considering additional rulemaking proceedings concerning this intercarrier compensation scheme, and we currently cannot predict whether any rule changes will be adopted or the impact these rule changes might have on our access charges if they are adopted. Recent and pending decisions of the FCC and state regulatory commissions may limit the availability and increase pricing used by our suppliers to provide telecommunication services to us. We cannot predict whether the rules will change or, if they do, whether the changes will increase the cost or availability of services we purchase from our suppliers.

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        The third party telecommunications service suppliers for our information services are obligated to contribute directly to the Federal Universal Service Fund. Our telecommunications service suppliers, in turn, recover the cost of their contribution obligations by imposing surcharges on us and our competitors based upon a percentage of their interstate and international end-user telecommunications revenues. If the Federal Universal Service Fund surcharges increase, our telecommunications service suppliers will pass those increased surcharges on to us. We in turn will pass those potential increased Federal Universal Service Fund surcharges on to our customers to the extent permitted under our contracts with them. The United States Congress and the FCC are considering modifying the way in which Federal Universal Service Fund charges are calculated, including considering whether to assess universal service charges on a flat-fee basis, such as a per-line, per-telephone number or per-account charge. We currently cannot predict whether Congress will mandate or the FCC will adopt changes in the calculation of Federal Universal Service Fund contributions or whether these changes, if adopted, would increase our Federal Universal Service Fund surcharges. If the FCC implements any legislation, adopts any proposal or takes any administrative action that increases our Federal Universal Service Fund surcharges, our network operating costs will increase. In addition, if the FCC implements any legislation, adopts any proposal, or takes any administrative action that increases our supplier's Federal Universal Service Fund obligations, these telecommunications service suppliers may seek to pass through cost-recovery charges to us, which would result in an increase in our cost of network services, an increased cost which the Company may or may not be able to pass on to our customers.

Intellectual Property

        Our success is dependent in part upon our proprietary technology. While we own patents with respect to certain of the services we provide, we rely principally upon trade secret and copyright law to protect our technology, including our software and network design. We enter into confidentiality or license agreements with our employees, distributors, customers and potential customers and limit access to and distribution of our software, documentation and other proprietary information. We believe, however, that because of the rapid pace of technological change in the data communications industry, the legal protections for our services are less significant factors in our success than the knowledge, ability and experience of our employees and the timeliness and quality of services provided by us.

Employees

        As of December 31, 2010, we employed 1,237 persons worldwide, of whom 817 were engaged in systems operation, development and engineering, 261 of whom were engaged in sales and sales support, 148 of whom were engaged in finance and administration and 11 comprised executive management. Of our total employees as of December 31, 2010, 781 were employed domestically and the balance were in other countries, including 302 in Europe and 154 in Asia Pacific. None of our employees are currently represented by a labor union. We have not experienced any work stoppages and consider our relationship with our employees to be good.

Internet Address and Company SEC Filings

        Our internet address is www.tnsi.com. On the investor relations portion of our web site, we provide a link to our electronic SEC filings, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to these reports. All such filings are available free of charge and are available as soon as reasonably practicable after filing. The reference to our website address does not constitute incorporation by reference of the information contained in the website and such information should not be considered part of this report.

Executive Officers of the Registrant

        See Item 10 of this report for information about our executive officers.

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Item 1A.    Risk Factors

        We are subject to various risks that could have a negative effect on the Company and its financial condition. You should understand that these risks could cause results to differ materially from those expressed in forward-looking statements contained in this report and in other Company communications. Because there is no way to determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following.

We derive a substantial portion of our revenue from a small number of customers. If one or more of our top five customers were to cease doing business with us, or to substantially reduce its dealings with us, our revenues and earnings could decline.

        For the year ended December 31, 2010, we derived approximately 18.9% of our total revenues from our five largest customers. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our revenues. No customers accounted for more than 10% of revenues for the year ended December 31, 2010. The loss of any of our largest customers or a decision by one of them to purchase our services at a reduced level could negatively impact our revenues, earnings and business.

        The contracts with our five largest customers contain minimum transaction or revenue commitments on an annual or contract term basis. Upon meeting these commitments, the customers are no longer obligated to purchase services from us and may elect not to make further use of our services. In addition, our customers may elect not to renew their contracts when they expire. Even if contracts are renewed, the renewal terms may be less favorable to us than under the current contracts. The contracts with our five largest customers expire from 2011 to 2012

We face significant pressure on the prices for our services from our competitors and customers. Our failure to sustain pricing could impair our ability to maintain profitability or positive cash flow.

        Our competitors and customers have caused and may continue to cause us to reduce the prices we charge for services. We may not be able to offset the effects of these price reductions by increasing the number of transactions we transport using our networks or by reducing our costs. The primary sources of pricing pressure include:

    Competitors offering our customers services at reduced prices. For example, telecommunications carriers may reduce the overall cost of their services by bundling their data networking services with other services such as voice communications.

    Payments and telecommunication services customers seeking greater pricing discounts during contract negotiations in exchange for maintaining or increasing their minimum transaction or revenue commitments.

    Consolidation of existing customers resulting in pricing reductions. For example, one of our customers with relatively lower contract prices may acquire another of our customers, enabling the acquired customer's services to receive the benefit of the lower prices. In addition, if an existing customer acquires another customer, the combined transaction volume may qualify for reduced pricing under our contract. Further, consolidation among our customers may cause us to reduce prices in order to avoid losing these customers.

Our Payments and Telecommunications Services businesses are highly dependent upon our customers' transaction volumes and our ability to expand into new markets.

        We already serve most of the largest payment processors in the United States and Europe. Accordingly, our Payments division is highly dependent on the number of transactions transmitted by

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our existing customers through our networks in the United States and the United Kingdom. Factors which may reduce the number of credit and debit card and ATM transactions include economic downturns, acts of war or terrorism and other events that reduce consumer spending. Revenues from our Payments Division have decreased primarily as a result of a decline in transaction volumes which we attribute to the continued softness in the economy, as well as a decrease in revenue per transaction as a result of negotiated price reductions upon renewal of certain contracts.

        We may be unable to increase our business from IP-based network services as well as our payment gateway service offerings that we have identified as potential sources of future growth for our Payments business in the United States and abroad. Factors that may interfere with our ability to expand further into these areas include:

    market participants' adoption of alternative technologies; and

    our potential inability to enter into commercial relationships with additional market participants.

        Our Telecommunications Services business is also dependent on our customers' transaction volumes. In the past, consolidation among our TSD customers has caused us to lose transaction volume. In addition, certain of our TSD customers have developed in-house solutions to replace part or all of the services we provide to them. In the future, consolidation among our customers or the decision by existing customers to deploy in-house solutions to replace our services could cause us to lose volume and our revenues to decline.

Our efforts to integrate recent or future acquisitions into our operations could be disruptive, and we may not be able to successfully integrate them on a timely basis. Even if we are able to successfully integrate an acquisition into our operations, we may not realize the anticipated benefits of the acquisition on the timetable contemplated, or at all. Recent or future acquisitions could negatively affect our operating results and could dilute the interests of existing stockholders.

        In October 2010 we acquired Cequint, Inc., a Seattle based company providing caller identification services to wireless operators. Cequint currently provides a caller identification feature for some wireless operators that automatically displays on the wireless handsets of customers of those operators the city and state in which the caller's phone number is registered. In the near future, Cequint also plans to launch a new application of that service together with a network component that allows mobile operators to display the name of the calling party from authoritative telecommunication carrier databases together with the incoming number on the wireless handsets. This new Name ID application will be pre-loaded onto the wireless handsets by its manufacturer at the request of the wireless operator. It will be integrated at the call-handler level on those wireless handsets ranging from entry level cellular handsets to advanced mobile smart phones that will be sold through the wireless operator's normal distribution channels. Upon purchase of the wireless handset, the wireless operator's customer will be automatically provided with a free-trial of that application on the purchased handset. After expiration of the free-trial period, the wireless operator's customer will be prompted with a purchase screen giving the customer the option to purchase the application and be billed on a monthly recurring basis on the wireless operator's bill to that customer at a price established by the wireless operator.

        We have begun to integrate the network Caller ID component of that service with the Caller ID application to be pre-loaded onto the handsets of wireless operators. This integration may prove to be more difficult and may take longer than we currently anticipate for the application to work as intended, which could result in the Cequint business failing to meet expectations. Furthermore, we may experience unanticipated difficulties and delays in the process of having wireless operators request and ensure that our Caller ID application is pre-loaded onto their wireless handsets by their manufacturers. Even if we are successful in integrating our service and having the Name ID application pre-loaded onto wireless operator's handsets, our anticipated revenues from such service are highly dependent on

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adoption rates of the Name ID application by the customers of the wireless operators and the revenue share and pricing to be determined for such application by the wireless operators. We may fail to achieve the revenues anticipated from this Cequint acquisition despite incurring substantial costs of the business, which may adversely affect our future financial position, results of operations, and customer relationships.

        In addition, we expect to continue to seek selective acquisitions and investments as an element of our growth strategy. Recent and future acquisitions could subject us to risks including:

    If we are not able to successfully integrate acquired businesses in a timely manner, our operating results may decline. We also may incur substantial costs, delays or other operational or financial problems during the integration process.

    If we are not able to successfully integrate acquired businesses in a timely manner, our operating results may decline, particularly in the fiscal quarters immediately following the completion of such transactions while the operations of the acquired entities are being integrated into our operations. We also may incur substantial costs, delays or other operational or financial problems during the integration process.

    Acquisitions could result in large, immediate write-offs and assumption of contingent liabilities, either of which could harm our operating results.

    Acquisitions may divert the attention of senior management from our existing business.

    Additional indebtedness incurred to finance acquisitions are likely to increase our interest expense, and new debt agreements may involve new restrictive covenants that could reduce our flexibility in managing our business.

    If we issue additional equity to finance our acquisitions or investments, it could result in dilution for our existing stockholders.

Our strategy to expand internationally may fail, which may impede our growth and harm our operating results.

        During the year ended December 31, 2010, we did not generate positive operating cash flows in 7 out of the 24 countries in which we have operations and provide services outside of North America. In addition, we are planning expansion into new and existing international markets. Key challenges we will face in pursuing our international strategy include the need to:

    secure commercial relationships to help establish our presence in international markets,

    obtain telecommunications services from incumbent telecommunication service providers that may compete with us,

    adapt our services to support varying telecommunications protocols that differ from those markets where we have established operations,

    hire and train personnel capable of marketing, installing and integrating our data communications services, supporting customers and managing operations in foreign countries,

    localize our products to target the specific needs and preferences of foreign customers, which may differ from our traditional customer base in the United States and United Kingdom,

    build our brand name and awareness of our services among foreign customers,

    implement new systems, procedures and controls to monitor our operations in new markets, and

    obtain licenses or authorizations that may be required to sell our services internationally.

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        If we fail to address the challenges and risks associated with international expansion, we may encounter difficulties implementing our strategy, which could impede our growth or harm our operating results.

We are subject to risks associated with operating in foreign countries, including:

    multiple, changing and often inconsistent enforcement of telecommunications, foreign ownership and other laws and regulations that could have a direct or indirect adverse impact on our business and market opportunities,

    competition with existing market participants which have a longer history in and greater familiarity with the foreign markets we enter,

    laws and business practices that favor local competitors,

    fluctuations in currency exchange rates,

    imposition of limitations on conversion of foreign currencies into U.S. dollars or remittance of dividends and other payments by foreign subsidiaries,

    changes in a specific country's or region's political or economic conditions,

    longer payment cycles for customers in some foreign countries,

    difficulty and expense associated with enforcement of agreements and collection of receivables through legal systems in some foreign countries, and

    difficulty and expense associated with managing a large organization spread throughout numerous foreign countries.

We face risks related to movements in foreign exchange rates that could have a material adverse effect on our business, financial position and results of operations.

        Our revenues and earnings are affected by fluctuations in the value of the U.S. dollar as compared with foreign currencies, predominantly the Euro, the British Pound and the Australian dollar as the functional currency of each of our foreign subsidiaries is the local currency. To the extent that the U.S. dollar appreciates in value against these currencies, the reported value of our revenues, earnings and financial position may be materially adversely affected.

We conduct business in many international markets with complex and evolving tax rules, which subjects us to international tax compliance risks.

        While we obtain advice from tax and legal advisors as necessary to help ensure compliance with tax and regulatory matters, most tax jurisdictions in which we operate have complex and subjective rules regarding the valuation of inter-company services, cross-border payments between affiliated companies and the related effects on the taxes to which we are subject, including income tax, value-added tax and transfer tax. From time to time our foreign subsidiaries are subject to tax audits and may be required to pay additional taxes, interest or penalties should the taxing authority assert different interpretations, or different allocations or valuations of our services. There is a risk, if one or more taxing authorities significantly disagrees with our interpretations, allocations or valuations, that any additional taxes, interest or penalties which may result could be material and could reduce our income and cash flow from our international subsidiaries.

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Our dependence on third-party providers for network connectivity, network equipment, software, hardware, and hosting or co-location services exposes us to a variety of risks we cannot control.

        To deliver our services successfully, we depend on network connectivity, network equipment, software, hardware, and hosting or co-location services supplied by our vendors and customers. We cannot assure that we be able to continue to purchase all of these necessary components of our services from these third-party vendors on acceptable terms or at all. Our third-party vendors have increased and in the future may increase the prices charged for their services, which have increased and would further increase our costs.

        Our business also depends on the capacity, reliability and security of the network infrastructure owned and managed by third parties, including our vendors and customers. Our payments services, telecommunication services, and financial services, including technology interoperability services, payment processing services, network services, database services, call signaling and roaming and clearing services, all depend to some extent on the capacity, reliability and security of the infrastructure of third parties. We have no control over the operation, quality, or maintenance of a significant portion of that infrastructure and whether these third parties will upgrade or improve their equipment, software and services to meet our and our customers' evolving requirements. We depend on these companies to maintain the operational integrity of our services. If one or more of these companies is unable or unwilling to supply or expand its levels of services to us in the future, our operations and customer services could be negatively impacted or severely interrupted.

Our customers may develop in-house networks and divert part or all of their data communications from our network to their networks.

        As a payment processor's business grows larger and generates a greater number of credit card and debit card transactions, it could become economically advantageous for the processor to develop its own network for transmitting transaction data, including credit card and debit card transactions. Currently, some of the largest processors and some very large merchants globally, such as supermarkets, department stores and major discount stores, operate their own networks to transmit some or all of their transactions. Also, as the number of outsourced providers of network services has decreased, payment processors and large merchants have developed, and may continue to seek to develop, their own networks in order to maintain multiple sources of supply. In addition, our telecommunication services division customers may elect to connect their call signaling networks directly to the call signaling networks of other telecommunications carriers, thus decreasing their need for our services. As a result of any of these events, we could experience lower revenues.

System failures or slowdowns, security breaches and other problems could harm our reputation and business, cause us to lose customers and revenue, and expose us to customer liability.

        Our business is based upon our ability to securely, rapidly and reliably receive and transmit data through our networks. One or more of our networks could slow down significantly or fail, or be breached, for a variety of reasons, including:

    failure of third party equipment, software or services utilized by us,

    undetected defects or errors in our software programs, especially when first integrated into a network,

    unexpected problems encountered when integrating changes, enhancements or upgrades of third party equipment or software with our systems,

    computer viruses,

    natural or man-made disasters disrupting power or telecommunications systems generally, and

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    damage to, or failure of, our systems due to human error or intentional disruption such as physical or electronic break-in, sabotage, acts of vandalism and similar events.

        We may not have sufficient redundant systems or backup telecommunications facilities to allow us to receive and transmit data in the event of significant system failures. Any significant security breach degradation or failure of one or more of the networks on which we rely, including the networks of our vendors and customers could disrupt the operation of our network and cause our customers to suffer delays in transaction processing, which could damage our reputation, increase our service costs, or cause us to lose customers and revenues.

Our customers' inability to successfully implement our services could negatively impact our business.

        Significant technological challenges may arise for our customers when they implement our services. Our customers' ability to support the deployment of our services and integrate them successfully within their operations depends, in part, on our customers' technological capabilities and the level of technological complexity involved. Difficulty in deploying our services could increase our customer service support costs, delay the recognition of revenues received until the services are implemented and reduce our operating margins.

Our capacity limits on current network and application platforms may be difficult to manage and project, and we may not be able to expand or upgrade our systems to meet increased demand or use.

        As customers' usage of our services increase, we will need to expand our network and application platforms. We may not be able to accurately project the rate of increase in usage of our services. In addition, we may not be able to expand and upgrade our systems, networks, and application platforms in a timely manner to accommodate increased usage of our services. If we do not timely and appropriately expand and upgrade our systems, networks, application platforms, we may limit our ability to add new customers or lose customers and our operating performance may suffer.

We depend on a limited number of network equipment suppliers and do not have supply contracts. Our inability to obtain necessary network equipment or technical support could harm our business.

        Some key components we use in our networks are available only from a limited number of suppliers. The number of available suppliers of components and technical support for our X.25 networks are particularly limited. We do not have long-term supply contracts with these or any other limited source vendors, and we purchase data network equipment on a purchase order basis. If we are unable to obtain sufficient quantities of limited source equipment and required technical support, or to develop alternate sources as required in the future, our ability to deploy equipment in our networks could be delayed or reduced, or we may be forced to pay higher prices for our network components. Delays or reductions in supplies could lead to slowdowns or failures of our networks.

We may experience fluctuations in quarterly results because of the seasonal nature of our business and other factors outside of our control, which could cause the market price of our common stock to decline.

        Credit card and debit card transactions account for a major percentage of the transaction volume processed by our customers. The volume of these transactions on our networks generally is greater in the fourth quarter holiday season than during the rest of the year. Consequently, revenues and earnings from credit card and debit card transactions in the first quarter generally are lower than revenues and earnings from credit card and debit card transactions in the fourth quarter of the immediately preceding year. We expect that our operating results in the foreseeable future will be significantly affected by seasonal trends in the credit card and debit card transaction market.

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        In addition, a variety of other factors may cause our results to fluctuate from one quarter to the next, including but not limited to:

    varying costs incurred for network expansion,

    the impact of quarterly variations in general economic conditions,

    acquisitions made or customers acquired or lost during the quarter,

    changes in pricing policy by us, our competitors and our third party supplier and service providers during a particular quarter, and

    foreign currency translation rates, in particular the British pound, Euro and Australian dollar.

We may not be able to adapt to changing technology and our customers' technology needs.

        We face rapidly changing technology and frequent new service offerings by competitors that can render existing services obsolete or unmarketable. Our future success depends on our ability to enhance existing services and to develop, introduce and market, on a timely and cost effective basis, new services that keep pace with technological developments and customer requirements.

We may be unable to protect our proprietary technology, which would allow competitors to duplicate our services. This would make it more difficult for us to compete with them.

        We may not be able to protect sufficiently our proprietary technology, which could make it easier for competitors to develop services that compete with our services. We rely principally on copyright and trade secret laws and contractual provisions to protect our proprietary technology. The laws of some countries in which we sell our services and products may not protect software and intellectual property rights to the same extent as the laws of the United States. If these measures do not adequately prevent misappropriation of our technology, competitors may be able to use and adapt our technology. Our failure to protect our technology could diminish our competitive advantage and cause us to lose customers to competitors.

We may face claims of infringement of proprietary rights, which could harm our business and operating results.

        Third parties may assert claims that we are infringing their proprietary rights. If infringement claims are asserted against us, we could incur significant costs in defending those claims. We may be required to discontinue using and selling any infringing technology and services, to expend resources to develop non-infringing technology or to purchase licenses or pay royalties for other technology. We may be unable to acquire licenses for the other technology on reasonable commercial terms or at all. As a result, we may find that we are unable to continue to offer the services and products upon which our business depends.

We may not have adequate resources to meet demands resulting from growth.

        Growth may strain our management systems and resources. We may need to make additional investments in the following areas:

    recruitment and training,

    communications and information systems,

    sales and marketing,

    facilities and other infrastructure,

    treasury and accounting functions,

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    licensing and acquisition of technology and rights, and

    employee and customer relations and management.

        If we fail to develop systems, procedures and controls to handle current and future growth on a timely basis, we may be less efficient in the management of our business or encounter difficulties implementing our strategy, either of which could harm our results of operations.

We may lack the capital required to maintain our competitive position or to sustain our growth.

        We have historically relied on cash flow from operations and proceeds from equity and debt to fund our operations, capital expenditures and expansion. If we are unable to obtain sufficient capital in the future, we may face the following risks:

    We may not be able to continue to meet customer demand for service quality, availability and competitive pricing.

    We may not be able to expand rapidly internationally or to acquire complementary businesses.

    We may not be able to develop new services or otherwise respond to changing business conditions or unanticipated competitive pressures.

Our level of debt could adversely affect our financial health.

        As of December 31, 2010, we had $407.5 million in debt outstanding.

        This level of debt could have important consequences. Below, we have identified some of the material potential consequences resulting from this debt:

    A significant portion of our cash flow from operations must be dedicated to the repayment or servicing of indebtedness, thereby reducing the amount of cash we have available for other purposes, including reinvestment in the company.

    We may be unable to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate purposes.

    Our ability to adjust to changing market conditions may be hampered.

    We may be at a competitive disadvantage compared to our less leveraged competitors.

    We may be vulnerable to the impact of adverse economic and industry conditions and, to the extent of our outstanding debt under our senior secured credit facility, the impact of increases in interest rates.

        We cannot assure you that we will continue to generate sufficient cash flow or that we will be able to borrow funds under our senior secured credit facility in amounts sufficient to enable us to service our debt, or meet our working capital and capital expenditure requirements. We must satisfy borrowing base restrictions in order to borrow additional amounts under our November 2009 Credit Facility. If we are not able to generate sufficient cash flow from operations or to borrow sufficient funds to service our debt, due to borrowing base restrictions or otherwise, we may be required to sell assets, reduce capital expenditures, refinance all or a portion of our existing debt, or obtain additional financing. We cannot assure you that we will be able to refinance our debt, sell assets or borrow more money on terms acceptable to us, if at all.

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If we do not compete effectively, we may lose market share to competitors and suffer a decline in revenues.

        Many of our competitors have greater financial, technical, marketing and other resources than us. As a result, they may be able to support lower pricing and margins and to devote greater resources to marketing their current and new products and services.

        We face competition in each of our three divisions as follows:

    The primary competitors of our telecommunication services division include telecommunication carriers such as Verizon Communications, Inc., AT&T Corp., and CenturyLink, Syniverse Technologies, Inc., and TARGUSinfo.

    The primary competitors of our Payments division are APRIVA, AT&T Corp., Cybera, Inc., Phoenix Managed Networks, LLC, and Verizon Business Solutions, an operating unit of Verizon Communications, Inc. in North America, and BT Group PLC and Avantra in the United Kingdom, France Telecom in France, Telecom Italia in Italy, Telefonica in Spain and Telstra in Australia. The primary competitors of our Payment Division's gateway services are other payment gateway offerings from payment service providers, such as Authorize.Net from Cybersource (Visa).

    The primary competitors of our financial services division include AT&T Corp., BT Group PLC, Bloomberg, Reuters, The Thomson Corporation (Thomson Financial), and SAVVIS, Inc.

We depend on key personnel.

        Our success depends largely on the ability and experience of a number of key employees, including Henry H. Graham, Jr., our Chief Executive Officer, and Michael Q. Keegan, our Chief Operating Officer. If we lose the services of any of our key employees, our business may be adversely affected.

Our stock price may be volatile.

        The trading price of our common stock could be subject to wide fluctuations in response to various factors, some of which are beyond our control, such as:

    actual or anticipated variations in quarterly results of operations;

    fluctuations in foreign exchange rates for the currencies of countries in which we have operations;

    announcements of technological innovations;

    pricing by us or our competitors;

    changes in financial estimates by securities analysts;

    announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our customers or competitors;

    additions or departures of key personnel; and

    generally adverse market conditions.

Regulatory changes may increase our costs or impair our growth.

        Federal and state regulations can affect the costs of business for us and our competitors by changing the rate structure for access services purchased from local exchange carriers to originate and terminate calls, by restricting access to dedicated connections available from local exchange carriers, by changing the basis for computation of other charges, such as universal service charges, or by revising the basis for taxing the services we purchase or provide. The Federal Communications Commission

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("FCC") is currently considering changes to the rate structure for services provided by local exchange carriers, including the rate structure for access services, and we currently cannot predict whether these rule changes will be adopted or the impact these rule changes may have on our charges for access and other services if they are adopted.

        Recent and pending decisions of the FCC may limit the availability and increase pricing of network elements used by our suppliers to provide telecommunications services to us. We cannot predict whether these rule changes will increase the cost of services we purchase from our suppliers. Further, the United States Congress and the FCC is considering modifying the way in which Federal Universal Service Fund charges are calculated, including considering whether to assess universal service charges on a flat-fee basis, such as a per-line, per-telephone number or per-account charge. We currently cannot predict whether Congress will mandate or the FCC will adopt changes in the calculation of Federal Universal Service Fund contributions or whether these changes, if adopted, would increase our Federal Universal Service Fund surcharges. If the FCC implements any legislation, adopts any proposal or takes any administrative action that increases our Federal Universal Service Fund surcharges, our network operating costs will increase. In addition, if the FCC implements any legislation, adopts any proposal, or takes any administrative action that increases our telecommunications service supplier's Universal Service Fund obligations, these suppliers may seek to pass through cost-recovery charges to us. We in turn will pass those potential increased Federal Universal Service Fund surcharges on to our customers to the extent permitted under our contracts with them. An increase in the Federal Universal Service Fund surcharges that we are required to pay would result in an increase in our cost of network services, a cost which the Company may or may not be able to pass on to our customers.

        The business of our telecommunication services division customers is or may become subject to regulation that indirectly affects our business. Many of our telecommunication services division customers are subject to federal and state regulations applicable to the telecommunications industry. Changes in these regulations could cause our customers to alter or decrease the services they purchase from us.

        In addition, the payment processing industry in which our POS division operates may become subject to regulation as a result of recent data security breaches that have exposed consumer data to potential fraud. To the extent this occurs, our POS division customers could impose on us additional technical, contractual or other requirements as a condition to continuing to do business with them. These requirements could cause us to incur additional costs, which could be significant, or to lose revenues to the extent we do not comply with these requirements.

        We cannot predict when, or upon what terms and conditions, further regulation or deregulation might occur or the effect future regulation or deregulation may have on our business. Our operating costs may be increased because our service providers and several services that we offer may be indirectly affected by federal and state regulations. In addition, future services we may provide could become subject to direct regulation.

We face risks related to securities litigation that could have a material adverse effect on our business, financial position and results of operations.

        In the past we have been named as a defendant in a securities class action lawsuit. We are generally obliged, to the extent permitted by law, to indemnify our current and former directors and officers who are named as defendants in lawsuits. Defending against existing and potential securities litigation may divert financial and management resources that would otherwise be used to benefit our operations. Regardless of the outcome, securities litigation can result in significant legal expenses. A materially adverse resolution of a securities lawsuit could have a material adverse affect on our business, financial position and results of operations.

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Due to uncertainties associated with the future performance of acquired businesses and assets, we may not realize the full fair value of associated intangible assets and goodwill. Our financial results may be adversely affected if we have to write-off a material portion of our intangible assets or goodwill.

        As a result of our acquisitions, a significant portion of our total assets consists of intangible assets including goodwill. Goodwill and intangible assets, net of amortization, together accounted for approximately 53% of the total assets on our balance sheet as of December 31, 2010. We may not realize the full fair value of our intangible assets and goodwill. We also expect to engage in additional acquisitions, which may result in our recognition of additional intangible assets and goodwill. Under current accounting standards, we are able to amortize certain intangible assets over the useful life of the asset, while goodwill is not amortized. We evaluate on a regular basis whether all or a portion of our goodwill intangible assets may be impaired. Under current accounting rules, any determination that impairment has occurred would require us to write-off the impaired portion of goodwill and such intangible assets, resulting in a charge to our earnings. Such a write-off could adversely affect our financial condition and results of operations.

The current national and world-wide financial crisis could adversely affect our operating results and stock price in a material manner.

        General world-wide economic conditions have resulted in slower economic activity, concerns about inflation and deflation, volatility in energy costs, decreased consumer confidence, reduced corporate capital spending, adverse business conditions and liquidity concerns in the wireless communications markets. These conditions make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they could cause U.S. and foreign businesses to slow spending on our services. Furthermore, during challenging economic times, our customers may face issues gaining timely access to sufficient credit, which could impair their ability to make timely payments to us. If that were to occur, we may be required to increase our allowance for doubtful accounts and our accounts receivable outstanding would be negatively impacted. And any future downturn may reduce our revenue or our percentage of revenue growth on a quarter-to-quarter basis. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, world-wide, or in the telecommunications industry or the wireless communications markets. If the economy or the markets in which we operate do not improve from their current condition or if they deteriorate, our customers or potential customers could continue to reduce or further delay their use of our services, which would adversely impact our revenues and ultimately our profitability. In addition, we may record additional charges related to the restructuring of our business and the impairment of our goodwill and other long-lived assets, and our business, financial condition and results of operations will likely be materially and adversely affected.

Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        Our principal executive offices are located in Reston, Virginia and consist of approximately 46,157 square feet of office space under a lease expiring in February 2013. Our primary network control center is also located in Reston, Virginia and consists of approximately 44,500 square feet of separate office

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space under a lease expiring in June 2013. In addition, we lease the following additional principal facilities:

Use
  Location   Approximate
square footage
  Lease
expiration date

European technology and finance center

  Dublin, Ireland     14,500   January 2022

United Kingdom headquarters and network control centre

  Sheffield, England     16,000   April 2015

United Kingdom processing centre

  Welwyn Garden City, England     21,680   June 2012

Operations and Engineering

  Overland Park, Kansas     17,940   January 2018

Sales and Development

  Tampa, Florida     12,560   December 2013

Cequint Sales and Development

  Seattle, Washington     13,170   December 2012

Australia Operations and Engineering

  Brisbane, Australia     14,010   July 2016

Systems Integration Center

  Chantilly, Virginia     13,650   January 2013

        We also lease and occupy regional sales offices in various cities. We house our remote network switching equipment in facilities owned and maintained by some of our digital telecommunications circuit providers and also in leased telecommunications point-of-presence facilities located in various cities. These leases total approximately 48,088 square feet and expire on dates ranging from April 2011 to June 2018. We believe that our existing facilities are adequate to meet current requirements and that suitable additional space will be available as needed to accommodate the expansion of our operations and development.

        In addition, we also own approximately 67,500 square feet of office space in Lacey, Washington, which is being used for Operations and Development. This property was acquired through our acquisition of the Communication Services Group from VeriSign, Inc. on May 1, 2009.

Item 3.    Legal Proceedings

        We are from time to time a party to other legal proceedings, which arise in the normal course of business. We are not currently involved in any material litigation the outcome of which could, in management's judgment based on information currently available, have a material adverse effect on our results of operations or financial condition. Management is not aware of any material litigation threatened against us.

Item 4.    [Removed and Reserved]

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our common stock trades on The New York Stock Exchange ("NYSE") under the symbol "TNS". The following tables reflect the range of high and low sale prices for the period indicated as reported by the NYSE.

Fiscal Year Ended December 31, 2009
  HIGH   LOW  

First quarter ended March 31, 2009

  $ 10.62   $ 5.80  

Second quarter ended June 30, 2009

  $ 19.81   $ 8.68  

Third quarter ended September 30, 2009

  $ 28.51   $ 18.16  

Fourth quarter ended December 31, 2009

  $ 31.35   $ 23.82  

 

Fiscal Year Ended December 31, 2010
  HIGH   LOW  

First quarter ended March 31, 2010

  $ 26.57   $ 21.74  

Second quarter ended June 30, 2010

  $ 27.50   $ 17.44  

Third quarter ended September 30, 2010

  $ 19.95   $ 14.43  

Fourth quarter ended December 31, 2010

  $ 21.20   $ 16.79  

        As of March 11, 2011, there were 37 stockholders of record of our common stock, excluding shares held in street name by various brokerage firms. We estimate that there are approximately 3,000 beneficial owners of our common stock.

        We do not anticipate paying any regular cash dividends in the foreseeable future. Under our senior secured credit agreement, we are subject to restrictions on paying dividends.

        During the period covered by this report, we did not sell any equity securities without registration under the Securities Act.

Issuer Purchases of Equity Securities

 
  Total Number
of Shares
Purchased(1)
  Average Price
Paid per
Share
  Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs(2)
  Average Price
Paid per
Share
  Maximum Number
of Shares that
May Yet be
Purchased Under
the Plans
or Programs(3)
 

Period:

                               

1/1/10-1/31/10

    42,951   $ 25.59              

2/1/10-2/28/10

    40,254   $ 23.83              

3/1/10-3/31/10

    19,294   $ 23.28              

4/1/10-4/30/10

    233   $ 26.37              

5/1/10-5/31/10

    14,157   $ 26.22              

7/1/10-7/31/10

    9,917   $ 19.41              

8/1/10-8/31/10

    17,607   $ 20.20              

10/1/10-10/31/10

    5,728   $ 18.96     915,333   $ 18.02      

11/1/10-11/30/10

            134,914   $ 18.81      
                       

    150,141   $ 23.59     1,050,247   $ 18.17     1,484,812  
                       

(1)
These shares represent shares surrendered by employees to satisfy payroll tax withholding obligations on the vesting of Restricted Stock Units.

(2)
These shares represent shares repurchased as part of our publicly announced Authorized Stock Repurchase Plan which commenced on October 1, 2010, and expires on March 31, 2012.

(3)
These shares represents the number of shares that could be repurchased using the remaining $31.9 million, of the authorized $50.0 million, at the Company's closing share price on December 31, 2010 of $20.80. The maximum shares that may be purchased will differ from this number as a result of the actual share price at the time of purchase.

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Item 6.    Selected Consolidated Financial Data

        The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this report. The consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010, and the consolidated balance sheet data as of December 31, 2009 and 2010, are derived from our consolidated financial statements, which are included elsewhere in this report. The consolidated statement of operations data for the years ended December 31, 2006 and 2007, and the balance sheet data as of December 31, 2006, 2007, and 2008 are derived from our consolidated financial statements, which are not included in this report.

        The historical results are not necessarily indicative of the results to be expected for any future period.

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Selected Consolidated Financial Data
(In thousands, except per share and transaction data)

 
  Year ended December 31,  
 
  2006   2007   2008   2009   2010  

Consolidated Statements of Operations Data:

                               

Revenues

  $ 286,160   $ 325,524   $ 343,991   $ 474,817   $ 527,135  

Cost of network services

    146,181     163,559     162,423     224,497     261,060  

Engineering and development

    22,287     27,626     29,149     36,268     38,382  

Selling, general and administrative

    71,757     75,287     78,104     100,588     97,033  

Contingent consideration expense

                    1,794  

Depreciation and amortization of property and equipment

    22,208     23,114     25,286     32,247     47,527  

Amortization of intangible assets

    24,820     25,656     25,734     32,353     39,540  

Total operating expenses

    287,153     315,242     320,696     425,953     485,336  

Income (loss) from operations before income taxes, equity in net loss of unconsolidated affiliates and cumulative effect of a change in accounting principle

    (993 )   10,322     23,295     48,864     41,799  

Interest expense

    (9,261 )   (16,655 )   (10,868 )   (58,553 )   (24,572 )

Interest income

    598     1,105     707     497     387  

Other income (expense), net

    2,197     2,356     (241 )   471     4,440  

Income tax benefit (provision)

    2,665     (586 )   (9,213 )   6,777     (13,222 )

Equity in net (loss) income of unconsolidated affiliates

    (5,186 )   643     (202 )   (115 )   (288 )

Cumulative effect of a change in accounting principle, net of tax provision

    84                  

Net (loss) income

    (9,896 )   (2,815 )   3,478     (2,059 )   8,544  

Per Share Information:

                               

Basic net (loss) income per common share

  $ (0.41 ) $ (0.12 ) $ 0.14   $ (0.08 ) $ 0.33  

Diluted net (loss) income per common share

  $ (0.41 ) $ (0.12 ) $ 0.14   $ (0.08 ) $ 0.32  

Basic weighted average common shares outstanding

    24,076     24,204     24,763     25,403     25,949  

Diluted weighted average common shares outstanding

    24,076     24,204     25,196     25,403     26,472  

 

 
  December 31,  
 
  2006   2007   2008   2009   2010  

Consolidated Balance Sheet Data:

                               

Cash and cash equivalents

  $ 17,322   $ 17,805   $ 38,851   $ 32,480   $ 56,689  

Working capital

    31,829     32,844     49,438     45,836     56,023  

Total assets

    381,677     383,098     363,284     601,446     644,740  

Total debt, including current portion and net of discount

    123,313     205,500     178,500     369,713     403,624  

Total stockholders' equity

    179,265     92,272     102,815     121,340     115,281  

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

Financial Highlights

        Total revenues increased $52.3 million, or 11.0%, to $527.1 million for the year ended December 31, 2010, from $474.8 million for the year ended December 31, 2009. Foreign exchange translation increased revenues by $1.2 million. Excluding the positive effect of foreign exchange rates, total revenues increased $51.1 million, or 10.8%, to $525.9 million for the year ended December 31, 2010.

        Revenues from the payments division increased $3.4 million, or 1.7%, to $200.2 million for the year ended December 31, 2010, from $196.8 million for the year ended December 31, 2009. The positive effect of foreign exchange translation on a year-over-year basis was $0.8 million. Excluding the positive effect of foreign exchange rates, payments revenue increased $2.6 million, or 1.3%, to $199.4 million for the year ended December 31, 2010. The growth in our payments division was driven primarily by gains outside of North America in our key international markets of the UK, Australia, France, Italy and Spain. In the UK and Australia the primary driver of growth were our IP-based network services and our payment gateway products. The primary drivers of growth in France, Italy and Spain were gains in market share of dial-up network services and growth in IP-based network services. During the fourth quarter of 2009 and the first quarter of 2010 we made decisions to focus our product portfolio and as a result we discontinued selling our ATM processing software product, Sonic, and our UK terminal logistics service. Revenues from these products were $0.4 million for the year ended December 31, 2010 compared to $4.1 million for the same period in 2009.

        In 2010 we continued to face challenges in the majority of our markets, in particular the U.S., Australia and Spain, with respect to our existing customers that utilize our dial-up network service. Our dial-up network customers are primarily the merchant processors, however the end users of the service are typically small merchants. During the course of 2009 and the first half of 2010 we saw reductions in the number of dial-up terminals accessing our network, which resulted in a reduction in the total number of dial-up transactions we delivered to our existing merchant processor customers from small merchants. We attribute these reductions primarily to the impact that the global recession has had on small merchants. During the second half of 2010, we saw the number of dial-up terminals accessing our network from existing customers stabilize in most of our markets. In the U.S., we have seen recent increased competition for our dial-up network services and as a result we are anticipating our revenue per transaction will decrease and, depending on the number of dial-up transactions we transport, our dial-up revenues may continue to decrease. We currently estimate the impact of these pricing concessions to reduce our U.S. dial-up revenues by $4 million to $5 million in 2011. As part of our strategy to accelerate growth in this division, we have made selected investments in our IP-based network services as well as our payment gateway offerings and plan to introduce these product sets across all of our key markets over time. For example, in the second half of 2010 we introduced our card-not-present payment gateway into the North American market and plan to introduce this offering in Europe in the second half of 2011.

        Revenues from the telecommunication services division increased $48.0 million, or 22.5% to $260.7 million for the year ended December 31, 2010, from $212.7 million for the year ended December 31, 2009. Revenue growth in this division was primarily driven by the contribution of revenues from the CSG acquisition which we acquired on May 1, 2009 and more recently from the Cequint, Inc. acquisition we acquired on October 1, 2010 (see Note 3 to the consolidated financial statements included elsewhere in this Annual Report). In connection with the CSG acquisition, we acquired several customer contracts that contained pricing that was well above current market prices. We successfully re-negotiated these contracts to current market rates during the second half of 2009 and through the first quarter of 2010. In addition, through the acquisition we acquired certain assets

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that enabled us to compete directly for caller-id services rather than using a third party service provider. As a result, the third-party provider with whom we contracted to deliver caller-id services to our customers prior to the CSG acquisition began to remove its traffic from our network during the first quarter of 2009 completing the migration by the end of the first quarter of 2010. We also subsequently lost a customer to this provider in May 2010. Finally, we acquired a contract through the CSG acquisition to provide services to Alltell which, prior to our acquisition of CSG in May 2009, had been acquired by Verizon in January 2009. Verizon completed the migration of the services we provided Alltell off of our network by the end of the first quarter of 2010.

        As a result of the above mentioned factors, the revenues that we reported in our telecommunications services division decreased from the third quarter of 2009 through the second quarter of 2010 (see table below). We believe we have taken the appropriate actions to stabilize the revenues in this division and have made and will continue to make selected investments in our wireless roaming and clearing platform, IP registry platform, identity and verification services and next-generation IP network services that we believe will help drive future revenue growth in this division. In addition, by the end of 2010 we substantially completed the integration of the legacy CSG network into the TSD network and stabilized and enhanced the roaming and clearing and IP registry platforms that we acquired through the CSG acquisition. As part of our strategy to develop solutions that drive revenue for our telecommunications carrier customers, we closed the Cequint, Inc. acquisition on October 1, 2010 and will integrate this business into our telecommunications services division. Cequint provides carrier—grade caller ID products and enhanced services in partnership with top U.S.-based mobile operators through an embedded software client on certain mobile phone handsets. Cequint will leverage the caller-id capabilities that we provide to wireline operators through our identity and verification services. The table below shows the revenue we recognized in our telecommunications services division from the third quarter of 2009 (the first full quarter of the inclusion of CSG's results) through the fourth quarter of 2010 (in thousands):

 
  For the three month period ended  
 
  9/30/2009   12/31/2009   3/31/2010   6/30/2010   9/30/2010   12/31/2010  

TSD revenue as reported

  $ 72,419   $ 68,389   $ 65,461   $ 64,262   $ 64,651   $ 66,341  

Less:

                                     
 

Pass-through revenue

    (2,337 )   (2,188 )   (1,950 )   (2,117 )   (2,025 )   (1,988 )
 

Cequint revenue

                        (2,299 )
                           
   

Total

  $ 70,081   $ 66,201   $ 63,511   $ 62,145   $ 62,626   $ 62,053  
                           

        Revenues from the financial services division increased $1.0 million, or 1.5%, to $66.2 million for the year ended December 31, 2010, from $65.2 million for the year ended December 31, 2009. Foreign exchange translation increased revenues by $0.4 million for the year ended December 31, 2010. Excluding the positive effect of foreign exchange rates, financial services revenue increased $0.6 million, to $65.8 million as of December 31, 2010. Coming into 2010, we were facing challenges in our North American financial services business following the economic downturn in the financial services industry in late 2008 and throughout 2009 which resulted in consolidation among our existing customer base as well as a reduction in the number of market participants (e.g. hedge funds) that utilize our secure trading extranet. In addition, due to changes in the competitive environment for providing low-latency market data exchange services in North America we have experienced significant declines for this service offering. These factors resulted in revenue declines of $6.7 million in North America. As of the end of 2010, we believe we have seen the majority of the consolidation in the financial services industry that has negatively impacted our business. These decreases were more than offset by the increases in revenue from new customer endpoints and to a lesser extent from the introduction of bandwidth based services to our new and existing customers. Revenues increased $4.6 million in North America (not including the $6.7 million in decreases mentioned above), $1.4 million in Europe and $1.3 million in

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Asia Pacific. Revenue increased in North America primarily through growth in endpoints and bandwidth based services to participants in the foreign exchange markets. Revenue growth in Europe was primarily driven by market share gains and the introduction of our bandwidth based services. Revenue growth in Asia Pacific was primarily driven by our expansion efforts to capture the growth opportunities in this region for electronic trading.

        Net income increased $10.6 million to $8.5 million for the year ended December 31, 2010 from a net loss of $2.1 million for the same period in 2009. Diluted earnings per share was $0.32 for the year ended December 31, 2010 compared to a net loss per diluted share of ($0.08) for the same period in 2009. Adjusted net income (a non-GAAP measure) increased $2.8 million, or 5.2%, to $57.2 million for the year ended December 31, 2010 compared to $54.4 million for the same period in 2009. Adjusted net income per share was $2.15 per share for the year ended December 31, 2010 compared to $2.10 per share for the same period in 2009. EBITDA before stock compensation expense (a non-GAAP measure) increased $13.2 million, or 10.6%, to $137.1 million for the year ended December 31, 2010 from $123.9 million for the same period in 2009.

        Adjusted net income and related per share amounts, EBITDA before stock compensation expense and revenue comparisons at constant exchange rates are not measures prepared in accordance with U.S. GAAP. See Additional Information for an explanation of management's use of these non-GAAP measures. The following is a reconciliation of our results of operations prepared in accordance with U.S. GAAP to those adjusted results considered by management:

 
  For the year ended December 31,  
 
  2008   2009   2010  

EBITDA before stock compensation expense:

                   

Net (loss) income (GAAP)

  $ 3,478   $ (2,059 ) $ 8,544  

Add back the following items:

                   

Equity in net loss of unconsolidated affiliate

    202     115     288  

Provision (Benefit) for income taxes

    9,213     (6,777 )   13,222  

Other income

    (466 )   (968 )   (4,827 )

Interest expense

    10,868     58,553     24,572  

Depreciation and amortization of property and equipment

    25,286     32,247     47,527  

Amortization of intangible assets

    25,734     32,353     39,540  

Contingent compensation expense

            1,794  

Stock compensation expense

    11,305     10,446     6,418  
               

EBITDA before stock compensation expense

  $ 85,620   $ 123,910   $ 137,078  
               

Adjusted Net Income:

                   

Net (loss) income (GAAP)

  $ 3,478   $ (2,059 ) $ 8,544  

Add provision (benefit) for income taxes

    9,213     (6,777 )   13,222  
               

Income (loss) before provision for income taxes

    12,691     (8,836 )   21,766  

Add back the following items:

                   

Amortization of intangible assets

    25,734     32,353     39,540  

Contingent compensation expense

            1,794  

Other debt related costs

    232     34,046     2,021  

Stock compensation expense

    11,305     10,446     6,418  
               

Adjusted Net Income before income taxes

    49,962     68,009     71,539  

Income tax provision at 20%

    (9,992 )   (13,602 )   (14,308 )
               

Adjusted Net Income

  $ 39,970   $ 54,407   $ 57,231  
               

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Business Overview

        We are an international data communications company which provides network managed connectivity, data communications and value added services to many of the world's leading retailers, banks and payment processors. We are also a leading provider of secure data network services to the global financial services industry. We operate the largest unaffiliated Signaling System No. 7 network in the United States capable of providing services nationwide, and we utilize this network to provide call signaling and database access services to the domestic telecommunications industry. We also provide roaming and clearing services to both domestic and international mobile phone operators. Our data communications services enable secure and reliable transmission of time-sensitive, transaction-related information critical to our customers' operations. Our customers outsource their data communications requirements to us because of our substantial expertise, comprehensive customer support and cost-effective services. We provide services to customers in the United States and increasingly to international customers in over 40 countries, including Canada and Mexico and countries in Europe, Latin America and the Asia-Pacific region. We currently maintain operations and/or employees in 26 countries.

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

        We generate revenues through three business divisions:

    Telecommunication services.  Our telecommunication services division provides innovative communications infrastructure services to fixed, mobile, broadband and VoIP operators around the world. We collaborate with customers, sharing our expertise, resources and infrastructure to leverage rapidly evolving technologies. Our suite of services includes a reliable, nationwide SS7 network, intelligent database and registry services, identity and verification services, and hosted roaming and clearing solutions that simplify our customers' operations, expand their reach and provide a foundation that helps them increase their profitability.

    Payments.  We deliver a broad portfolio of secure and resilient transaction delivery services as well as innovative value added solutions to many of the world's top banks, retailers, ISOs, transaction processors and ATM deployers. Our PCI DSS certified global backbone network and range of payment gateways securely deliver billions of card present and card not present transactions each year from the Point-of-Sale (POS) to their destination. Protocol/message conversion, ATM and POS processing, payment encryption and file settlement form part of the comprehensive payment solutions that we provide around the world.

    Financial services.  As one of the industry's leading electronic connectivity solutions, our Secure Trading Extranet brings together an extensive global financial community of interest and delivers mission-critical low latency connectivity solutions to some of the largest and most prominent financial organizations in the world. Our private Secure Trading Extranet provides low latency to support Direct Market Access, algorithmic trading and market data distribution. Organizations utilizing our network can benefit from a range of value added services, including co-location and hosting services, interoffice WAN solutions and connectivity to our large community of interest.

        In connection with a reorganization of our divisional management team structure, we began to report revenues in three business divisions beginning with the three month period ending March 31,

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2010. The following table provides the revenue breakout in both the historical business divisions and the new divisional structure (in thousands):

 
  Year ended December 31,  
 
  2008   2009  

Historical business divisions

             

Telecommunication services division

  $ 67,131   $ 212,744  

Point of sale division

    74,450     76,057  

Financial services division

    45,874     47,749  

International services division(1)

    156,536     138,267  
           

  $ 343,991   $ 474,817  
           

Revised business divisions

             

Telecommunication services division

  $ 67,131   $ 212,744  

Payments division

    213,237     196,808  

Financial services division

    63,623     65,265  
           

  $ 343,991   $ 474,817  
           

(1)
International services division

   

Payments revenue

  $ 138,787   $ 120,779  
   

Financial services revenue

    17,749     17,488  
           

  $ 156,536   $ 138,267  
           

        Our most significant expense is cost of network services, which is comprised primarily of the following: telecommunications charges, including data transmission and database access, leased digital capacity charges, circuit installation charges and activation charges; salaries and other costs related to supporting our data platforms and systems; and compensation paid to providers of calling name and line information database records. The cost of data transmission is based on a contract, or in the United States potentially a tariff rate per minute of usage in addition to a prescribed rate per transaction for some vendors. The costs of database access, circuits, installation charges and activation charges are based on fixed fee contracts with local exchange carriers and interexchange carriers. The cost of accessing database records from external providers is based on a per query fee for the use of that data. The compensation charges paid to providers of calling name and line information database records are based on a percentage of query revenue generated from our customers accessing those records. Depreciation expense on our network equipment and amortization of developed technology is excluded from our cost of network services and is included in depreciation and amortization of property and equipment and amortization of intangible assets in our consolidated statements of operations.

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

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

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Acquisition of Cequint, Inc.

        On October 1, 2010, we completed the acquisition of Cequint, Inc. (Cequint) in accordance with the terms and conditions of the Agreement and Plan of Merger dated September 8, 2010. The purchase price, subject to working capital adjustments, included an initial payment of $49.8 million, consisting of $46.7 million in cash and $3.1 million (178,823 shares) in TNS common stock issued to certain Cequint shareholders, and may be adjusted in the future for a potential additional $52.5 million in cash based upon the achievement of four specified profit milestones not to extend past May 31, 2014, for a potential total purchase price of $102.3 million. As part of the $49.8 million purchase price, Cequint paid off approximately $6.8 million in debt and we assumed approximately $0.4 million in cash. We funded the transaction through a new $50.0 million term loan facility using a portion of the accordion feature as part of our November 2009 Credit Facility (see Note 2). Cequint provides carrier—grade caller identification products and enhanced services to top U.S.-based mobile operators. We will integrate Cequint into our telecommunication services division. Please refer to Note 3 to the consolidated financial statements included elsewhere in this report for additional detail.

Acquisition of the Communications Services Group (CSG)

        On March 2, 2009, we entered into an asset purchase agreement with VeriSign, Inc. pursuant to which we 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 conditions of the asset purchase agreement. The initial purchase price was approximately $226.2 million in cash and was subject to a post-closing working capital adjustment. During the third quarter of 2009 and fourth quarter of 2009, working capital and other adjustments were negotiated resulting in a $4.5 million increase in the purchase price to $230.7 million. We funded the transaction through a new $230.0 million term loan facility as part of the May 2009 Credit Facility (see further discussion below). CSG provides call signaling services, intelligent database services such as caller identification, toll-free call routing and local number portability to the U.S. telecommunications industry. In addition, CSG provides wireless roaming and clearing services to mobile phone operators. We integrated CSG into our telecommunication services division. Please refer to our amended Current Report on Form 8-K/A filed with the SEC on July 15, 2009 for more detail on the historical and pro-forma results of CSG and Note 3 to the consolidated financial statements included elsewhere in this report.

Changes to Credit Facility

        On May 1, 2009, we entered into a $423.5 million amended and restated senior secured credit facility (May 2009 Credit Facility) to finance the acquisition of the CSG assets from VeriSign, Inc. and to refinance the 2007 Credit Facility. The May 2009 Credit Facility consisted of a fully funded term loan facility with an outstanding principal amount equal to $178.5 million, a new fully funded term loan facility with an outstanding principal amount equal to $230.0 million, and a senior secured revolving credit facility in an aggregate principal amount of $15.0 million. Interest on the outstanding balances under the term loan facilities was payable, at our option, at a rate equal to the higher of the prime rate announced by Suntrust Bank, the federal funds rate plus 50 basis points, or the one-month London Interbank Offered Rate ("LIBOR") plus 100 basis points (the "Base Rate"), plus in each case a margin of 5.0%, or at LIBOR plus a margin of 6.0%. Interest on the outstanding balances under the senior secured revolving credit facility were payable, at our option, at the Base Rate plus a margin of 5.0%, or at LIBOR plus a margin of 6.0%. Additionally, in no event would the LIBOR rate be less than 3.5%. In connection with the closing of the May 2009 Credit Facility, we wrote off approximately $1.7 million in unamortized deferred financing costs related to the 2007 Credit Facility which has been included in interest expense in the accompany consolidated statement of operations for the year ended December 31, 2009. On closing the May 2009 Credit Facility, we incurred approximately $5.4 million in financing costs, which were deferred and were being amortized using the effective interest method over

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the life of the May 2009 Credit Facility. A debt discount of $23 million was created by recording the new debt at fair value and was being amortized to interest expense over the life of the May 2009 Credit Facility.

        On November 19, 2009 we entered into a secured credit facility (November 2009 Credit Facility) to refinance our May 2009 Credit Facility principally to take advantage of a more favorable interest rate environment. The November 2009 Credit Facility consisted of a fully funded $325 million term loan facility and a senior secured revolving credit facility in an aggregate principal amount of $75 million, of which $49.4 million was funded at closing. Interest on outstanding balances under the November 2009 Credit Facility is payable, at our option, at the Base Rate plus a margin of 3%, or at LIBOR plus a margin of 4%. Additionally, in no event will the LIBOR rate be less than 2.0%. The November 2009 Credit Facility also provides for optional incremental term loan(s) and revolving loan(s) to increase the term and revolving facilities in an aggregate principal amount not to exceed $100 million. In connection with the closing of the November 2009 Credit Facility, we wrote-off $21.9 million in unamortized deferred financing costs and debt discount related to the May 2009 Credit Facility and incurred a $3.3 million term loan call premium charge. These items have been included in interest expense in the accompanying consolidated statement of operations for the year ended December 31, 2009. On closing of the November 2009 Credit Facility, we incurred approximately $2.9 million in financing costs. These financing costs have been deferred and are being amortized using the effective interest method over the life of the November 2009 Credit Facility.

        On October 1, 2010 we amended our November 2009 Credit Facility to allow for the Cequint acquisition and to amend certain covenants, including restrictions on fundamental changes, incurrence of indebtedness, restricted payments (including the share repurchase plan described below) and financial covenants (and related definitions). In addition, we increased the amount of the term loan and revolving credit facilities by $50 million and $25 million, respectively, to fund the Cequint acquisition and for general working capital purposes. In connection with the amendment we incurred approximately $1.9 million in financing costs. These financing costs have been deferred and are being amortized using the effective interest method over the life of the November 2009 Credit Facility. Please refer to Note 5 to the consolidated financial statements, included elsewhere in this report, for additional detail.

Share Repurchase Plan

        On September 1, 2010 our Board of Directors approved a share repurchase plan authorizing the repurchase of a maximum of $50.0 million of our common stock over the period expiring March 31, 2012. We commenced repurchasing shares on October 1, 2010 and as of December 31, 2010, had repurchased 1,050,247 shares for a total of $19.1 million.

Results of Operations

        We acquired the assets of the CSG business on May 1, 2009, and have included its results since that date in our statement of operations for the year ended December 31, 2009. We completed the acquisition of Cequint on October 1, 2010, and have included its results since that date in our statement of operations for the year ended December 31, 2010. Therefore, our results for the full years

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2008, 2009 and 2010 are not comparable. The following tables set forth, for the periods indicated, the selected statements of operations data (in thousands):

 
  Year ended December 31,  
 
  2008   2009   2010  

Statements of Operations Data:

                   

Revenues

  $ 343,991   $ 474,817   $ 527,135  

Operating expenses:

                   

Cost of network services, exclusive of the items shown separately below

    162,423     224,497     261,060  

Engineering and development

    29,149     36,268     38,382  

Selling, general and administrative

    78,104     100,588     97,003  

Contingent consideration expense

            1,794  

Depreciation and amortization of property and equipment

    25,286     32,247     47,527  

Amortization of intangible assets

    25,734     32,353     39,540  
               

Total operating expenses

    320,696     425,953     485,336  
               

Income from operations

    23,295     48,864     41,799  

Interest expense

    (10,868 )   (58,553 )   (24,572 )

Interest income

    707     497     387  

Other (expense) income, net

    (241 )   471     4,440  
               

Income (loss) before income taxes and equity in net loss of unconsolidated affiliates

    12,893     (8,721 )   22,054  

Income tax (provision) benefit

    (9,213 )   6,777     (13,222 )

Equity in net (loss) of unconsolidated affiliates

    (202 )   (115 )   (288 )
               

Net income (loss)

  $ 3,478   $ (2,059 ) $ 8,544  
               

Year ended December 31, 2010 compared to the year ended December 31, 2009

        Revenues.    Total revenues increased $52.3 million, or 11.0%, to $527.1 million for the year ended December 31, 2010, from $474.8 million for the year ended December 31, 2009. The positive effect of foreign exchange translation on a year-over-year basis was $1.2 million. Excluding the positive effect of foreign exchange rates, total revenues increased $51.1 million, or 10.8%, to $525.9 million for the year ended December 31, 2010.

        We enter into arrangements with our customers in the currency of the markets we operate in. As a result, our reported results are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominantly the British Pound, the Euro and the Australian dollar. The following table shows the currency composition of our revenues for the year ended December 31, 2010 and 2009 and the weighted average exchange rates used to translate our local currency results to the U.S. dollar:

 
  2010   2009  
 
  % of Revenue   Weighted Average
Exchange Rates
  % of Revenue   Weighted Average
Exchange Rates
 

British Pound

    12 %   1.55     11 %   1.57  

Euro

    9 %   1.32     9 %   1.39  

Australian Dollar

    5 %   0.92     5 %   0.79  

        A $0.01 change in exchange rates for each of the major foreign currencies we operate in would have the following annual impact on revenue: British Pound, $0.4 million, Euro, $0.4 million and Australian Dollar $0.3 million.

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        We generate revenues through three business divisions: the telecommunication services division (TSD), the payments division, and the financial services division (FSD).

        Telecommunication services division.    Revenues from the telecommunication services division increased $48.0 million, or 22.5%, to $260.7 million for the year ended December 31, 2010, from $212.7 million for the year ended December 31, 2009. This was due to the following increases (decreases):

    Identity and verification services

    Revenue from identity and verification services increased $19.2 million due to: $24.2 million related to the incremental full-year combined CSG and TSD operations and; $2.3 million due to the acquisition of Cequint. This increase was partially offset by the following decreases: ($3.9) million due to volume declines from a customer following the acquisition of CSG based on the expectation that we will compete with the customer; ($1.3) million related to the loss of a wireless customer who decided to consolidate their calling name access and storage services under an alternate provider; ($1.2) million due a reduction in volumes in our payphone fraud and validation service; and ($0.9) million due to the loss by one of our wireline customers of a portion of its wholesale business.

    Network solutions

    Revenue from network solutions increased $19.8 million primarily due to the incremental full-year combined CSG and TSD operations.

    Registry services

    Revenue from registry services increased $5.0 million primarily due to $9.5 million related to the incremental full-year combined CSG and TSD operations which was partially offset by a decrease of ($4.5) million in our legacy service order administration business due to a competitor offering those services at heavily discounted prices.

    Roaming and clearing services

    Revenue from roaming and clearing services increased $4.0 million primarily due to the inclusion of the incremental full-year combined CSG and TSD operations.

        Future revenue growth in the telecommunication services division depends on a number of factors including the number of database access queries we transport, the number of call signaling routes our customers purchase, and the success of our new product offerings, which potentially may be offset by customers seeking pricing discounts due to industry consolidation or other reasons, as well as the successful integration of the businesses acquired through our purchase of CSG and Cequint (see note 3). In addition, we have recently seen an increase in the sales lead times for certain of our telecommunication services division products which has impacted our ability to grow our revenue base. We attribute these delays primarily to what we believe to be resource constraints at our potential customers as a result of the overall weakness of the global economy.

        Payments division.    Revenues from the payments division increased $3.4 million, or 1.7%, to $200.2 million for the year ended December 31, 2010, from $196.8 million for the year ended December 31, 2009. The positive effect of foreign exchange translation on a year-over-year basis was $0.8 million. Excluding the impact of foreign exchange rates, payments revenue increased $2.6 million,

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or 1.3%, to $199.4 million for the year ended December 31, 2010. This was due to the following increases (decreases):

    Network services

    Europe: Revenue increased $8.3 million due to market share gains and increased demand for our IP network services, primarily in the UK, France, Spain, Italy and Romania.

    Asia Pacific: Revenue decreased ($1.2) million due to a reduction of ($3.0) million resulting from the previously disclosed loss by our Australian telecommunications partner of a significant portion of their business. This was partially offset by an increase of $1.8 million due to increased demand for our IP network services, primarily in Australia.

    North America: Revenue decreased ($3.5) million due to ($3.7) million in declines in our dial-up services primarily related to lower average revenue per transaction as a result of pricing concessions on the renewal of certain customer contacts and mix-shift in our transaction volume, and to a lesser extent from volume declines. This was partially offset by an increase of $0.2 million due to increased demand for our IP network services. We have recently seen an increase in the competitive environment for our dial-up services in the United States and as a result in 2011 it is likely our revenue per transaction will decrease and depending upon the number of dial-up transactions we transport our dial-up revenues may continue to decrease.

    Payment gateway services

    Europe: Revenue increased $1.4 million due to market share gains and increased demand for our cardholder-present gateway services.

    Asia Pacific: Revenue increased $2.1 million due to increased demand for our cardholder-not-present gateway services.

    North America: Revenue increased $0.1 million due to a new customer win following the launch of our North American card holder not present platform in the third quarter of 2010.

    ATM processing and software services

    Europe: Revenue decreased ($2.0) million due to ($0.5) million related to our decision to discontinue our terminal logistics business in the UK and ($1.5) million due to the previously disclosed loss of an ATM processing customer.

    North America: Revenue decreased ($2.6) million due to a decrease of ($3.5) million from our ATM software product which we ceased selling in the fourth quarter of 2009. In the second quarter of 2010 one of our customers exercised its right under its contract to in-source its processing services which resulted in the sale of this customer's dedicated processing platform for $1.4 million. The recurring revenue associated with this customer was $0.7 million in 2010 and $1.3 million in 2009.

      Future revenue growth in the payments division depends on a number of factors including the success of our IP-related network services and payment gateway applications, the success of our payments products in countries we have recently entered, the total number of dial-up transactions we transport and global economic conditions. Smaller merchants, which represent a large portion of the user base for our dial-up services in the U.S., in our opinion have been more adversely impacted by recent global economic conditions than the larger merchants and may take longer to recover if and when the economy improves. We have continued to see a reduction in the growth rates of our dial-up transaction volumes in many of the markets in which we operate, which we primarily attribute to the overall weakness of the global economy.

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        Financial services division.    Revenues from the financial services division increased $1.0 million, or 1.5%, to $66.2 million for the year ended December 31, 2010, from $65.2 million for the year ended December 31, 2009. The positive effect of foreign exchange translation on a year-over-year basis was $0.4 million. Excluding the impact of foreign exchange rates, financial services revenue increased $0.6 million, to $65.8 million as of December 31, 2010 due to the following increases (decreases):

    Europe: Revenue increased $1.4 million due to the continued expansion of the number of customer endpoints primarily from market share gains and to a lesser extent from growth in bandwidth based services;

    Asia Pacific: Revenue increased $1.3 million due primarily to the continued expansion of the number of customer endpoints primarily due to the growth in electronic equity trading in the region;

    North America: Revenue decreased ($2.0) million due to a reduction of ($6.7) million related to the continued rationalization of market data access services which was partially offset by an increase of $4.6 million due to growth in new endpoints and sales of bandwidth based services primarily to the foreign exchange community.

        Future revenue growth in the financial services division depends on a number of factors including the number of connections to and through our network as well as the success of our new product offerings. We have continued to see a decline in demand for legacy low latency exchange data connectivity for the major global exchanges in the U.S. and no longer generate significant revenue from these services in North America.

        Cost of network services.    Cost of network services increased $36.6 million, or 16.3%, to $261.1 million for the year ended December 31, 2010, from $224.5 million for the year ended December 31, 2009. The effect of foreign exchange translation on cost of network services was not significant.

        The increase in cost of network services was primarily due to the following increases: $34.6 million related to the incremental full-year combined CSG and TSD operations; $3.0 million due to higher payroll and related costs to support our IP registry, roaming and clearing and payment gateway platforms; $1.5 million due to higher dial access rates in North America; $1.6 million to support the growth in our payments business in Europe; $1.1 million in regulatory charges which are passed through to our customers; $0.8 million to support the growth in our FSD business in Europe and Asia Pacific; and $0.4 million to support our ATM processing business in Canada. This was partially offset by the following decreases: ($5.0) million in cost reductions achieved through the integration of the legacy CSG operations; ($1.0) million in lower variable incentive cash compensation; and ($0.4) million due to reduced stock compensation due to the full vesting of stock granted in prior periods and a reduction in the number of grants issued in 2010.

        Gross profit represented 50.5% of total revenues for the year ended December 31, 2010, compared to 52.7% for the year ended December 31, 2009. On a constant dollar basis, gross margins for the year ended December 31, 2010 decreased 230 basis points to 50.4% of total revenues. Included in revenue and margins for the year ended December 31, 2009, were $3.8 million and $3.7 million, respectively, related to our ATM Software product which we ceased selling in the fourth quarter of 2009. Excluding these revenues and gross margin, gross profit would have decreased 190 basis points from 52.3% for the year ended December 31, 2009. This decrease was primarily due to the following items: 170 basis points related to incremental investments in our gateway, roaming and clearing and IP registry services; 80 basis points due to the decline in margins in our payments division in North America; and 95 basis points due to anticipated price reductions on the renewal of certain legacy CSG customer contracts. These decreases were partially offset by the following increases: 100 basis points due to cost savings achieved through the integration of legacy CSG operations and 55 basis points due to growth in our payments division internationally.

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        Future cost of network services depends on a number of factors including total transaction and query volumes, the relative growth and contribution to total transaction volume of each of our customers, the success of our new service offerings, the timing and extent of our network expansion and the timing and extent of any network cost increases or reductions. Due to an increase in the fourth quarter of 2010 in the rates charged by the providers of toll-free access services we use to transport domestic dial-up POS transactions, we anticipate that the cost of network services associated with the payments division will increase between $2 million and $3 million in 2011. The actual amount of this increase will depend upon a number of factors, including the number and average length of domestic toll-free POS transactions we transport in 2011 and our ability to find alternate providers of toll-free access services at lower costs.

        Engineering and development expense.    Engineering and development expense increased $2.1 million, or 5.8%, to $38.4 million for the year ended December 31, 2010, from $36.3 million for the year ended December 31, 2009. On a constant dollar basis, engineering and development expenses would have increased $1.4 million, or 4.0%, to $37.7 million and represented 7.2% and 7.6% of revenues for the years ended December 31, 2010 and 2009, respectively.

        The increase in engineering and development costs was primarily due to the following: $7.0 million related to the incremental full-year CSG and TSD operations; $2.0 million in costs resulting from our acquisition of Cequint; and $0.3 million to support our ATM processing business in Canada. This was partially offset by the following decreases: an increase in capitalized software development costs, which are offset against engineering and development costs, of $3.3 million due to incremental investment of $2.3 million in our roaming and clearing, IP registry and payment gateway platforms and $1.0 million in our mobile caller identification products developed through Cequint; ($1.9) million in variable incentive cash compensation due to performance thresholds not being acheived; ($1.2) million from cost reduction achieved through the integration of the legacy CSG operations; ($1.1) million from our ATM software product which we ceased selling in the fourth quarter of 2009; and ($0.4) million in stock compensation expense due to the full vesting of stock granted in prior periods and a reduction in the number of grants issued in 2010.

        Selling, general and administrative expense.    Selling, general and administrative expenses decreased $3.6 million, or 3.6%, to $97.0 million for the year ended December 31, 2010, from $100.6 million for the year ended December 31, 2009. On a constant dollar basis, selling, general and administrative expenses would have decreased $5.7 million, or 5.7%, to $94.9 million and would have represented 18.0% of revenues for the year ended December 31, 2010, compared to 21.2% of revenues for the year ended December 31, 2009. Included in selling, general and administrative expense for the year ended December 31, 2010 and 2009 were stock compensation expense of $4.9 million and $8.2 million, respectively. The decrease in stock compensation expense was due to the full vesting of stock awards granted in prior periods and a reduction in the number of performance based awards achieved in 2010. Included in selling, general and administrative expense for the years ended December 31, 2010 and 2009 were acquisition related costs of $0.7 million and $2.2 million related to the acquisition of Cequint and CSG, respectively. These costs were expensed in accordance with the provisions of FASB ASC 805, Business Combinations.

        Excluding the abovementioned decreases in stock compensation expense, expensed acquisition costs and the effect of foreign exchange, selling, general and administrative expense decreased ($0.9) million primarily due to the following: ($3.2) million in variable cash incentive compensation; ($3.0) million in cost reductions achieved through the integration of the legacy CSG operations; ($0.9) million in severance; and ($0.2) million from our ATM software business which we ceased selling in the fourth quarter of 2009, as previously disclosed. This was partially offset by the following: $4.8 million related to the incremental full-year CSG and TSD operations; $1.1 million related to incremental overhead from our acquisition of Cequint; and $0.5 million to support our ATM processing business in Canada.

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        Contingent consideration expense.    Contingent consideration expense of $1.8 million for the year ended December 31, 2010, represents the change in the fair value of the liability recorded for the additional consideration which may be payable in relation to the acquisition of Cequint, Inc. See Note 3 for further details regarding the Cequint contingent consideration. This liability will be re-measured each reporting period and changes in the fair value will be recorded through this line item in our consolidated statement of operations.

        Depreciation and amortization of property and equipment.    Depreciation and amortization of property and equipment increased $15.3 million, or 47.3%, to $47.5 million for the year ended December 31, 2010, from $32.2 million for the year ended December 31, 2009. On a constant dollar basis, depreciation and amortization of property and equipment would have increased $15.0 million or 46.7% to $47.3 million and represented 9.0% and 6.8% of revenue for the year ended December 31, 2010 and 2009, respectively.

        This increase in depreciation and amortization of property and equipment was due to the following: $5.5 million due to an accelerated depreciation charge following a decision made during the second quarter to phase out surplus network assets and office equipment that will no longer be required following the integration of the legacy CSG and TNS operations; $5.5 million due to capital expenditures primarily to support our revenue growth and to a lesser extent the integration of back office systems; $3.9 million due to a full year of depreciation on the acquired CSG assets and $0.1 million due to our acquisition of Cequint.

        Amortization of intangible assets.    Amortization of intangible assets increased $7.1 million, or 21.9%, to $39.5 million for the year ended December 31, 2010, from $32.4 million for the year ended December 31, 2009. On a constant dollar basis, amortization of intangible assets would have increased $7.0 million, or 21.6% to $39.4 million.

        The increase in amortization of intangible assets was due to the following: $5.8 million related to a full year of amortization on the acquired CSG assets; $2.5 million due the impairment of certain customer relationship intangibles and $1.8 million related to the acquisition of Cequint. This was partially offset by a reduction of ($3.1) million as certain intangible assets reached the end of their economic useful lives during 2010.

        Interest expense.    Interest expense decreased $34.0 million to $24.6 million for the year ended December 31, 2010, from $58.6 million for the year ended December 31, 2009. Included in interest expense for the year ended December 31, 2009 were charges of $1.7 million related to the write-off of deferred financing fees following the refinancing of the 2007 Credit Facility in May 2009 and the write-off of $21.9 million in debt discount and deferred financing fees related to the May 2009 Credit Facility in November 2009. Also included was a $3.3 million term loan call premium related to the refinancing of the May 2009 credit facility in November 2009. Amortization of deferred financing fees and discount for the years ended December 31, 2010 and December 31, 2009 was $2.0 million and $7.1 million, respectively. Excluding these charges, cash interest expense decreased $6.1 million due to a reduction in interest rates which was partially offset by an increase of $4.1 million due to higher borrowing levels.

        Other income.    For the year ended December 31, 2010 other income was $4.4 million compared to $0.5 million for the year ended December 31, 2009. Included in other income for the year ended December 31, 2010 are foreign currency revaluation gains of approximately $4.1 million due to fluctuations in the value of the U.S. dollar, principally against the Euro, versus a gain on foreign currency revaluation of $0.3 million for the year ended December 31, 2009.

        Income tax provision.    For the year ended December 31, 2010, our income tax provision was approximately $13.2 million compared to an income tax benefit of $6.8 million for the year ended December 31, 2009. The increase in our income tax provision is primarily related to higher income

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from operations, an increase in valuation allowance on net domestic deferred tax assets, and increases in FASB ASC 740 reserves due to certain income tax exposures. Our effective tax rate was 60.7% and 76.7% for the year ended December 31, 2010 and 2009, respectively. Our effective tax rate differs from the U.S. Federal statutory rate of 34% primarily due to an increase in valuation allowance on net domestic deferred tax assets, increases in FASB ASC 740 reserves due to certain income tax exposures, and profits of our international subsidiaries being taxed at rates different than the U.S. Federal statutory rate.

Year ended December 31, 2009 compared to the year ended December 31, 2008

        Revenues.    Total revenues increased $131.0 million, or 38.0%, to $474.8 million for the year ended December 31, 2009, from $344.0 million for the year ended December 31, 2008. We reported revenues from four business divisions. The adverse effect of foreign exchange translation on a year-over-year basis was $15.5 million. Excluding the adverse effect of foreign exchange rates, total revenues increased $146.3 million, or 42.5%, to $490.3 million for the year ended December 31, 2009.

        International services division.    Revenues from the international services division decreased $18.2 million, or 11.7%, to $138.3 million for the year ended December 31, 2009, from $156.5 million for the year ended December 31, 2008. The adverse effect of foreign exchange translation on a year-over-year basis was $15.3 million. Excluding the adverse impact of foreign exchange rates, international services revenue decreased $2.9 million, or 1.9% to $153.6 million for the year ended December 31, 2009. The decrease was due to a $3.7 million decrease in POS revenue in the UK as described below, a decrease of $2.6 million from a reduction in development revenue for our card-not-present service, a decrease of $1.0 million due to lower transactions volumes in Spain and France and a decrease of $0.8 million due to lower transaction volumes in Japan. This was partially offset by an increase of $2.8 million in revenue in Italy as result of increased market share, an increase of $1.1 million due to higher transaction volumes in Australia and an increase in international financial services revenue of $1.5 million due to additional customer connections.

        Revenues from our UK subsidiary decreased $13.6 million, or 18.9%, to $58.4 million for the year ended December 31, 2009, from $72.0 million for the year ended December 31, 2008. On a constant dollar basis, revenue from our UK subsidiaries for the year ended December 31, 2009 would have decreased $4.1 million, or 5.7%, to $67.9 million. UK POS revenue decreased $4.0 million due to lower transaction volumes and $1.4 million due to the loss of two processing customers. This was partially offset by an increase of $0.5 million resulting from market share gains and $0.8 million due to increased sales of our payment gateway products. In addition, UK financial services revenue increased $0.3 million as a result of increased customer connections.

        In our international services division we enter into arrangements with our customers in the currency of the markets we operate in. As a result, our reported results are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominantly the British Pound, the Euro and the Australian dollar. The following table shows the currency composition of our revenues in the international services division for the year ended December 31, 2009 and 2008 and weighted average exchange rates used to translate our local currency results to the U.S. dollar:

 
  2009   2008  
 
  % of ISD
Revenue
  Weighted Average
Exchange Rates
  % of ISD
Revenue
  Weighted Average
Exchange Rates
 

British Pound

    42 %   1.57     46 %   1.85  

Euro

    34 %   1.39     31 %   1.47  

Australian Dollar

    18 %   0.79     18 %   0.84  

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        POS division.    Revenues from the POS division increased $1.6 million, or 2.2%, to $76.1 million for the year ended December 31, 2009, from $74.5 million for the year ended December 31, 2008. This increase is due to a $3.9 million increase in revenue from our managed broadband products, a $3.4 million increase from sales of our ATM processing products, primarily in Canada, and a $1.5 million increase in development revenue associated with the our ATM switching product. This was partially offset by a $7.2 million decrease in revenue from our dial-up POS offering which was due to a 7.1% decline in transaction volumes, which we attribute to softness in the economy, and to a lesser extent from a decrease in revenue per transaction for our dial-up POS offering mainly resulting from the renewal of certain customer contracts. During the fourth quarter of 2009 we made the determination that we would discontinue the sale of our ATM switching product as we do not believe this product fits within our overall payments service offerings as we move forward. The total revenue recognized related to this product was $3.8 million and $2.1 million for the years ended December 31, 2009 and 2008, respectively.

        Telecommunication services division.    Revenues from the telecommunication services division increased $145.6 million, or 217.0%, to $212.7 million for the year ended December 31, 2009, from $67.1 million for the year ended December 31, 2008. Included in revenues were pass-through charges of $22.8 million and $6.1 million for the years ended December 31, 2009 and 2008, respectively. Excluding the increase in pass through charges, revenues increased $128.8 million to $189.9 million for the year ended December 31, 2009, from $61.1 million for the year ended December 31, 2008. The incremental revenue contribution from the CSG acquisition which took place on May 1, 2009 was $135.8 million, excluding $6.5 million from our customers which switched services to CSG in 2008 and which became our customers again through the acquisition. Revenue from cable customers increased $0.7 million and revenue from other customers increased $0.9 million due to increased demand for our network and database services. These increases were partially offset by a decrease in revenue of $7.0 million due to volume declines from a customer following the acquisition of CSG based on the expectation that we will compete with the customer and a decrease of $1.6 million due to a reduction in volumes in our payphone fraud and validation service.

        Financial services division.    Revenues from the financial services division increased $1.8 million, or 4.1%, to $47.7 million for the year ended December 31, 2009, from $45.9 million for the year ended December 31, 2008. The increase in revenues was primarily due to an incremental $2.6 million from new customer endpoints which was partially offset by a decrease of $0.4 million due to a reduction in the number of connections between endpoints which we believe is a result of the consolidation in the financial services industry and $0.3 million from lower market data services revenue.

        Cost of network services.    Cost of network services increased $62.1million, or 38.2%, to $224.5 million for the year ended December 31, 2009, from $162.4 million for the year ended December 31, 2008. On a constant dollar basis, cost of network services would have increased $68.5 million, or 42.2%, to $230.9 million. Cost of network services were 47.3% of revenues for the year ended December 31, 2009, compared to 47.2% of revenues for the year ended December 31, 2008. The cost of network services increased $74.5 million due to the operation of the assets acquired from CSG, $4.7 million due to increased headcount and facilities costs required to support our growth, $4.1 million due to increased international broadband connections, $3.4 million due to higher bandwidth connections and increased exchange subscription charges to support our financial services revenue both internationally and domestically, and $1.6 million to support the growth in our ATM processing business, primarily in Canada. This was partially offset by a decrease of $13.7 million in our legacy telecommunications services business primarily due to reduced volumes and a decrease of $6.3 million primarily due to lower transaction volumes and to a lesser extent negotiated price reductions from our vendors in relation to our POS business.

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        Gross profit represented 52.7% of total revenues for the year ended December 31, 2009, compared to 52.8% for the year ended December 31, 2008. On a constant dollar basis, gross margins for the year ended December 31, 2009 remained flat at 52.9% compared to the year ended December 31, 2008.

        Engineering and development expense.    Engineering and development expense increased $7.2 million, or 24.7%, to $36.3 million for the year ended December 31, 2009, from $29.1 million for the year ended December 31, 2008. On a constant dollar basis, engineering and development expense would have increased $8.2 million, or 28.1% to $37.3 million. Engineering and development expense represented 7.6% of revenues for the year ended December 31, 2009 and 8.5% for the year ended December 31, 2008. Capitalized software development costs, which are offset against engineering and development costs, increased $3.2 million to $8.9 million from $5.7 million for the year ended December 31, 2009. The increase in capitalized software development costs is primarily due to investment in our roaming and clearing and IP registry platforms and to a lesser extent from development of our payment gateway platforms. Included in engineering and development expense for the year ended December 31, 2009 and 2008 is stock compensation expense of $1.3 million and $1.6 million, respectively. Excluding stock compensation, the increase in capitalized software and the effects of foreign exchange, engineering and development expense would have increased $11.6 million to $44.9 million for the year ended December 31, 2009 from $33.3 million for the year ended December 31, 2008. The increase relates primarily to additional headcount and other costs required to support our acquisition of CSG.

        Selling, general and administrative expense.    Selling, general and administrative expenses increased $22.5 million, or 28.8%, to $100.6 million for the year ended December 31, 2009, from $78.1 million for the year ended December 31, 2008. On a constant dollar basis, selling, general and administrative expenses would have increased $25.9 million, or 33.1%, to $104.0 million. Selling, general and administrative expenses represented 21.2% of revenues for the year ended December 31, 2009, compared to 22.7% of revenues for the year ended December 31, 2008. Included in selling, general and administrative expenses for the year ended December 31, 2009 and 2008 is $8.2 million and $8.5 million of stock compensation expense, respectively. The decrease in stock compensation expense is due to a reduction in performance related stock compensation as a result of fewer grants. Included in selling, general and administrative expenses for the year ended December 31, 2009 and 2008 is $2.0 million and $1.2 million in severance expenses, respectively. Included in selling, general and administrative expenses for the year ended December 31, 2009 are $2.2 million in professional fees related to our acquisition of CSG that were expensed in accordance with the provisions of FASB ASC 805, Business Combinations. Included in selling, general and administrative expenses for the year ended December 31, 2008 was a $0.9 million benefit associated with the settlement of a state sales tax liability. Excluding these items and the effects of foreign exchange, selling, general and administrative expenses increased $23.1 million for the year ended December 31, 2009. This increase was primarily attributable to additional headcount and other costs necessary to support the acquired CSG operations and to a lesser extent an increase in professional fees related to the CSG integration effort as well as costs incurred to support our Canadian ATM processing business.

        Depreciation and amortization of property and equipment.    Depreciation and amortization of property and equipment increased $6.9 million, or 27.3%, to $32.2 million for the year ended December 31, 2009, from $25.3 million for the year ended December 31, 2008. On a constant dollar basis, depreciation and amortization of property and equipment would have increased $8.2 million, or 32.7%, to $33.5 million. Depreciation and amortization of property and equipment represented 6.8% of revenues for the year ended December 31, 2009, compared to 7.4% of revenues for the year ended December 31, 2008. Included in depreciation expense for the year ended December 31, 2008 is a charge of $1.1 million related to the impairment of certain capitalized software assets, primarily related to our vending platform. Excluding this item and the effects of foreign exchange, depreciation expense increased $9.3 million for the year ended December 31, 2009. The increase in depreciation expense was

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primarily due to an incremental $7.7 million related to the acquired CSG assets and to a lesser extent from increases in capital expenditures made to support our revenue growth.

        Amortization of intangible assets.    Amortization of intangible assets increased $6.7 million, or 26.1%, to $32.4 million for the year ended December 31, 2009, from $25.7 million for the year December 31, 2008 and relates solely to intangible assets resulting from acquisitions. On a constant dollar basis, amortization of intangible assets would have increased $7.4 million, or 28.7% to $33.1 million. The increase primarily relates to additional amortization expense of $11.5 million related to the CSG acquisition. This was partially offset by a decrease of $2.3 million as certain intangible assets reached the end of their economic useful lives and $1.8 million less in accelerated amortization on a portion of our customer relationship intangible assets in connection with the loss of certain customers. Beginning in 2005, we experienced revenue and transaction volume declines with a major customer. The intangible asset value attributable to this customer relationship was approximately $17.9 million as of December 31, 2009. We assessed recoverability of this customer relationship asset based upon undiscounted anticipated future cash flows and concluded no impairment existed as of December 31, 2009.

        Interest expense.    Interest expense increased $47.7 million to $58.6 million for the year ended December 31, 2009, from $10.9 million for the year ended December 31, 2008. Included in interest expense for the year ended December 31, 2009 were charges of $1.7 million related to the write-off of deferred financing fees following the refinancing of the 2007 Credit Facility in May 2009 and the write-off of $21.9 million in debt discount and deferred financing fees related to the May 2009 Credit Facility in November 2009. Also included was a $3.3 million term loan call premium related to the refinancing of the May 2009 credit facility in November 2009. Excluding the write off of deferred financing fees, debt discount and the term loan call premium, amortization of deferred financing fees and debt discount, interest expense increased $6.4 million to $7.1 million from $0.7 million as a result of the refinancing transactions which took place in May and November 2009. Excluding the amortization and charges noted above associated with the refinancing transactions, interest expense would have increased $14.4 million to $24.6 million for the year ended December 31, 2009, from $10.2 million for the year ended December 31, 2008, primarily as a result of the increased level of borrowings used to finance the CSG acquisition and to a lesser extent from an increase in the weighted average interest rate.

        Income tax benefit.    For the year ended December 31, 2009, our income tax benefit was approximately $6.8 million compared to a $9.2 million expense for the year ended December 31, 2008. The decrease in our tax expense is related to lower income in the U.S. partially offset by higher income from our non-U.S. operations. Our effective tax rate for the year ended December 31, 2009 was 76.7% versus the U.S. federal statutory rate of 34.0% due primarily to the recognition of tax benefits relating to research credits in the U.S., nondeductible stock based compensation expense, profits from our international subsidiaries being taxed at rates different than the U.S. federal statutory rate, the effect of adjustments to income tax expense for the six months ending June 30, 2009 resulting from the finalization of tax returns in the United Kingdom, and certain excessive employee remuneration not deductible for tax purposes. Our effective tax rate for the year ended December 31, 2008 was 72.5% versus the U.S. federal statutory rate of 34.0% due primarily to changes in uncertain tax positions and deductions for stock based compensation.

Additional Information

Non-GAAP Measures

        To supplement our consolidated financial statements presented on a GAAP basis, we disclose certain non-GAAP measures, including EBITDA before stock compensation expense, adjusted net income and adjusted net income per share. These non-GAAP measures are not in accordance with, or

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an alternative for, generally accepted accounting principles in the United States. Reconciliations of each of these non-GAAP measures to the corresponding GAAP measure are included elsewhere in this Annual Report.

        EBITDA before stock compensation expense is determined by adding the following items to Net Income, the closest GAAP financial measure: equity in net loss of unconsolidated affiliate, income tax provision, other income (expense), interest expense, depreciation and amortization of property and equipment, amortization of intangibles, contingent consideration expense and stock compensation expense.

        Adjusted net income is determined by adding the following items to Net Income, the closest GAAP financial measure: provision for income taxes, certain non-cash items, including amortization of intangible assets, stock compensation expense, the change in fair value of contingent consideration and the amortization of debt issuance costs, and the result is tax effected at an assumed long-term tax rate of 20%, which excludes the effect of our net operating losses. The assumed long-term tax rate of 20% takes into consideration the following primary factors: the income generated outside of the U.S. which is taxed at substantially lower rates than U.S. statutory rates; the cash benefit of our tax-deductible amortization of intangible assets and tax-deductible goodwill; and the cash benefit of tax-deductible stock compensation expense.

        We believe that the disclosure of EBITDA before stock compensation expense and adjusted net income and related per-share amounts are useful to investors as these non-GAAP measures form the basis of how our management team reviews and considers our operating results. We also rely on adjusted net income as the primary measure of our earnings exclusive of certain non-cash charges. By disclosing these non-GAAP measures, we believe that we create for investors a greater understanding of, and an enhanced level of transparency into, the means by which our management team operates our company. We also believe these measures can assist investors in comparing our performance to that of other companies on a consistent basis exclusive of selected significant non-cash items.

        EBITDA before stock compensation expense, adjusted net income and adjusted net income per share have limitations as analytical tools, and you should not rely upon them or consider them in isolation or as a substitute for GAAP measures, such as net income and other consolidated income or other cash flows statement data prepared in accordance with GAAP. In addition, these non-GAAP measures may not be comparable to other similarly titled measures of other companies. Because of these limitations, EBITDA before stock compensation expense should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Adjusted net income and adjusted net income per share also should not be considered as a replacement for, or a measure that should be used or analyzed in lieu of, net income or net income per share. We attempt to compensate for these limitations by relying primarily upon our GAAP results and using EBITDA before stock compensation expense, adjusted net income and adjusted net income per share as supplemental information only.

        All references to the effect of foreign currency exchange rates on a constant dollar basis were determined by applying the prior year foreign currency rates to the current year results.

Seasonality

        Credit card and debit card transactions account for a major percentage of the transaction volume processed by our customers. The volume of these transactions on our networks generally is greater in the third and fourth quarter vacation and holiday seasons than during the rest of the year. Consequently, revenues and earnings from credit card and debit card transactions in the first and second quarter generally are lower than revenues and earnings from credit card and debit card transactions in the third and fourth quarters of the immediately preceding year. We expect that our

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operating results in the foreseeable future will be significantly affected by seasonal trends in the credit card and debit card transaction market.

Liquidity and Capital Resources

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

        Our operations provided us cash of $119.7 million for the year ended December 31, 2010, which was attributable to net income of $8.5 million, depreciation, amortization and other non-cash charges of $106.5 million and an decrease in working capital of $4.6 million. Our operations provided us cash of $105.5 million for the year ended December 31, 2009, which was attributable to a net loss of $2.1 million, adjusted by depreciation, amortization and other non-cash charges of $96.6 million and a decrease in working capital of $10.9 million. Our operations provided us cash of $73.7 million for the year ended December 31, 2008, which was attributable to net income of $3.5 million, adjusted by depreciation, amortization and other non-cash charges of $68.4 million and a decrease in working capital of $1.8 million.

        We used cash of $101.8 million in investing activities for the year ended December 31, 2010, which was comprised primarily of $55.0 million of capital expenditures to support our revenue growth and integration activities and $46.3 million to fund our acquisition of Cequint and $0.5 million related to the finalization of our acquisition of CSG. We used cash of $271.3 million in investing activities for the year ended December 31, 2009 which included $230.7 million to fund our acquisition of CSG and $40.6 million to fund capital expenditures primarily to support our revenue growth. We used cash of $32.0 million in investing activities for the year ended December 31, 2008 in order to fund capital expenditures primarily to support our revenue growth.

        Our financing activities provided us cash of $10.6 million for the year ended December 31, 2010. This consisted of proceeds (net of debt discount and financing fees) from the amended November 2009 Credit Facility of $63.1 million and $1.9 million from the exercise of employee stock options less $31.9 million in scheduled payments and voluntary pre-payments on the November 2009 Credit Facility and $22.6 million which was used to repurchase stock primarily as part of the Company's authorized share repurchase plan as well as to satisfy employee tax withholding requirements on the vesting of restricted stock units. Our financing activities provided us cash of $162.5 million for the year ended December 31, 2009. This consisted of proceeds (net of debt discount, financing fees and term loan call premium) from the May and November 2009 Credit Facilities of $201.6 million and $363.2 million of which $48.5 million was from the Revolver Credit Facility, respectively, less the payment of the 2007 and May 2009 credit facilities of $178.5 million and $230.0 million, respectively. In addition, $1.8 million was used to repurchase stock to satisfy employee tax withholding requirements on the vesting of restricted stock units and we received $8.1 million from the exercise of employee stock options. We used cash of $19.4 million from financing activities for the year ended December 31, 2008, which included voluntary pre-payments of $27.0 million on our 2007 senior secured credit facility, and $2.2 million was used to repurchase stock to satisfy employee tax withholding requirements on the vesting of restricted stock units. In addition we received $9.6 million from the exercise of employee stock options.

        The covenants in our amended November 2009 Credit Facility do not, and are not reasonably likely to, limit our ability to pursue strategic acquisitions as part of our growth strategy to a material extent. To the extent that we are not able to fund a strategic acquisition through cash flow from

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operations or additional amounts that we are able to borrow under our existing 2009 Credit Facility, we would need to undertake additional debt or equity financing.

Commitments

        The following table summarizes our contractual obligations as of December 31, 2010 that require us to make future cash payments (dollars in thousands):

 
   
  Year ending December 31,    
 
 
  Total   2011   2012   2013   2014   2015   Thereafter  

Contractual Cash Obligations by Period:

                                           

Long-term debt under the senior secured credit facility

  $ 407,495   $ 18,750   $ 18,750   $ 18,750   $ 68,120   $ 283,125      

Supplier commitments

    41,459     24,197     10,125     3,297     1,772     1,772     296  

Operating lease obligations

    39,289     12,294     8,244     5,847     3,896     3,142     5,866  
                               

  $ 488,243   $ 55,241   $ 37,119   $ 27,894   $ 73,788   $ 288,039   $ 6,162  
                               

        Due to uncertainty with respect to the timing of future cash flows associated with unrecognized tax benefits at December 31, 2010, the Company is unable to make reasonably reliable estimates of the period of cash settlement. Therefore $2.7 million of liabilities for unrecognized tax benefits have been excluded from the contractual obligations table above. See Note 7 to the Consolidated Financial Statements for further discussion of income tax.

        Not included in the table above are commitments to make interest payments under the terms of our November 2009 Credit Facility due to the variable nature of the interest rates. See note 5 to the consolidated financial statements for further details on interest rates and other terms and conditions of this facility.

        In addition, the table above does not include contingent consideration of up to $52.5 million or performance payments of up to $10 million, which may be payable to certain executives and key personnel in conjunction with the Cequint acquisition based on the achievement of four profit related milestones. These payments are excluded from the table since the amounts are not contractually certain to be paid. See Note 3 to the consolidated financial statements for further discussion.

        We expect that we will be able to fund our remaining obligations and commitments with cash flow from operations. To the extent we are unable to fund these obligations and commitments with cash flow from operations, we intend to fund these obligations and commitments with proceeds from borrowings under our November 2009 Credit Facility or future debt or equity financings.

Critical Accounting Policies

        Our significant accounting policies are described in Note 2 to our consolidated financial statements included elsewhere in this report. We consider the accounting policies related to revenue and related cost recognition, valuation of goodwill, other intangible assets and contingent consideration related to business combinations, stock based compensation and accounting for income taxes to be critical to the understanding of our results of operations. Critical accounting policies include the areas where we have made what we consider to be particularly subjective or complex judgments in making estimates and where these estimates can significantly impact our financial results under different assumptions and conditions. We prepare our financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements

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and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates.

        The following is a discussion on the most significant accounting estimates affecting the financial statements:

Acquisitions

        We account for acquisitions in accordance with FASB ASC 805, Business Combinations (ASC 805). We preliminarily record the fair value of assets acquired and liabilities assumed based on guidance defined in FASB ASC820, Fair Value Measurments and Disclosures and adjust these values once valuations are finalized within 12 months of the close of the acquisition. When the valuations are finalized, any changes to the preliminary valuation of assets acquired and liabilities assumed may result in significant adjustments to the fair value of net identifiable assets acquired and goodwill.

        Pursuant to the guidance in ASC 805, in those circumstances where an acquisition involves a contingent consideration arrangement, we recognize a liability equal to the estimated fair value of the contingent payments we expect to make as of the acquisition date. We re-measure this liability each reporting period and record changes in the fair value through a separate line item within our consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in our expectations as the timing and probability of achievement of milestones on which the contingent consideration is based.

Goodwill, intangible and other long-lived assets

        We account for goodwill and intangible assets in accordance with FASB ASC 350, Intangibles—Goodwill and Other (ASC 350). Under this standard, goodwill and intangible assets deemed to have indefinite lives are not amortized and are subject to annual impairment tests. We have elected to perform the impairment test annually as of October 1 of each year. An interim goodwill impairment test is performed if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If facts and circumstances indicate goodwill may be impaired, we perform a recoverability evaluation based upon a determination of fair value.

        In accordance with FASB ASC 360, Property, Plant and Equipment (ASC 360) and ASC 350, we review our long-lived assets including property and equipment, capitalized software development costs and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of our long-lived assets, we evaluate the probability that future estimated undiscounted net cash flows will be less than the carrying amount of the assets. If we estimate that the assets are impaired, the assets are written down to their fair value. For purposes of measuring and recognizing impairment of long-lived assets, we assess whether separate cash flows can be attributed to the individual asset. We group our long-lived assets where separately identifiable cash flows are available. In the event that long-lived assets, including intangibles are abandoned or otherwise disposed of, we recognize an impairment charge upon disposition. For our customer relationship intangible assets, we evaluate impairment upon the significant loss of revenue from a customer. Beginning in 2005, we experienced revenue and transaction volume declines with a major customer. The intangible asset value attributable to this customer relationship was approximately $16.4 million as of December 31, 2010. We assessed the recoverability of this customer relationship asset based upon undiscounted anticipated future cash flows and concluded no impairment existed as of December 31, 2010.

        The calculation of fair value in accordance with ASC 350 and 360 contains uncertainties due to judgment in estimates and assumptions, including projections of future income and cash flows, the

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identification of appropriate market multiples and the choice of an appropriate discount rate. Our estimates of anticipated future income and cash flows used in determining fair value contain uncertainties due to uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions. Therefore, those estimates could be reduced significantly in the future due to changes in technologies, regulation, available financing, competition or other circumstances. As a result, the carrying amount of our long-lived assets could be reduced through impairment charges in the future. Additionally, changes in estimated future cash flows could result in a shortening of estimated useful lives for long-lived assets including intangibles.

Income taxes

        We account for income taxes pursuant to the provisions of FASB ASC 740, Income Taxes. Under this method, deferred tax assets or liabilities are computed based upon the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expense or benefits are based upon the changes in the asset or liability from period to period. We provide a valuation allowance on net deferred tax assets when it is not more likely than not that such assets will be realized. We must exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, and related valuation allowance, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. We expect to realize the benefit of our deferred tax assets for which no valuation allowance is recorded as we expect to generate sufficient taxable income in future years. During 2010, we increased the valuation allowance on domestic deferred tax assets by $8.6 million since it became more likely than not that those deferred tax assets will not be realized. An additional valuation allowance for deferred tax assets may be required if our future taxable income is not sufficient to realize our deferred tax assets.

        From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on interpretation of tax laws and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. For financial reporting purposes, we only recognize tax benefits taken or expected to be taken on the tax return that we believe are "more likely than not" of being sustained. We record a liability (or a reduction of the associated tax asset, as applicable) for the difference between the benefit recognized and measured pursuant to the accounting guidance for income taxes and the tax position taken or expected to be taken on our tax return. This analysis is performed in accordance with the requirements of ASC 740 and is based on a two-step process. Both steps presume that the tax position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The first step is to evaluate the tax position for recognition by determining if, based on the weight of available evidence, it is more likely than not that the position will be sustained on examination. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement with a taxing authority. It is inherently difficult and subjective to estimate such amounts, as this may require us to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a periodic basis. This evaluation is based on factors including, but not limited to, current year tax positions, expiration of statutes of limitations, litigation, legislative activity, or other changes in facts and circumstances. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in that period. The amounts ultimately paid upon resolution of such uncertain tax positions could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our consolidated results of operations. The tax liabilities for uncertain tax positions are recorded as a separate component in our long-term income taxes payable balance.

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Effects of Inflation

        Our monetary assets, consisting primarily of cash and receivables, and our non-monetary assets, consisting primarily of intangible assets and goodwill, are not affected significantly by inflation. However, the rate of inflation affects our expenses, such as those for employee compensation and costs of network services, which may not be readily recoverable in the price of services offered by us.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

Interest rates

        Our principal exposure to market risk relates to changes in interest rates. As of December 31, 2010 we had $407.5 million outstanding under our November 2009 Credit Facility with interest rates tied to changes in the lender's base rate or the LIBOR rate. Interest on outstanding balances under the November 2009 Credit Facility, is payable, at the Company's option, at the base rate plus a margin of 3%, or at LIBOR plus a margin of 4%. Additionally, in no event will the base rate be less than 3.0% or the LIBOR rate be less than 2.0%. At December 31, 2010 the 1 month LIBOR rate was 0.26%. Based upon the outstanding borrowings on December 31, 2010 and assuming repayment of the Term Loan in accordance with scheduled maturities, each 1.0% increase or decrease in these rates, once the LIBOR rate exceeds the 2.0% minimum, could affect our annual interest expense by $4.1 million.

        As of December 31, 2010, we did not hold derivative financial or commodity instruments and all of our cash and cash equivalents were held in money market or commercial accounts.

Foreign currency risk

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

        We provide services to customers in the United States and increasingly to international customers in over 40 countries including Canada and Mexico and countries in Europe, Latin America and the Asia-Pacific region. We currently maintain operations and/or employees in 28 countries. We provide services in these countries using networks deployed in each country. We manage foreign exchange risk through the structure of our business. In the substantial majority of our transactions, we receive payments denominated in the U.S. dollar, British Pound, Euro or Australian dollar. Therefore, we do not rely on international currency markets to obtain and pay illiquid currencies. The foreign currency exposure that does exist is limited by the fact that the majority of transactions are paid according to our standard payment terms, which are generally short-term in nature. Our policy is not to speculate in foreign currencies, and we promptly buy and sell foreign currencies as necessary to cover our net payables and receivables, denominated in foreign currencies. However, in December 2009 our subsidiary in Ireland entered into a $25.8 million loan agreement with our subsidiary in Bermuda to provide it with the ability of making loans and working capital funding to our subsidiaries. This loan is denominated in U.S. dollars and therefore fluctuations in the euro to the U.S. dollar exchange rate are recorded as revaluation gains or losses in our income statement. As it relates to this specific loan agreement, each $0.01 movement in the euro to U.S. dollar exchange rate could affect our other income (loss) by $0.2 million. For the year ended December 31, 2010, we recorded a gain on foreign currency revaluation of $4.1 million which is included in other income (expense) in the accompanying condensed consolidated financial statement of operations.

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Item 8.    Financial Statements and Supplementary Data

        The following financial information is included on the pages indicated:

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and shareholders of TNS, Inc.:

        We have audited the accompanying consolidated balance sheets of TNS, Inc. as of December 31, 2009 and 2010, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule listed in Item 15B. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TNS, Inc. at December 31, 2009 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), TNS, Inc.'s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP                                

McLean, Virginia
March 16, 2011

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and shareholders of TNS, Inc.:

        We have audited TNS, Inc.'s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). TNS, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management report located in Item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, TNS, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of TNS, Inc. as of December 31, 2009 and 2010, and the related consolidated statements of operations, stockholders' equity, and cash flows of TNS, Inc. for each of the three years in the period ended December 31, 2010 and our report dated March 16, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP                                

McLean, Virginia
March 16, 2011

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TNS, INC.

CONSOLIDATED BALANCE SHEETS

 
  December 31,  
 
  2009   2010  
 
  (in thousands, except per
share and share amounts)

 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 32,480   $ 56,689  

Accounts receivable, net of allowance for doubtful accounts of $6,013 and $3,977, respectively

    97,840     86,988  

Prepaid expenses

    8,207     7,937  

Deferred tax assets

    7,355     220  

Inventory

    2,716     2,259  

Other receivables

    12,180      

Other current assets

    2,156     3,960  
           
 

Total current assets

    162,934     158,053  
           

Property and equipment, net

    125,596     135,418  

Identifiable intangible assets, net

    268,925     306,077  

Goodwill

    14,844     38,620  

Deferred tax assets, net

    24,720     1,097  

Other assets

    4,427     5,475  
           
 

Total assets

  $ 601,446   $ 644,740  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             

Accounts payable, accrued expensed and other current liabilities

  $ 88,009   $ 71,481  

Deferred revenue

    13,970     12,061  

Current portion of long term debt, net of discount

    15,119     18,488  
           
 

Total current liabilities

    117,098     102,030  
           

Long-term debt, net of current portion and discount

    354,594     385,136  

Deferred tax liabilities

    3,416     1,912  

Contingent consideration

        33,594  

Other liabilities

    4,998     6,787  
           
 

Total liabilities

    480,106     529,459  
           

Commitments and contingencies (see Note 9)

             

Stockholders' equity:

             

Common stock, $0.001 par value; 130,000,000 shares authorized; 25,957,444 shares issued and 25,795,767 shares outstanding and 26,515,823 shares issued and 25,359,255 shares outstanding, respectively

    26     27  

Treasury stock, 161,677 shares and 1,156,568 shares, respectively

    (2,439 )   (21,523 )

Additional paid-in capital

    168,780     176,633  

Accumulated deficit

    (42,859 )   (34,315 )

Accumulated other comprehensive (loss)

    (2,168 )   (5,541 )
           
 

Total stockholders' equity

    121,340     115,281  
           
 

Total liabilities and stockholders' equity

  $ 601,446   $ 644,740  
           

See accompanying notes.

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TNS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 
  Year ended December 31,  
 
  2008   2009   2010  
 
  (in thousands, except per share and share amounts)
 

Revenues

  $ 343,991   $ 474,817   $ 527,135  

Operating expenses:

                   
 

Cost of network services, exclusive of the items shown separately below

    162,423     224,497     261,060  
 

Engineering and development

    29,149     36,268     38,382  
 

Selling, general, and administrative

    78,104     100,588     97,033  
 

Contingent consideration

            1,794  
 

Depreciation and amortization of property and equipment

    25,286     32,247     47,527  
 

Amortization of intangible assets

    25,734     32,353     39,540  
               
 

Total operating expenses

    320,696     425,953     485,336  
               

Income from operations

    23,295     48,864     41,799  

Interest expense

    (10,868 )   (58,553 )   (24,572 )

Interest income

    707     497     387  

Other (expense) income net

    (241 )   471     4,440  
               

Income (loss) before income tax provision, and equity in net loss of unconsolidated affiliates

    12,893     (8,721 )   22,054  

Income tax (provision) benefit

    (9,213 )   6,777     (13,222 )

Equity in net loss of unconsolidated affiliates

    (202 )   (115 )   (288 )
               

Net income (loss)

  $ 3,478     (2,059 )   8,544  
               

Basic net income (loss) per common share

  $ 0.14   $ (0.08 ) $ 0.33  
               

Basic weighted average common shares outstanding

    24,763,299     25,402,506     25,949,139  
               

Diluted net income (loss) per common share

  $ 0.14   $ (0.08 ) $ 0.32  
               

Diluted weighted average common shares outstanding

    25,195,521     25,402,506     26,471,472  
               

See accompanying notes.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 
  Common Stock    
   
   
  Accumulated
other
comprehensive
income (loss)
   
   
 
 
  Treasury
Stock
  Additional
paid-in
capital
  Accumulated
deficit
  Total
stockholders'
equity
  Comprehensive
(loss) income
 
 
  Shares   Amount  
 
  (in thousands, except per share and share amounts)
 

Balance, December 31, 2007

    24,274,195   $ 24   $ (239 ) $ 131,485   $ (44,278 ) $ 5,280   $ 92,272        

Exercise of employee stock options

   
543,328
   
1
   
   
9,588
   
   
   
9,589
       

Issuance of common stock upon vesting of restricted stock units

    364,627                                

Tax benefit of share based payments

                284             284        

Purchase of treasury stock

            (2,162 )               (2,162 )      

Stock compensation expense

                11,305             11,305        

Foreign currency translation

                        (11,951 )   (11,951 )   (11,951 )

Retirement of treasury shares

    (100,143 )       1,823     (1,823 )                  

Net income

                    3,478         3,478     3,478  
                                   

Balance, December 31, 2008

    25,082,007   $ 25   $ (578 ) $ 150,839   $ (40,800 ) $ (6,671 ) $ 102,815        
                                     

Total, December 31, 2008

                                            $ (8,473 )
                                                 

Issuance of common stock upon vesting of restricted stock units

    402,514                                  

Exercise of employee stock options

    472,923     1         8,141             8,142        

Tax benefit of share based payments

                (646 )           (646 )      

Purchase of treasury stock

            (1,861 )               (1,861 )      

Stock compensation expense

                10,446             10,446        

Foreign currency translation

                        4,503     4,503     4,503  

Net loss

                    (2,059 )       (2,059 )   (2,059 )
                                   

Balance, December 31, 2009

    25,957,444   $ 26   $ (2,439 ) $ 168,780   $ (42,859 ) $ (2,168 ) $ 121,340        
                                     

Total, December 31, 2009

                                            $ 2,444  
                                                 

Issuance of common stock upon vesting of restricted stock units

    452,440     1         (1 )                  

Exercise of employee stock options

    132,613             1,949             1,949        

Issuance of common stock

    178,823             3,060             3,060        

Purchase of treasury stock

            (22,657 )               (22,657 )      

Stock compensation expense

                6,418             6,418        

Foreign currency translation

                        (3,373 )   (3,373 )   (3,373 )

Retirement of treasury shares

    (205,497 )       3,573     (3,573 )                  

Net income

                    8,544         8,544     8,544  
                                   

Balance, December 31, 2010

    26,515,823   $ 27   $ (21,523 ) $ 176,633   $ (34,315 ) $ (5,541 ) $ 115,281        
                                     

Total, December 31, 2010

                                            $ 5,171  
                                                 

See accompanying notes.

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TNS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  Year ended December 31,  
 
  2008   2009   2010  
 
  (in thousands)
 

Cash flows from operating activities:

                   

Net income (loss)

  $ 3,478   $ (2,059 ) $ 8,544  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

                   
 

Depreciation and amortization of property and equipment

    25,286     32,247     47,527  
 

Amortization of intangible assets

    25,734     32,353     39,540  
 

Deferred income tax provision (benefit)

    4,960     (12,685 )   8,734  
 

Loss on disposal of property and equipment

    165     25     160  
 

Amortization of deferred financing costs and debt discount

    722     7,126     2,021  
 

Loss on debt extinguishment

        26,944      
 

Change in fair value of contingent consideration

            1,794  
 

Equity in net loss of unconsolidated affiliates

    202     115     288  
 

Stock compensation

    11,305     10,446     6,418  

Changes in operating assets and liabilities, net of effect of acquisitions:

                   
 

Accounts receivable, net

    (174 )   8,888     11,153  
 

Other current and noncurrent assets

    (368 )   (11,344 )   10,573  
 

Accounts payable and accrued expenses

    3,585     17,932     (16,762 )
 

Deferred revenue

    (4,115 )   (3,533 )   (2,117 )
 

Other current and noncurrent liabilities

    2,945     (998 )   1,789  
               
   

Net cash provided by operating activities

    73,725     105,457     119,662  
               

Cash flows from investing activities:

                   
 

Purchases of property and equipment

    (32,047 )   (40,638 )   (55,026 )
 

Proceeds from sale of property and equipment

             
 

Cash paid for business acquisitions, net of cash acquired(1)

        (230,656 )   (46,802 )
               
   

Net cash used in investing activities

    (32,047 )   (271,294 )   (101,828 )
               

Cash flows from financing activities:

                   
 

Net proceeds from issuance of long-term debt

        516,335     48,755  
 

Net borrowings on revolving credit facility

        48,522     14,377  
 

Repayment of long-term debt

    (27,000 )   (408,500 )   (31,875 )
 

Payment of long-term debt financing costs

    (75 )   (175 )    
 

Proceeds from stock option exercises

    9,589     8,142     1,949  
 

Excess tax benefits from share based payments

    284          
 

Purchase of treasury stock

    (2,162 )   (1,861 )   (22,657 )
               
   

Net cash (used in) provided by financing activities

    (19,364 )   162,463     10,549  
               

Effect of exchange rates on cash and cash equivalents

    (1,268 )   (2,997 )   (4,174 )
               

Net increase (decrease) in cash and cash equivalents

    21,046     (6,371 )   24,209  

Cash and cash equivalents, beginning of year

    17,805     38,851     32,480  
               

Cash and cash equivalents, end of year

  $ 38,851   $ 32,480   $ 56,689  
               

Supplemental disclosures of cash flow information:

                   
 

Cash paid for interest

  $ 10,835   $ 22,281   $ 21,784  
               
 

Cash paid for income taxes

  $ 2,547   $ 2,192   $ 8,356  
               

(1)
Cash paid for business acquisitions does not include the non-cash issuance of approximately $3.1 million in the Company's stock to certain former shareholders of Cequint. See note 3 for further details of the acquisition of Cequint.




See accompanying notes.

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TNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

1. The Company:

Business Description

        TNS, Inc. (TNS or the Company) is a Delaware corporation. TNS is a leading provider of business-critical data communications services to processors of credit card, debit card and automated teller machine (ATM) transactions. TNS is also a leading provider of call signaling and database access services to the North American telecommunications industry and of secure data network services to the global financial services industry. TNS' data communication services enable secure and reliable transmission of time-sensitive, transaction-related information critical to its customers' operations. The Company's customers outsource their data communication requirements to TNS because of the Company's expertise, comprehensive customer support, and cost-effective services. TNS provides services to customers in the United States and increasingly to customers in 40 countries, including Canada, Mexico and countries in Europe, Latin America and the Asia-Pacific region.

        The Company provides its services through its global data network, designed specifically for transaction applications. This network supports a variety of widely accepted communications protocols, and is designed to be scalable and accessible by multiple methods, including dial-up, dedicated, wireless and Internet connections.

        In 2010, the Company had three business divisions: (1) the payments division, which provides data communications services to payment processors in North America, Europe and Asia Pacific, (2) the telecommunication services division (TSD), which provides call signaling services, database access services and roaming and clearing services primarily to the North American telecommunications industry, and (3) the financial services division (FSD), which provides data communications services to the financial services community in support of the Financial Information eXchange (FIX) messaging protocol and other transaction-oriented trading applications.

Share Repurchase Program

        On September 1, 2010, the Company's Board of Directors authorized a share repurchase program of up to $50 million of the Company's common stock over the period ended March 31, 2012, subject to extension. The Company commenced repurchasing shares on October 1, 2010 and as of December 31, 2010, has repurchased 1,050,247 shares for a total cost of approximately $19.1 million under the share repurchase program. In addition, the company repurchased 150,141 shares for a total cost of approximately $3.6 million to satisfy the minimum employee tax withholdings upon vesting of restricted stock units.

        On February 25, 2011, the Company's board of directors approved the retirement of 1,206,462 shares of treasury stock.

2. Summary of Significant Accounting Policies:

Principles of Consolidation

        The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated upon consolidation. The Company consolidates investments where it has a controlling financial interest as defined by Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810, Consolidation. The usual

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TNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010

2. Summary of Significant Accounting Policies: (Continued)


condition for controlling financial interest is ownership of a majority of the voting interest and, therefore, as a general rule ownership, directly or indirectly, of over fifty percent of the outstanding voting shares is a condition pointing towards consolidation. For investments in variable interest entities the Company consolidates when it is determined to be the primary beneficiary of the variable interest entity. For those investments in entities where the Company has significant influence over operations, but where the Company neither has a controlling financial interest nor is the primary beneficiary of a variable interest entity, the Company follows the equity-method of accounting pursuant to FASB ASC 323, Investments—Equity Method and Joint Ventures.

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Significant estimates affecting the consolidated financial statements include management's judgments regarding the allowance for doubtful accounts, realization of deferred tax assets, future cash flows from long-lived assets, additions of capitalized software costs, estimates of telecommunication accruals, accrued expenses for probable losses, estimates related to the fair value of the Company's employee stock options, including volatility, expected term and estimates of forfeitures in future periods, and estimates related to the fair value of the contingent consideration related to the Cequint acquisition (See Note 3). Actual results could differ from those estimates.

Revenue Recognition

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

        Payments revenue is derived primarily from per transaction fees paid by the Company's customers for the transmission of transaction data, through the Company's network, between payment processors and Point of Sale (POS) or ATM terminals and monthly recurring fees for IP-based network services. TSD revenue is derived primarily from fixed monthly fees for call signaling services and per message fees charged for database access, call validation and roaming and clearing services. FSD revenue is derived primarily from monthly recurring fees based on the number of customer connections to and through the Company's network as well as dedicated bandwidth usage.

        The Company considers the criteria established primarily by FASB ASC 605-45, "Reporting Revenue Gross as a Principal versus Net as an Agent," in determining whether revenue should be recognized on a gross versus a net basis. Factors considered in determining if gross or net basis recognition is appropriate include whether the Company is primarily responsible to the client for the services, has discretion on vendor selection, or bears credit risk. The revenues for which there are gross vs. net considerations include regulatory network charges levied on our customers. Regulatory network charges include messaging signaling unit charges related to the Company's Signaling System No. 7 (SS7) network and Universal Service Fund charges applicable to interstate telecommunications services approved or imposed by the Federal Communications Commission. The Company believes that the indicators under ASC 605-45 support gross revenue presentation since the Company is the primary

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TNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010

2. Summary of Significant Accounting Policies: (Continued)


obligor in the arrangement and carries the underlying traffic over its data communications network and has sole discretion over whether to include such regulatory charges in the amounts invoiced to customers. Included in revenue for the year ended December 31, 2008, 2009 and 2010, are $8.4 million, $10.5 million and $11.6 million, respectively, related to these charges.

        In certain of our international locations, the Company enters into revenue sharing arrangements with third parties related to data communications services it provides to the payment processing industry. Certain of the Company's international payment processing customers elect to configure POS terminals with a caller-paid number. In this type of POS terminal configuration, the customer is responsible for paying a regulated charge for each call to its underlying telecommunications carrier with which it contracts directly. The telecommunications carrier collects the regulated charge from the customer and bears the credit risk in the transaction. The telecommunications carrier then remits the charge to the Company, withholding a fee for the use of its network in delivering the call to the Company. The Company then will pass these charges through to the payment processor, withholding a portion of the amount as a fee. Based on the Company's contractual arrangements with its payment processing customers, it has no obligation to remit cash until and unless the cash is remitted to the Company by the telecommunications carrier. The customer looks to the telecommunications carrier for the provision of data communications access to the POS device and the payment processer for the processing of card-based payments. The Company believes that the indicators under ASC 605-45 support net revenue presentation since the telecommunications provider and payment processor, not the Company, are the primary obligors in the arrangement and the Company does not bear the credit risk. For the year ended December 31, 2008, 2009 and 2010, revenue share was $36.8 million, $36.2 million and $39.0 million, respectively.

        Incentives granted to new customers or upon contract renewals are deferred and recognized ratably as a reduction of revenue over the contract period to the extent that the incentives are recoverable against the customer's minimum purchase commitments under the contract. Deferred customer incentives were approximately $0.8 million and $1.2 million as of December 31, 2009 and 2010, respectively, of which approximately $0.3 million and $0.6 million was classified in other current assets as of December 31, 2009 and 2010, respectively. The remaining balance was classified in other assets in the accompanying consolidated balance sheets. The Company performs periodic evaluations of its customer base and establishes allowances for estimated credit losses.

        In addition, the Company receives installation fees related to the configuration of the customers' systems. Revenue from installation fees is deferred and recognized ratably over the customer's contractual service period, generally three years. Installation fees were approximately $4.1 million, $3.9 million, and $4.1 million for the years ended December 31, 2008, 2009 and 2010, respectively. Approximately $5.0 million and $6.1 million of installation fees are included in deferred revenue (current liabilities) and other liabilities (non current liabilities) as of December 31, 2009 and 2010, respectively. The Company performs periodic evaluations of its customer base and establishes allowances for estimated credit losses.

Cost of Network Services

        Cost of network services is comprised primarily of the following: telecommunications charges, which include data transmission and database access charges, leased digital capacity charges, circuit

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TNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010

2. Summary of Significant Accounting Policies: (Continued)


installation charges and activation charges; salaries, equipment maintenance and other costs related to supporting our data platforms and systems; and compensation paid to the providers of calling name and line information database records. The cost of data transmission is based on a contract or tariff rate per minute of usage in addition to a prescribed rate per transaction for certain vendors. The costs of database access, circuits, installation and activation charges are based on fixed fee contracts with local exchange carriers and interexchange carriers. The cost of accessing database records from external providers is based on a per query fee for the use of that data. The compensation charges paid to the providers of calling name and line information database records are based on a percentage of query revenue generated from the Company's customers accessing those records. These costs are expensed by the Company as incurred. The Company recognizes a liability for telecommunications charges based upon network services utilized at historical invoiced rates. Direct costs of installations are deferred and amortized over the customer's contracted service period, generally three years.

        Deferred installation costs as of December 31, 2009 and 2010 were approximately $2.4 million and $2.7 million, respectively, and are classified as other current assets and other assets in the accompanying consolidated balance sheets. Depreciation expense on network equipment was approximately $16.3 million, $23.6 million, and $35.1 million for the years ended December 31, 2008, 2009 and 2010, respectively, and is included in depreciation and amortization of property and equipment in the accompanying consolidated statements of operations. Amortization expense on developed technology, an intangible asset recorded in various acquisitions was approximately $4.6 million, $5.0 million, and $5.8 million for the years ended December 31, 2008, 2009 and 2010, respectively and is included in amortization of intangible assets in the accompanying consolidated statements of operations.

Cash and Cash Equivalents

        The Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents.

Concentrations of Credit Risk

        Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company does not, as a matter of policy, require collateral on credit granted to customers. The Company performs periodic evaluations of its customer base and establishes allowances for estimated credit losses.

Fair Value of Financial Instruments

        In September 2006, the FASB issued FASB ASC 820, Fair Value Measurements and Disclosures. FASB ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2007, the FASB issued FASB ASC 825, Financial Instruments. FASB ASC 825 permits entities to choose to measure many financial assets and financial liabilities at fair value. For financial assets and financial liabilities, FASB ASC 820 was effective for the Company on January 1, 2008. The adoption of FASB ASC 820 to the Company's financial assets and financial liabilities did not have a material effect on the Company's consolidated financial statements. As we did not elect to fair value any of our

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TNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010

2. Summary of Significant Accounting Policies: (Continued)


financial instruments under the provisions of FASB ASC 825, the adoption of this statement did not have any impact on our financial position or results of operations.

        The fair value of the Company's long-term debt is based upon quoted market prices for the same and similar issues giving consideration to quality, interest rates, maturity and other characteristics. As of December 31, 2010, the Company believes the carrying amount of its long-term debt approximates its fair value since the variable interest rate of the debt approximates a market rate. See Note 5 for further discussions regarding application of fair value to our debt instruments.

Allowance for doubtful accounts

        The allowance for doubtful accounts reflects the company's estimate of credit exposure, determined principally on the basis of its collection experience, aging of its receivables and significant individual account credit risks.

Inventory

        Inventory is stated at the lower of cost or market, using the average cost method. Inventory consists primarily of network and computer parts and equipment. The Company's products are subject to technological change and changes in the Company's respective competitive markets. It is possible that new product launches or changes in customer demand could result in unforeseen changes in inventory requirements for which no write-down has been recorded.

Long-Lived Assets

        In accordance with FASB ASC 360, Property, Plant and Equipment, and FASB ASC 350, Intangibles—Goodwill and Other, the Company reviews its long-lived assets, including property and equipment, capitalized software development costs and definite-lived intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows will be less than the carrying amount of the assets. If future estimated undiscounted cash flows are less than the carrying amount of long-lived assets, then such assets are written down to their estimated fair value.

        For purposes of measuring and recognizing impairment of long-lived assets, including definite-lived intangibles, the Company assesses whether separate cash flows can be attributed to the individual asset. The Company groups long-lived assets where separately identifiable cash flows are available. For the Company's customer relationship intangible assets, the Company evaluates impairment upon the significant loss of revenue from a customer. The fair value measurement of a customer relationship intangible is primarily based on an income approach using significant inputs that are not observable in the market, therefore representing a Level 3 measurement as defined in FASB ASC 820, Fair Value Measurements and Disclosures. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flow is discounted at a rate of return that reflects the relative risk of achieving the cash flow and the time value of money. Included in amortization of intangibles expense for the years ended December 31, 2008, 2009 and 2010 is approximately $2.2 million, $0.4 million and $2.6 million, respectively, in accelerated amortization in

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connection with the impairment of certain customer relationships, primarily payments division customers, during those respective periods. As a result, these customer relationship intangible assets were written down to their fair values of $0.0 million, $0.0 million and $1.3 million during December 31, 2008, 2009 and 2010, respectively.

        Included in depreciation and amortization of property and equipment for the year ended December 31, 2010 is $5.5 million related to the accelerated depreciation of surplus network monitoring assets that are no longer required following the acquisition of CSG and are therefore being removed from service. The net book value of these assets at December 31, 2010 is approximately $0.7 million.

        Included in depreciation and amortization of property and equipment for the year ended December 31, 2008 is approximately $1.1 million of capitalized software costs related to the Company's vending platform that was impaired following the decision to discontinue the vending product.

        The Company's estimates of anticipated cash flows could be reduced significantly in the future due to changes in technologies, regulation, available financing, competition or other circumstances. As a result, the carrying amount of long-lived assets could be reduced through impairment charges in the future. Additionally, changes in estimated future cash flows could result in a change to the method of amortization or a shortening of estimated useful lives for long-lived assets including intangibles.

Property and Equipment

        Property and equipment is recorded at acquisition date cost or fair value, as appropriate, net of accumulated depreciation and amortization. Replacements and improvements that extend the useful life of property and equipment are capitalized. In accordance with FASB ASC 350, Intangibles—Goodwill and Other, costs for internal use software that are incurred in the preliminary project stage and the post-implementation and operation stage are expensed as incurred. Costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software.

        Depreciation and amortization of property and equipment is computed using the straight-line method over the estimated useful lives of the assets as follows:

Network equipment and purchased software

  3 – 7 years

Office furniture and equipment

  3 – 5 years

Leasehold improvements

  Shorter of the useful life or the lease term, generally 5 – 15 years

Capitalized software development

  3 – 5 years

Buildings

  39 years

Land

  Not depreciated

Goodwill and Identifiable Intangible Assets

        The Company accounts for goodwill and identifiable intangible assets in accordance with FASB ASC 350, Intangibles—Goodwill and Other. Under this standard, goodwill and intangible assets

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2. Summary of Significant Accounting Policies: (Continued)


deemed to have indefinite lives are not amortized and are subject to annual impairment tests or between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company performs its annual impairment testing of its goodwill as of October 1 of each year. The Company is required to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. Fair value of the reporting unit is determined using a market based approach. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, the Company performs the second step of the impairment test, as this is an indication that the reporting unit goodwill may be impaired. In the second step of the impairment test, the Company determines the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment of goodwill has occurred and the Company must recognize an impairment loss for the difference between the carrying amount and the implied fair value of goodwill. To date, the Company's testing has indicated that there is no impairment of its goodwill.

        Goodwill increased from 2009 to 2010 due primarily to $24.0 million related to the acquisition of Cequint, Inc.

        Amortization of definite-lived intangible assets is recorded on a straight-line or accelerated basis, as appropriate, over their expected useful lives. The Company evaluates the useful lives assigned to intangible assets on a regular basis. Amortization periods are as follows:

Developed technology

  4 – 15 years

Trade names

  20 years

Customer relationships

  3 – 20 years

Non-compete agreements

  2 – 5 years

        Developed technology represents the Company's proprietary knowledge, including processes and procedures, used to configure its networks. Network equipment and software, both purchased and internally developed, are components used to build the networks and systems, and are separately identified assets classified within property and equipment.

Income Taxes

        The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes. Under FASB ASC 740, deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The Company provides a valuation allowance on its net deferred tax assets when it is more likely than not that such assets will not be realized. Deferred income tax expense or benefits are based upon the changes in the asset or liability from period to period. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

        Effective January 1, 2007, the Company adopted an amendment to FASB ASC 740, Income Taxes which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

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December 31, 2010

2. Summary of Significant Accounting Policies: (Continued)

Net Income (Loss) Per Common Share

        FASB ASC 260, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings (loss) per common share is computed by dividing income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. The diluted earnings (loss) per common share data is computed using the weighted average number of common shares outstanding plus the dilutive effect of common stock equivalents, unless the common stock equivalents are anti-dilutive. The treasury stock effect of options to purchase 885,323 shares of common stock that were outstanding as of December 31, 2008, options to purchase 1,364,720 shares of common stock and 806,607 restricted stock units that were outstanding as of December 31, 2009 and options to purchase 457,784 shares of common stock that were outstanding as of December 31, 2010 were excluded from the computation of diluted net loss per common share for those years as their effect would have been anti-dilutive.

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

 
  Year ended December 31,  
 
  2008   2009   2010  

Net income (loss) attributable to common stockholders

  $ 3,478     (2,059 )   8,544  
               

Weighted average common share calculation:

                   
 

Basic weighted average common shares outstanding

    24,763,299     25,402,506     25,949,139  
   

Treasury stock effect of unvested common stock

    288,671         249,835  
   

Treasury stock effect of options

    143,551         272,498  
               
 

Diluted weighted average common shares outstanding

    25,195,521     25,402,506     26,471,472  
               
   

Basic income (loss) per common share

  $ 0.14   $ (0.08 ) $ 0.33  
               
   

Diluted income (loss) per common share

  $ 0.14   $ (0.08 ) $ 0.32  
               

Stock-Based Compensation

        The Company accounts for stock-based compensation under FASB ASC 718, Compensation-Stock Compensation. FASB ASC 718 requires all stock-based compensation to employees be measured at fair value and expensed over the requisite service period and also requires an estimate of forfeitures when calculating compensation expense. Refer to Note 6 for additional discussion regarding details of the Company's stock-based compensation plans.

Foreign Currency Translation and Revaluation

        The Company has operations in 24 countries outside the United States including the United Kingdom, Austria, Australia, Bermuda, Canada, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Malaysia, Mexico, New Zealand, Poland, Romania, Singapore, South Korea, Spain, Sweden, Thailand, Netherlands and Turkey. The Company has determined that the functional currency of its non-U.S. operations is the local currency. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates in effect at each balance sheet date. Operating results

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2. Summary of Significant Accounting Policies: (Continued)


are translated into U.S. dollars using the average rates of exchange prevailing during the period. The Company's results of operations are affected by fluctuations in the value of the U.S. dollar as compared with foreign currencies, predominately the euro, the British pound and the Australian dollar. Gains or losses resulting from the translation of assets and liabilities are included as a component of accumulated other comprehensive income (loss) in stockholders' equity, except for the translation effect of intercompany balances that are anticipated to be settled in the foreseeable future, which are included in the statements of operations. For the years ended December 31, 2008, 2009 and 2010, the Company recorded foreign exchange (losses) gains of $(0.1) million, $0.3 million and $4.1 million, respectively, which are included in other (expense) income, net in the accompanying consolidated statements of operations.

Comprehensive Income (Loss)

        Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under accounting principles generally accepted in the United States are included in comprehensive income (loss), but excluded from the determination of net income (loss). The Company's other comprehensive income consists solely of foreign currency translation adjustments. The cumulative foreign currency translation adjustment as of December 31, 2009 and 2010 was a $2.2 million and $5.5 million decrease to equity, respectively.

Segment Reporting

        The Company provides segment information in accordance with FASB ASC 280, Segment Reporting. The Company classifies its business into one reportable segment. In addition, the Company's management evaluates revenues for its three business divisions: Payments, TSD, and FSD. A significant portion of the Company's operating expenses are shared between Payments, TSD and FSD, and, therefore, management analyzes operating results for these three business divisions on a combined basis. FASB ASC 280 designates the internal information used by management for allocating resources and assessing performance as the source of the Company's reportable segments and requires disclosure about products and services, geographical areas and major customers.

3. Acquisitions and Long-Term Investments:

Cequint, Inc

        On September 8, 2010, the Company entered into the Agreement and Plan of Merger (the Merger Agreement) which provided for the merger of Cequint, Inc (Cequint) with and into Thunder Acquisition Corp., a wholly owned subsidiary of the Company formed for the purpose of the acquisition. Cequint provides carriergrade caller ID products and enhanced services to tier-one U.S. mobile operators and will be integrated into the Company's telecommunications services division. On October 1, 2010, the Company completed the merger in accordance with the terms and conditions of the Merger Agreement. The initial purchase price for the acquisition was $49.8 million consisting of $46.7 million in cash, subject to a post-closing working capital adjustment, and $3.1 million in Company stock issued to certain management shareholders of Cequint. This stock consideration consists of 178,823 shares at a fair value of $17.11 per share, which include restrictions on transfer that expire as follows: one third of total shares issued on the first anniversary of the date of acquisition; one third of

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total shares issued on the second anniversary of the date of acquisition; and one third of total shares issued on the third anniversary of the date of acquisition. The purchase price may be adjusted in the future by an additional $52.5 million in cash based upon the achievement of four specific profit-related milestones, during the period commencing on the earlier of June 1, 2011 or the date on which the Name ID product is successfully launched with a tier-one U.S. mobile operator and not to extend beyond May 31, 2014 (the Earn-Out Period), for a potential total purchase price of $102.3 million. In addition to the contingent consideration of up to $52.5 million, there is an additional $10.0 million of performance payments which may be payable to certain executives and key personnel, based on the achievement of the same four profit-related milestones. To the extent the additional $10.0 million is payable, it will be recorded as compensation expense as described below.

        The four profit-related milestones must be met for two consecutive months during the Earn-Out Period. These criteria are set out in the following table:

 
  Criteria   Shareholder
Payment
Contingent
Consideration
  Employee
Performance Plan
Compensation
Expense
  Total Potential
Payouts
 
Milestone 1   (i)   Monthly Gross Margin(1) greater than $2.5 million;   $ 12.6 million   $ 2.4 million   $ 15.0 million  
    (ii)   Positive Net Income Contribution(2); and                    
    (iii)   Name ID product successfully launched with a tier-one carrier                    

Milestone 2

 

Monthly Gross Margin(1) greater than $5.0 million

 

$

14.7 million

 

$

2.8 million

 

$

17.5 million

 
Milestone 3   Monthly Gross Margin(1) greater than $7.5 million   $ 12.6 million   $ 2.4 million   $ 15.0 million  
Milestone 4   Monthly Gross Margin(1) greater than $10.0 million   $ 12.6 million   $ 2.4 million   $ 15.0 million  
                       
            $ 52.5 million   $ 10.0 million   $ 62.5 million  
                       

(1)
Defined in the Merger Agreement as revenues for such month (excluding any non-recurring revenues) less licensing, depreciation and other direct costs incurred in providing Cequint products and services

(2)
Defined in the Merger Agreement as the Monthly Gross Margin for such month less any direct research and development (including capitalized research and development), sales, marketing, finance, operations and indirect costs (including costs allocated to Cequint) incurred in connection with Cequint's products and services for such month.

(3)
For further details in relation to the Agreement and Plan of Merger, please refer to the Form 8K filed by the company on September 14, 2010.

        As of the acquisition date, the Company recorded a liability of $31.8 million representing the estimated fair value of the contingent purchase consideration of $52.5 million based on a probability weighted scenario approach to determine the likelihood and timing of the achievement of the relevant milestones. In calculating this liability, the company applied a rate of probability to each scenario, as well as a risk-adjusted discount factor, to derive the estimated fair value of the consideration as of the acquisition date. This fair value is based on significant unobservable inputs, including management estimates and assumptions, and accordingly is classified as Level 3 within the fair value hierarchy

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3. Acquisitions and Long-Term Investments: (Continued)


prescribed by ASC Topic 820, Fair Value Measurements and Disclosures. This liability will be re-measured each reporting period and changes in the fair market value will be recorded as a separate line item in our consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and likely achievement of the relevant milestones. During the period ended December 31, 2010, the Company recognized a $1.8 million increase in the fair value of the contingent consideration related primarily to the change in the discount period (accretion due to the passage of time).

        The potential $10.0 million of performance payments will be recognized in a systematic and rational manner over the Earn-Out Period to the extent it is probable the milestones will be met. These costs will be treated as compensation expense and will be included in operating expenses in the Company's consolidated statement of operations.

        The Company funded the acquisition of Cequint through a new $50 million term loan facility using the accordian feature of the November 2009 Credit Facility (see Note 5). The consolidated statements of operations for the year ended December 31, 2010 includes the results of the Cequint acquisition from October 1, 2010. In conjunction with the Cequint acquisition, the Company incurred total acquisition related costs of $0.7 million which have been included in selling, general and administrative costs in the consolidated statements of operations.

        The acquisition of Cequint has been accounted for as a business combination under FASB ASC 805, Business Combinations.

        The fair values of the assets acquired and liabilities assumed were determined using various valuation techniques, primarily based on significant inputs that are not observable in the market and therefore represent Level 3 measurements as defined in FASB ASC 820, Fair Value Measurements and Disclosures. Developed technology was valued using the relief from royalty method which values the subject technology by reference to the amount of royalty income that could be generated if the technology were licensed in an arm's length transaction to a third party. Customer relationship intangibles were valued using the multi-period excess earnings method which is based on the operating profit from existing customer relationships, less applicable charges for the use of assets such as working capital, fixed assets, identified intangible assets and the assembled workforce. Covenants not to compete were valued using the comparison of economic income approach under which the projected cash flows of the business with the covenants in place are compared to the projected cash flows presuming the active competition of the individuals against the company.

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December 31, 2010

3. Acquisitions and Long-Term Investments: (Continued)

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

 
  Amount  

Purchase price allocation:

       

Cash

  $ 463  

Accounts receivable, net

    1,768  

Prepayments and other assets

    257  

Deferred tax asset

    5,061  

Property and equipment

    1,264  

Goodwill

    23,975  

Identifiable intangible assets

       
 

Developed technology

    17,200  
 

Customer relationships

    48,600  
 

Covenants not to compete

    10,100  
       

Total assets

    108,688  

Accounts payable, accrued expenses and other current liabilities

    (1,471 )

Deferred tax liability

    (25,635 )
       

Total purchase price

  $ 81,582  
       

        Reconciliation of Cequint purchase price to cash consideration, as follows (in thousands):

Total purchase price

  $ 81,582  

Less non cash items:

       

Company Stock issued

    (3,060 )

Contingent consideration

    (31,800 )
       

    46,722  

Less cash received

    (463 )
       

Cash consideration

  $ 46,259  
       

        The amounts allocated to property and equipment are being depreciated on a straight line basis over their weighted average estimated useful lives of 2 to 4 years. The intangible asset related to developed technology is being amortized on a straight line basis over 7 years, the intangible asset related to customer relationships is being amortized on a straight line basis over 17 years and the intangible asset related to covenants not to compete is being amortized on a straight line basis over 5 years. The intangible asset related to covenants not to compete is expected to be deductible for tax purposes. The intangible assets related to developed technology and customer relationships, and the goodwill, are not expected to be deductible for tax purposes.

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December 31, 2010

3. Acquisitions and Long-Term Investments: (Continued)

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

 
  Weighted average
amortization period
 

Developed technology

    7  

Customer relationships

    17  

Non competition agreements

    5  
       

Total weighted average amortization period

    13.1  
       

        The allocation of the purchase price for Cequint has not been finalized as of December 31, 2010 as certain information required to confirm the assumptions used in the initial valuation of the acquired assets and liabilities remains outstanding.

        Unaudited pro forma results of operations assuming the Cequint acquisition had taken place at the beginning of the period are not provided because the historical operating results of Cequint were not significant and pro forma results would not be significantly different from reported results for the periods presented.

        During the period from the date of acquisition on October 1, 2010 to December 31, 2010, Cequint contributed revenue of $2.3 million and a net loss of $2.6 million. These amounts have been included in the Company's consolidated statement of operations for the year ended December 31, 2010. As of December 31, 2010, the Earn-Out Period had not commenced.

VeriSign Communications Services Group (CSG)

        On March 2, 2009, the Company entered into an Asset Purchase Agreement (the Purchase Agreement), by and between the Company and VeriSign, Inc. (the Seller) pursuant to which the Company agreed to purchase certain assets and assume certain liabilities of the Seller's Communications Services Group (CSG). On May 1, 2009, the Company completed the acquisition in accordance with the terms and conditions of the Purchase Agreement. The initial purchase price was approximately $226.2 million in cash and subject to a post-closing working capital adjustment. During the third quarter of 2009 and fourth quarter of 2009, working capital and other adjustments were made resulting in a $4.5 million increase in the purchase price to $230.7 million. The purchase price was finalized in May 2010 resulting in an additional $0.5 million increase in the purchase price to $231.2 million. The Company funded the transaction through a new $230 million term loan facility as part of its May 2009 Credit Facility (see Note 2). CSG provides call signaling services and intelligent database services such as caller ID, toll-free call routing and local number portability to the U.S. telecommunications industry. In addition, CSG provides wireless roaming and clearing services to mobile phone operators. The Company is integrating CSG into its telecommunication services division. In conjunction with the CSG acquisition, the Company incurred total acquisition related costs of $2.5 million. During the year ended December 31, 2009, acquisition related costs of $2.2 million were included in selling, general and administrative expenses in the accompanying consolidated statement of operations.

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December 31, 2010

3. Acquisitions and Long-Term Investments: (Continued)

        The acquisition of CSG has been accounted for as a business combination under FASB ASC 805, Business Combinations. During the second quarter of 2010, the Company completed the appraisals necessary to assess the fair values of the tangible and intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the acquisition date. As a result of the purchase price finalization, $1.7 million was adjusted retrospectively to certain working capital amounts on the December 31, 2009 balance sheet with a corresponding decrease in goodwill. Such adjustment had no impact in our statement of operations.

        The fair values of the assets acquired and liabilities assumed were determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and therefore represent a Level 3 measurement as defined in FASB ASC 820, Fair Value Measurements and Disclosures. Developed technology and customer relationships were valued using the excess earnings method, a variation on the income method. The excess earnings method considers the use of other assets in the generation of the projected cash flows in order to determine the economic benefit generated by the subject intangible asset. Non competition agreements were valued using the income approach. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flow is discounted at a rate of return that reflects the relative risk of achieving the cash flow and the time value of money. Fixed assets and real estate were valued using the market and cost approaches, as appropriate. The market approach indicates value for a subject asset based on available market pricing for comparable assets. The cost approach indicates value by determining the current cost of replacing an asset with another of equivalent economic utility. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.

        The purchase price for CSG was allocated as follows (in thousands):

 
  Preliminary
allocation
  Additional
consideration
paid
  Measurement
period
adjustments
  Final
allocation
 

Purchase price allocation:

                         

Accounts receivable

  $ 33,852   $ 914   $ 6   $ 34,772  

Prepaid expenses

    2,963             2,963  

Property and Equipment

    43,633     1,198         44,831  

Land and buildings

    10,034             10,034  

Goodwill

    3,984     649     (1,737 )   2,896  

Identifiable intangible assets

                         
 

Customer relationships

    141,500             141,500  
 

Developed technology

    4,800             4,800  
 

Non competition agreements

    600             600  
 

Other intangible assets

    300             300  
                   

Total assets

    241,666     2,761     (1,731 )   242,696  

Accounts payable, accrued expenses and other current liabilities

    (15,469 )   2,242     1,731     (11,496 )
                   

Total purchase price

  $ 226,197   $ 5,003   $   $ 231,200  
                   

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December 31, 2010

3. Acquisitions and Long-Term Investments: (Continued)

        During the year ended December 31, 2010, the Company paid $0.5 million related to the finalization of the CSG aquisition.

        The amounts allocated to property and equipment are being depreciated on a straight line basis over their weighted average estimated useful lives of 4 years. The amount allocated to buildings is being depreciated on a straight line basis over their estimated useful lives of 39 years. The customer relationships included in intangible assets are being amortized on a straight line basis over 9 years and other intangible assets are being amortized on a straight line basis over 2 to 4 years. The goodwill of $2.9 million is expected to be deductible for income tax purposes.

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

 
  Weighted average amortization period  

Customer relationships

    9  

Developed technology

    4  

Non competition agreements

    2  

Other intangible assets

    4  
       

Total weighted average amortization period

    8.8  
       

Pro Forma Information

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

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

        The following unaudited pro forma consolidated results of operations assume that the acquisition of CSG was completed as of January 1, for each of the respective periods presented (dollars in thousands, except per share amounts):

 
  Year ended
December 31,
 
 
  2008   2009  

Operating revenues

  $ 604,098   $ 556,607  

Net income (loss)

    (4,346 )   (2,248 )

Earnings (loss) per common share:

             
 

Basic

  $ (0.18 ) $ (0.09 )
 

Diluted

  $ (0.18 ) $ (0.09 )

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December 31, 2010

3. Acquisitions and Long-Term Investments: (Continued)

        The CSG historical operating results include the direct costs related to the business and certain allocated costs for services and support functions provided by Verisign, Inc. Included in net income for the years ended December 31, 2008 and 2009 are allocated after tax costs of $17.2 million, or ($0.68) per share, and $4.8 million, or ($0.18) per share, related to those functions, respectively. Because the selected unaudited pro forma consolidated results of operations are based on CSG's operating results during the period when CSG was not under the control, influence or management of TNS, the information presented may not be representative of the results for the periods indicated that would have actually occurred had the acquisition been consummated as of January 1, 2008, nor is it indicative of the future financial or operating results of the combined entity.

        The contribution of CSG to the Company's consolidated results was approximately $160.8 million in revenues and $74.5 million of network service costs for the year ended December 31, 2009. Due to the extent and nature of the integration of CSG's operations into the operations of TNS as well as the overlap with the Company's telecommunication services division, remaining amounts related to the contribution of CSG to the Company's consolidated results are not separately identifiable. Accordingly, the stand alone results of CSG for the year ended December 31, 2009 have not been disclosed.

Long-Term Investments

        In September 2004, the Company made an investment in AK Jensen Group, Limited (AKJ), a company that provides order routing systems and integrated electronic trading solutions to financial software companies and end clients. The Company purchased 94,429 common shares for $1.0 million and obtained representation on AKJ's board of directors. On August 8, 2007, the Company sold 9,443 shares for approximately $0.3 million. The Company is accounting for this investment under the equity method of accounting as the Company has significant influence over AKJ's operating and financing activities through its representation on the board of directors. Due to timing of the receipt of AKJ's financial statements, the Company is accounting for the income or loss in this equity method investment on a one month lag. For the years ended December 31, 2008, 2009 and 2010 the Company recognized a net loss in the equity of an unconsolidated affiliate of approximately, $201,000, $115,000 and $289,000 respectively. As of December 31, 2010, the carrying value of the Company's AKJ investment was nil.

4. Balance Sheet Details:

Property and Equipment, Net

        Property and equipment consists of the following (in thousands):

 
  December 31,  
 
  2009   2010  

Network equipment and software

  $ 178,338   $ 208,813  

Office furniture and equipment

    22,458     31,277  

Capitalized software development costs

    50,965     64,163  

Leasehold improvements

    16,864     18,285  

Land and buildings

    10,311     10,390  
           

Total cost

    278,936     332,928  

Accumulated depreciation and amortization

    (153,340 )   (197,510 )
           

Property and equipment, net

  $ 125,596   $ 135,418  
           

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TNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010

4. Balance Sheet Details: (Continued)

Identifiable Intangible Assets, Net

        Identifiable intangible assets consist of the following (in thousands):

 
  December 31,  
 
  2009   2010  

Customer relationships

  $ 317,144   $ 365,744  

Accumulated amortization

    (111,740 )   (140,179 )
           
 

Customer relationships, net

    205,404     225,565  
           

Developed technology

    90,942     108,142  

Accumulated amortization

    (66,231 )   (72,133 )
           
 

Developed technology, net

    24,711     36,009  
           

Trade names

    68,644     68,644  

Accumulated amortization

    (30,632 )   (34,011 )
           
 

Trade names, net

    38,012     34,633  
           

Non-compete agreements

    10,555     20,655  

Accumulated amortization

    (10,007 )   (10,960 )
           
 

Non-compete agreements, net

    548     9,695  
           

Other intangible assets

    300     300  

Accumulated amortization

    (50 )   (125 )
           
 

Other intangible assets, net

    250     175  
           

Identifiable intangible assets, net

  $ 268,925   $ 306,077  
           

        Future scheduled amortization of intangible assets is as follows as of December 31, 2010 (in thousands):

2011

  $ 39,231  

2012

    37,036  

2013

    34,671  

2014

    32,554  

2015

    29,869  

Thereafter

    132,716  
       

  $ 306,077  
       

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TNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010

4. Balance Sheet Details: (Continued)

        Accounts payable, accrued expenses and other current liabilities consist of the following (in thousands):

 
  December 31,  
 
  2009   2010  

Accounts payable and accrued network costs

  $ 52,582   $ 41,771  

Accrued sales and use tax

    1,141     2,812  

Income taxes payable

    2,975     167  

Accrued legal and professional fees

    1,855     1,482  

Accrued compensation and benefits

    16,886     9,307  

Accrued severance and benefits

    782     118  

Accrued interest

    2,708     3,479  

Accrued customer credits

    1,250     672  

Other accrued expenses

    5,329     6,447  

Other current liabilities

    2,501     5,226  
           

Accounts payable, accrued expenses and other current liabilities

  $ 88,009   $ 71,481  
           

5. Long-Term Debt:

        Debt consists of the following (in thousands):

 
  December 31,  
 
  2009   2010  

Revolving credit facility

  $ 49,371   $ 49,370  

Term Loan

    325,000     358,125  
           

Total credit facility outstanding

    374,371     407,495  

Unamortized discount

    (4,658 )   (3,871 )