| TNS INC 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, 2005, we derived approximately 20dtta9prca 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 |
| The loss of any of our largest customers or a decision by one of them to purchase our services at a reduced level could harm our revenues and earnings |
| 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 2006-2009 |
| 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 |
| · POS 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 transactions 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 |
| Our POS business is highly dependent upon our customers’ transaction volumes and our ability to expand into new markets |
| We already serve the largest payment processors in the United States |
| Accordingly, our POS division is highly dependent on the number of domestic transactions transmitted by our existing customers through our networks |
| Factors which may reduce the number of credit and debit card and ATM transactions include future economic downturns, acts of war or terrorism and other events that reduce consumer spending |
| Revenues from our POS division, which represented our largest business segment prior to the 18 ______________________________________________________________________ year ended December 31, 2005, have decreased as a result of a decline in transaction volumes primarily from a major customer and to a lesser extent 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 state lottery operators, electronic benefits programs and healthcare industry participants that we have identified as potential sources of future growth for our POS business |
| Factors that may interfere with our ability to expand further into these areas include: · market participants’ adoption of alternative technologies, · our potential inability to enter into commercial relationships with additional market participants, and · implementation of federal and state regulations |
| Our strategy to expand internationally may fail, which may impede our growth and harm our operating results |
| As of December 31, 2005, we have yet to generate positive operating cash flows in six out of the 14 countries in which we have operations and provide services outside the United States and Canada |
| In addition, we are planning expansion in our existing international markets and into additional 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, · build our brand name and awareness of our services among foreign customers, and · implement new systems, procedures and controls to monitor our operations in new markets |
| In addition, we are subject to risks associated with operating in foreign countries, including: · multiple, changing and often inconsistent enforcement of telecommunications and other laws and regulations, · 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 US dollars or remittance of dividends and other payments by foreign subsidiaries, and · changes in a specific country’s or region’s political or economic conditions |
| 19 ______________________________________________________________________ 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 |
| Our customers may develop in-house networks and divert part or all of their data communications from our networks 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 in the United States and some very large merchants, 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 |
| Our reliance on a limited number of telecommunication services providers exposes us to a number of risks over which we have no control, including risks with respect to increased prices and termination of essential services |
| The operation of our networks depends upon the capacity, reliability and security of services provided to us by a limited number of telecommunication services 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 services providers may increase the prices at which they provide services, which would increase our costs |
| If one or more of our telecommunication services providers were to cease to provide essential services or to significantly increase their prices, we could be required to find alternative vendors for these services |
| With a limited number of vendors, we could experience significant delays in obtaining new or replacement services, which could lead to slowdowns or failures of our networks |
| A slowdown or failure of our networks could cause us to lose customers and revenue |
| Our business is based upon our ability to rapidly and reliably receive and transmit data through our networks |
| One or more of our networks could slow down significantly or fail for a variety of reasons, including: · 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 · damage to, or failure of, our systems due to human error or intentional disruption |
| 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 degradation or failure of one or more of our networks could 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 |
| 20 ______________________________________________________________________ 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 X25 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 |
| In addition, a variety of other factors may cause our results to fluctuate from one quarter to the next, including: · 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, and · changes in pricing policy by us, our competitors and our third party supplier and service providers during a particular quarter |
| 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 |
| 21 ______________________________________________________________________ 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 |
| Future acquisitions and investments could negatively affect our operating results and could dilute the interests of existing stockholders |
| We expect to continue to seek selective acquisitions and investments as an element of our growth strategy |
| Future acquisitions and investments 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, 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 and investments may divert the attention of senior management from our existing business |
| · If we issue additional equity to finance our acquisitions or investments, it could result in dilution for our existing stockholders |
| · If we incur additional indebtedness to finance acquisitions or investments, our interest expense could increase and new debt agreements might involve new restrictive covenants that could reduce our flexibility in managing our business |
| · If we invest in companies before they are profitable, we may incur losses on these investments up to the amount invested |
| As of December 31, 2005, we have dlra6dtta0 million of long-term investments in unconsolidated affiliates, and we expect to incur losses on these investments in 2006 and may continue to incur losses thereafter |
| 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, · licensing and acquisition of technology and rights, and · employee and customer relations and management |
| 22 ______________________________________________________________________ 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 substantial debt could adversely affect our financial health |
| As of December 31, 2005, we had dlra113dtta4 million in debt outstanding |
| You should be aware that this level of debt could have important consequences to you |
| 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 amended and restated 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 amended and restated 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 amended and restated senior secured 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 |
| 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 |
| 23 ______________________________________________________________________ We face competition in each of our four divisions as follows: · The primary competitors of our POS division are MCI, Inc |
| · The primary competitors of our telecommunication services division include Southern New England Telephone Company, Syniverse Technologies, Inc |
| and Verisign, Inc |
| · The primary competitors of our financial services division include SAVVIS Communications Corporation, Radianz Inc, AT&T Corp, Bloomberg LP, Reuters Group PLC and The Thomson Corporation (Thomson Financial) |
| · The primary competitors of our international services division include British Telecom in the United Kingdom, France Telecom in France, Telefonica SA in Spain and Telstra Corporation Limited in Australia |
| We depend on key personnel |
| Our success depends largely on the ability and experience of a number of key employees, including John J McDonnell, Jr, our Chairman and Chief Executive Officer, Brian J Bates, our President and Chief Operating Officer, and Henry H Graham, Jr, our Executive Vice President and Chief Financial Officer |
| If we lose the services of any of our key employees, our business may be adversely affected |
| 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 (“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, which would result in an increase in our cost of network services |
| 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 |
| 24 ______________________________________________________________________ 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 |