Attached files
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EX-31.1 - EXHIBIT 31.1 - GXS Worldwide, Inc. | dp19041_ex3101.htm |
EX-31.2 - EXHIBIT 31.2 - GXS Worldwide, Inc. | dp19041_ex3102.htm |
EX-32.1 - EXHIBIT 32.1 - GXS Worldwide, Inc. | dp19041_ex3201.htm |
EX-10.1 - EXHIBIT 10.1 - GXS Worldwide, Inc. | dp19041_ex1001.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2010
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or
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£
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _________________ to _________________
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Commission file number: 333-167650
GXS Worldwide, Inc.
(Exact name of registrant as specified in its charter)
Delaware
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35-2181508
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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9711 Washingtonian Boulevard, Gaithersburg, MD
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20878
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(Address of principal executive offices)
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(Zip Code)
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301-340-4000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes £ No R
Indicate by check mark 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 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 £ Accelerated filer £ Non-accelerated filer R Smaller Reporting company £
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R
As of June 30, 2010, the registrant had 1,000 outstanding shares of common stock, all of which was held by an affiliate of the registrant.
GXS WORLDWIDE, INC.
QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 2010
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
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Financial Statements
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4 | |
Condensed Consolidated Balance Sheets as of December 31, 2009 and June 30, 2010
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4
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Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2010
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5
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Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2009 and 2010
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6
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Condensed Consolidated Statement of Changes in Stockholder’s Deficit for the six months ended June 30, 2010
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7
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Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2010
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8
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Notes to Condensed Consolidated Financial Statements
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9
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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28
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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34
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Item 4.
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Controls and Procedures | 35 | |
PART II. OTHER INFORMATION
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Item 1.
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Legal Proceedings
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37
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Item 1A.
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Risk Factors | 37 | |
Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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38
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Item 3.
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Defaults Upon Senior Securities | 38 | |
Item 4.
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(Removed and Reserved)
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38
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Item 5.
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Other Information
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38
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Item 6.
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Exhibits | 38 |
In this Quarterly Report, all references to “our,” “us,” “we,” “the Company” and “GXS” refer to GXS Worldwide, Inc. and its subsidiaries as a consolidated entity, unless the context otherwise requires or where otherwise indicated.
The common stock of GXS, Inc., GXS Worldwide, Inc.’s only subsidiary, is collateral for the Company’s 9.75% Senior Secured Notes due 2015, which are the subject of a registered exchange offer that commenced on August 11, 2010 and is expected to expire on September 10, 2010 (subject to extension). Securities and Exchange Commission Rule 3-16 of Regulation S-X (“Rule 3-16”) requires financial statements for each of the
2
registrant’s affiliates whose securities constitute a substantial portion of the collateral for registered securities. The common stock of GXS, Inc. is considered to constitute a substantial portion of the collateral for the registered notes being offered in the exchange offer. Accordingly, the financials statements of GXS, Inc. would be required by Rule 3-16. Management does not believe the GXS, Inc. financial statements would add meaningful disclosure and has not included those financial statements herein, because they are substantially identical to the GXS Worldwide, Inc. financial statements and the total assets, revenues, operating income, net income (loss) and cash flows of GXS, Inc. are expected to continue to constitute substantially all of the corresponding amounts for GXS Worldwide, Inc. and its subsidiaries.
3
PART I. FINANCIAL INFORMATION
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
December 31, 2009
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June 30, 2010
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|||||||
Assets
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(unaudited)
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Current:
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||||||||
Cash and cash equivalents
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$ | 25,549 | $ | 24,451 | ||||
Receivables, net
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90,028 | 94,469 | ||||||
Prepaid expenses and other current assets
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12,760 | 18,392 | ||||||
Total current assets
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128,337 | 137,312 | ||||||
Restricted cash
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227,580 | –– | ||||||
Property and equipment, net
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91,208 | 94,601 | ||||||
Goodwill
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75,856 | 249,531 | ||||||
Other intangible assets, net
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9,254 | 178,653 | ||||||
Deferred financing costs
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22,622 | 20,807 | ||||||
Other assets
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19,165 | 20,782 | ||||||
Total Assets
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$ | 574,022 | $ | 701,686 | ||||
Liabilities and Stockholder's Deficit
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Current:
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||||||||
Borrowings under revolving credit facility
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$ | –– | $ | 15,000 | ||||
Trade payables
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10,995 | 9,137 | ||||||
Deferred income
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29,914 | 38,446 | ||||||
Accrued expenses and other current liabilities
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60,232 | 66,357 | ||||||
Total current liabilities
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101,141 | 128,940 | ||||||
Long-term debt
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766,450 | 767,746 | ||||||
Deferred tax liabilities
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1,330 | 7,865 | ||||||
Other liabilities
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43,863 | 49,842 | ||||||
Total liabilities
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912,784 | 954,393 | ||||||
GXS Worldwide, Inc. stockholder's deficit:
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Common stock $1.00 par value, 1,000 shares authorized, issued
and outstanding
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1 | 1 | ||||||
Additional paid-in capital
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357,851 | 427,572 | ||||||
Accumulated deficit
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(690,147 | ) | (672,731 | ) | ||||
Accumulated other comprehensive loss
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(6,707 | ) | (7,739 | ) | ||||
Total GXS Worldwide, Inc. stockholder's deficit
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(339,002 | ) | (252,897 | ) | ||||
Non-controlling interest
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240 | 190 | ||||||
Total deficit
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(338,762 | ) | (252,707 | ) | ||||
Total Liabilities and Stockholder's Deficit
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$ | 574,022 | $ | 701,686 |
See accompanying notes to condensed consolidated financial statements.
4
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
Three Months ended June 30,
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Six Months ended June 30,
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2009
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2010
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2009
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2010
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Revenues
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$ | 86,864 | $ | 97,649 | $ | 170,710 | $ | 182,335 | ||||||||
Costs and operating expenses:
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Cost of revenues
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48,405 | 50,407 | 97,912 | 94,463 | ||||||||||||
Sales and marketing
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10,477 | 13,067 | 21,185 | 24,548 | ||||||||||||
General and administrative
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11,838 | 12,466 | 25,392 | 25,803 | ||||||||||||
Restructuring charges
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6,181 | 781 | 6,601 | 1,067 | ||||||||||||
Merger and acquisition fees
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–– | 6,519 | –– | 9,004 | ||||||||||||
Operating income
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9,963 | 14,409 | 19,620 | 27,450 | ||||||||||||
Other income (expense):
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Loss on disposition of assets
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–– | (1,724 | ) | –– | (1,724 | ) | ||||||||||
Interest income
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74 | 90 | 138 | 129 | ||||||||||||
Interest expense
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(15,242 | ) | (20,717 | ) | (27,082 | ) | (42,938 | ) | ||||||||
Other income (expense), net
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2,344 | (560 | ) | 621 | (1,412 | ) | ||||||||||
Loss before income taxes
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(2,861 | ) | (8,502 | ) | (6,703 | ) | (18,495 | ) | ||||||||
Income tax expense (benefit)
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6 | (36,537 | ) | 503 | (35,861 | ) | ||||||||||
Net income (loss)
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(2,867 | ) | 28,035 | (7,206 | ) | 17,366 | ||||||||||
Less: Net income (loss) attributable to non-controlling interest
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(7 | ) | (21 | ) | 1 | (50 | ) | |||||||||
Net income (loss) attributable to GXS Worldwide, Inc.
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$ | (2,860 | ) | $ | 28,056 | $ | (7,207 | ) | $ | 17,416 |
See accompanying notes to condensed consolidated financial statements.
5
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
Three Months ended June 30,
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Six Months ended June 30,
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|||||||||||||||
2009
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2010
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2009
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2010
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Net income (loss)
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$ | (2,867 | ) | $ | 28,035 | $ | (7,206 | ) | $ | 17,366 | ||||||
Unrealized gain (loss) on interest rate swap
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954 | –– | (494 | ) | –– | |||||||||||
Foreign currency translation adjustments
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3,115 | (367 | ) | 3,044 | (1,032 | ) | ||||||||||
Comprehensive income (loss)
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1,202 | 27,668 | (4,656 | ) | 16,334 | |||||||||||
Less: Comprehensive income (loss) attributable to non-controlling interest
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(7 | ) | (21 | ) | 1 | (50 | ) | |||||||||
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
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$ | 1,209 | $ | 27,689 | $ | (4,657 | ) | $ | 16,384 |
See accompanying notes to condensed consolidated financial statements.
6
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholder’s Deficit
(In thousands)
(Unaudited)
Common
stock
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Additional
paid-in
capital
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Accumulated
deficit
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Accumulated
other
comprehensive
loss
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Non-
controlling
interest
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Total
Stockholder's
deficit
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Balance at December 31, 2009
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$ | 1 | $ | 357,851 | $ | (690,147 | ) | $ | (6,707 | ) | $ | 240 | $ | (338,762 | ) | |||||||||
Net income (loss)
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–– | –– | 17,416 | –– | (50 | ) | 17,366 | |||||||||||||||||
Stock compensation expense
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–– | 83 | –– | –– | –– | 83 | ||||||||||||||||||
Waiver of payment by Francisco Partners of management fees
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–– | 833 | –– | –– | –– | 833 | ||||||||||||||||||
Contribution from GXS Holdings
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–– | 68,805 | –– | –– | –– | 68,805 | ||||||||||||||||||
Foreign currency translation adjustments
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–– | –– | –– | (1,032 | ) | –– | (1,032 | ) | ||||||||||||||||
Balance at June 30, 2010
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$ | 1 | $ | 427,572 | $ | (672,731 | ) | $ | (7,739 | ) | $ | 190 | $ | (252,707 | ) |
See accompanying notes to condensed consolidated financial statements.
7
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months ended June 30,
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2009
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2010
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Cash flows from operations:
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Net income (loss)
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$ | (7,206 | ) | $ | 17,366 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
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Depreciation and amortization
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29,330 | 18,851 | ||||||
Deferred income taxes
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(1,228 | ) | 152 | |||||
Change in deferred tax asset valuation allowance resulting from business acquisition
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–– | (36,821 | ) | |||||
Loss on disposition of assets
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–– | 1,724 | ||||||
Amortization of deferred financing costs and debt discount
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1,553 | 3,722 | ||||||
Unrealized gain on interest rate swap
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(414 | ) | (3,333 | ) | ||||
Stock compensation expense
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80 | 83 | ||||||
Accretion of interest on obligations of GXS Holdings
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2,206 | –– | ||||||
Changes in operating assets and liabilities, net of effect of business acquisition:
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Decrease in receivables
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5,943 | 10,850 | ||||||
Increase in prepaid expenses and other assets
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(5,586 | ) | (1,114 | ) | ||||
Decrease in trade payables
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(2,066 | ) | (14,803 | ) | ||||
Decrease in deferred income
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(489 | ) | (2,309 | ) | ||||
Increase (decrease) in accrued expenses and other liabilities
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7,182 | (1,501 | ) | |||||
Other
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(2,687 | ) | 3,282 | |||||
Net cash provided by (used in) operating activities
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26,618 | (3,851 | ) | |||||
Cash flows from investing activities:
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Purchases of property and equipment
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(13,132 | ) | (19,517 | ) | ||||
Proceeds from sale of assets
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–– | 400 | ||||||
Business acquisition, net of cash acquired of $14,440
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–– | (220,005 | ) | |||||
Decrease in restricted cash
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–– | 227,580 | ||||||
Net cash used in investing activities
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(13,132 | ) | (11,542 | ) | ||||
Cash flows from financing activities:
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Repayment of long-term debt
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(42,138 | ) | –– | |||||
Borrowings under revolving credit facility
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18,000 | 23,000 | ||||||
Repayments of borrowings under revolving credit facility
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(18,000 | ) | (8,000 | ) | ||||
Payment of financing costs
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(2,621 | ) | (228 | ) | ||||
Net cash provided by (used in) financing activities
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(44,759 | ) | 14,772 | |||||
Effect of exchange rate changes on cash
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2,272 | (477 | ) | |||||
Decrease in cash and cash equivalents
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(29,001 | ) | (1,098 | ) | ||||
Cash and cash equivalents, beginning of year
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47,863 | 25,549 | ||||||
Cash and cash equivalents, end of period
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$ | 18,862 | $ | 24,451 | ||||
Supplemental disclosure of cash flow information:
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Cash paid for interest
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$ | 21,885 | $ | 41,460 | ||||
Cash paid for income taxes
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$ | 790 | $ | 1,060 | ||||
Noncash investing and financing activities:
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Advisory fees waived by Francisco Partners
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$ | 1,000 | $ | 833 | ||||
Fair value of equity securities issued in business acquisition
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$ | - | $ | 68,805 |
See accompanying notes to condensed consolidated financial statements.
8
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, unless otherwise indicated)
(1) Business and Basis of Presentation
GXS Worldwide, Inc. and its subsidiaries (GXS Worldwide or the Company) are primarily engaged in the business of providing transaction management infrastructure products and services that enable companies to electronically exchange essential business documents. The Company’s services and solutions enable customers to manage mission critical supply chain functions and financial transactions related to the exchange of goods and services. Customers and their trading partners do business together via GXS Trading Grid®, a globally-accessible, cloud-computing platform specifically designed for B2B e-commerce. The Company is a wholly owned subsidiary of GXS Group, Inc. (GXS Group).
On June 2, 2010, GXS Holdings, Inc. (GXS Holdings), a Delaware corporation and our direct parent company, which directly owned 100% of the Company’s issued and outstanding common stock, acquired Inovis International, Inc. (Inovis), a provider of integrated B2B services and solutions that manage the flow of e-commerce information for global trading communities (the Merger). Following the Merger, Inovis was merged with GXS, Inc. (GXSI), an indirect wholly-owned subsidiary, and became an indirect wholly-owned subsidiary of GXS Group, Inc. (previously known as Griris Holding Company, Inc.). Certain foreign subsidiaries of Inovis became wholly owned subsidiaries of GXSI.
The Merger is being accounted for using the purchase method of accounting prescribed in Financial Accounting Standard Codification 805 – Business Combinations. Under this standard, the excess of the purchase price over net assets acquired and liabilities assumed is recorded as goodwill. Purchase price allocated to property and equipment, trade names, customer contracts and relationships or other identifiable intangible assets will result in additional depreciation and amortization expense after the Merger. The amount of depreciation and amortization will be based upon the amount allocated and the estimated useful lives of the respective assets. Revenue and operating income will be affected by a write-down of deferred revenue to reflect estimated fair value. The adjustment to deferred revenue will affect revenue and operating income in the twelve months following the Merger.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information. Accordingly, these financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring accruals) considered necessary for a fair presentation of the financial position and results of operations.
Interim results for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2009, which are included in the Company’s registration statement on Form S-4 filed under the Securities Act with the Securities and Exchange Commission (SEC) on July 27, 2010.
Certain reclassifications have been made to the condensed consolidated financial statements as of December 31, 2009 and for the three and six months ended June 30, 2009 to conform to the presentation at June 30, 2010 and for the three and six months then ended.
(2) Summary of Significant Accounting Policies
(a) Consolidation
The condensed consolidated financial statements represent the consolidation of all companies in which the Company directly or indirectly has a majority ownership interest and controls the operations. All significant intercompany transactions and balances have been eliminated in consolidation. Investments in companies in which the Company has an ownership interest of 50% or less but can exercise significant influence over the investee’s operations and policies are accounted for under the equity method of accounting. The Company uses the cost method to account for investments where it holds less than a 20% ownership interest and where it cannot exercise significant influence over the investee’s operations and policies. At the end of each reporting period, the Company assesses the fair value of its investments to determine if any impairment has occurred. To the extent the Company’s carrying value exceeds the estimated fair value and the loss is considered to be other than a temporary decline, the Company records an impairment charge.
9
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Dollars in thousands, unless otherwise indicated)
(b) Foreign Currency
The financial statements of most subsidiaries located outside of the United States are measured using the local currency as the functional currency. Assets, including goodwill, and liabilities are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange. The resulting translation gains and losses are included as a separate component of other comprehensive income (loss). Gains and losses from transactions in foreign currency are included in the condensed consolidated statements of operations within other income (expense), net.
(c) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of overnight interest bearing deposits.
(d) Revenue Recognition
The Company generates revenues from three principal sources:
Transaction Processing — The Company earns recurring transaction processing fees from facilitating the exchange of business documents among its customers’ computer systems and those of their trading partners. Such revenues are generally based on a per transaction fee or monthly minimum charge and are recognized in the period in which the related transactions are processed. Revenue on contracts with monthly, quarterly or annual minimum transaction levels is recognized based on the greater of actual transactions or the specified contract minimum amounts.
Software Licensing and Maintenance — The Company earns revenue from the licensing of software applications that facilitate and automate the exchange of information among disparate business systems and applications. Such revenues are recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection is considered probable. Revenue from licensing software that requires significant customization and modification or where services are otherwise considered essential to the functionality of the software are recognized using the percentage of completion method, based on the costs incurred in relation to the total estimated costs of the contract. Revenue from hosted software applications are recognized ratably over the hosting period unless the customer has the contractual right to take possession of the software without significant penalty and it is feasible for the customer to use the software with its own hardware or contract with another party unrelated to the Company to host the software. Software maintenance revenue is deferred and recognized on a straight-line basis over the life of the related maintenance period, which is typically one year.
Professional Services — Professional services are generally conducted under time and material contracts and revenue is recognized as the related services are provided.
For arrangements with more than one element of revenue, the Company allocates revenue to each component based on vendor specific objective evidence (VSOE) of fair value. VSOE for software maintenance is based on contractual renewal rates. Professional services are separately priced and are based on standard hourly rates determined by the nature of the service and the experience of the professional performing the service.
The Company defers direct costs associated with implementation of certain of its long-term customer contracts to the extent such costs can be recovered through guaranteed contract revenues. The unamortized balance of those costs as of December 31, 2009 and June 30, 2010 were $14,403 and $15,595, respectively, and are included in other non-current assets in the condensed consolidated balance sheets.
10
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Dollars in thousands, unless otherwise indicated)
(e) Comprehensive Loss
Comprehensive loss consists of net loss adjusted for increases and decreases affecting accumulated other comprehensive loss in stockholder’s deficit that are excluded from the determination of net loss.
Accumulated other comprehensive loss consisted of the following:
December 31,
2009
|
June 30,
2010
|
|||||||
Additional minimum pension liability
|
$ | (963 | ) | $ | (963 | ) | ||
Foreign currency translation adjustments
|
(5,744 | ) | (6,776 | ) | ||||
Accumulated other comprehensive loss
|
$ | (6,707 | ) | $ | (7,739 | ) |
(f) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income tax liabilities are recorded for the impact of positions taken on income tax returns which management believes are not likely to be sustained on tax audit. Interest expense accrued on such unrecognized tax benefits and income tax penalties are recognized through income tax expense.
The expected effective income tax rate for the three and six months ended June 30, 2009 and 2010 differs from the federal statutory rate of 35% principally as a result of state income taxes, differing rates in foreign jurisdictions, the effect of losses in the United States and foreign jurisdictions for which no income tax benefit has been recognized and the decrease in the Company’s deferred tax asset valuation allowance as a result of net deferred tax liabilities assumed and recognized in purchase accounting. Such reduction was recognized as an income tax benefit in the condensed consolidated statement of operations.
(g) Derivative Instruments
Derivative instruments are recognized on the condensed consolidated balance sheets at their fair value and changes in the fair value are recognized in income, unless the derivatives qualify as hedges of future cash flows. For derivatives qualifying as hedges of future cash flows, the effective portion of any changes in fair value is recorded temporarily in equity, and then recognized in income along with the related effects of the hedged items. Any ineffective portion of hedges is reported in income as it occurs.
The Company determined the fair value of its interest rate swap using pricing models developed based on the LIBOR swap rate and other observable inputs, adjusted to reflect non performance risk of both the counterparty and the Company. The Company considers the interest rate swap to be included within Level 2 of the fair value hierarchy established by U.S. GAAP, as its fair value is measured primarily utilizing observable market based inputs.
(h) Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, receivables, an interest rate swap and long-term debt. Generally, the carrying amounts of current assets and liabilities approximate fair value because of the short-term maturity of these instruments. As of June 30, 2010, the Company’s long-term debt was trading close to the issue price so the Company considers the fair value to approximate the book value. The fair value of the Company’s interest rate swap is discussed further in note 8.
(i) Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Significant estimates used in preparing the condensed
11
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Dollars in thousands, unless otherwise indicated)
consolidated financial statements include recovery of long-lived assets, valuation of receivables and valuation of deferred tax assets. In addition, estimates are required to recognize revenue for software arrangements with multiple deliverables and to assess the stage at which software development costs should be capitalized.
(j) Recently Released Accounting Standards
In September 2009, the FASB issued Accounting Standards Update (ASU) 2009-13 (previously Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple Deliverables). ASU 2009-13 supersedes EITF No. 00-21 and addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 will require companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. Management is currently evaluating the potential impact, if any, of the adoption of ASU 2009-13 on the Company’s consolidated results of operations and financial condition.
(3) Acquisition of Inovis
On June 2, 2010, GXS Holdings acquired all the capital stock of Inovis International, Inc. for total consideration of $303,250, including cash of $129,782 paid to retire the outstanding debt of Inovis and cash of $104,663 paid to the Inovis stockholders. The Inovis stockholders also received common and preferred stock, with a preliminary estimated fair value of $68,805, in a newly formed holding company, GXS Group, Inc., which owns all of the capital stock of GXS Holdings, resulting in Inovis stockholders having an approximate 28.1% ownership interest in the combined company following consummation of the Merger. Concurrent with the Merger, through a series of transactions, the capital stock of Inovis was contributed to GXS, Inc., a wholly-owned subsidiary of the Company and Inovis International, Inc. and certain of its U.S. subsidiaries became wholly-owned subsidiaries of GXS, Inc.
The Company used net proceeds held in escrow of $227,580 obtained from the senior secured notes issued in December 2009 to retire the Inovis indebtedness and to fund a portion of the cash consideration paid to the Inovis stockholders. Of the $104,663 cash paid to the Inovis stockholders, $10,800 is held in escrow until the indemnification obligations of the Inovis stockholders expire on June 2, 2011.
Inovis is a provider of integrated B2B services and solutions that manage the flow of e-commerce information for global trading communities. The Merger will expand the Company’s customer base in the U.S., Canada and the U.K., broaden its product offerings and increase the functionality of its managed services offering.
The Merger was accounted for using the purchase method of accounting prescribed in Financial Accounting Standard Codification 805 – Business Combinations. Under this standard, the excess of the purchase price over the fair value of net assets acquired and liabilities assumed is recorded as goodwill. The application of purchase accounting for the transaction resulted in a preliminary value of $303,250. On that basis, the table below shows the preliminary value of the consideration paid in connection with the Merger:
Debt of Inovis retired at closing
|
$ | 129,782 | ||
Cash paid to stockholders of Inovis
|
104,663 | |||
Preliminary estimated fair value of equity securities issued to stockholders of Inovis
|
68,805 | |||
Total consideration
|
$ | 303,250 |
All expenditures incurred in connection with the Merger were expensed and are included in operating expenses. Transaction costs incurred in connection with the Merger were $6,519 and $9,004 during the three months and six months ended June 30, 2010, including $3,000 paid to Francisco Partners during the three months ended June 30, 2010. The results of operations for Inovis have been included in the condensed consolidated results of operations for the period June 2, 2010 through June 30, 2010.
We have preliminarily allocated the purchase price based on current estimates of the fair values of assets acquired and liabilities assumed in connection with the Inovis acquisition. The table below summarizes the preliminary estimates of fair value of the Inovis assets acquired, liabilities assumed and related deferred income taxes as of the acquisition date. The Company expects to obtain additional information to assist in determining the fair value of the net assets acquired at the acquisition date. Therefore, these
12
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Dollars in thousands, unless otherwise indicated)
preliminary estimates may be revised in future periods during the applicable measurement period and the revisions may materially affect the presentation of our consolidated financial results. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.
Preliminary
Allocation
June 2, 2010
|
||||
Acquired assets:
|
||||
Current assets
|
$ | 34,917 | ||
Property and equipment
|
5,802 | |||
Other non-current assets
|
555 | |||
Goodwill
|
174,606 | |||
Amortized intangible assets
|
171,380 | |||
Total assets
|
387,260 | |||
Assumed liabilities:
|
||||
Current liabilities
|
(38,609 | ) | ||
Deferred tax liabilities
|
(42,836 | ) | ||
Other non-current liabilities
|
(2,565 | ) | ||
Total liabilities
|
(84,010 | ) | ||
Total consideration
|
$ | 303,250 |
Amortized intangible assets and the related estimated useful lives consist of the following:
Preliminary
Estimated
Useful Lives
|
Preliminary
Estimated
Value
June 2, 2010
|
||||
Customer relationships
|
15-20 years
|
$ | 149,100 | ||
Product technology
|
5-10 years
|
17,780 | |||
Trademarks
|
5 years
|
4,500 | |||
$ | 171,380 |
In connection with the Merger, the Company reduced its deferred tax asset valuation allowance by $36,821 as the result of net deferred tax liabilities assumed and recognized in purchase accounting. Such reduction was recognized as an income tax benefit in the condensed consolidated statements of operations for the three and six months ended June 30, 2010.
The following schedule presents unaudited consolidated pro forma results of operations data as if the Merger had occurred on January 1, 2009. This information does not purport to be indicative of the actual results that would have occurred if the Merger had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company:
Three Months ended June 30,
|
Six Months ended June 30,
|
|||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||
Revenues
|
$ | 120,107 | $ | 120,561 | $ | 237,261 | $ | 237,173 | ||||||||
Net loss
|
(5,183 | ) | (446 | ) | (15,305 | ) | (3,730 | ) |
The Merger was subject to regulatory review. In connection with the review by the Antitrust Division of the U.S. Department of Justice, the Company divested its catalog service offering. On May 28, 2010, the Company sold customer contracts and intellectual property rights related to its catalog service offering and recorded a loss on sale of $1,724.
13
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Dollars in thousands, unless otherwise indicated)
(4) Accounts Receivable
Accounts receivable, net were comprised of the following:
December 31,
2009
|
June 30,
2010
|
|||||||
Trade accounts receivable
|
$ | 79,763 | $ | 86,607 | ||||
Unbilled receivables
|
2,200 | 2,454 | ||||||
Other receivables
|
22,414 | 20,035 | ||||||
104,377 | 109,096 | |||||||
Less: allowance for doubtful accounts
|
(14,349 | ) | (14,627 | ) | ||||
Total
|
$ | 90,028 | $ | 94,469 |
(5) Property and Equipment
Property and equipment, net were comprised of the following:
December 31,
2009
|
June 30,
2010
|
|||||||
Computer equipment and furniture
|
$ | 249,125 | $ | 195,555 | ||||
Computer software
|
287,216 | 293,847 | ||||||
Leasehold improvements
|
18,673 | 19,808 | ||||||
555,014 | 509,210 | |||||||
Less: accumulated depreciation and amortization
|
(463,806 | ) | (414,609 | ) | ||||
Total
|
$ | 91,208 | $ | 94,601 |
(6) Goodwill and Other Acquired Intangible Assets
The following represents a summary of changes in goodwill for the six months ended June 30, 2010:
Beginning of year
|
$ | 75,856 | ||
Merger-related additions
|
174,606 | |||
Foreign currency translation
|
(931 | ) | ||
End of period
|
$ | 249,531 |
On June 2, 2010, the Company acquired Inovis for total consideration of $303,250, as more fully discussed in note 3. The preliminary aggregate purchase price exceeded the preliminary estimated fair value of the net tangible assets and identified intangible assets by $174,606, which was allocated to goodwill.
14
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Dollars in thousands, unless otherwise indicated)
Other acquired intangible assets were comprised of the following:
June 30, 2010
|
||||||||||||
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net
|
||||||||||
Amortized intangible assets:
|
||||||||||||
Customer relationships
|
$ | 246,864 | $ | (93,467 | ) | $ | 153,397 | |||||
Product technology
|
17,780 | (167 | ) | 17,613 | ||||||||
Trade names and trademarks
|
4,500 | (75 | ) | 4,425 | ||||||||
Other acquired intangible assets
|
3,840 | (2,741 | ) | 1,099 | ||||||||
Total
|
$ | 272,984 | $ | (96,450 | ) | $ | 176,534 | |||||
Unamortized intangible assets:
|
||||||||||||
Trade names and trademarks
|
$ | 2,119 | ||||||||||
December 31, 2009
|
||||||||||||
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net
|
||||||||||
Amortized intangible assets:
|
||||||||||||
Customer relationships
|
$ | 97,875 | $ | (92,046 | ) | $ | 5,829 | |||||
Other acquired intangible assets
|
3,865 | (2,585 | ) | 1,280 | ||||||||
Total
|
$ | 101,740 | $ | (94,631 | ) | $ | 7,109 | |||||
Unamortized intangible assets:
|
||||||||||||
Trade names and trademarks
|
$ | 2,145 |
Intangible assets, except for those with an indefinite life, are amortized over their estimated useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are expected to be consumed or on a straight-line basis. Amortization expense related to intangible assets was $4,900 and $10,256 for the three and six months ended June 30, 2009, respectively, and $1,385 and $1,818 for the three and six months ended June 30, 2010. Estimated aggregate amortization expense of intangible assets for the period from July 1, 2010 through December 31, 2010 and for each of the following five years ending December 31 is approximately: $6,595 remaining in 2010, $13,190 in 2011, $13,190 in 2012, $13,190 in 2013, $11,445 in 2014, $10,665 in 2015 and $108,259 thereafter.
The gross carrying amounts of certain intangible assets are impacted by certain balances being denominated in foreign currencies. These balances are translated into U.S. dollars at the exchange rate in effect at the balance sheet date.
15
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Dollars in thousands, unless otherwise indicated)
(7) Long-Term Debt
The carrying values of our notes payable were as follows:
December 31,
2009
|
June 30,
2010
|
|||||||
Senior secured notes
|
$ | 785,000 | $ | 785,000 | ||||
Less: unamortized discount
|
(18,550 | ) | (17,254 | ) | ||||
Long-term debt
|
$ | 766,450 | $ | 767,746 |
The fair values of the senior secured notes approximate their respective book values at December 31, 2009 and June 30, 2010.
Senior Secured Notes
On December 23, 2009, the Company issued $785,000 of senior secured notes (the Senior Secured Notes) with an original issue discount of approximately $18,608. Net proceeds from issuance were used to retire all of the outstanding debt under the 2007 Credit Facility, $35,000 of GXS Holdings outstanding subordinated notes, pay debt issue costs and for other general corporate purposes. Furthermore, under the terms of the indenture, the Company placed $227,580 in an escrow account to fund the Merger. On June 2, 2010, the Company withdrew all of the funds from the escrow account to fund a portion of the cash paid to retire the outstanding debt of Inovis and the cash paid to the Inovis stockholders as more fully described in note 3.
On July 27, 2010, the Company filed a registration statement with the SEC to register new notes with materially identical terms to the Senior Secured Notes. On August 11, 2010, the Company filed a prospectus pursuant to Rule 424(b) of the Securities Act with the SEC to offer a public exchange of these notes. The exchange offer expires on September 10, 2010 (subject to extension).
The Senior Secured Notes bear interest at an annual rate of 9.75%, with interest payable on June 15 and December 15 each year. The Senior Secured Notes mature on June 15, 2015 and are guaranteed on a senior secured basis by all of the Company’s existing and future wholly-owned domestic subsidiaries and all other domestic subsidiaries that guarantee the Company’s other indebtedness; and in certain circumstances are secured by an interest granted on substantially all of the Company’s properties and assets. The Senior Secured Notes contain covenants that, among other things, restrict the Company’s ability to pay dividends, redeem stock, or make certain distributions or payments or investments, incur indebtedness, create liens on the collateral, merge, consolidate or sell assets, and enter into transactions with affiliates.
Revolving Credit Facility
On December 23, 2009, the Company entered into a Credit and Guaranty Agreement which provides the Company with a $50,000 revolving credit facility. The interest rate for the revolving credit facility is an amount to be determined above the London Interbank Offered Rate (subject to a LIBOR floor of 2.0%) or at an amount to be determined above the administrative agent’s “base rate” (subject to a floor of 3.0%), at the Company’s option. The revolving credit facility is guaranteed by the guarantors that guarantee the Senior Secured Notes and secured by collateral that secure the Senior Secured Notes. The revolving credit facility is used by the Company, among other things, to fund its working capital needs, back letters of credit and for general corporate purposes. The Company’s ability to borrow additional monies in the future under the revolving credit facility is subject to certain conditions, including compliance with certain covenants beginning with the fiscal quarter that ended March 31, 2010. As of June 30, 2010, the Company had outstanding letters of credit of $11,661, borrowings of $15,000 and additional available borrowings of $23,339 under the revolving credit facility. The annual interest rate on the borrowings outstanding under the Revolving Credit Facility at June 30, 2010 was 7.75%. Following the December 23, 2009 debt refinancing, our principal sources of liquidity are expected to be cash, cash flow from operations and borrowings under the revolving credit facility. The revolving credit facility shall be repaid in full, and the commitments shall terminate, on the date that is three years after December 23, 2009.
The revolving credit facility requires the Company to maintain certain financial and nonfinancial covenants. Noncompliance with any covenant specified in the Credit and Guaranty Agreement would qualify as an event of default whereby the lenders would have rights to call all outstanding borrowings due and payable. At June 30, 2010, the Company was in compliance with all financial and nonfinancial covenants.
16
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Dollars in thousands, unless otherwise indicated)
2007 Credit Facility
On October 5, 2007, the Company entered into a first lien credit agreement (the First Lien Agreement) and a second lien credit agreement (the Second Lien Agreement and together with the First Lien Agreement, the 2007 Credit Facility). Proceeds from the 2007 Credit Facility together with a capital contribution from GXS Holdings and cash resources were used to retire all amounts under the 2005 Credit Facility and the Company’s outstanding Senior Subordinated Notes. The First Lien Agreement consisted of (a) a $335,000 term credit facility (the First Lien Facility) and (2) a $50,000 revolving credit facility. The Second Lien Agreement consisted of a $175,000 term credit facility (the Second Lien Facility). Interest expense for the 2007 Credit Facility was $11,853 and $21,057 for the three months and six months ended June 30, 2009, respectively.
All amounts outstanding under the 2007 Credit Facility were retired upon issuance of the Senior Secured Notes on December 23, 2009, and the 2007 Credit Facility was terminated.
Obligations of GXS Holdings
On October 5, 2007, GXS Holdings issued $55,000 of subordinated notes due September 30, 2017. The notes bear interest at 14.2%, all payable in additional debt securities with the same terms and conditions as the subordinated notes. The Company has not guaranteed nor pledged any of its assets to secure the notes. The entire proceeds from these subordinated notes were used to fund a capital contribution to the Company which was used, in part, to repay the debt which was refinanced in connection with the closing of the 2007 Credit Facility.
The Company repaid $35,000 of the outstanding subordinated notes in December 2009 with a portion of the proceeds from the issuance of the Senior Secured Notes. In the three and six months ended June 30, 2009, interest expense incurred related to the GXS Holdings debt and included in the Company’s condensed consolidated statements of operations was $1,122 and $2,206, respectively.
Other Information
The Company expects that cash flows from foreign operations will be required to meet its domestic debt service requirements. The Company expects to generate cash flows from its foreign operations from the sale of network and processing resources, software licenses and software maintenance contracts. However, there is no assurance that the foreign subsidiaries will generate sufficient cash flow or that the laws in foreign jurisdictions will not change to limit collections on these sales or increase the tax burden on the collections.
(8) Financial Instruments
The Company has an interest rate swap agreement with a commercial bank with a notional amount of $255,000. The provisions of the agreement provide that the Company will pay the counterparty a fixed rate of 3.86%. The counterparty will pay the Company a variable rate equal to three-month LIBOR, which was 0.31% at June 30, 2010. The fair value of the interest rate swap was $11,848 and $8,515 as of December 31, 2009 and June 30, 2010, respectively, and was recorded in other liabilities in the condensed consolidated balance sheets. The interest rate swap agreement has a three-year term which expires on April 26, 2011.
The interest rate swap had previously been designated as a cash flow hedge, and was utilized to manage the Company’s exposure related to changes in the three month LIBOR rate associated with its variable-rate 2007 Credit Facility. As the hedged future forecasted transactions (variable interest payments on the 2007 Credit Facility) were no longer probable of occurring upon the repayment and extinguishment of the 2007 Credit Facility in December 2009, the effective portion of the hedge was reclassified out of accumulated other comprehensive loss into interest expense in December 2009. In addition, changes in the fair value of the interest rate swap are now recorded through interest expense, and the change in fair value of the interest rate swap of $2,291 and $3,333 were recorded as a reduction to interest expense in the three and six months ended June 30, 2010.
(9) Contingencies
The Company is subject to various legal proceedings and claims, which arise in the ordinary course of its business, none of which management believes are likely to have a material adverse effect on the Company’s financial position or results of operations.
In 2006, Inovis became aware of patent infringement allegations by a third party against certain customers of one of Inovis’ software technology products. In July 2007, Inovis filed a complaint for declaratory judgment against the third party in the United States District Court of Delaware, seeking a judgment and declaration that neither Inovis nor any of its customers have infringed on the
17
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Dollars in thousands, unless otherwise indicated)
patent at issue. Inovis filed a Request for Reexamination of such patent with the U.S. Patent and Trademark Office (the “USPTO”) which was accepted in May 2008, resulting in the amendment and/or cancellation of certain of the patent claims. In September 2009, the USPTO granted a second Request for Reexamination of the patent filed by Inovis, finding a substantial new question of patentability with respect to all claims. In March 2010, the USPTO issued an initial ruling rejecting all of the claims in the patent. The litigation is currently stayed pending the outcome of the second reexamination proceeding. Although the Company believes that the third party’s patent infringement allegations are without merit, there can be no assurance that the Company will prevail in the litigation.
(10) Restructuring Charges
During the past several years, the Company has undertaken a series of restructuring activities, which included closing, consolidating or abandoning certain office facilities and employee terminations, in order to reduce expenses in response to changing business requirements. Notably, in 2009, the Company initiated a plan to relocate its global headquarters and sublet its former global headquarters. The move was completed in 2010. The restructuring charges reflect the total estimated net costs of these activities and current period adjustments of revised estimates associated with these restructuring plans.
The Company recorded a restructuring accrual of $1,345 for costs associated with the termination of certain Inovis employees who were terminated upon consummation of the Merger. This restructuring accrual was established as part of the assumed liabilities of Inovis, as shown in note 3. Accordingly, there was no charge in the current period for the costs associated with these activities. The Company expects to take restructuring charges in 2010 and beyond related to exit activities associated with the integration of the Inovis business.
The changes in the restructuring accrual for the six months ended June 30, 2010 are as follows:
Severance
|
Facilities
|
Total
|
||||||||||
Balance as of December 31, 2009
|
$ | 149 | $ | 12,480 | $ | 12,629 | ||||||
Restructuring charges
|
825 | 242 | 1,067 | |||||||||
Merger-related exit costs
|
1,345 | –– | 1,345 | |||||||||
Payments and other adjustments
|
(746 | ) | (2,724 | ) | (3,470 | ) | ||||||
Balance as of June 30, 2010
|
$ | 1,573 | $ | 9,998 | $ | 11,571 |
Amounts that are estimated to be payable in the next twelve months totaled $4,553 and $4,861 at December 31, 2009 and June 30, 2010, respectively and are included in accrued expenses and other current liabilities in the condensed consolidated balance sheets.
(11) Related Party Transactions
Prior to the merger with Inovis on June 2, 2010, the Company had an agreement with Francisco Partners, the controlling shareholder of GXS Holdings, under which the Company had agreed to pay Francisco Partners an annual fee of $2,000 plus expenses for financial advisory and consulting services (the Monitoring Agreement). The expense related to the fees payable under the Monitoring Agreement was $500 and $651 for the three months ended June 30, 2009 and 2010, respectively, and $1,000 and $833 for the six months ended June 30, 2009 and 2010, respectively. Francisco Partners waived the payment of $2,000 of fees earned during the year ended December 31, 2009 and $833 of fees earned through June 2, 2010. Such amounts were recorded as contributions to additional paid-in capital in the condensed consolidated statements of changes in stockholder’s deficit. The Company paid Francisco Partners an advisory fee of $3,000 prior to the closing of the Merger.
On June 2, 2010, the Company terminated the Monitoring Agreement and GXS Group entered into a new management agreement pursuant to which GXS Group agreed to pay in the aggregate an annual fee of $4,000 to Francisco Partners and certain former shareholders of Inovis, Golden Gate Capital and Cerebus Partners, in exchange for financial advisory and consulting services (the Management Agreement). The Management Agreement has a term of ten years. The expense related to the management fee was $318 for the period from June 2, 2010 through June 30, 2010 and will be payable in full on December 31, 2010 along with the remaining management fees that will accrue during 2010.
18
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Dollars in thousands, unless otherwise indicated)
One of our executives is an investor in Mentora Group, Inc., a company that has provided technology-related consulting and hosting management services for Inovis. During the period from the date of acquisition through June 30, 2010, the Company incurred fees payable to Mentora of $185 for services provided during that period under various service agreements.
(12) Subsequent Events
Management evaluated all events and transactions that occurred after June 30, 2010 and through the date of this report, and determined the Company did not have any material subsequent events that require adjustment to or disclosure in the condensed consolidated financial statements during this period.
(13) Supplemental Condensed Consolidated Financial Information
The Senior Secured Notes are guaranteed by each of the Company’s United States subsidiaries (the Subsidiary Guarantors). The guarantees are full, unconditional and joint and several. The Subsidiary Guarantors are each wholly owned by the Company. The ability of the Company’s subsidiaries to make cash distributions and loans to the Company and Subsidiary Guarantors is not expected to be significantly restricted. The following supplemental financial information sets forth, on a consolidating basis, balance sheets, statements of operations and comprehensive income (loss), and statements of cash flows for the Company, Subsidiary Guarantors and the Company’s non-guarantor subsidiaries.
19
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
December 31, 2009
(In thousands)
(unaudited)
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
Assets
|
||||||||||||||||||||
Current:
|
||||||||||||||||||||
Cash and cash equivalents
|
$ | –– | $ | 12,983 | $ | 12,566 | $ | –– | $ | 25,549 | ||||||||||
Receivables, net
|
–– | 33,946 | 56,082 | –– | 90,028 | |||||||||||||||
Prepaid expenses and other assets
|
–– | 2,459 | 10,301 | –– | 12,760 | |||||||||||||||
Advances to subsidiaries
|
–– | 504,773 | 198,220 | (702,993 | ) | –– | ||||||||||||||
Total current assets
|
–– | 554,161 | 277,169 | (702,993 | ) | 128,337 | ||||||||||||||
Restricted cash
|
–– | 227,580 | –– | –– | 227,580 | |||||||||||||||
Investments in subsidiaries
|
421,238 | 4,284 | –– | (425,522 | ) | –– | ||||||||||||||
Property and equipment, net
|
–– | 84,196 | 7,012 | –– | 91,208 | |||||||||||||||
Goodwill
|
–– | 58,087 | 17,769 | –– | 75,856 | |||||||||||||||
Other intangible assets, net
|
–– | 700 | 8,554 | –– | 9,254 | |||||||||||||||
Deferred financing costs
|
22,622 | –– | –– | –– | 22,622 | |||||||||||||||
Other assets
|
–– | 12,225 | 6,940 | –– | 19,165 | |||||||||||||||
Total Assets
|
$ | 443,860 | $ | 941,233 | $ | 317,444 | $ | (1,128,515 | ) | $ | 574,022 | |||||||||
Liabilities and Equity (Deficit)
|
||||||||||||||||||||
Current:
|
||||||||||||||||||||
Trade payables
|
$ | 950 | $ | 6,548 | $ | 3,497 | $ | –– | $ | 10,995 | ||||||||||
Other current liabilities
|
3,614 | 37,823 | 48,709 | –– | 90,146 | |||||||||||||||
Advances from affiliates
|
–– | 465,977 | 237,016 | (702,993 | ) | –– | ||||||||||||||
Total current liabilities
|
4,564 | 510,348 | 289,222 | (702,993 | ) | 101,141 | ||||||||||||||
Long-term debt
|
766,450 | –– | –– | –– | 766,450 | |||||||||||||||
Other liabilities
|
11,848 | 9,647 | 23,698 | –– | 45,193 | |||||||||||||||
Total liabilities
|
782,862 | 519,995 | 312,920 | (702,993 | ) | 912,784 | ||||||||||||||
Equity (Deficit):
|
||||||||||||||||||||
Stockholder’s equity (deficit) GXS Worldwide, Inc.
|
(339,002 | ) | 421,238 | 4,284 | (425,522 | ) | (339,002 | ) | ||||||||||||
Non-controlling interest
|
–– | –– | 240 | –– | 240 | |||||||||||||||
Total equity (deficit)
|
(339,002 | ) | 421,238 | 4,524 | (425,522 | ) | (338,762 | ) | ||||||||||||
Total Liabilities and Equity (Deficit)
|
$ | 443,860 | $ | 941,233 | $ | 317,444 | $ | (1,128,515 | ) | $ | 574,022 |
20
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
June 30, 2010
(In thousands)
(Unaudited)
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
Assets
|
||||||||||||||||||||
Current:
|
||||||||||||||||||||
Cash and cash equivalents
|
$ | –– | $ | 12,936 | $ | 11,515 | $ | –– | $ | 24,451 | ||||||||||
Receivables, net
|
–– | 42,674 | 51,795 | –– | 94,469 | |||||||||||||||
Prepaid expenses and other assets
|
–– | 5,398 | 12,994 | –– | 18,392 | |||||||||||||||
Advances to subsidiaries
|
–– | 756,004 | 190,985 | (946,989 | ) | –– | ||||||||||||||
Total current assets
|
–– | 817,012 | 267,289 | (946,989 | ) | 137,312 | ||||||||||||||
Investments in subsidiaries
|
523,944 | 24,784 | –– | (548,728 | ) | –– | ||||||||||||||
Property and equipment, net
|
–– | 88,205 | 6,396 | –– | 94,601 | |||||||||||||||
Goodwill
|
–– | 218,176 | 31,355 | –– | 249,531 | |||||||||||||||
Other intangible assets, net
|
–– | 171,126 | 7,527 | –– | 178,653 | |||||||||||||||
Deferred financing costs
|
20,807 | –– | –– | –– | 20,807 | |||||||||||||||
Other assets
|
–– | 13,680 | 7,102 | –– | 20,782 | |||||||||||||||
Total Assets
|
$ | 544,751 | $ | 1,332,983 | $ | 319,669 | $ | (1,495,717 | ) | $ | 701,686 | |||||||||
Liabilities and Equity (Deficit)
|
||||||||||||||||||||
Current:
|
||||||||||||||||||||
Borrowing under revolving credit facility
|
$ | 15,000 | $ | –– | $ | –– | $ | –– | $ | 15,000 | ||||||||||
Trade payables
|
1,118 | 4,877 | 3,142 | –– | 9,137 | |||||||||||||||
Other current liabilities
|
5,269 | 47,218 | 52,316 | –– | 104,803 | |||||||||||||||
Advances from affiliates
|
–– | 719,925 | 227,064 | (946,989 | ) | –– | ||||||||||||||
Total current liabilities
|
21,387 | 772,020 | 282,522 | (946,989 | ) | 128,940 | ||||||||||||||
Long-term debt
|
767,746 | –– | –– | –– | 767,746 | |||||||||||||||
Other liabilities
|
8,515 | 37,019 | 12,173 | –– | 57,707 | |||||||||||||||
Total liabilities
|
797,648 | 809,039 | 294,695 | (946,989 | ) | 954,393 | ||||||||||||||
Equity (Deficit)
|
||||||||||||||||||||
Stockholder’s equity (deficit) GXS Worldwide, Inc.
|
(252,897 | ) | 523,944 | 24,784 | (548,728 | ) | (252,897 | ) | ||||||||||||
Non-controlling interest
|
–– | –– | 190 | –– | 190 | |||||||||||||||
Total equity (deficit)
|
(252,897 | ) | 523,944 | 24,974 | (548,728 | ) | (252,707 | ) | ||||||||||||
Total Liabilities and Equity (Deficit)
|
$ | 544,751 | $ | 1,332,983 | $ | 319,669 | $ | (1,495,717 | ) | $ | 701,686 |
21
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended June 30, 2009
(In thousands)
(Unaudited)
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
Revenues
|
$ | –– | $ | 72,834 | $ | 47,992 | $ | (33,962 | ) | $ | 86,864 | |||||||||
Costs and operating expenses
|
–– | 51,397 | 53,285 | (33,962 | ) | 70,720 | ||||||||||||||
Restructuring and related charges
|
–– | 5,059 | 1,122 | –– | 6,181 | |||||||||||||||
Operating income (loss)
|
–– | 16,378 | (6,415 | ) | –– | 9,963 | ||||||||||||||
Other income (expense), net
|
(15,048 | ) | 3,851 | (1,627 | ) | –– | (12,824 | ) | ||||||||||||
Income (loss) before income taxes
|
(15,048 | ) | 20,229 | (8,042 | ) | –– | (2,861 | ) | ||||||||||||
Income tax expense (benefit)
|
–– | 555 | (549 | ) | –– | 6 | ||||||||||||||
Income (loss) before equity in income (loss) of subsidiaries
|
(15,048 | ) | 19,674 | (7,493 | ) | –– | (2,867 | ) | ||||||||||||
Equity in income (loss) of subsidiaries
|
12,181 | (7,493 | ) | –– | (4,688 | ) | –– | |||||||||||||
Net income (loss)
|
(2,867 | ) | 12,181 | (7,493 | ) | (4,688 | ) | (2,867 | ) | |||||||||||
Unrealized gain on interest rate swap
|
954 | –– | –– | –– | 954 | |||||||||||||||
Foreign currency translation adjustments
|
–– | –– | 3,115 | –– | 3,115 | |||||||||||||||
Comprehensive income (loss)
|
(1,913 | ) | 12,181 | (4,378 | ) | (4,688 | ) | 1,202 | ||||||||||||
Less: Comprehensive loss attributable to non-controlling interest
|
–– | –– | (7 | ) | –– | (7 | ) | |||||||||||||
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
|
$ | (1,913 | ) | $ | 12,181 | $ | (4,371 | ) | $ | (4,688 | ) | $ | 1,209 |
22
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Six months ended June 30, 2009
(In thousands)
(Unaudited)
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
Revenues
|
$ | –– | $ | 145,064 | $ | 94,395 | $ | (68,749 | ) | $ | 170,710 | |||||||||
Costs and operating expenses
|
–– | 110,964 | 102,274 | (68,749 | ) | 144,489 | ||||||||||||||
Restructuring and related charges
|
–– | 5,229 | 1,372 | –– | 6,601 | |||||||||||||||
Operating income (loss)
|
–– | 28,871 | (9,251 | ) | –– | 19,620 | ||||||||||||||
Other income (expense), net
|
(27,086 | ) | 5,659 | (4,896 | ) | –– | (26,323 | ) | ||||||||||||
Income (loss) before income taxes
|
(27,086 | ) | 34,530 | (14,147 | ) | –– | (6,703 | ) | ||||||||||||
Income tax expense (benefit)
|
–– | 573 | (70 | ) | –– | 503 | ||||||||||||||
Income (loss) before equity in income (loss) of subsidiaries
|
(27,086 | ) | 33,957 | (14,077 | ) | –– | (7,206 | ) | ||||||||||||
Equity in income (loss) of subsidiaries
|
19,880 | (14,077 | ) | –– | (5,803 | ) | –– | |||||||||||||
Net income (loss)
|
(7,206 | ) | 19,880 | (14,077 | ) | (5,803 | ) | (7,206 | ) | |||||||||||
Unrealized loss on interest rate swap
|
(494 | ) | –– | –– | –– | (494 | ) | |||||||||||||
Foreign currency translation adjustments
|
–– | –– | 3,044 | –– | 3,044 | |||||||||||||||
Dividends from subsidiaries
|
–– | 422 | –– | (422 | ) | –– | ||||||||||||||
Comprehensive income (loss)
|
(7,700 | ) | 20,302 | (11,033 | ) | (6,225 | ) | (4,656 | ) | |||||||||||
Less: Comprehensive income attributable to non-controlling interest
|
–– | –– | 1 | –– | 1 | |||||||||||||||
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
|
$ | (7,700 | ) | $ | 20,302 | $ | (11,034 | ) | $ | (6,225 | ) | $ | (4,657 | ) |
23
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended June 30, 2010
(In thousands)
(Unaudited)
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
Revenues
|
$ | –– | $ | 78,238 | $ | 52,304 | $ | (32,893 | ) | $ | 97,649 | |||||||||
Costs and operating expenses
|
–– | 59,533 | 49,300 | (32,893 | ) | 75,940 | ||||||||||||||
Restructuring and related charges
|
–– | 672 | 109 | –– | 781 | |||||||||||||||
Merger and acquisition fees
|
6,519 | –– | –– | –– | 6,519 | |||||||||||||||
Operating income (loss)
|
(6,519 | ) | 18,033 | 2,895 | –– | 14,409 | ||||||||||||||
Other income (expense), net
|
(20,945 | ) | (9 | ) | (1,957 | ) | –– | (22,911 | ) | |||||||||||
Income (loss) before income taxes
|
(27,464 | ) | 18,024 | 938 | –– | (8,502 | ) | |||||||||||||
Income tax benefit
|
–– | (36,202 | ) | (335 | ) | –– | (36,537 | ) | ||||||||||||
Income (loss) before equity in income (loss) of subsidiaries
|
(27,464 | ) | 54,226 | 1,273 | –– | 28,035 | ||||||||||||||
Equity in income (loss) of subsidiaries
|
55,499 | 1,273 | –– | (56,772 | ) | –– | ||||||||||||||
Net income (loss)
|
28,035 | 55,499 | 1,273 | (56,772 | ) | 28,035 | ||||||||||||||
Foreign currency translation adjustments
|
–– | –– | (367 | ) | –– | (367 | ) | |||||||||||||
Comprehensive income (loss)
|
28,035 | 55,499 | 906 | (56,772 | ) | 27,668 | ||||||||||||||
Less: Comprehensive loss attributable to non-controlling interest
|
–– | –– | (21 | ) | –– | (21 | ) | |||||||||||||
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
|
$ | 28,035 | $ | 55,499 | $ | 927 | $ | (56,772 | ) | $ | 27,689 |
24
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Six months ended June 30, 2010
(In thousands)
(Unaudited)
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
Revenues
|
$ | –– | $ | 146,587 | $ | 101,982 | $ | (66,234 | ) | $ | 182,335 | |||||||||
Costs and operating expenses
|
–– | 114,745 | 96,303 | (66,234 | ) | 144,814 | ||||||||||||||
Restructuring and related charges
|
–– | 814 | 253 | –– | 1,067 | |||||||||||||||
Merger and acquisition fees
|
9,004 | –– | –– | –– | 9,004 | |||||||||||||||
Operating income (loss)
|
(9,004 | ) | 31,028 | 5,426 | –– | 27,450 | ||||||||||||||
Other income (expense), net
|
(42,977 | ) | 455 | (3,423 | ) | –– | (45,945 | ) | ||||||||||||
Income (loss) before income taxes
|
(51,981 | ) | 31,483 | 2,003 | –– | (18,495 | ) | |||||||||||||
Income tax expense (benefit)
|
–– | (36,066 | ) | 205 | –– | (35,861 | ) | |||||||||||||
Income (loss) before equity in income (loss) of subsidiaries
|
(51,981 | ) | 67,549 | 1,798 | –– | 17,366 | ||||||||||||||
Equity in income (loss) of subsidiaries
|
69,347 | 1,798 | –– | (71,145 | ) | –– | ||||||||||||||
Net income (loss)
|
17,366 | 69,347 | 1,798 | (71,145 | ) | 17,366 | ||||||||||||||
Foreign currency translation adjustments
|
–– | –– | (1,032 | ) | –– | (1,032 | ) | |||||||||||||
Comprehensive income (loss)
|
17,366 | 69,347 | 766 | (71,145 | ) | 16,334 | ||||||||||||||
Less: Comprehensive loss attributable to non-controlling interest
|
–– | –– | (50 | ) | –– | (50 | ) | |||||||||||||
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
|
$ | 17,366 | $ | 69,347 | $ | 816 | $ | (71,145 | ) | $ | 16,384 |
25
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Six months ended June 30, 2009
(In thousands)
(Unaudited)
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
Cash flows from operating activities:
|
||||||||||||||||||||
Net income (loss)
|
$ | (7,206 | ) | $ | 19,880 | $ | (14,077 | ) | $ | (5,803 | ) | $ | (7,206 | ) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
||||||||||||||||||||
Depreciation and amortization
|
–– | 19,551 | 9,779 | –– | 29,330 | |||||||||||||||
Deferred income taxes
|
–– | –– | (1,228 | ) | –– | (1,228 | ) | |||||||||||||
Amortization of deferred financing fees and debt discount
|
1,553 | –– | –– | –– | 1,553 | |||||||||||||||
Unrealized gain on interest rate swap
|
(414 | ) | –– | –– | –– | (414 | ) | |||||||||||||
Stock compensation expense
|
–– | 80 | –– | –– | 80 | |||||||||||||||
Accretion of interest on on obligations of GXS Holdings
|
2,206 | –– | –– | –– | 2,206 | |||||||||||||||
Equity in net (income) loss of subsidiaries
|
(19,880 | ) | 14,077 | –– | 5,803 | –– | ||||||||||||||
Changes in operating assets and liabilities, net
|
68,500 | (58,588 | ) | (7,615 | ) | –– | 2,297 | |||||||||||||
Net cash provided by (used in) operating activities
|
44,759 | (5,000 | ) | (13,141 | ) | –– | 26,618 | |||||||||||||
Cash flows from investing activities:
|
||||||||||||||||||||
Purchases of property and equipment
|
–– | (12,860 | ) | (272 | ) | –– | (13,132 | ) | ||||||||||||
Net cash used in investing activities
|
–– | (12,860 | ) | (272 | ) | –– | (13,132 | ) | ||||||||||||
Cash flows from financing activities:
|
||||||||||||||||||||
Repayment of long-term debt
|
(42,138 | ) | –– | –– | –– | (42,138 | ) | |||||||||||||
Borrowings under revolving credit facility
|
18,000 | –– | –– | –– | 18,000 | |||||||||||||||
Payment of borrowings under revolving credit facility
|
(18,000 | ) | –– | –– | –– | (18,000 | ) | |||||||||||||
Payment of financing costs
|
(2,621 | ) | –– | –– | –– | (2,621 | ) | |||||||||||||
Net cash used in financing activities
|
(44,759 | ) | –– | –– | –– | (44,759 | ) | |||||||||||||
Effect of exchange rate changes on cash
|
–– | –– | 2,272 | –– | 2,272 | |||||||||||||||
Decrease in cash and cash equivalents
|
–– | (17,860 | ) | (11,141 | ) | –– | (29,001 | ) | ||||||||||||
Cash and cash equivalents, beginning of year
|
–– | 24,671 | 23,192 | –– | 47,863 | |||||||||||||||
Cash and cash equivalents, end of period
|
$ | –– | $ | 6,811 | $ | 12,051 | $ | –– | $ | 18,862 |
26
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Six months ended June 30, 2010
(In thousands)
(Unaudited)
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
Cash flows from operating activities:
|
||||||||||||||||||||
Net income (loss)
|
$ | 17,366 | $ | 69,347 | $ | 1,798 | $ | (71,145 | ) | $ | 17,366 | |||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
||||||||||||||||||||
Depreciation and amortization
|
–– | 16,461 | 2,390 | –– | 18,851 | |||||||||||||||
Deferred income taxes
|
–– | –– | 152 | –– | 152 | |||||||||||||||
Change in valuation allowance resulting from business acquisition
|
–– | (36,821 | ) | –– | –– | (36,821 | ) | |||||||||||||
Loss on disposition of assets
|
–– | 1,724 | –– | –– | 1,724 | |||||||||||||||
Amortization of deferred financing fees and debt discount
|
3,722 | –– | –– | –– | 3,722 | |||||||||||||||
Unrealized gain on interest rate swap
|
(3,333 | ) | –– | –– | –– | (3,333 | ) | |||||||||||||
Stock compensation expense
|
–– | 83 | –– | –– | 83 | |||||||||||||||
Equity in net (income) loss of subsidiaries
|
(69,347 | ) | (1,798 | ) | –– | 71,145 | –– | |||||||||||||
Changes in operating assets and liabilities, net
|
36,820 | (38,132 | ) | (4,283 | ) | (5,595 | ) | |||||||||||||
Net cash provided by (used in) operating activities
|
(14,772 | ) | 10,864 | 57 | –– | (3,851 | ) | |||||||||||||
Cash flows from investing activities:
|
||||||||||||||||||||
Purchases of property and equipment
|
–– | (18,886 | ) | (631 | ) | –– | (19,517 | ) | ||||||||||||
Proceeds from sale of assets
|
–– | 400 | –– | –– | 400 | |||||||||||||||
Business acquisition, net of cash acquired of $14,440
|
–– | (220,005 | ) | –– | –– | (220,005 | ) | |||||||||||||
Decrease in restricted cash
|
–– | 227,580 | –– | –– | 227,580 | |||||||||||||||
Net cash used in investing activities
|
–– | (10,911 | ) | (631 | ) | –– | (11,542 | ) | ||||||||||||
Cash flows from financing activities:
|
||||||||||||||||||||
Borrowings under revolving credit facility
|
23,000 | –– | –– | –– | 23,000 | |||||||||||||||
Payment of borrowings under revolving credit facility
|
(8,000 | ) | –– | –– | –– | (8,000 | ) | |||||||||||||
Payment of financing costs
|
(228 | ) | –– | –– | –– | (228 | ) | |||||||||||||
Net cash provided by financing activities
|
14,772 | –– | –– | –– | 14,772 | |||||||||||||||
Effect of exchange rate changes on cash
|
–– | –– | (477 | ) | –– | (477 | ) | |||||||||||||
Decrease in cash and cash equivalents
|
–– | (47 | ) | (1,051 | ) | –– | (1,098 | ) | ||||||||||||
Cash and cash equivalents, beginning of year
|
12,983 | 12,566 | 25,549 | |||||||||||||||||
Cash and cash equivalents, end of period
|
$ | –– | $ | 12,936 | $ | 11,515 | $ | –– | $ | 24,451 |
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. This discussion contains forward-looking statements that involve risk and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed under “Risk Factors” in this Quarterly Report. The following discussion should also be read in conjunction with our audited consolidated financial statements and related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our registration statement on Form S-4 filed with the SEC on July 27, 2010.
Overview
We are a leading global provider of B2B e-commerce and integration services and solutions that simplify and enhance business process integration, synchronization and collaboration among businesses. Our services and solutions enable our customers to manage mission critical supply chain functions and financial transactions related to the exchange of goods and services. By utilizing these services, our customers realize a number of key benefits such as lower total cost of ownership, accelerated time to market and enhanced reliability and security. Approximately 30,000 global customers and their trading partners do business together via Trading Grid, a globally-accessible, cloud-computing platform specifically designed for B2B e-commerce. Our business model is characterized by substantial operating leverage, strong cash flow generation and a recurring revenue model attributable to our transaction processing and software maintenance fees.
The majority of our revenue is generated through transaction processing fees and subscriptions for access to our platform. We process more than 8 billion electronic transactions per year and support an estimated 6 million trading partner relationships. We have substantial vertical expertise in a variety of key industries such as retail, consumer products, financial services, automotive and high technology. Our platform links to approximately 30,000 customers across 50 countries with support in 11 different languages. As a result, customers view our services and solutions as essential to their day-to-day supply chain operations and typically enter into long-term contracts with us. Revenue attributable to transaction processing and software maintenance fees, which tend to be recurring in nature, represented approximately 87% of our total revenue for the six months ended June 30, 2010. Additionally, of our top 50 customers, 92% have been customers for five or more years.
On June 2, 2010, GXS Holdings, Inc. (GXS Holdings), a Delaware corporation and our direct parent company, which directly owns 100% of our issued and outstanding common stock, acquired Inovis International, Inc. (Inovis), a leading provider of fully integrated B2B services and solutions that manage the flow of critical e-commerce information for global trading communities, which we refer to as the “Merger”. Inovis’s core business has historically been the provision of messaging services to approximately 16,000 customers worldwide with approximately one billion transactions per year, primarily on a fee-per-transaction basis. Following the Merger, Inovis was merged with GXS, Inc. (GXSI), one of our indirect wholly-owned subsidiaries, and we became an indirect wholly-owned subsidiary of GXS Group, Inc. (previously known as Griris Holding Company, Inc.). Certain foreign subsidiaries of Inovis became wholly owned subsidiaries of GXSI.
Factors Affecting our Business
We have five service lines, with each service line deriving revenue from three separate types of services. Our five service lines are:
·
|
Messaging Services, which comprised approximately 56.6% of revenues for the six months ended June 30, 2010, automates the exchange of electronic documents between businesses and eliminates the complexities of disparate standards and communication protocols;
|
·
|
Managed Services, which comprised approximately 26.3% of revenues for the six months ended June 30, 2010, allows our customers to outsource all or part of their day-to-day supply chain management activities;
|
·
|
Custom Outsourcing Services, which comprised approximately 6.9% of revenues for the six months ended June 30, 2010, relates to our legacy custom outsourcing contracts. Custom outsourcing allows our customers to outsource activities not directly related to supply chain activities but to which our technical solutions and related services can provide value;
|
28
·
|
B2B Software and Services, which comprised approximately 5.8% of revenues for the six months ended June 30, 2010, provides software and services that allow our customers to more effectively manage their day-to-day supply chain activities internally; and
|
·
|
Data Synchronization, which comprised approximately 4.4% of revenues for the six months ended June 30, 2010, provides tools and services that enhance our customers’ abilities to exchange data with their trading partners and manage data more efficiently within their enterprise.
|
Across these five service lines, we derive our revenues from:
·
|
transaction processing fees;
|
·
|
professional service fees earned in connection with implementing or supporting our products and services; and
|
·
|
software licensing and maintenance fees for software we develop or procure from others.
|
Over the past five years, our transaction processing revenues in our Messaging Services business have been adversely impacted by a number of factors. First, competitive pricing dynamics across the industry have adversely affected pricing in our Messaging Services business as transaction processing has become more commoditized. Second, several years ago we launched an initiative to pursue the migration of our customers to multi-year contracts. Pursuant to this strategy, we introduced lower price points to encourage increased platform usage, promote volume growth, attract new customers and increase existing customer retention.
In order to drive revenue growth, we have focused on investing in Managed Services, where we see significant opportunities for growth which we believe will offset declining revenues from Messaging Services. As part of our strategy of growing Managed Services, we have focused on broadening our product offering and enhancing the functionality of our Managed Services offering. As the cost of providing technologies such as transaction processing as part of our Managed Services offering is reduced, our customers expect to share in the benefits of that cost reduction. As a result, we must continue to offer value-added services and solutions to offset pricing pressure as it relates to this trend. In addition, as business processes that utilize a transaction management infrastructure have become increasingly complex and expensive for our customers to maintain in-house, we have seen an increased demand for our Managed Services offering. We will continue to target large and mid-sized enterprises, for which our outsourcing services could eliminate significant costs and staff as well as increase B2B functionality and efficiency. We believe this approach will increase our revenues and enhance profitability over the long-term.
In addition, as a result of our significant international operations, the translation of our foreign revenues generated in foreign currencies into U.S. dollars impacts the comparison of our revenues from period to period. As a result, our revenues in recent periods have been affected by strengthening and weakening of the U.S. dollar relative to the foreign currencies in which we transact business. The weaker U.S. dollar during the three and six months ended June 30, 2010 as compared to the three and six months ended June 30, 2009 resulted in a $2.1 million and $6.7 million increase in our revenues for the three and six months ended June 30, 2010, respectively, from translating revenues generated in foreign currencies into U.S. dollars.
Our Revenues and Expenses
Revenues
For transaction processing, we usually charge a transaction processing fee to both the sending and the receiving party. Such revenues are generally recognized on a per transaction basis in the period in which the related transactions are processed. Revenues on contracts with monthly, quarterly or annual minimum transaction levels are recognized based on the greater of the actual transactions or the specified contract minimum amounts during the relevant period. Because the transactions we process, such as the exchange of invoices and purchase orders, are routine and essential to the day-to-day operations of our customers, the revenues generated from these fees tend to be recurring in nature. Customers who are not committed to multi-year contracts generally are under contracts for transaction processing solutions that automatically renew every month.
Professional services generally are conducted under time and material contracts and revenue is recognized as the related services are provided. Professional services are separately priced and are based on standard hourly rates determined by the nature of the service and the experience of the professional performing the services.
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We earn revenue from the licensing of software applications that facilitate and automate the exchange of information among disparate business systems and applications. Such revenues are recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred and collection is considered probable. Revenue from licensing software that requires significant customization and modification or where services are otherwise considered essential to the functionality of the software are recognized using the percentage of completion method based on the costs incurred in relation to the total estimated costs of the contract. Revenue from hosted software applications is recognized ratably over the hosting period unless the customer has the contractual right to take possession of the software without significant penalty and it is feasible for the customer to use the software with its own hardware or contract with another party unrelated to us to host the software. Software maintenance revenues are deferred and recognized on a straight-line basis over the life of the related contract, which is typically one year.
For the three and six months ended June 30, 2009 and 2010, the breakdown of revenue by service line appears below (in thousands):
Three Months Ended June 30,
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Six Months Ended June 30,
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Service Line
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2009
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2010
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2009
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2010
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Messaging Services
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$ | 52,694 | $ | 53,027 | $ | 105,299 | $ | 103,197 | ||||||||
Managed Services
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20,580 | 26,603 | 38,945 | 48,008 | ||||||||||||
Custom Outsourcing
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6,394 | 6,259 | 12,556 | 12,521 | ||||||||||||
Data Synchronization
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3,670 | 4,865 | 7,290 | 8,118 | ||||||||||||
B2B Software and Services
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3,526 | 6,895 | 6,620 | 10,491 | ||||||||||||
Total revenues
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$ | 86,864 | $ | 97,649 | $ | 170,710 | $ | 182,335 |
Each service line includes revenue from transaction processing, professional services, software licensing and software maintenance.
Cost of Revenues
Cost of revenues primarily consists of:
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compensation and related benefit expenses associated with our workforce engaged in service delivery, technical operations and research and development;
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computer, network and facility operating expenses, including our network services outsourcing agreement with Verizon Business Services;
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royalty payments associated with resale of third party software licenses; and
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depreciation and amortization expense, including the amortization of our capitalized software costs, deferred implementation costs and acquired intangibles.
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We defer direct costs associated with implementation of certain multi-year customer contracts to the extent such costs can be recovered through guaranteed minimum revenues. The unamortized balances of these costs as of December 31, 2009 and June 30, 2010 were $14.4 million and $15.6 million, respectively, and are included in other non-current assets in the condensed consolidated balance sheets.
Operating Expenses
Operating expenses consist of sales and marketing expenses, general and administrative expenses, restructuring charges and merger and acquisition fees.
Sales and marketing expenses primarily consist of compensation and related benefit expenses associated with our employees engaged in sales and marketing, including sales commissions, advertising costs, meetings, travel and entertainment expenses and facility costs. General and administrative expenses consists of compensation and related benefit expenses associated with our employees engaged in management, finance, legal, and human resources together with the related information technology management and costs, as well as, other general business expenses such as accounting, legal and business insurance. Restructuring charges include severance costs associated with workforce reduction efforts and lease termination costs
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associated with unused office space. Merger and acquisition fees include transaction costs associated with our acquisition of Inovis.
The weaker U.S. dollar during the three and six months ended June 30, 2010 as compared to the three and six months ended June 30, 2009 resulted in an increase of $1.4 million and $4.0 million, respectively, in our costs of revenues and operating expenses for the three and six months ended June 30, 2010 from translation of our expenses incurred in foreign currencies into U.S. dollars.
The following is a summary of our costs and operating expenses for the three and six months ended June 30, 2009 and 2010 (in thousands):
Three Months Ended June 30,
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Six Months Ended June 30,
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2009
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2010
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2009
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2010
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Costs and operating expenses:
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Cost of revenues
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$ | 48,405 | $ | 50,407 | $ | 97,912 | $ | 94,463 | ||||||||
Sales and marketing
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10,477 | 13,067 | 21,185 | 24,548 | ||||||||||||
General and administrative
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11,838 | 12,466 | 25,392 | 25,803 | ||||||||||||
Restructuring and related charges
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6,181 | 781 | 6,601 | 1,067 | ||||||||||||
Merger and acquisition fees
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–– | 6,519 | –– | 9,004 | ||||||||||||
Total costs and operating expenses
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$ | 76,901 | $ | 83,240 | $ | 151,090 | $ | 154,885 |
Results of Operations
Three and six months ended June 30, 2010 compared to three and six months ended June 30, 2009
Revenues. Revenues increased by $10.7 million, or 12.4%, to $97.6 million for the three months ended June 30, 2010 from $86.9 million for the three months ended June 30, 2009. Revenues increased by $11.6 million, or 6.8%, to $182.3 million for the six months ended June 30, 2010 from $170.7 million for the six months ended June 30, 2009. The increase was principally caused by the acquisition of Inovis, which contributed revenues of $10.6 million for the period from June 2, 2010 through June 30, 2010, and the favorable impact of translating revenues generated in foreign currencies to U.S. dollars, partially offset by competitive pricing pressure. The weakening U.S. dollar during the three and six months ended June 30, 2010 as compared to the three and six months ended June 30, 2009 resulted in a $2.1 million and $6.7 million increase in our revenues from translating revenues generated in foreign currencies into U.S. dollars, respectively. Our service line revenues from:
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Messaging Services increased by $0.3 million, or 0.6%, to $53.0 million for the three months ended June 30, 2010 from $52.7 million for the three months ended June 30, 2009. Messaging Services revenue decreased by $2.1 million, or 2.0%, to $103.2 million from $105.3 million for the six months ended June 30, 2009. During the three months ended June 30, 2010, revenues increased $3.5 million from our acquisition of Inovis and the favorable impact of translating revenues generated in foreign currencies into U.S. dollars, partially offset by the revenue decline due to a reduction in realized price levels from continued price competition. During the six months ended June 30, 2010, the decrease in revenue was primarily due to lower realized price levels partially offset by increases in revenue due to our acquisition of Inovis and the favorable impact of translating revenues generated in foreign currencies into U.S. dollars.
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Managed Services increased by $6.0 million, or 29.3%, to $26.6 million for the three months ended June 30, 2010 from $20.6 million for the three months ended June 30, 2009. Managed Services revenue increased by $9.0 million, or 23.3%, to $48.0 million for the six months ended June 30, 2010 from $39.0 million for the six months ended June 30, 2009. The increases are principally due to revenues of $2.3 million from our acquisition of Inovis, the ramp up of services to customers added in previous years, additional professional services provided to existing customers, and favorable impact of translating revenues generated in foreign currencies into U.S. dollars.
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Data Synchronization Services, B2B Software and Services and Custom Outsourcing Services revenue increased in the aggregate by $4.4 million, or 32.6%, to $18.0 million for the three months ended June 30, 2010 from $13.6 million for the three months ended June 30, 2009. Data Synchronization services, B2B Software
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and Services and Custom Outsourcing Services revenue increased by $4.7 million, or 17.6%, to $31.1 million for the six months ended June 30, 2010 from $26.4 million for the six months ended June 30, 2009. The increases are principally due to revenues of $4.8 million from our acquisition of Inovis and the favorable impact of translating revenues generated in foreign currencies into U.S. dollars.
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Cost of revenues. Cost of revenues increased by $2.0 million, or 4.1%, to $50.4 million for the three months ended June 30, 2010 from $48.4 million for the three months ended June 30, 2009. Cost of revenues decreased by $3.4 million, or 3.5%, to $94.5 million for the six months ended June 30, 2010 from $97.9 million for the six months ended June 30, 2009. The increase in cost of revenues for the three months ended was primarily from our acquisition of Inovis and the unfavorable impact of translating foreign currencies into U.S. dollars, partially offset by lower depreciation and amortization expense for previously acquired intangible assets which were fully amortized in the fourth quarter of 2009. The decrease in cost of revenues for the six months ended June 30, 2010 was partially from lower depreciation and amortization expense of intangible assets that were fully amortized in the fourth quarter of 2009, partially offset by our acquisition of Inovis and the unfavorable impact of translating foreign currencies into U.S. dollars.
Sales and marketing. Sales and marketing expenses increased by $2.6 million, or 24.7%, to $13.1 million for the three months ended June 30, 2010 from $10.5 million for the three months ended June 30, 2009. Sales and marketing expenses increased by $3.3 million, or 15.9%, to $24.5 million from $21.2 million for the six months ended June 30, 2010. The increases were primarily due to our acquisition of Inovis and the unfavorable impact of translating foreign currencies into U.S. dollars.
General and administrative. General and administrative expenses increased by $0.6 million, or 5.3%, to $12.5 million for the three months ended June 30, 2010 from $11.8 million for the three months ended June 30, 2009. General and administrative expenses increased by $0.4 million, or 1.6%, to $25.8 million for the six months ended June 30, 2010 from $25.4 million for the six months ended June 30, 2009. The increases were due to our acquisition of Inovis, partially offset by lower facility costs as a result of restructuring activities including relocating our global headquarters.
The impact of translating foreign currencies into U.S. dollars caused cost of revenues, sales and marketing, and general and administrative expenses to be approximately $1.4 million and $4.0 million higher for the three months and six months ended June 30, 2010, respectively, as compared to the three months and six months ended June 30, 2009.
Restructuring charges. Restructuring charges were $0.8 million and $1.1 million for the three months and six months ended June 30, 2010, respectively, as a result of management restructuring actions. During the past several years, the Company has undertaken a series of restructuring activities, which included closing, consolidating or abandoning certain office facilities and employee terminations, in order to reduce expenses in response to changing business requirements. Notably, in 2009, the Company initiated a plan to relocate its global headquarters and sublet its former global headquarters. The relocation was completed in the first quarter of 2010. The restructuring charges reflect the total estimated net costs of these activities and current period adjustments of revised estimates associated with these restructuring activities. We expect to incur restructuring and other non-recurring costs in connection with the Merger of approximately $9.8 million in the first twelve months after closing the Merger. No assurances can be given that the restructuring charges related to the Merger will not be greater than expected.
Merger and acquisition fees. Merger and acquisition fees were $6.5 million and $9.0 million for the three and six months ended June 30, 2010, respectively. These expenses related to the Merger which was consummated on June 2, 2010.
Loss on disposition of assets. The Merger was subject to regulatory review. In connection with the review by the Antitrust Division of the U.S. Department of Justice, the Company divested its catalog service offering. On May 28, 2010, the Company sold customer contracts and intellectual property rights related to its catalog service offering and recorded a loss on the sale of $1,724. The Company plans to continue providing catalog service offerings associated with the Inovis CatalogueTM.
Interest expense, net. Interest expense, net increased by $5.5 million to $20.6 million for the three months ended June 30, 2010 compared to $15.2 million for the three months ended June 30, 2009. Interest expense, net increased by $15.9 million to $42.8 million for the six months ended June 30, 2010 from $26.9 million for the six months ended June 30, 2009. The increases in interest expense are primarily attributable to a higher debt balance as a result of the December 2009 refinancing.
Other income (expense), net. Other expense was $0.6 million for the three months ended June 30, 2010 compared to other income of $2.3 million for the three months ended June 30, 2009. Other expense was $1.4 million for the six months ended
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June 30, 2010 compared to other income of $0.6 million for the six months ended June 30, 2009. These amounts were primarily comprised of gains and losses on foreign currency transactions.
Income tax expense (benefit). Income tax benefit was $36.5 million and $35.9 million for the three months and six months ended June 30, 2010, respectively, compared to income tax expense of $6,000 and $0.5 million for the three months and six months ended June 30, 2009, respectively. Our income tax benefit for the three months and six months ended June 30, 2010 resulted from the reduction of the Company’s deferred tax asset valuation allowance by $36.8 million as the result of net deferred tax liabilities assumed and recognized in purchase accounting related to the acquisition of Inovis. Our income tax expense for the three months and six months ended June 30, 2009 related primarily to taxes for foreign jurisdictions in which we have income.
Net income (loss). Net income was $28.1 million for the three months ended June 30, 2010 compared to a net loss of $2.9 million for the three months ended June 30, 2009. Net income was $17.4 million for the six months ended June 30, 2010 compared to $7.2 million net loss for the six months ended June 30, 2009. Net income for the three months and six months ended June 30, 2010 is primarily attributable to the reduction of the Company’s net deferred tax valuation allowance partially offset by higher interest expense and fees incurred in connection with the Merger.
Sources and Uses of Cash
The following table is a summary of our sources and uses of cash during the six months ended June 30, 2009 and 2010 (in thousands):
Six Months Ended June 30, | ||||||||
2009
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2010
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Cash flows provided by (used in) operating activities | $ | 26,618 | $ | (3,851 | ) | |||
Cash flows used in investing activities | (13,132 | ) | (11,542 | ) | ||||
Cash flows provided by (used in) financing activities | (44,759 | ) | 14,772 | |||||
Effect of exchange rate changes on cash | 2,272 | (477 | ) | |||||
Net decrease in cash and cash equivalents | $ | (29,001 | ) | $ | (1,098 | ) | ||
Cash and cash equivalents, end of period | $ | 18,862 | $ | 24,451 |
Six months ended June 30, 2010 compared to six months ended June 30, 2009
Net cash used in operating activities was $3.9 million for the six months ended June 30, 2010 compared to net cash provided of $26.6 million for the six months ended June 30, 2009. The decrease in net cash provided by operating activities of $30.5 million was mainly attributable to higher interest payments resulting from the December 2009 debt refinancing and payments for transaction costs associated with our acquisition of Inovis.
Net cash used in investing activities was $11.5 million for the six months ended June 30, 2010 compared to $13.1 million for the six months ended June 30, 2009. Net cash used in investing activities in 2010 included $220.0 million for the acquisition of Inovis, net of cash acquired of $14.4 million, and capital expenditures of $19.5 million for property, software and equipment primarily related to continued enhancements of our service platform offset by a decrease in restricted cash of $227.6 million and $0.4 million from the sale of our catalogue service offering. Net cash used in investing activities in 2009 was for capital expenditures for property, software and equipment. Capital expenditures for each of the six–month periods ended June 30, 2010 and 2009 included $9.1 million of cost capitalized for the development of software for internal use.
Net cash provided by financing activities was $14.8 million for the six months ended June 30, 2010 compared to net cash used in financing activities of $44.8 million for the six months ended June 30, 2009. Net cash provided by financing activities for the six months ended June 30, 2010 was from net borrowings under our revolving credit facility partially offset by deferred financing costs related to our December 2009 refinancing. Net cash used in financing activities for the six months ended June 30, 2009 was from scheduled payments of our debt under the previous credit facility and fees paid for amendments to the First and Second Lien Agreements.
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Liquidity and Capital Resources
On December 23, 2009, we completed the refinancing of our then-outstanding indebtedness by issuing $785.0 million in aggregate principal amount of Senior Secured Notes with an original issue discount of $18.6 million. From the proceeds, we repaid all of the debt outstanding under the previously existing First Lien and Second Lien credit facilities, used $220.1 million to partially fund the acquisition of Inovis on June 2, 2010 and repaid $35.0 million in debt of GXS Holdings.
On July 27, 2010, the Company filed a registration statement with the SEC to register new notes with materially identical terms to the Senior Secured Notes. On August 11, 2010, the Company filed a prospectus pursuant to Rule 424(b) of the Securities Act with the SEC to offer a public exchange of these notes. The exchange offer expires on September 10, 2010 (subject to extension).
The Senior Secured Notes carry an interest rate of 9.75% with the interest payable on June 15 and December 15 each year. The Senior Secured Notes will mature on June 15, 2015. Following the December 23, 2009 debt refinancing, our principal sources of liquidity are expected to be cash, cash flow from operations and borrowings under the revolving credit facility of our Credit and Guaranty Agreement.
Prior to June 15, 2012, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of the Senior Secured Notes at a redemption price equal to 109.75% of the aggregate principal amount of the Senior Secured Notes redeemed, using the net cash proceeds from certain equity offerings, provided that at least 65% of the original aggregate principal amount of the Senior Secured Notes remain outstanding after the redemption. We may on any one or more occasions redeem some or all of the Senior Secured Notes at any time prior to June 15, 2012 at a price equal to 100% of the principal amount of the Senior Secured Notes redeemed, plus a make-whole premium. Any time after June 15, 2012, we may at anytime and from time to time redeem the Senior Secured Notes, in whole or in part, at the redemption prices defined in the indenture governing the Senior Secured Notes. Prior to June 15, 2012, we may on any one or more occasions redeem a portion of the Senior Secured Notes at a redemption price of 103% of the principal amount of the Senior Secured Notes redeemed, provided that in no event may we redeem more than 10% of the original aggregate principal amount of the Senior Secured Notes issued during any twelve-month period at this price. In each case, we must also pay accrued and unpaid interest and special interest, if any, to the redemption date. In the event of a change in control, we must offer to repurchase any outstanding Senior Secured Notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest and special interest, if any.
The Credit and Guaranty Agreement entered into on December 23, 2009 with various lenders provides the Company with a revolving credit facility in an aggregate principal amount of $50.0 million, the proceeds of which shall be used for working capital, supporting letters of credit and general corporate purposes. The interest rate for the revolving credit facility is an amount to be determined above LIBOR (subject to a LIBOR floor of 2.0%) or at an amount to be determined above the administrative agent’s “base rate” (subject to a floor of 3.0%), at the Company’s option.
The agreements governing the new debt impose limitations of our ability, to among other things, incur additional indebtedness, incur liens, consummate certain asset sales, make certain restricted payments, enter into certain transactions with affiliates, issue capital stock, merge or consolidate with any other person or sell, transfer or otherwise dispose of any assets. The Credit and Guaranty Agreement also requires that we meet and maintain certain financial ratios and tests, including a minimum interest coverage ratio of 1.75 and a maximum net leverage ratio of 5.25, each as defined in the agreement. Our ability to comply with these covenants and to meet and maintain the financial ratios is material to the success of our business and may be affected by events beyond our control. Our failure to comply with these covenants could result in a default under the Credit and Guaranty Agreement and the Indenture governing our Senior Secured Notes. At June 30, 2010, the Company was in compliance with all financial and nonfinancial covenants.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk exposures include the effect of foreign currency fluctuations and interest rate changes.
Foreign currency risk. The foreign currency financial statements of our international operations are translated into U.S. dollars at current exchange rates, except revenue and expenses, which are translated at average exchange rates during each reporting period. Net exchange gains or losses resulting from the translation of assets and liabilities are accumulated in a separate section of stockholders' equity titled "accumulated other comprehensive loss." Therefore, our exposure to foreign currency exchange rate risk occurs when translating the financial results of our international operations to U.S. dollars in consolidation. Our foreign currency risk is primarily for transactions denominated in the British pound sterling, European euro, Japanese yen and Brazilian reals.
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Although much of our revenues are generated in U.S. dollars, $92.0 million, or 50.4% of our revenues for the six months ended June 30, 2010 were generated in non-U.S. dollar denominated currencies. Our operating expenses are also generally denominated in U.S. dollars, but some of our operating expenses are incurred in non-U.S. dollar denominated currencies. Approximately $52.3 million, or 33.8%, of our expenses for the six months ended June 30, 2010 were denominated in foreign currencies. Due to the relative weakening of the U.S. dollar, as of June 30, 2010, our operating income was favorably affected by $2.7 million when compared to the six months ended June 30, 2009.
From a sensitivity analysis viewpoint, based on our financial results for the six months ended June 30, 2010, a hypothetical overall 10% change in the U.S. dollar from the average foreign exchange rates during the six months ended June 30, 2010 would have impacted our revenue and operating income by approximately $9.2 million and $4.0 million, respectively.
Interest rate risk. For fixed rate debt, interest rate changes affect the fair value of financial instruments but do not impact earnings or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. Because our Senior Secured Notes bear interest at a fixed rate of 9.75%, our exposure to market risk for changes in interest rates relates primarily to our Revolving Credit Facility and our interest rate swap agreement which impacts earnings by changes in our interest expense.
On December 23, 2009, the Company entered into a Credit and Guaranty Agreement which provides the Company with a $50,000 revolving credit facility. The interest rate for the Revolving Credit Facility is an amount to be determined above the London Interbank Offered Rate (subject to a LIBOR floor of 2.0%) or at an amount to be determined above the administrative agent’s “base rate” (subject to a floor of 3.0%), at the Company’s option. The interest rate on the borrowings outstanding under the Revolving Credit Facility at June 30, 2010 was 7.75%. Based on the outstanding borrowings under our Revolving Credit Facility of $15.0 million at June 30, 2010, the annual impact on our results of operations of a one-percentage point change in the applicable interest rate would be approximately $150,000. The actual impact of any change in the applicable interest rate on our results of operations could be affected by the existence of interest rate floors established for LIBOR and the administrative agent’s “base rate”.
The Company has an interest rate swap agreement with a commercial bank with a notional amount of $255.0 million. The provisions of the agreement provide that the Company will pay the counterparty a fixed rate of 3.86%. The counterparty will pay the Company a variable rate equal to three-month LIBOR, which was 0.31% at June 30, 2010. The fair value of the interest rate swap was $11.8 million and $8.5 million as of December 31, 2009 and June 30, 2010, respectively, and was recorded in other liabilities in the condensed consolidated balance sheets. The interest rate swap agreement has a three-year term which expires on April 26, 2011.
The interest rate swap had previously been designated as a cash flow hedge, and was utilized to manage the Company’s exposure related to changes in the three-month LIBOR rate associated with its variable-rate 2007 Credit Facility. As the hedged future forecasted transactions (variable interest payments on the 2007 Credit Facility) were no longer probable of occurring upon the repayment and extinguishment of the 2007 Credit Facility in December 2009, the effective portion of the hedge was reclassified out of accumulated other comprehensive loss into interest expense in December 2009. In addition, changes in the fair value of the interest rate swap are now recorded through interest expense, and the increase in fair value of the interest rate swap of $2.3 million and $3.3 million was recorded as a reduction to interest expense in the three and six months ended June 30, 2010 respectively.
If three-month LIBOR were to increase, the amount of variable-rate interest we are paid by the counterparty under our interest rate swap agreement would increase, thus reducing our total consolidated net interest expense. Conversely, a decrease in three-month LIBOR would cause our total consolidated net interest expense to increase. The annual impact on our results of operations of a one-percentage point change in three-month LIBOR would be approximately $2.6 million; however, given three-month LIBOR was 0.31% at June 30, 2010, the actual amount by which it could decrease is limited to an amount less than one percentage point.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and timely reported as provided in SEC rules and forms. We periodically review the design and effectiveness of our disclosure controls and procedures worldwide, including compliance with various laws and regulations that apply to our operations. We make modifications to improve the design and effectiveness of our disclosure controls and procedures, and may take other corrective action, if our reviews identify a need for such
35
modifications or actions. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
We have carried out an evaluation, under the supervision and the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2010. Based upon that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2010.
Changes in Internal Control Over Financial Reporting
As a result of our merger with Inovis, we are integrating certain business processes and systems. Accordingly, certain changes have been made and will continue to be made to our internal controls over financial reporting until such time as these integrations are complete. There have been no other changes in our internal control over financial reporting during the quarter ended June 30, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to various legal proceedings and claims which arise in the ordinary course of our business. Although we cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, we make provision for potential liabilities when we deem them probable and reasonably estimable. These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.
In 2006, Inovis became aware of patent infringement allegations by a third party against certain customers of one of Inovis’ software technology products. In July 2007, Inovis filed a complaint for declaratory judgment against the third party in the United States District Court of Delaware, seeking a judgment and declaration that neither Inovis nor any of its customers have infringed on the patent at issue. Inovis filed a Resquest for Reexamination of such patent with the U.S. Patent and Trademark Office (the “USPTO”) which was accepted in May 2008, resulting in the amendment and/or cancellation of certain of the patent claims. In September 2009, the USPTO granted a second Request for Reexamination of the patent filed by Inovis, finding a substantial new question of patentability with respect to all claims. In March 2010, the USPTO issued an initial ruling rejecting all of the claims in the patent. The litigation is currently stayed pending the outcome of the second reexamination proceeding. Although the Company believes that the third party’s patent infringement allegations are without merit, there can be no assurance that the Company will prevail in the litigation.
We are also subject to income and other taxes in the United States and foreign jurisdictions and we are regularly under audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation or other proceedings could be materially different than that which is reflected in our tax provisions and accruals. Should additional taxes be assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made.
For example, our Brazilian subsidiary, GXS Tecnologia da Informação (Brasil) Ltda., is subject to potential tax claims by Brazilian tax authorities relating to value added tax (VA) exposure that we identified in the course of conducting due diligence in connection with the acquisition of Interchange. We believe that VAT may have been underpaid by Interchange during the period from January 2004 to June 2006, and we have recorded a reserve of approximately $14.8 million as of June 30, 2010 in respect of these claims. Although the sellers of Interchange are contractually obligated to indemnify us pursuant to the stock purchase agreement executed in connection with the acquisition and we have recorded a corresponding receivable of $14.8 million as of June 30, 2010 and for the indemnity to offset the potential liability, we can make no assurance that we will be able to recover any potential liability under such indemnity. GXS Tecnologia da Informação (Brasil) Ltda is also the subject of a tax claim by the Sao Paulo tax authorities relating to alleged underpayment of VAT on pre-Interchange GXS customer billings from January 2005 to December 2008. GXS is challenging the tax claim, including penalties and interest claimed. Our advisors believe that GXS’s position is reasonable but it is too early to assess our chances for ultimate success in the matter.
In addition, our Indian subsidiary, GXS India Technology Centre Private Limited (GXS India), is subject to potential assessments by Indian tax authorities in the district of Bangalore. U.S. and Indian transfer pricing regulations require that any international transaction involving associated enterprises be at arm’s-length prices. Accordingly, the Company determines the pricing for such transactions on the basis of detailed functional and economic analysis involving benchmarking against similar transactions among entities that are not under common control. If the applicable tax authorities determine that the transfer price applied was not appropriate, the Company may incur an increased tax liability, including accrued interest and penalties. GXS India has received assessment orders from the Indian tax authorities alleging that the transfer price applied to intercompany transactions was not appropriate. Based on advice from our tax advisors, we continue to believe that the facts the Indian tax authorities are using to support their assessment are flawed. The Company has started appeal procedures and anticipates a settlement with the tax authorities. We have made provisions in our accounts to cover our anticipated financial exposure to this matter. We cannot assure you that our appeals will be successful or that these appeals will be finally resolved in the near future. There is a possibility that we may receive similar orders for other years until the above disputes are resolved.
Item 1A. Risk Factors
There have been no material changes in the risk factors affecting us from those described in “Risk Factors—Risk factors related to our business” included in our registration statement on Form S-4 filed with the SEC on July 27, 2010.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits:
Exhibit No.
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Description
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*10.1
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2010 GXS Group, Inc. Long Term Incentive Plan
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*31.1
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
*31.2
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
*32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
____________
* Filed herewith
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 31, 2010
|
|||
GXS WORLDWIDE, INC.
By: GXS WORLDWIDE, INC.
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|||
By:
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/s/ Robert Segert | ||
Name: Robert Segert | |||
Title: Director, President and Chief Executive Officer | |||
By:
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/s/ John Duvall | ||
Name: John Duvall | |||
Title: Senior Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer |
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39
EXHIBIT INDEX
Exhibit No.
|
Description
|
|
*10.1
|
2010 GXS Group, Inc. Long Term Incentive Plan
|
|
*31.1
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
*31.2
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
*32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
____________
* Filed herewith