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EX-31.2 - CERTIFICATION - GXS Worldwide, Inc.dp22533_ex3102.htm
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EX-31.1 - CERTIFICATION - GXS Worldwide, Inc.dp22533_ex3101.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
 
or
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to

Commission file number: 333-167650

GXS Worldwide, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
35-2181508
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)

9711 Washingtonian Boulevard, Gaithersburg, MD
20878
(Address of principal executive offices)
(Zip Code)

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 R  No £

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 May 12, 2011, 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 MARCH 31, 2011
 
INDEX

 
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
Condensed Consolidated Balance Sheets as of December 31, 2010 and March 31, 2011 (Unaudited)
  4
     
 
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2011
  5
     
 
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2010 and 2011
  6
     
 
Unaudited Condensed Consolidated Statement of Changes in Stockholder’s Deficit for the three months ended March 31, 2011
  7
     
 
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2011
  8
     
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
  9
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
41
     
Item 4.
Controls and Procedures
42
     
     
PART II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
43
     
Item 1A.
Risk Factors
43
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
43
     
Item 3.
Defaults Upon Senior Securities
44
     
Item 4.
(Removed and Reserved)
44
     
Item 5.
Other Information
44
     
Item 6.
Exhibits
44
     
     
SIGNATURES
45


 
2

 

 
In this Quarterly Report on Form 10-Q, 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.  All references to “Inovis” refer to Inovis International, Inc., which the Company acquired on June 2, 2010.

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.  Securities and Exchange Commission Rule 3-16 of Regulation S-X (“Rule 3-16”) requires financial statements for each of the 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.  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,
2010
   
March 31,
2011
 
         
(Unaudited)
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 16,326     $ 19,405  
Receivables, net
    97,738       102,811  
Prepaid expenses and other assets
    26,643       29,213  
Total current assets
    140,707       151,429  
                 
Property and equipment, net
    95,523       98,976  
Goodwill
    264,857       267,826  
Intangible assets, net
    141,357       136,238  
Deferred financing costs
    19,262       18,240  
Other assets
    16,730       17,273  
                 
Total Assets
  $ 678,436     $ 689,982  
                 
Liabilities and Stockholder's Deficit
               
Current liabilities:
               
Borrowings under revolving credit facility
  $ 8,000     $ ––  
Trade payables
    12,862       11,303  
Deferred income
    43,101       48,984  
Accrued expenses and other current liabilities
    60,275       77,029  
Total current liabilities
    124,238       137,316  
                 
Long-term debt
    769,115       769,796  
Deferred income tax liabilities
    7,580       6,690  
Other liabilities
    43,912       44,669  
Total liabilities
    944,845       958,471  
                 
GXS Worldwide, Inc. stockholder's deficit:
               
Common stock $1.00 par value, 1,000 shares authorized, issued and outstanding
    1       1  
Additional paid-in capital
    427,892       428,521  
Accumulated deficit
    (686,162 )     (689,966 )
Accumulated other comprehensive loss
    (8,397 )     (7,312 )
Total GXS Worldwide, Inc. stockholder's deficit
    (266,666 )     (268,756 )
Non-controlling interest
    257       267  
Total stockholder’s deficit
    (266,409 )     (268,489 )
                 
Total Liabilities and Stockholder’s Deficit
  $ 678,436     $ 689,982  


See accompanying notes to condensed consolidated financial statements (unaudited)

 
 
4

 
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
 
 
   
Three Months ended March 31,
 
   
2010
   
2011
 
Revenues
  $ 84,686     $ 114,108  
                 
Costs and operating expenses:
               
Cost of revenues
    44,056       62,629  
Sales and marketing
    11,481       15,459  
General and administrative
    13,337       18,184  
Restructuring charges
    286       201  
Merger and acquisition fees
    2,485       26  
Operating income
    13,041       17,609  
                 
Other income (expense):
               
Interest income
    39       21  
Interest expense
    (22,221 )     (20,970 )
Other income (expense), net
    (852 )     456  
Loss before income taxes
    (9,993 )     (2,884 )
                 
Income tax expense
    676       910  
Net loss
    (10,669 )     (3,794 )
Less:  Net income (loss) attributable to non-controlling interest
    (29 )     10  
Net loss attributable to GXS Worldwide, Inc.
  $ (10,640 )   $ (3,804 )
                 


See accompanying notes to condensed consolidated financial statements (unaudited)

 
 
5

 
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)

 
   
Three Months ended March 31,
 
   
2010
   
2011
 
             
Net loss
  $ (10,669 )   $ (3,794 )
Foreign currency translation adjustments
    (665 )     1,085  
Comprehensive loss
    (11,334 )     (2,709 )
Less:  Comprehensive income (loss) attributable to non-controlling interest
    (29 )     10  
Comprehensive loss attributable to GXS Worldwide, Inc.
  $ (11,305 )   $ (2,719 )


See accompanying notes to condensed consolidated financial statements (unaudited)


 
6

 


GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholder’s Deficit
(In thousands)
(Unaudited)

 
   
Common stock
   
Additional paid-in capital
   
Accumulated deficit
   
Accumulated other comprehensive loss
   
Non- controlling interest
   
Total stockholder's deficit
 
Balance at December 31, 2010
  $ 1     $ 427,892     $ (686,162 )   $ (8,397 )   $ 257     $ (266,409 )
Net income (loss)
    ––       ––       (3,804 )     ––       10       (3,794 )
Stock compensation expense
    ––       209       ––       ––       ––       209  
Foreign currency translation adjustments
    ––       ––       ––       1,085       ––       1,085  
Contribution by GXS Group, Inc.
    ––       420       ––       ––       ––       420  
Balance at March 31, 2011
  $ 1     $ 428,521     $ (689,966 )   $ (7,312 )   $ 267     $ (268,489 )


See accompanying notes to condensed consolidated financial statements (unaudited)

 
 
7

 
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
   
Three Months ended March 31,
 
   
2010
   
2011
 
Cash flows from operations:
           
Net loss
  $ (10,669 )   $ (3,794 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    8,555       12,922  
Deferred income taxes
    143       135  
Amortization of deferred financing costs and debt discount
    1,847       1,763  
Unrealized gain on interest rate swap
    (1,042 )     (2,365 )
Stock compensation expense
    41       209  
Changes in operating assets and liabilities, net of effect of business acquisition:
               
(Increase) decrease in receivables
    6,475       (4,731 )
Increase in prepaid expenses and other assets
    (454 )     (4,376 )
Decrease in trade payables
    (507 )     (1,721 )
Increase (decrease) in deferred income
    (1,388 )     5,365  
Increase in accrued expenses and other liabilities
    16,448       19,544  
Other
    660       (296 )
Net cash provided by operating activities
    20,109       22,655  
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (9,091 )     (10,790 )
Business acquisitions, net of cash acquired ($4 for three months ended March 31, 2011)
    ––       (1,125 )
Increase in restricted cash
    (3 )     ––  
Net cash used in investing activities
    (9,094 )     (11,915 )
                 
Cash flows from financing activities:
               
Repayments under revolving credit facility
    ––       (8,000 )
Payment of financing costs
    (50 )     (2 )
Net cash used in financing activities
    (50 )     (8,002 )
                 
Effect of exchange rate changes on cash
    (539 )     341  
                 
Increase in cash and cash equivalents
    10,426       3,079  
Cash and cash equivalents, beginning of year
    25,549       16,326  
Cash and cash equivalents, end of period
  $ 35,975     $ 19,405  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 24     $ 298  
Cash paid for income taxes
  $ 521     $ 669  
                 
Noncash investing and financing activities:
               
Management fees waived by Francisco Partners
  $ 500     $ ––  
Fair value of equity securities issued in business acquisition
  $     $ 420  


See accompanying notes to condensed consolidated financial statements (unaudited)
 
 
 
8

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
(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 business-to-business (“B2B”) e-commerce.  The Company is a wholly-owned subsidiary of GXS Holdings, Inc. (“GXS Holdings”), its direct parent company, and is an indirect wholly-owned subsidiary of GXS Group, Inc. (“GXS Group”), the ultimate parent company.

On June 2, 2010, GXS Holdings 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.  Following the transaction, Inovis was merged with and into GXS, Inc. (“GXSI”), an indirect wholly-owned subsidiary and a guarantor of the Company’s notes, and the Company became an indirect wholly-owned subsidiary of GXS Group (previously known as Griris Holding Company, Inc.).  Certain foreign subsidiaries of Inovis became wholly-owned subsidiaries of GXSI.  The results of operations for Inovis since its acquisition on June 2, 2010 are included and reflected in the condensed consolidated results of operations and financial condition for the three months ended March 31, 2011.

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 considered necessary for a fair presentation of the financial position and results of operations.

Interim results for the three month period ended March 31, 2011 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, 2010, which are included in the Company’s Annual Report on Form 10-K, filed under the Securities Act with the Securities and Exchange Commission (“SEC”) on March 31, 2011.


(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.

(b)
Acquisition Accounting

Acquisitions are accounted for using the purchase method of accounting prescribed in Financial Accounting Standards (“FAS”) Codification 805 – Business Combinations.  Under this standard, assets and liabilities acquired are recorded at their fair values on the date of acquisition.  Certain long-lived assets recorded at their fair values including property and equipment, trade names, customer contracts and relationships or other identifiable intangible assets will result in additional depreciation and amortization expense after the acquisition.  The amount of depreciation and amortization will be based upon the assets’ fair values at date of acquisition and the estimated useful lives of the respective assets.  Revenue and operating income in the twelve months following the acquisition will be affected by a reduction of deferred revenue to reflect estimated fair value of the obligation which includes estimated cost to deliver and the associated margin.

 
 
9

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(In thousands, except per share amounts)
(c)    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 accumulated other comprehensive loss included in stockholder’s deficit.  Gains and losses from transactions in foreign currency are included in the condensed consolidated statements of operations within other income (expense), net.

(d)   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.

(e)   Revenue Recognition

The Company has various service lines, specifically including:  Messaging Services, Managed Services, B2B Software Services, Custom Outsourcing Services, and Data Synchronization.  The Company’s service lines generate revenues from three principal sources:

Transaction Processing — The Company earns recurring transaction processing revenue 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.

Professional Services — Professional services are generally conducted under time and material contracts and revenue is recognized as the related services are provided.

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 revenue is 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.

Effective January 1, 2011, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2009-13 – Revenue Arrangements with Multiple Deliverables, which requires companies to allocate the overall arrangement 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 (“VSOE”) or other third-party evidence of the selling price.  The Company identified no significant impact on its condensed consolidated results of operations and financial condition of adopting ASU 2009-13.  For non-software arrangements with more than one element of revenue with stand-alone value, the Company allocates revenue to each component based on VSOE, or third party evidence of selling price when available, or estimated selling price.  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.

In certain arrangements, the Company sells transaction processing along with implementation and start-up services.  The implementation and start-up services typically do not have stand-alone value and, therefore, are not separated.  Implementation and start-up services are recognized over the term of the related transaction processing arrangement.  In some arrangements, the Company also sells professional services which do have stand-alone value and can be separated from other elements in the arrangement.  The revenue related to these services is recognized as the service is performed.
 
 
 
10

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(In thousands, except per share amounts)
 
The Company also defers all direct and relevant costs associated with implementation of long-term customer contracts to the extent such costs can be recovered through guaranteed contract revenues.  The unamortized balance of these costs as of December 31, 2010 and March 31, 2011 was $18,950 and $21,026, respectively, and are included in both prepaid expenses and other assets (see Note 5) and other assets (see Note 8) in the condensed consolidated balance sheets.

(f)     Receivables and Concentration of Credit Risk

The Company provides products and services and extends credit to numerous customers in B2B e-commerce markets. To the extent that the credit quality of customers deteriorates, the Company may have exposure to credit losses.  The Company monitors its exposure to credit losses and maintains allowances for anticipated losses.  The Company believes it has adequate allowances to cover its exposure.

The Company’s allowance for doubtful accounts is determined through specific identification of customers known to be doubtful of collection and an evaluation of the aging of its accounts receivable, and considers such factors as the likelihood of collection based upon an evaluation of the customer’s creditworthiness, the customer’s payment history and other conditions or circumstances that may affect the likelihood of payment, such as political and economic conditions in the country in which the customer is located.

(g)    Property and Equipment

Property and equipment are stated at cost.  Depreciation on computer equipment and software is calculated on straight-line and accelerated methods over the estimated useful lives of the assets of three to five years.  Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.  Property and equipment includes costs related to the development of internal-use software.

(h)   Capitalized Software Costs

The Company capitalizes software development costs in accordance with FASB ASC 350-40, Accounting for the Costs of Computer Software Developed or Obtained for Internal-Use.  The Company begins to capitalize costs for software to be used internally when it enters the application development stage.  This occurs when the Company completes the preliminary project stage, management authorizes and commits to funding the project and it is feasible that the project will be completed and the software will perform the intended function.  The Company stops capitalizing costs related to a software project when it enters the post implementation and operation stage.  If different determinations are made with respect to the state of development that a software project had achieved, then the amount capitalized and the amount charged to expense for that project could differ materially.

Costs capitalized during the application development stage consist of payroll and related costs for employees who are directly associated with, and who devote time directly to, a project to develop software for internal-use.  The Company also capitalizes the direct costs of materials and services, which generally includes outside contractors, and capitalized interest.  The Company does not capitalize any general and administrative or overhead costs or costs incurred during the application development stage related to training or data conversion costs.  Costs related to upgrades and enhancements to internal-use software, if those upgrades and enhancements result in additional functionality, are capitalized.  If upgrades and enhancements do not result in additional functionality, those costs are expensed as incurred.  If different determinations are made with respect to whether upgrades or enhancements to software projects would result in additional functionality, then the amount capitalized and the amount charged to expense for that project could differ materially.

The Company begins to amortize capitalized costs with respect to development projects for internal-use software when the software is ready for use.  The capitalized software development costs are generally amortized using the straight-line method over a five-year period.  In determining and reassessing the estimated useful life over which the cost incurred for the software should be amortized, the Company considers the effects of obsolescence, technology, competition and other economic factors.  If different determinations are made with respect to the estimated useful lives of the software, the amount of amortization charged in a particular period could differ materially.

During the three months ended March 31, 2010 and 2011, the Company capitalized costs related to the development of internal-use software of $4,083 and $6,056, respectively.  Such amounts include capitalized interest of $206 and $286 for the three months ended March 31, 2010 and 2011, respectively.
 
 
 
11

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(In thousands, except per share amounts)
 
In accordance with FASB ASC 985-20, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, the Company expenses costs incurred in the development of software sold externally or developed for license to customers until technological feasibility has been established under the working model method.  However, the Company does not capitalize costs since there is generally such a short period of time between the date technological feasibility is achieved and the date when the product is available for general release to customers, thus any costs incurred have not been material to date.

(i)
Goodwill

As of December 31, 2010 and March 31, 2011, the Company had goodwill in the amount of $264,857 and $267,826, respectively.  The Company historically tests goodwill and intangible assets with indefinite useful lives for impairment at least annually or whenever there is a change in events or circumstances which may indicate impairment.  The impairment test involves two steps.  In the first step, the Company compares the carrying value of the reporting unit which holds the goodwill with the fair value of the reporting unit.  If the carrying value is less than the fair value, there is no impairment.  If the carrying value exceeds the fair value of the reporting unit, step two is performed to measure the impairment loss.

In December 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-28, Intangibles – Goodwill and Other (Topic 350) (previously Emerging Issues Task Force (“EITF”) Issue No. 10-A, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts).  ASU 2010-28 requires companies that are performing their goodwill impairment testing (either on an annual or interim basis) and have identified a reporting unit with a zero or negative carrying value of equity during step one of the test, to perform step two of the goodwill impairment test and determine if it is more likely than not that a goodwill impairment exists.  ASU 2010-28 became effective prospectively for public entities whose fiscal years, and interim period within those years, begin after December 15, 2010.  The Company adopted ASU 2010-28 as of January 1, 2011 and, aside from potentially more frequent impairment testing of goodwill since the Company currently has a negative carrying value of equity (a stockholder’s deficit), identified no material impact that its adoption had on the Company’s condensed consolidated results of operations and financial condition.

As of December 31, 2010 and March 31, 2011, the Company completed impairment testing, including performing the required step two test as of March 31, 2011, and determined that goodwill was not impaired.  The Company’s impairment test is based on a single operating segment and reporting unit structure.  The fair value of the reporting unit significantly exceeded the carrying value at December 31, 2010 and March 31, 2011.

(j)     Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of

The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset.  If the carrying amount of an asset is not deemed to be recoverable, the impairment to be recognized is the extent by which the carrying amount of the asset exceeds the fair value of the asset less selling costs.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less selling costs.

(k)   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,
2010
   
March 31, 2011
 
Additional minimum pension liability
  $ (2,292 )   $ (2,292 )
Foreign currency translation adjustments
    (6,105 )     (5,020 )
Accumulated other comprehensive loss
  $ (8,397 )   $ (7,312 )
 
 
 
12

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(In thousands, except per share amounts)
 
(l)     Research and Development

Research and development costs are expensed as incurred.  Research and development costs are reflected within cost of revenues in the condensed consolidated results of operations for the three months ended March 31, 2010 and 2011.

(m)   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 months ended March 31, 2010 and 2011 differs from the federal statutory rate of 35% principally as a result of state income taxes, differing rates in foreign jurisdictions and the effect of losses in the United States and foreign jurisdictions for which no income tax benefit has been recognized.

(n)    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 entered into an interest rate swap agreement with a commercial bank in 2008.  The interest rate swap had been designated as a cash flow hedge.  The unrecognized loss for the cash flow hedge included in accumulated other comprehensive loss at December 31, 2008 was reclassified into interest expense during 2009, as the Company retired all variable rate debt in December, 2009.  The fair value of the interest rate swap was determined using pricing models developed based on the London Interbank Offered Rate (“LIBOR”) swap rate and other observable inputs, adjusted to reflect nonperformance 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. generally accepted accounting principles (“GAAP”), as its fair value is measured primarily utilizing observable market based inputs.
 
(o)    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 December 31, 2010 and March 31, 2011, 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 12.

(p)    Stock Option Plans

GXS Holdings sponsors a stock option plan (the GXS Holdings, Inc. Stock Incentive Plan or “Holdings Plan”) that provides for the grant of stock options and certain other types of stock-based compensation awards to employees, directors and consultants of the Company.  The Holdings Plan provided for the grant of awards to acquire up to 18,836 shares of GXS Holdings common stock.  Effective with the Inovis merger in June 2010, shares reserved and granted under the Holdings Plan were subject to a conversion into shares and grants in GXS Group at a conversion rate of approximately 18 to 1 (specifically 0.056022246), and remain outstanding with their existing vesting schedules, expiration dates and subject to other terms of the Holdings Plan, which GXS Group assumed upon the merger.  The conversion reduced the total authorized number of Holdings Plan options that could be awarded from 18,836 shares to 1,055 shares.  However, no additional award grants will be made from this plan, therefore the maximum number of plan options in the pool will equal the number of options outstanding at the end of a measurement period.
 
 
 
13

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(In thousands, except per share amounts)
 
In connection with the Inovis merger, the Company established the 2010 GXS Group, Inc. Long-Term Incentive Plan (“Group LTIP”) in July 2010 that provides for the grant of stock options and certain other types of stock-based compensation awards to employees, directors and consultants of the Company.  The Group LTIP provides for the grant of awards to acquire up to 14,000 shares of GXS Group common stock and all future option grants of the Company will be generated through the Group LTIP.

Compensation costs relating to share-based payment transactions are recognized in the condensed consolidated statements of operations based upon the fair value of the award over the applicable service period.  Fair value is determined in accordance with FASB Accounting Standards Codification (“ASC”) Topic 718 – Accounting for Stock Options and Other Stock-Based Compensation.

(q)   Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management of the Company to make estimates and assumptions that affect the amounts reported and related disclosures.  Additionally, estimates were used when recording the fair value of assets acquired and liabilities assumed in acquisitions.  Estimates, by their nature, are based on judgment and available information.  Actual results could differ materially from those estimates.

Significant estimates used in preparing the condensed consolidated financial statements include:  recovery of long-lived assets; useful lives of amortized intangible assets; and valuations of goodwill, receivables, deferred tax assets and pension liabilities.  In addition, estimates are required to recognize revenue for software and other arrangements with multiple deliverables and to assess the stage at which software development costs should be capitalized.

(r)    Reclassifications

Certain reclassifications have been made to the condensed consolidated financial statements as of December 31, 2010 and for the three months ended March 31, 2010 to conform to the presentation at March 31, 2011 and for the three months then ended.

 
(3)
Acquisitions

RollStream, Inc.

On March 28, 2011, GXS Group acquired all of the capital stock of RollStream, Inc. (“RollStream”), a softwareasaservice (“SaaS”) provider of enterprise community management, for total consideration of $1,549, including cash of $1,129 and shares of GXS Group common and preferred stock with a combined fair value of $420, paid to the RollStream stockholders.  The fair value of the stock issued has been pushed down to the Company.
 
The acquisition was accounted for using the purchase method of accounting prescribed in FAS Codification 805 – Business Combinations.  The Company recorded the preliminary estimated fair values of assets acquired and liabilities assumed in connection with the RollStream acquisition, including a $2,100 preliminary estimate of goodwill, which may be adjusted upon finalization of the fair value analysis of the RollStream net assets on the acquisition date.

The impact of the RollStream acquisition on the Company’s condensed consolidated results of operations and financial condition for the three months ended March 31, 2011 is immaterial.

Inovis International, Inc.

On June 2, 2010, GXS Holdings acquired all the capital stock of Inovis International, Inc. (“Inovis”) 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 “Merger”).  The Inovis stockholders also received shares of common and preferred stock with a fair value of $68,805, as determined by an independent third-party valuation services firm, in GXS Group, which owns all of the capital stock of GXS Holdings, resulting in Inovis stockholders having an approximate 28.1% ownership interest in GXS Group following consummation of the Merger.
 
 
 
14

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(In thousands, except per share amounts)
 
The Company used cash held in escrow of $227,580 obtained from the Senior Secured Notes issuance 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 was a provider of integrated B2B services and solutions that manage the flow of e-commerce information for global trading communities.  The Merger expands the Company’s customer base in the U.S., Canada and the U.K., broadens its product offerings and increases the functionality of its Managed Services offering.

The Merger was accounted for using the purchase method of accounting prescribed in FAS Codification 805 – Business Combinations.  Under this standard, acquired assets and liabilities are recorded at their fair values on the date of acquisition.  The application of purchase accounting for the transaction resulted in a value of $303,250, which was pushed down to the Company.

All transaction costs incurred in connection with the Merger were expensed and are included in operating expenses.  Transaction costs incurred in connection with the Merger were $2,485 during the three months ended March 31, 2010 and no additional transaction costs in connection with the Merger were recorded during the three months ended March 31, 2011.  These transaction costs are reflected as merger and acquisition fees in the condensed consolidated statement of operations.

Interchange Serviços S.A.

On December 30, 2008, GXS Tecnologia da Informação (Brasil) Ltda., the Company’s wholly owned subsidiary in Brazil, acquired all of the capital stock of Interchange Serviços S.A. (“Interchange”) for $19,772, including transaction costs of $467.  Interchange was a provider of electronic data interchange and related services to customers located in Brazil.  The Company acquired Interchange to expand the Company’s presence in Brazil and enable it to offer additional integration opportunities to global businesses seeking to expand their operations in Latin America.

The Company identified a pre-acquisition tax contingency for which the sellers have provided a full indemnification.  The Company had originally accrued an estimated liability of $11,278 and recorded an equal amount as a receivable from the seller, which is classified as other receivables within receivables, net.  As of March 31, 2011 the estimated liability and corresponding indemnification receivable was $8,470 and continues to be reflected in both accrued expenses and other current liabilities (see Note 9) and receivables, net (see Note 4) in the condensed consolidated balance sheets.


(4)
Receivables

Receivables, net were comprised of the following:

   
December 31,
2010
   
March 31, 2011
 
Trade accounts receivable
  $ 90,818     $ 98,306  
Unbilled receivables
    6,008       4,309  
Other receivables
    13,282       12,788  
    Subtotal
    110,108       115,403  
Less:  allowance for doubtful accounts
    (12,370 )     (12,592 )
    Total receivables, net
  $ 97,738     $ 102,811  

Unbilled receivables represent amounts earned and accrued as receivables from customers prior to the end of the period.  Unbilled receivables are expected to be billed and collected within twelve months of the respective balance sheet date.  Other receivables include various value added tax receivables and the indemnification receivable associated with the Interchange tax contingency of $8,339 and $8,470 at December 31, 2010 and March 31, 2011, respectively.


 
15

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(In thousands, except per share amounts)

(5)
Prepaid Expenses and Other Assets

Prepaid expenses and other assets (a current asset) consisted of the following:

   
December 31,
2010
   
March 31, 2011
 
Deferred income tax assets, current
  $ 6,505     $ 5,558  
Deferred direct and relevant costs
    7,626       8,993  
Prepaid expenses
    12,322       14,555  
Other
    190       107  
    Total
  $ 26,643     $ 29,213  


(6)
Property and Equipment

Property and equipment, net were comprised of the following:

   
December 31,
2010
   
March 31, 2011
 
Computer equipment and furniture
  $ 195,154     $ 198,689  
Computer software
    303,442       311,180  
Leasehold improvements
    17,788       18,247  
    Gross property and equipment
    516,384       528,116  
Less:  accumulated depreciation and amortization
    (420,861 )     (429,140 )
    Property and equipment, net
  $ 95,523     $ 98,976  

Depreciation and amortization expense related to property and equipment was $8,122 and $7,435 for the three months ended March 31, 2010 and 2011, respectively.


(7)
Goodwill and Other Acquired Intangible Assets

The following represents a summary of changes in goodwill for the three months ended March 31, 2011:

Balance as of  December 31, 2010
  $ 264,857  
Additions:  RollStream acquisition
    2,100  
Foreign currency translation
    869  
Balance as of  March 31, 2011
  $ 267,826  

Other acquired intangible assets were comprised of the following:

March 31, 2011
 
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
Amortizable intangible assets:
                 
  Customer relationships
  $ 221,508     $ (108,061 )   $ 113,447  
  Product technology
    18,151       (1,698 )     16,453  
  Trade names and trademarks
    4,300       (717 )     3,583  
  Other acquired intangible assets
    3,921       (3,003 )     918  
      Subtotal
    247,880       (113,479 )     134,401  
Non-amortizable intangible assets:
                       
  Trade names and trademarks
    1,837       ––       1,837  
      Total
  $ 249,717     $ (113,479 )   $ 136,238  
 
 
 
16

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(In thousands, except per share amounts)
 
December 31, 2010
 
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
Amortizable intangible assets:
                       
  Customer relationships
  $ 221,150     $ (103,319 )   $ 117,831  
  Product technology
    18,090       (1,186 )     16,904  
  Trade names and trademarks
    4,300       (502 )     3,798  
  Other acquired intangible assets
    3,895       (2,874 )     1,021  
      Subtotal
    247,435       (107,881 )     139,554  
Non-amortizable intangible assets:
                       
  Trade names and trademarks
    1,803       ––       1,803  
      Total
  $ 249,238     $ (107,881 )   $ 141,357  
 
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.

Intangible assets, except for those with an indefinite life (such as certain trade names and trademarks), 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. The weighted average amortization periods are as follows:
 
 
Amortization Period
Customer relationships
10.0 years
Product technology
9.4 years
Trade names and trademarks
5.0 years
Other acquired intangible assets
5.0 years

Amortization expense related to intangible assets was $433 and $5,487 for the three months ended March 31, 2010 and 2011, respectively.
 
 
(8)
Other Assets

Other assets (a non-current asset) consisted of the following:

   
December 31, 2010
   
March 31, 2011
 
Deferred direct and relevant costs on implementations of long-term contracts, net
  $ 11,324     $ 12,033  
Refundable deposits
    2,352       2,568  
Other
    3,054       2,672  
    Total
  $ 16,730     $ 17,273  

 
(9)
Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

   
December 31, 2010
   
March 31, 2011
 
Employee compensation and benefits
  $ 15,921     $ 15,928  
Other non-income taxes accrued
    9,018       9,438  
Accrued interest
    5,258       24,382  
Restructuring
    4,581       4,414  
Fair value of interest rate swap
    4,683       2,318  
Estimated Interchange pre-acquisition tax contingency
    8,339       8,470  
Other
    12,475       12,079  
    Total
  $ 60,275     $ 77,029  


 
17

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(In thousands, except per share amounts)
 
(10)
Other Liabilities

Other liabilities (a non-current liability) consisted of the following:

   
December 31, 2010
   
March 31, 2011
 
Pension and related benefits
  $ 19,779     $ 21,045  
Restructuring – non-current
    5,817       5,104  
Rebates due to stockholders of Interchange, net of discount
    1,899       2,270  
Deferred income – non-current
    7,061       6,551  
Deferred rent – non-current
    8,014       8,285  
Other
    1,342       1,414  
    Total
  $ 43,912     $ 44,669  

 
(11)
Debt

Debt consisted of the following:

   
December 31, 2010
   
March 31, 2011
 
Revolving credit facility
  $ 8,000     $ ––  
Senior secured notes
    785,000       785,000  
Less:  unamortized original issue discount
    (15,885 )     (15,204 )
Total debt
    777,115       769,796  
Less:  current maturities of long-term debt
    (8,000 )     ––  
Total long-term debt
  $ 769,115     $ 769,796  

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 $18,608.  Net proceeds from issuance were used to fund the Inovis Merger in 2010, retire all of the outstanding debt under the previously outstanding credit facility and $35,000 of GXS Holdings outstanding subordinated notes, pay debt issuance costs and for other general corporate purposes.  Under the terms of the Senior Secured Notes indenture, the Company placed $227,580 in an escrow account to fund the Merger.  On June 2, 2010, the Company withdrew the funds from the escrow account to fund the Merger.

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, make certain distributions, 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 Revolver”).  The interest rate for the Revolver is a predetermined amount above the LIBOR, subject to a floor of 2.0%, or at a predetermined amount above the administrative agent’s “base rate”, subject to a floor of 3.0%, at the Company’s option.  The Revolver is guaranteed by the guarantors that guarantee the Senior Secured Notes and secured by collateral that secure the Senior Secured Notes.  The Revolver is used by the Company, among other things, to fund its working capital needs, support letters of credit and for general corporate purposes.  The Company’s ability to borrow additional monies in the future under the Revolver is subject to certain conditions, including compliance with certain covenants.  As of March 31, 2011, the Company had outstanding letters of credit of $11,700, no outstanding borrowings and additional available borrowings of $38,300 under the Revolver.  Any outstanding borrowings under the Revolver shall be repaid in full on December 23, 2012 and the commitments shall terminate on that date.
 
 
 
18

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(In thousands, except per share amounts)
 
The Revolver 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 March 31, 2011, the Company was in compliance with all financial and non-financial covenants.

Other Information

The Company expects that cash flows from foreign operations will be required to meet its domestic debt service requirements.  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 the Company’s ability to repatriate these cash flows or increase the tax burden on the collections.

 Deferred financing costs are being amortized over the life of the debt using a method that approximates the interest method. Amortization expense related to the deferred financing costs for the three months ended March 31, 2010 and 2011 was $1,000 and $1,025, respectively.


(12)
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 0.30% at March 31, 2011.  The fair value of the interest rate swap was $4,683 and $2,318 as of December 31, 2010 and March 31, 2011, respectively.  The interest rate swap was recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheets at December 31, 2010 and March 31, 2011, respectively.  The interest rate swap agreement expired on April 26, 2011 and was settled with the commercial bank with a final payment of $2,318 on that date.

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 previously outstanding variable-rate credit facility.  As the hedged future forecasted transactions (variable interest payments on the credit facility) were no longer probable of occurring upon the repayment and extinguishment of the previously outstanding 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.  The changes in fair value of the interest rate swap of $1,042 and $2,365 were recorded as a reduction to interest expense in the three months ended March 31, 2010 and 2011, respectively.

 
(13)
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 condensed consolidated 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 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, in response to which the patent holder filed amended claims.  In December 2010, the USPTO issued a final ruling cancelling certain of the patent claims and leaving one amended claim and its dependent claims.  The litigation is currently stayed, but may
 
 
 
19

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(In thousands, except per share amounts)
 
resume in 2011.  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.  An amount of potential loss, if any, cannot be determined at this time.
 
The Company is also subject to income and other taxes in the United States and foreign jurisdictions and is regularly under audit by tax authorities.  Although the Company believes its 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 the Company’s tax provisions and accruals.  Should additional taxes be assessed as a result of an audit or litigation, it could have a material effect on the Company’s income tax provision and net income in the period or periods for which that determination is made.
 
Currently, New York State tax authorities are in the process of conducting a sales tax audit of Inovis for the period March 2008 to May 2010.  The tax audit  is in its early stages, but if the tax authorities finally determine that the applicable sales tax was underpaid  by Inovis, the Company may incur a tax liability, including accrued interest and penalties.  Since the audit is currently in its preliminary stages, the Company is unable to estimate the likelihood or amount of any potential additional liability at this time and has not accrued for any potential exposure.
 

(14)
Restructuring Charges

During the past several years, the Company has undertaken a series of restructuring activities, which included closing or consolidating certain office facilities and terminating employees, in order to reduce expenses in response to changing business requirements.  The restructuring charges reflect the total estimated net costs of these activities and current period adjustments of revised estimates associated with these restructuring plans.

During the three months ended March 31, 2011, the Company recorded restructuring charges of $201, which principally included charges associated with the consolidation of office space at the former Inovis headquarters and termination of approximately five employees associated with the integration of the Inovis business.  The Company also assumed obligations for restructuring activities related to the termination of certain RollStream employees of $164.

The restructuring accrual amounts recorded are net of amounts the Company expects to receive from subleasing vacated space, primarily at its previous corporate headquarters through April 2014.  The facility charge was determined by discounting the net future cash obligation of the existing lease less anticipated rental receipts to be received from existing and potential subleases.  As of March 31, 2011, there are $7,074 of the facilities restructuring obligations associated with the Company’s previous global headquarters.  In March 2010, the Company relocated to a new facility.

The changes in the restructuring accrual for the three months ended March 31, 2011 are as follows:

   
Severance
   
Facilities
   
Total
 
Balance as of  December 31, 2010
  $ 1,437     $ 8,961     $ 10,398  
Restructuring obligations assumed in RollStream acquisition
    164       ––       164  
Restructuring charges
    60       141       201  
Payments and other adjustments
    (739 )     (506 )     (1,245 )
Balance as of March 31, 2011
  $ 922     $ 8,596     $ 9,518  

The current portion of the above obligations totaled $4,581 and $4,414 at December 31, 2010 and March 31, 2011, respectively, and are included in accrued expenses and other current liabilities on the consolidated balance sheets (see Note 9).  The long-term portion of the above obligations totaled $5,817 and $5,104 at December 31, 2010 and March 31, 2011, respectively, and are included in other liabilities on the consolidated balance sheets (see Note 10).

The Company expects to take further restructuring charges in 2011 and beyond related to exit activities associated with the continued integration of the Inovis and RollStream businesses.


 
20

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(In thousands, except per share amounts)

(15)
Related Party Transactions

Prior to the Inovis Merger, 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 for the three months ended March 31, 2010.  Francisco Partners waived the payment of $833 of fees earned from January 1, 2010 through June 2, 2010, which included the fees payable of $500 for the three months ended March 31, 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 a merger advisory fee of $3,000 prior to the closing of the Inovis Merger.

On June 2, 2010, the Company terminated the Monitoring Agreement and entered into a new management agreement pursuant to which the Company agreed to pay in the aggregate an annual fee of $4,000 to Francisco Partners and certain former stockholders of Inovis, Golden Gate Capital and Cerberus 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 2010 annual management fee was $4,000 for the period from June 2, 2010 through December 31, 2010.  On December 22, 2010 the Company made a partial payment of $2,868 to Francisco Partners and remaining unpaid fees payable to Golden Gate Capital and Cerberus Partners of $1,132 were included in accrued expenses and other current liabilities as of December 31, 2010.

On March 11, 2011 the Company made a payment of $566 to Golden Gate Capital for their balance of 2010 management fees and the remaining unpaid 2010 management fees of $566 payable to Cerberus Partners were included in accrued expenses and other current liabilities as of March 31, 2011.  The Company also reimbursed Golden Gate Capital $9 for net incurred expenses on March 11, 2011.  The expense related to the 2011 annual management fee was $1,000 for the three month period ended March 31, 2011 and was recorded as an accrued expense at March 31, 2011.


(16)
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 condensed 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.
 
 
 
21

 

 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
December 31, 2010
(In thousands)
 

   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Assets
                             
Current assets:
                             
Cash and cash equivalents
  $ ––     $ 6,358     $ 9,968     $ ––     $ 16,326  
Receivables, net
    ––       46,570       51,168       ––       97,738  
Prepaid expenses and other assets
    139       13,385       13,119       ––       26,643  
Advances to subsidiaries
    ––       803,900       208,232       (1,012,132 )     ––  
Total current assets
    139       870,213       282,487       (1,012,132 )     140,707  
Investments in subsidiaries
    501,083       28,461       ––       (529,544 )     ––  
Property and equipment, net
    ––       88,423       7,100       ––       95,523  
Goodwill
    ––       237,960       26,897       ––       264,857  
Intangible assets, net
    ––       123,377       17,980       ––       141,357  
Deferred financing costs
    19,262       ––       ––       ––       19,262  
Other noncurrent assets
    ––       9,397       7,333       ––       16,730  
Total Assets
  $ 520,484     $ 1,357,831     $ 341,797     $ (1,541,676 )   $ 678,436  
                                         
Liabilities and Stockholder’s Equity (Deficit)
                                 
Current liabilities:
                                       
Current maturities of long-term debt
  $ 8,000     $ ––     $ ––     $ ––     $ 8,000  
Trade payables
    94       9,097       3,671       ––       12,862  
Other current liabilities
    9,941       51,828       41,607       ––       103,376  
Advances from affiliates
    ––       762,233       249,899       (1,012,132 )     ––  
Total current liabilities
    18,035       823,158       295,177       (1,012,132 )     124,238  
Long-term debt less current maturities
    769,115       ––       ––       ––       769,115  
Other liabilities
    ––       33,590       17,902       ––       51,492  
Total liabilities
    787,150       856,748       313,079       (1,012,132 )     944,845  
Stockholder’s equity (deficit):
                                       
Stockholder’s equity (deficit) GXS Worldwide, Inc.
    (266,666 )     501,083       28,461       (529,544 )     (266,666 )
Non-controlling interest
    ––       ––       257       ––       257  
Total stockholder’s equity (deficit)
    (266,666 )     501,083       28,718       (529,544 )     (266,409 )
Total Liabilities and Stockholder’s Equity (Deficit)
  $ 520,484     $ 1,357,831     $ 341,797     $ (1,541,676 )   $ 678,436  


 
22

 
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
March 31, 2011
(In thousands)
(Unaudited)
 

   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Assets
                             
Current assets:
                             
Cash and cash equivalents
  $ ––     $ 7,492     $ 11,913     $ ––     $ 19,405  
Receivables, net
    ––       51,222       51,589       ––       102,811  
Prepaid expenses and other assets
    104       15,685       13,424       ––       29,213  
Advances to subsidiaries
    ––       792,157       212,931       (1,005,088 )     ––  
Total current assets
    104       866,556       289,857       (1,005,088 )     151,429  
Investments in subsidiaries
    509,395       28,332       ––       (537,727 )     ––  
Property and equipment, net
    ––       91,755       7,221       ––       98,976  
Goodwill
    ––       240,012       27,814       ––       267,826  
Intangible assets, net
    ––       118,898       17,340       ––       136,238  
Deferred financing costs
    18,240       ––       ––       ––       18,240  
Other noncurrent assets
    ––       8,969       8,304       ––       17,273  
Total Assets
  $ 527,739     $ 1,354,522     $ 350,536     $ (1,542,815 )   $ 689,982  
                                         
Liabilities and Stockholder’s Equity (Deficit)
                                 
Current liabilities:
                                       
Trade payables
  $ ––     $ 7,050     $ 4,253     $ ––     $ 11,303  
Other current liabilities
    26,699       54,667       44,647       ––       126,013  
Advances from affiliates
    ––       752,054       253,034       (1,005,088 )     ––  
Total current liabilities
    26,699       813,771       301,934       (1,005,088 )     137,316  
Long-term debt less current maturities
    769,796       ––       ––       ––       769,796  
Other liabilities
    ––       31,356       20,003       ––       51,359  
Total liabilities
    796,495       845,127       321,937       (1,005,088 )     958,471  
Stockholder’s equity (deficit):
                                       
Stockholder’s equity (deficit) GXS Worldwide, Inc.
    (268,756 )     509,395       28,332       (537,727 )     (268,756 )
Non-controlling interest
    ––       ––       267       ––       267  
Total stockholder’s equity (deficit)
    (268,756 )     509,395       28,599       (537,727 )     (268,489 )
Total Liabilities and Stockholder’s Equity (Deficit)
  $ 527,739     $ 1,354,522     $ 350,536     $ (1,542,815 )   $ 689,982  


 
23

 
 
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three Months ended March 31, 2010
(In thousands)
(Unaudited)
 

   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Revenues
  $ ––     $ 68,349     $ 49,678     $ (33,341 )   $ 84,686  
Costs and operating expenses
    ––       54,054       48,161       (33,341 )     68,874  
Restructuring charges
    ––       142       144       ––       286  
Merger and acquisition fees
    2,485       ––       ––       ––       2,485  
                                         
Operating income (loss)
    (2,485 )     14,153       1,373       ––       13,041  
Other income (expense), net
    (22,236 )     639       (1,437 )     ––       (23,034 )
                                         
Income (loss) before income taxes
    (24,721 )     14,792       (64 )     ––       (9,993 )
Provision for income taxes
    ––       136       540       ––       676  
                                         
Income (loss) before equity in income (loss) of subsidiaries
    (24,721 )     14,656       (604 )     ––       (10,669 )
Equity in income (loss) of subsidiaries
    14,052       (604 )     ––       (13,448 )     ––  
                                         
Net income (loss)
    (10,669 )     14,052       (604 )     (13,448 )     (10,669 )
Foreign currency translation adjustments
    ––       ––       (665 )     ––       (665 )
                                         
Comprehensive income (loss)
    (10,669 )     14,052       (1,269 )     (13,448 )     (11,334 )
Less: Comprehensive loss attributable to non-controlling interest
    ––       ––       (29 )     ––       (29 )
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
  $ (10,669 )   $ 14,052     $ (1,240 )   $ (13,448 )   $ (11,305 )


 
24

 

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three Months ended March 31, 2011
(In thousands)
(Unaudited)
 

   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Revenues
  $ ––     $ 95,678     $ 52,973     $ (34,543 )   $ 114,108  
Costs and operating expenses
    ––       77,663       53,152       (34,543 )     96,272  
Restructuring charges
    ––       61       140       ––       201  
Merger and acquisition fees
    26       ––       ––       ––       26  
                                         
Operating income (loss)
    (26 )     17,954       (319 )     ––       17,609  
Other income (expense), net
    (21,176 )     486       197       ––       (20,493 )
                                         
Income (loss) before income taxes
    (21,202 )     18,440       (122 )     ––       (2,884 )
Provision for income taxes
    ––       63       847       ––       910  
                                         
Income (loss) before equity in income (loss) of subsidiaries
    (21,202 )     18,377       (969 )     ––       (3,794 )
Equity in income (loss) of subsidiaries
    17,408       (969 )     ––       (16,439 )     ––  
                                         
Net income (loss)
    (3,794 )     17,408       (969 )     (16,439 )     (3,794 )
Foreign currency translation adjustments
    ––       ––       1,085       ––       1,085  
                                         
Comprehensive income (loss)
    (3,794 )     17,408       116       (16,439 )     (2,709 )
Less: Comprehensive income attributable to non-controlling interest
    ––       ––       10       ––       10  
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
  $ (3,794 )   $ 17,408     $ 106     $ (16,439 )   $ (2,719 )


 
25

 

 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Three Months ended March 31, 2010
(In thousands)
(Unaudited)
 

   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Cash flows from operating activities:
                             
Net income (loss)
  $ (10,669 )   $ 14,052     $ (604 )   $ (13,448 )   $ (10,669 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                                       
Depreciation and amortization
    ––       7,358       1,197       ––       8,555  
Deferred income taxes
    ––             143       ––       143  
Amortization of deferred financing fees and debt discount
    1,847       ––       ––       ––       1,847  
Unrealized gain on interest rate swap
    (1,042 )     ––       ––       ––       (1,042 )
Stock compensation expense
    ––       41       ––       ––       41  
Equity in net (income) loss of subsidiaries
    (14,052 )     604       ––       13,448       ––  
Changes in operating assets and liabilities, net
    23,969       (9,703 )     6,968       ––       21,234  
Net cash provided by operating activities
    53       12,352       7,704       ––       20,109  
                                         
Cash flows from investing activities:
                                       
Purchases of property and equipment
    ––       (9,091 )           ––       (9,091 )
Increase in restricted cash
    (3 )     ––             ––       (3 )
Net cash used in investing activities
    (3 )     (9,091 )           ––       (9,094 )
                                         
Cash flows from financing activities:
                                       
Payment of financing costs
    (50 )     ––       ––       ––       (50 )
Net cash used in financing activities
    (50 )     ––       ––       ––       (50 )
                                         
Effect of exchange rate changes on cash
    ––       ––       (539 )     ––       (539 )
                                         
Increase in cash and cash equivalents
    ––       3,261       7,165       ––       10,426  
Cash and cash equivalents, beginning of year
    ––       12,983       12,566       ––       25,549  
Cash and cash equivalents, end of period
  $ ––     $ 16,244     $ 19,731     $ ––     $ 35,975  


 
26

 
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Three Months ended March 31, 2011
(In thousands)
(Unaudited)
 

   
Parent
   
Guarantors
   
Non-Guarantors