Washington, D.C. 20549
GXS Worldwide, Inc.
(Former name, former address and former fiscal year, if changed since last report)
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.
GXS WORLDWIDE, INC.
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 “Inovis Merger” or the “Merger”. All references to “RollStream” refer to RollStream, Inc., which the Company acquired on March 28, 2011.
GXS WORLDWIDE, INC. AND SUBSIDIARIES
| (1) | Business and Basis of Presentation |
GXS Worldwide, Inc. and its subsidiaries (“GXS Worldwide” or the “Company”) is a leading global provider of business-to-business (“B2B”) cloud integration services and solutions that simplify and enhance business process integration, data quality and compliance, and collaboration among businesses. The Company’s services and solutions enable customers to manage and improve mission critical supply chain functions, securely process financial transactions related to the exchange of goods and services, and automate and control other critical cross-enterprise business processes. By utilizing these services and solutions the Company’s customers realize a number of key benefits such as lower total cost of ownership, accelerated time to market and enhanced reliability and security. Customers and their trading partners do business together via GXS Trading Grid®, a multi-tenant integration cloud platform. The Company’s Managed Services offering compliments GXS Trading Grid® with shared processes and built-in industry expertise. 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. Certain foreign subsidiaries of Inovis became wholly-owned subsidiaries of GXSI. The results of operations for Inovis are included in the Company’s condensed consolidated results of operations since its acquisition on June 2, 2010.
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 fair presentation of the financial position and results of operations.
Interim results for the three and nine month periods ended September 30, 2012 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, 2011, which are included in the Company’s Annual Report on Form 10-K, filed under the Securities Exchange Act of 1934 with the Securities and Exchange Commission (“SEC”) on March 19, 2012.
| (2) | Summary of Significant Accounting Policies |
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 percent 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 percent 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. Following the acquisition, revenue and operating income are typically affected by a reduction of deferred revenue over its remaining term to reflect estimated fair value of the obligation which includes estimated cost to deliver and the associated margin.
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
The financial statements of most subsidiaries located outside of the United States (“U.S.”) are measured using the local currency as the functional currency. Assets and liabilities are translated at rates of exchange that approximate those 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.
The Company has various service lines, specifically including: Messaging Services, Managed Services, B2B Software Services, Data Synchronization, and Custom Outsourcing Services. The Company’s service lines generate revenues from three principal sources, as described in detail below. Regardless of the service line or source, the Company records revenues net of any taxes (e.g., sales, local, value-added) that are collected from customers and remitted to governmental authorities.
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 are recognized based on the greater of actual transactions or the specified contract minimum amounts.
Professional Services — The Company earns professional services revenue generally pursuant to time and material contracts and in most instances revenue is recognized as the related services are provided, except when such services are associated with a new project implementation, in which case the associated revenue is deferred over the estimated customer life which approximates the initial contract term as outlined below.
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 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 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.
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
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, they do not qualify as separate units of accounting and are not separated. These implementation and start-up services do not have stand-alone value outside of ongoing managed services arrangements, the services are not provided by any other vendor, the Company does not generally sell implementation and start-up services separately, and the results of such services cannot be re-sold by the Company’s customers. Revenues related to implementation and start-up services are recognized over the estimated customer life which, based on the Company’s current estimate, approximates 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.
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 September 30, 2012 and December 31, 2011 was $29,116 and $26,445, respectively, and are recorded in either “prepaid expenses and other assets” (see Note 4) or “other assets” (see Note 7) in the condensed consolidated balance sheets, depending on the remaining duration of the underlying contracts.
| (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 overall 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 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.
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
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.
The Company capitalized costs related to the development of internal-use software of $6,475 and $18,564 during the three and nine months ended September 30, 2012, respectively, and $6,305 and $19,404 during the three and nine months ended September 30, 2011, respectively. Such amounts include capitalized interest of $291 and $640 for the three and nine months ended September 30, 2012, respectively, and $410 and $1,035 for the three and nine months ended September 30, 2011, respectively.
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. The Company does not capitalize costs since there is generally 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.
As of September 30, 2012 and December 31, 2011, the Company had goodwill in the amount of $269,082 and $268,767, respectively. The Company 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 quantitative 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 September 2011, the FASB issued ASU 2011-08 – Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which is intended to simplify how an entity is required to test goodwill for impairment under ASU 2010-28 (issued in December 2010) by allowing an entity to first assess qualitative factors (which are defined in the new guidance) to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company adopted ASU 2011-08 on January 1, 2012, as required.
As of December 31, 2011, the Company completed goodwill impairment testing in accordance with ASU 2010-28 (including performing the required step-two test) and determined that goodwill was not impaired. The Company’s impairment test was 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, 2011. As of September 30, 2012, the Company assessed the qualitative factors (as defined in ASU 2011-08) and determined that goodwill was not impaired; as it was more likely than not that the fair value was greater than the carrying amount.
| (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.
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
The Company calculates the facility charge included in the restructuring charges by discounting the net future cash obligation of the existing leases less anticipated rental receipts to be received from existing and potential subleases. This requires significant judgment about the length of time the space will remain vacant, anticipated cost escalators and operating costs associated with the leases, the market rate at which the space will be subleased, and broker fees or other costs necessary to market the space. These judgments are based upon independent market analysis and assessment from experienced real estate brokers. If the Company were to make different determinations with respect to these factors the amounts of restructuring charges could differ materially, although most of the vacant space has been sublet with the sublease of the Company’s former corporate headquarters.
The Company periodically records the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. These events are called contingencies, and the accounting for these events is prescribed by FASB ASC 450 – Accounting for Contingencies. This standard defines a contingency as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. Contingent losses must be accrued if:
| | · | information is available that indicates it is probable that the loss has been incurred, given the likelihood of the uncertain future events; and |
| | · | the amount of the loss can be reasonably estimated. |
The accrual of a contingency involves considerable judgment on the part of management. Legal proceedings have elements of uncertainty, and in order to determine the amount of accrued liabilities required, if any, the Company assesses the likelihood of any adverse judgments or outcomes to pending and threatened legal matters, as well as the best estimate of or potential ranges of amounts of probable losses. The Company uses internal expertise and outside experts, as necessary, to help estimate the probability that a loss has been incurred and the amount or range of the loss. A determination of the amount of accrued liabilities required for these contingencies is made after analysis of each individual issue. The required accrued liabilities may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy.
Comprehensive loss consists of net income (loss) adjusted for increases and decreases affecting accumulated other comprehensive loss in stockholder’s deficit that are excluded from the determination of net income (loss).
Accumulated other comprehensive loss was comprised of the following:
| | | | | | | |
Additional minimum pension liability | | $ | (461 | ) | | $ | (461 | ) |
Foreign currency translation adjustments | | | (3,521 | ) | | | (5,747 | ) |
Accumulated other comprehensive loss | | $ | (3,982 | ) | | $ | (6,208 | ) |
| (n) | 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 and nine months ended September 30, 2012 and 2011.
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
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 at the time they are 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 more likely than not 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 nine months ended September 30, 2012 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 expected losses in the U.S. and foreign jurisdictions for which no income tax benefit has been recognized.
| (p) | Derivative Instruments |
Derivative instruments are recognized in 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 considered the interest rate swap, which expired and was settled on April 26, 2011, 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.
| (q) | Fair Value of Financial Instruments |
The Company’s financial instruments consist principally of cash and cash equivalents, receivables 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. At September 30, 2012, the Company’s long-term debt was valued at 103.50% of its face value, so the Company considered the fair value to be $812,475 at that date. At December 31, 2011, the Company’s long-term debt was valued at 92.63% of its face value, so the Company considered the fair value to be $727,146 at that date.
The Company considered the long-term debt 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, such as quotes of recent market trades of its debt.
Compensation costs relating to share-based payment transactions are recognized in the condensed consolidated statements of operations over the applicable service period based upon the fair value of the award at the grant date. Fair value is determined in accordance with FASB ASC Topic 718 – Accounting for Stock Options and Other Stock-Based Compensation.
The GXS Holdings, Inc. Stock Incentive Plan (or “Holdings Plan”) 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 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.
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”). Prior to the amendment of the Credit and Guaranty Agreement described below, the interest rate for the Revolver was 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 secures the Senior Secured Notes. The Revolver is used by the Company to, among other things, fund its working capital needs, support its 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.
On February 29, 2012, the Credit and Guaranty Agreement was amended as follows: (i) the expiration date of the Revolver was extended from December 23, 2012 to March 15, 2015; (ii) the minimum interest rate “floor” associated with the “base rate” and LIBOR was eliminated; (iii) the applicable margin was reduced with respect to Eurodollar rate loans to 4.50% per annum and with respect to “base rate” loans to 3.50% per annum; (iv) the revolving commitment fee percentage was lowered to 0.50% per annum; and (v) the net leverage ratio covenant was increased to a maximum of 5.75:1 commencing with the fiscal quarter ending March 31, 2012 and for each fiscal quarter ending thereafter. All other covenants and conditions are unchanged. The Company paid a closing fee of $375 and professional fees of $46 in connection with this amendment which are being deferred and amortized over the new term of the agreement, along with the existing unamortized deferred costs from the original agreement.
As of September 30, 2012, the Company had outstanding letters of credit of $11,661, no outstanding borrowings, and additional available borrowings of $38,339 under the Revolver. Any outstanding borrowings against the Revolver shall be repaid in full on March 15, 2015 and the commitments shall terminate on that date. 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 September 30, 2012, 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. 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. However, the Company has not had, nor does it have any knowledge of, any such limitations currently, nor in the near-term that could impact its ability to meet its operating requirements over the next twelve months.
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 on the Senior Secured Notes and Revolver was $1,121 and $3,331 for the three and nine months ended September 30, 2012, respectively, and $1,073 and $3,172 for the three and nine months ended September 30, 2011, respectively.
| (11) | Financial Instruments |
Until April 2011, the Company had an interest rate swap agreement with a commercial bank with a notional amount of $255,000. The interest rate swap agreement expired on April 26, 2011 and was settled with the commercial bank with a final payment of $2,318 having been made on that date. The change in fair value of the interest rate swap of $4,683 for the period from January 1, 2011 until the settlement and final payment in April 2011 was recorded as a reduction to interest expense for the nine months ended September 30, 2011.
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
| (12) | 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 and nine months ended September 30, 2012, the Company recorded restructuring charges of approximately $402 and $1,360, respectively, which included charges associated with the further consolidation of office space and involuntary termination of 6 and 22 employees, respectively.
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 September 30, 2012, approximately $3,687 of the facilities restructuring obligations are associated with the Company’s previous global headquarters. The Company relocated to its current global headquarters facility in March 2010.
The changes in the restructuring accrual for the nine months ended September 30, 2012 are as follows:
| | | | | | | | | | |
| | | | | | | | | | |
Balance as of December 31, 2011 | | $ | 488 | | | $ | 6,092 | | | $ | 6,580 | |
Restructuring charges | | | 890 | | | | 470 | | | | 1,360 | |
Payments and other adjustments | | | (1,154 | ) | | | (2,472 | ) | | | (3,626 | ) |
| | | | | | | | | | | | | |
Balance as of September 30, 2012 | | $ | 224 | | | $ | 4,090 | | | $ | 4,314 | |
The current portion of the above obligations totaled $2,773 and $3,394 at September 30, 2012 and December 31, 2011, respectively, and are included in “accrued expenses and other current liabilities” on the condensed consolidated balance sheets (see Note 8). The long-term portion of the above obligations totaled $1,541 and $3,186 at September 30, 2012 and December 31, 2011, respectively, and are included in “other liabilities” on the condensed consolidated balance sheets (see Note 9).
(13) Contingencies
The Company is subject to various legal proceedings and claims in the U.S. and other foreign jurisdictions, 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 U.S. 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 only one amended claim and its dependent claims. The litigation is currently stayed, but may resume later in 2012, or in 2013. 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.
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
The Company is also subject to income and other taxes in the U.S. and other foreign jurisdictions and is regularly under audit by tax authorities. Although the Company believes its tax estimates are reasonable, the final determination of any tax audits and related litigation or other proceedings could be materially different than that which is reflected in the Company’s tax provisions and accruals. In certain foreign jurisdictions, the Company may be required to place on deposit or provide a bank guarantee for amounts claimed by tax authorities while it challenges such amounts. Should additional taxes be assessed as a result of an audit or following an unsuccessful challenge by the Company through litigation, it could have a material effect on the Company’s financial position and results of operations in the period or periods for which that determination is made. A bank guarantee totaling $3,325 was made in May 2012 for a disputed tax matter in Brazil by the Company’s subsidiary, GXS Tecnologia da Informacao (Brasil) Ltda. (“GXS Brazil”), in connection with GXS Brazil’s judicial appeal of a tax claim by the municipality of Sao Paulo, Brazil in the approximate amount of $2,500 as of September 30, 2012. The bank guarantee is collateralized by a deposit of cash with the issuing bank. The Company intends to replace the bank guarantee with a letter of credit under the Revolver in the near future upon negotiation of commercially acceptable terms and conditions, which would result in a return of the cash deposit. The Company can terminate the bank guarantee at its option at any time and, therefore, have unrestricted access to the cash. However, terminating the bank guarantee would be expected to have detrimental legal and tax consequences that could prevent it from conducting business as usual in Brazil. The Company believes that the position of the Brazilian tax authorities is not consistent with the relevant facts. However, there can be no assurance that the Company will ultimately prevail and it is likely that the bank guarantee and supporting cash collateral, or the substituted letter of credit, could remain in place for several years while GXS Brazil pursues the appeal of the tax claim in the courts. While based on information available on the case and other similar matters provided by local counsel, the Company believes the facts support its position that an unfavorable outcome is not probable and no tax is owed, the ultimate outcome of this matter could result in a loss of up to the claim amount discussed above plus any future interest or penalties that may accrue.
The Company’s 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 arms-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 its tax advisors, the Company believes that the facts the Indian tax authorities are using to support their assessment are incorrect. The Company has started appeal procedures and anticipates a settlement with the tax authorities. The Company has accrued $1,494 to cover its anticipated financial exposure in this matter. There can be no assurance that appeals will be successful or that these appeals will be finally resolved in the near future. There is a possibility that the Company may receive similar orders for other years until the above disputes are resolved.
In the third quarter of 2012, the Company was notified by the landlord of one of its leased offices (the “Guildford office”) in the United Kingdom (“U.K.”) that the landlord was objecting to the Company’s written notice (the “Notice”) given in the first quarter of 2012 to allow the Company to break the Guildford office lease in October 2012. The lease break provision allowed the Company to cease all rights and obligations of the lease in October 2012, instead of the October 2017 scheduled lease end provided for in the lease. The Guildford office was one of the office locations closed as further described in Note 12 – Restructuring Charges. If the Notice is determined to be invalid, the Company would be subject to paying the facility costs of the Guildford office through October 2017. The Company is contesting the landlord’s assertion that the break notice was invalid, and is currently assessing what legal rights it has while engaging in discussions with the landlord and ascertaining the potential for mitigating its obligations through subleasing the Guildford office. If the Company is unsuccessful in its contention that the lease break is valid, it is possible that it could incur a loss of up to $1,000. A loss, if any, would be recorded as a “restructuring charge”. However, the Company has concluded that a loss is not probable at this time and has not accrued for any potential exposure.
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
(14) Related Party Transactions
In conjunction with the Inovis Merger on June 2, 2010, the Company entered into an amended management agreement pursuant to which the Company agreed to pay in the aggregate an annual fee of $4,000 to Francisco Partners, the controlling shareholder of GXS Holdings, and certain former stockholders of Inovis, Golden Gate Capital (“Golden Gate”) and Cerberus Partners (“Cerberus”), in exchange for financial advisory and consulting services (the “Management Agreement”). The Management Agreement has a term of ten years and the annual fee is allocated to Francisco Partners, Golden Gate and Cerberus in the annual amounts of $2,868, $566, and $566, respectively.
The expense accrued for in each of the three month periods ended September 30, 2012 and 2011 was $1,000 and the expense accrued for in each of the nine months periods ended September 30, 2012 and 2011 was $3,000. As of September 30, 2012 and December 31, 2011, the Company owed an aggregate of $2,557 and $1,415, respectively, for unpaid management fees earned under the Management Agreement through those dates. These unpaid fees are included in “accrued expenses and other current liabilities” in the condensed consolidated balance sheets as of the respective dates.
In November 2011, the Company entered into an agreement with a director of the Company to provide consulting services for operational and technology reviews and assessments, as requested by the Company. The Company considered the director’s experience as a former chief information officer of several public companies to be invaluable in providing useful analysis and feedback. The agreement ended on February 28, 2012; therefore, no expenses for services under this agreement were recorded during the three months ended September 30, 2012. During the nine months ended September 30, 2012, the Company recorded $54 for services provided and expenses incurred under this agreement.
(15) Supplemental Condensed Consolidated Financial Information
The Senior Secured Notes are guaranteed by each of the Company’s U.S. subsidiaries (the “Subsidiary Guarantors”). The guarantees are full, unconditional and joint and several. The Subsidiary Guarantors are each wholly-owned by the Company, either directly or indirectly. The ability of the Company’s subsidiaries to make cash distributions and loans to the Company and its 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, its Subsidiary Guarantors and the Company’s non-guarantor subsidiaries. (Also see Note 10 for further discussion of Rule 3-16 and the financial statements of GXS, Inc., the Company’s only direct subsidiary and a guarantor.)
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
December 31, 2011
(In thousands)
| | | | | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | –– | | | $ | 2,836 | | | $ | 10,132 | | | $ | –– | | | $ | 12,968 | |
Receivables, net | | | –– | | | | 57,294 | | | | 49,505 | | | | –– | | | | 106,799 | |
Prepaid expenses and other assets | | | –– | | | | 16,887 | | | | 11,994 | | | | –– | | | | 28,881 | |
Advances to subsidiaries | | | –– | | | | 644,162 | | | | 81,680 | | | | (725,842 | ) | | | –– | |
Total current assets | | | –– | | | | 721,179 | | | | 153,311 | | | | (725,842 | ) | | | 148,648 | |
| | | | | | | | | | | | | | | | | | | | | |
Investments in subsidiaries | | | 499,003 | | | | 18,098 | | | | –– | | | | (517,101 | ) | | | –– | |
Property and equipment, net | | | –– | | | | 97,204 | | | | 7,845 | | | | –– | | | | 105,049 | |
Goodwill | | | –– | | | | 242,198 | | | | 26,569 | | | | –– | | | | 268,767 | |
Intangible assets, net | | | –– | | | | 106,404 | | | | 14,079 | | | | –– | | | | 120,483 | |
Deferred financing costs | | | 15,018 | | | | –– | | | | –– | | | | –– | | | | 15,018 | |
Other noncurrent assets | | | –– | | | | 13,081 | | | | 10,031 | | | | –– | | | | 23,112 | |
| | | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 514,021 | | | $ | 1,198,164 | | | $ | 211,835 | | | $ | (1,242,943 | ) | | $ | 681,077 | |
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities and Stockholder’s Equity (Deficit) | | | | | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | | | | | |
| Current maturities of long-term debt | | $ | 3,000 | | | $ | –– | | | $ | –– | | | $ | –– | | | $ | 3,000 | |
Trade payables | | | 61 | | | | 13,910 | | | | 5,669 | | | | –– | | | | 19,640 | |
Other current liabilities | | | 3,500 | | | | 50,165 | | | | 40,326 | | | | –– | | | | 93,991 | |
Advances from affiliates | | | –– | | | | 602,517 | | | | 123,325 | | | | (725,842 | ) | | | –– | |
Total current liabilities | | | 6,561 | | | | 666,592 | | | | 169,320 | | | | (725,842 | ) | | | 116,631 | |
| | | | | | | | | | | | | | | | | | | | | |
| Long-term debt less current maturities | | | 772,068 | | | | –– | | | | –– | | | | –– | | | | 772,068 | |
Other liabilities | | | –– | | | | 32,569 | | | | 24,135 | | | | –– | | | | 56,704 | |
Total liabilities | | | 778,629 | | | | 699,161 | | | | 193,455 | | | | (725,842 | ) | | | 945,403 | |
| Stockholder’s equity (deficit): | | | | | | | | | | | | | | | | | | | | |
| Stockholder’s equity (deficit) GXS Worldwide, Inc. | | | (264,608 | ) | | | 499,003 | | | | 18,098 | | | | (517,101 | ) | | | (264,608 | ) |
Non-controlling interest | | | –– | | | | –– | | | | 282 | | | | –– | | | | 282 | |
Total stockholder’s equity (deficit) | | | (264,608 | ) | | | 499,003 | | | | 18,380 | | | | (517,101 | ) | | | (264,326 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Total Liabilities and Stockholder’s Equity (Deficit) | | $ | 514,021 | | | $ | 1,198,164 | | | $ | 211,835 | | | $ | (1,242,943 | ) | | $ | 681,077 | |
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
September 30, 2012
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | –– | | | $ | 22,300 | | | $ | 18,518 | | | $ | –– | | | $ | 40,818 | |
Receivables, net | | | –– | | | | 58,985 | | | | 44,665 | | | | –– | | | | 103,650 | |
Prepaid expenses and other assets | | | 35 | | | | 18,711 | | | | 8,693 | | | | –– | | | | 27,439 | |
Advances to subsidiaries | | | –– | | | | 626,061 | | | | 86,502 | | | | (712,563 | ) | | | –– | |
Total current assets | | | 35 | | | | 726,057 | | | | 158,378 | | | | (712,563 | ) | | | 171,907 | |
| | | | | | | | | | | | | | | | | | | | | |
Investments in subsidiaries | | | 512,622 | | | | 3,682 | | | | –– | | | | (516,304 | ) | | | –– | |
Property and equipment, net | | | –– | | | | 99,890 | | | | 8,768 | | | | –– | | | | 108,658 | |
Goodwill | | | –– | | | | 242,199 | | | | 26,883 | | | | –– | | | | 269,082 | |
Intangible assets, net | | | –– | | | | 93,901 | | | | 11,741 | | | | –– | | | | 105,642 | |
Deferred financing costs | | | 12,109 | | | | –– | | | | –– | | | | –– | | | | 12,109 | |
Other noncurrent assets | | | –– | | | | 9,767 | | | | 11,162 | | | | –– | | | | 20,929 | |
| | | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 524,766 | | | $ | 1,175,496 | | | $ | 216,932 | | | $ | (1,228,867 | ) | | $ | 688,327 | |
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities and Stockholder’s Equity (Deficit) | | | | | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | | | | | |
Trade payables | | $ | 5 | | | $ | 10,175 | | | $ | 4,681 | | | | –– | | | $ | 14,861 | |
Other current liabilities | | | 22,545 | | | | 48,985 | | | | 36,724 | | | | –– | | | | 108,254 | |
Advances from affiliates | | | –– | | | | 569,221 | | | | 143,342 | | | | (712,563 | ) | | | –– | |
Total current liabilities | | | 22,550 | | | | 628,381 | | | | 184,747 | | | | (712,563 | ) | | | 123,115 | |
| | | | | | | | | | | | | | | | | | | | | |
| Long-term debt less current maturities | | | 774,493 | | | | –– | | | | –– | | | | –– | | | | 774,493 | |
Other liabilities | | | –– | | | | 34,493 | | | | 28,189 | | | | –– | | | | 62,682 | |
Total liabilities | | | 797,043 | | | | 662,874 | | | | 212,936 | | | | (712,563 | ) | | | 960,290 | |
| Stockholder’s equity (deficit) GXS Worldwide, Inc. | | | (272,277 | ) | | | 512,622 | | | | 3,682 | | | | (516,304 | ) | | | (272,277 | ) |
Non-controlling interest | | | –– | | | | –– | | | | 314 | | | | –– | | | | 314 | |
| Total stockholder’s equity (deficit) | | | (272,277 | ) | | | 512,622 | | | | 3,996 | | | | (516,304 | ) | | | (271,963 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Total Liabilities and Stockholder’s Equity (Deficit) | | $ | 524,766 | | | $ | 1,175,496 | | | $ | 216,932 | | | $ | (1,228,867 | ) | | $ | 688,327 | |
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three Months Ended September 30, 2011
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenues | | $ | –– | | | $ | 105,170 | | | $ | 58,458 | | | $ | (40,912 | ) | | $ | 122,716 | |
| | | | | | | | | | | | | | | | | | | | | |
Costs and operating expenses | | | 62 | | | | 79,285 | | | | 58,373 | | | | (40,912 | ) | | | 96,808 | |
Restructuring charges | | | –– | | | | 579 | | | | 130 | | | | –– | | | | 709 | |
Operating income (loss) | | | (62 | ) | | | 25,306 | | | | (45 | ) | | | –– | | | | 25,199 | |
Other income (expense), net | | | (21,466 | ) | | | 2,060 | | | | (4,458 | ) | | | –– | | | | (23,864 | ) |
Income (loss) before income taxes | | | (21,528 | ) | | | 27,366 | | | | (4,503 | ) | | | –– | | | | 1,335 | |
Provision for income taxes | | | –– | | | | 307 | | | | 988 | | | | –– | | | | 1,295 | |
| Income (loss) before equity in income (loss) of subsidiaries | | | (21,528 | ) | | | 27,059 | | | | (5,491 | ) | | | –– | | | | 40 | |
Equity in income (loss) of subsidiaries | | | 21,568 | | | | (5,491 | ) | | | –– | | | | (16,077 | ) | | | –– | |
Net income (loss) | | | 40 | | | | 21,568 | | | | (5,491 | ) | | | (16,077 | ) | | | 40 | |
Foreign currency translation adjustments | | | –– | | | | –– | | | | (944 | ) | | | –– | | | | (944 | ) |
Dividends from subsidiaries | | | –– | | | | 1,784 | | | | –– | | | | (1,784 | ) | | | –– | |
Comprehensive income (loss) | | | 40 | | | | 23,352 | | | | (6,435 | ) | | | (17,861 | ) | | | (904 | ) |
| Less: Comprehensive loss attributable to non-controlling interest | | | –– | | | | –– | | | | (35 | ) | | | –– | | | | (35 | ) |
| Comprehensive income (loss) attributable to GXS Worldwide, Inc. | | $ | 40 | | | $ | 23,352 | | | $ | (6,400 | ) | | $ | (17,861 | ) | | $ | (869 | ) |
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Nine Months Ended September 30, 2011
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenues | | $ | –– | | | $ | 297,679 | | | $ | 166,652 | | | $ | (108,692 | ) | | $ | 355,639 | |
| | | | | | | | | | | | | | | | | | | | | |
Costs and operating expenses | | | 227 | | | | 230,328 | | | | 167,471 | | | | (108,692 | ) | | | 289,334 | |
Restructuring charges | | | –– | | | | 1,700 | | | | 628 | | | | –– | | | | 2,328 | |
Operating income (loss) | | | (227 | ) | | | 65,651 | | | | (1,447 | ) | | | –– | | | | 63,977 | |
Other income (expense), net | | | (62,300 | ) | | | 1,424 | | | | (4,171 | ) | | | –– | | | | (65,047 | ) |
Income (loss) before income taxes | | | (62,527 | ) | | | 67,075 | | | | (5,618 | ) | | | –– | | | | (1,070 | ) |
Provision for income taxes | | | –– | | | | 622 | | | | 2,004 | | | | –– | | | | 2,626 | |
| Income (loss) before equity in income (loss) of subsidiaries | | | (62,527 | ) | | | 66,453 | | | | (7,622 | ) | | | –– | | | | (3,696 | ) |
Equity in income (loss) of subsidiaries | | | 58,831 | | | | (7,622 | ) | | | –– | | | | (51,209 | ) | | | –– | |
Net income (loss) | | | (3,696 | ) | | | 58,831 | | | | (7,622 | ) | | | (51,209 | ) | | | (3,696 | ) |
Foreign currency translation adjustments | | | –– | | | | –– | | | | 2,167 | | | | –– | | | | 2,167 | |
Dividends from subsidiaries | | | –– | | | | 2,219 | | | | –– | | | | (2,219 | ) | | | –– | |
Comprehensive income (loss) | | | (3,696 | ) | | | 61,050 | | | | (5,455 | ) | | | (53,428 | ) | | | (1,529 | ) |
| Less: Comprehensive loss attributable to non-controlling interest | | | –– | | | | –– | | | | (3 | ) | | | –– | | | | (3 | ) |
| Comprehensive income (loss) attributable to GXS Worldwide, Inc. | | $ | (3,696 | ) | | $ | 61,050 | | | $ | (5,452 | ) | | $ | (52,428 | ) | | $ | (1,526 | ) |
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three Months Ended September 30, 2012
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenues | | $ | –– | | | $ | 101,257 | | | $ | 55,133 | | | $ | (35,111 | ) | | $ | 121,279 | |
| | | | | | | | | | | | | | | | | | | | | |
Costs and operating expenses | | | –– | | | | 78,696 | | | | 55,766 | | | | (35,111 | ) | | | 99,351 | |
Restructuring charges | | | –– | | | | 328 | | | | 74 | | | | –– | | | | 402 | |
Operating income (loss) | | | –– | | | | 22,233 | | | | (707 | ) | | | –– | | | | 21,526 | |
Other income (expense), net | | | (21,347 | ) | | | 538 | | | | 413 | | | | –– | | | | (20,396 | ) |
Income (loss) before income taxes | | | (21,347 | ) | | | 22,771 | | | | (294 | ) | | | –– | | | | 1,130 | |
Provision for income taxes | | | –– | | | | 659 | | | | 617 | | | | –– | | | | 1,276 | |
| Income (loss) before equity in income (loss) of subsidiaries | | | (21,347 | ) | | | 22,112 | | | | (911 | ) | | | –– | | | | (146 | ) |
Equity in income (loss) of subsidiaries | | | 21,201 | | | | (911 | ) | | | –– | | | | (20,290 | ) | | | –– | |
Net income (loss) | | | (146 | ) | | | 21,201 | | | | (911 | ) | | | (20,290 | ) | | | (146 | ) |
Foreign currency translation adjustments | | | –– | | | | –– | | | | 1,077 | | | | –– | | | | 1,077 | |
Dividends from subsidiaries | | | –– | | | | 469 | | | | –– | | | | (469 | ) | | | –– | |
Comprehensive income (loss) | | | (146 | ) | | | 21,670 | | | | 166 | | | | (20,759 | ) | | | 931 | |
| Less: Comprehensive income attributable to non-controlling interest | | | –– | | | | –– | | | | 47 | | | | –– | | | | 47 | |
| Comprehensive income (loss) attributable to GXS Worldwide, Inc. | | $ | (146 | ) | | $ | 21,670 | | | $ | 119 | | | $ | (20,759 | ) | | $ | 884 | |
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Nine Months Ended September 30, 2012
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenues | | $ | –– | | | $ | 306,318 | | | $ | 163,590 | | | $ | (108,908 | ) | | $ | 361,000 | |
| | | | | | | | | | | | | | | | | | | | | |
Costs and operating expenses | | | 48 | | | | 237,747 | | | | 170,581 | | | | (108,908 | ) | | | 299,468 | |
Restructuring charges | | | –– | | | | 855 | | | | 505 | | | | –– | | | | 1,360 | |
Operating income (loss) | | | (48 | ) | | | 67,716 | | | | (7,496 | ) | | | –– | | | | 60,172 | |
Other income (expense), net | | | (64,053 | ) | | | 1,970 | | | | (5,158 | ) | | | –– | | | | (67,241 | ) |
Income (loss) before income taxes | | | (64,101 | ) | | | 69,686 | | | | (12,654 | ) | | | –– | | | | (7,069 | ) |
Provision for income taxes | | | –– | | | | 1,790 | | | | 1,613 | | | | –– | | | | 3,403 | |
| Income (loss) before equity in income (loss) of subsidiaries | | | (64,101 | ) | | | 67,896 | | | | (14,267 | ) | | | –– | | | | (10,472 | ) |
Equity in income (loss) of subsidiaries | | | 53,629 | | | | (14,267 | ) | | | –– | | | | (39,362 | ) | | | –– | |
Net income (loss) | | | (10,472 | ) | | | 53,629 | | | | (14,267 | ) | | | (39,362 | ) | | | (10,472 | ) |
Foreign currency translation adjustments | | | –– | | | | –– | | | | 2,226 | | | | –– | | | | 2,226 | |
Dividends from subsidiaries | | | –– | | | | 1,062 | | | | –– | | | | (1,062 | ) | | | –– | |
Comprehensive income (loss) | | | (10,472 | ) | | | 54,691 | | | | (12,041 | ) | | | (40,424 | ) | | | (8,246 | ) |
| Less: Comprehensive income attributable to non-controlling interest | | | –– | | | | –– | | | | 32 | | | | –– | | | | 32 | |
| Comprehensive income (loss) attributable to GXS Worldwide, Inc. | | $ | (10,472 | ) | | $ | 54,691 | | | $ | (12,073 | ) | | $ | (40,424 | ) | | $ | (8,278 | ) |
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2011
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (3,696 | ) | | $ | 58,831 | | | $ | (7,622 | ) | | $ | (51,209 | ) | | $ | (3,696 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | –– | | | | 35,088 | | | | 5,077 | | | | –– | | | | 40,165 | |
Deferred income taxes | | | –– | | | | –– | | | | (726 | ) | | | –– | | | | (726 | ) |
| Amortization of deferred financing fees and debt discount | | | 5,365 | | | | –– | | | | 181 | | | | –– | | | | 5,546 | |
Unrealized gain on interest rate swap | | | (2,365 | ) | | | –– | | | | –– | | | | –– | | | | (2,365 | ) |
Settlement of interest rate swap | | | (2,318 | ) | | | –– | | | | –– | | | | –– | | | | (2,318 | ) |
Stock compensation expense | | | –– | | | | 787 | | | | –– | | | | –– | | | | 787 | |
| Equity in net (income) loss of subsidiaries | | | (58,831 | ) | | | 7,622 | | | | –– | | | | 51,209 | | | | –– | |
| Changes in operating assets and liabilities, net | | | 69,847 | | | | (65,779 | ) | | | 10,716 | | | | –– | | | | 14,784 | |
| Net cash provided by operating activities | | | 8,002 | | | | 36,549 | | | | 7,626 | | | | –– | | | | 52,177 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
| Purchases of property and equipment (including capitalized interest) | | | –– | | | | (30,918 | ) | | | (3,352 | ) | | | –– | | | | (34,270 | ) |
| RollStream acquisition, net of cash acquired of $4 | | | –– | | | | (1,125 | ) | | | –– | | | | –– | | | | (1,125 | ) |
Net cash used in investing activities | | | –– | | | | (32,043 | ) | | | (3,352 | ) | | | –– | | | | (35,395 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
| Borrowings under revolving credit facility | | | 34,000 | | | | –– | | | | –– | | | | –– | | | | 34,000 | |
| Repayments under revolving credit facility | | | (42,000 | ) | | | –– | | | | –– | | | | –– | | | | (42,000 | ) |
Payment of financing costs | | | (2 | ) | | | –– | | | | –– | | | | –– | | | | (2 | ) |
Net cash used in financing activities | | | (8,002 | ) | | | –– | | | | –– | | | | –– | | | | (8,002 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | –– | | | | –– | | | | 84 | | | | –– | | | | 84 | |
| | | | | | | | | | | | | | | | | | | | | |
| Increase in cash and cash equivalents | | | –– | | | | 4,506 | | | | 4,358 | | | | –– | | | | 8,864 | |
| Cash and cash equivalents, beginning of period | | | –– | | | | 6,358 | | | | 9,968 | | | | –– | | | | 16,326 | |
| | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | –– | | | $ | 10,864 | | | $ | 14,326 | | | $ | –– | | | $ | 25,190 | |
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2012
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (10,472 | ) | | $ | 53,629 | | | $ | (14,267 | ) | | $ | (39,362 | ) | | $ | (10,472 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | –– | | | | 37,589 | | | | 4,705 | | | | –– | | | | 42,294 | |
Deferred income taxes | | | –– | | | | 481 | | | | 475 | | | | –– | | | | 956 | |
| Amortization of deferred financing fees and debt discount | | | 5,756 | | | | –– | | | | 273 | | | | –– | | | | 6,029 | |
Stock compensation expense | | | –– | | | | 609 | | | | –– | | | | –– | | | | 609 | |
| Equity in net (income) loss of subsidiaries | | | (53,629 | ) | | | 14,267 | | | | –– | | | | 39,362 | | | | –– | |
| Changes in operating assets and liabilities, net | | | 61,766 | | | | (59,041 | ) | | | 20,689 | | | | –– | | | | 23,414 | |
| Net cash provided by operating activities | | | 3,421 | | | | 47,534 | | | | 11,875 | | | | –– | | | | 62,830 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
| Purchases of property and equipment (including capitalized interest) | | | –– | | | | (28,070 | ) | | | (3,335 | ) | | | –– | | | | (31,405 | ) |
Net cash used in investing activities | | | –– | | | | (28,070 | ) | | | (3,335 | ) | | | –– | | | | (31,405 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
| Borrowings under revolving credit facility | | | 20,000 | | | | –– | | | | –– | | | | –– | | | | 20,000 | |
| Repayments under revolving credit facility | | | (23,000 | ) | | | –– | | | | –– | | | | –– | | | | (23,000 | ) |
Payment of financing costs | | | (421 | ) | | | –– | | | | –– | | | | –– | | | | (421 | ) |
Net cash used in financing activities | | | (3,421 | ) | | | –– | | | | –– | | | | –– | | | | (3,421 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | –– | | | | –– | | | | (154 | ) | | | –– | | | | (154 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Increase in cash and cash equivalents | | | –– | | | | 19,464 | | | | 8,386 | | | | –– | | | | 27,850 | |
| Cash and cash equivalents, beginning of period | | | –– | | | | 2,836 | | | | 10,132 | | | | –– | | | | 12,968 | |
| | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | –– | | | $ | 22,300 | | | $ | 18,518 | | | $ | –– | | | $ | 40,818 | |
| 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 on Form 10-Q. 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 on Form 10-Q. 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” in Part II, Item 7 included in our 2011 Annual Report on Form 10-K.
Overview
We are a leading global provider of business-to-business (“B2B”) cloud integration services and solutions that simplify and enhance business process integration, data quality and compliance, and collaboration among businesses. Our services and solutions enable our customers to manage and improve mission critical supply chain functions, securely process financial transactions related to the exchange of goods and services, and automate and control other critical cross-enterprise business processes. By utilizing these services and solutions our customers realize a number of key benefits such as lower total cost of ownership, accelerated time to market and enhanced reliability and security. Our approximately 40,000 customers and their approximately 360,000 trading partners – a combined trading community of over 400,000 businesses – conduct business together via GXS Trading Grid®, our integration cloud that includes specialized capabilities for automating, assembling, monitoring, and improving multi-enterprise business processes.
As a division of General Electric Company (“GE”), from the 1960’s through 2001, our historical focus was primarily on providing customized information technology solutions to our customers. As a result, in 2000, 50% of our revenues were generated by custom outsourcing services. Following Francisco Partners and its co-investors’ acquisition of us from GE in 2002, we began investing in GXS Trading Grid®, a multi-tenant integration cloud platform, and launched our Managed Services offering, which compliments GXS Trading Grid® with shared processes and built-in industry expertise.
In 2005, we expanded the reach and number of integrated businesses on GXS Trading Grid® through the acquisition of IBM’s Business Exchange Services business, thereby further increasing our customer base, expanding our geographic presence and extending our reach into a number of verticals (such as financial services and the automotive sector).
In 2008, we purchased Interchange Serviços S.A. (“Interchange”), located in Brazil, which served to broaden the number of integrated businesses in Brazil on GXS Trading Grid®.
On June 2, 2010, GXS Holdings, Inc. (“GXS Holdings”), 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 “Inovis Merger” or the “Merger”. Inovis’ core business had historically been the provisioning of messaging services, catalog and managed services to approximately 16,000 customers worldwide with approximately two billion transactions per year, primarily on a fee-per-transaction basis.
In March 2011, we purchased RollStream, Inc. (“RollStream”), a software-as-a-service (“SaaS”) provider of enterprise community management solutions. The acquisition advanced our objective of simplifying the integration of global business communities for customers by combining data flows across systems, applications and people.
We intend to continue to selectively pursue acquisitions of companies with complementary products and technologies to enhance our ability to provide comprehensive services and solutions to our customers and to expand our business. Any such acquisitions could affect our results of operations for the period in which the acquisition is completed and future periods and, depending on the size of the acquisition, could affect the comparability of period-to-period results. There can be no assurance that we will be successful in consummating future acquisitions or that we will be able to locate adequate financing or successfully integrate future acquisitions.
As a result of new investments and repositioning away from customized solutions, the majority of our revenue is generated through data integration fees and subscription services on our platform, frequently wrapped with our Managed Services capabilities. Currently, we manage approximately twelve billion electronic transactions on an annual basis across an estimated six million integration pairs, or trading partner relationships, creating a combined trading community of over 400,000 businesses. We have substantial vertical expertise in a variety of key industries such as retail, consumer products, financial
services, automotive and high technology. Today, we have customers in over 60 countries, which we support in 15 different languages. We believe customers view our services and solutions as essential to their day-to-day supply chain operations and they typically enter into long-term contracts with us. Our recurring revenues, which are primarily attributable to transaction processing and software maintenance fees, represented approximately 84.5% and 85.5% of our total revenue for the three and nine months ended September 30, 2012, respectively. Additionally, 96.0% of our top 50 customers, based on annual revenue in fiscal 2011, have been our customers for five or more years.
Factors Affecting our Business
We have various service lines, with each service line deriving revenue from three principal sources. Our service lines are:
| | · | Messaging Services, which comprised approximately 43.1% and 44.4% of revenues for the three and nine months ended September 30, 2012, automates the exchange of electronic documents between businesses and eliminates the complexities of disparate standards and communication protocols; |
| | · | Managed Services, which comprised approximately 37.2% and 36.1% of revenues for the three and nine months ended September 30, 2012, allows our customers to offload complex integration functions or outsource supply chain management activities to improve speed-to-market, drive higher customer satisfaction, or reduce overall costs from data integration; |
| | · | B2B Software and Services, which comprised approximately 10.1% and 9.5% of revenues for the three and nine months ended September 30, 2012, provides software and services that allow our customers to manage their day-to-day supply chain activities internally. The majority of our software customers also access GXS Trading Grid® to extend their ability to serve new markets or geographies; |
| | · | Data Synchronization, which comprised approximately 6.5% and 6.8% of revenues for the three and nine months ended September 30, 2012, provides tools and services that enhance our customers’ abilities to improve the quality and accuracy of data exchanged with their trading partners. Primarily designed for the retail supply chain, our solution improves the ability to ensure the correct product, price and promotion information are synchronized throughout a supply chain; and |
| | · | Custom Outsourcing Services, which comprised approximately 3.1% and 3.2% of revenues for the three and nine months ended September 30, 2012, relates primarily to products and services which do not fit within the definitions of our other service lines. 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. |
Across these 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 several years, our transaction processing revenues in our Messaging Services business have been adversely impacted primarily by the commoditization of the technology and communications required to send and receive business documents. Competitive pricing dynamics across the industry have also adversely affected pricing in our Messaging Services business. We believe that our Messaging Services business will continue to face pricing pressure as a result of commoditization and contribute a lower percentage of our revenues over time.
In order to drive revenue growth, we have focused on investing in Managed Services, where we see significant opportunities which we believe will offset the planned declining revenues from Messaging Services. As part of our strategy of growing Managed Services, we have focused on building and delivering a portfolio of capabilities on GXS Trading Grid® that add value to our customers transactions flows, such as data transformation, transaction monitoring, process visibility and trading partner on-boarding. As a result, we will continue to offer these higher value integration services 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.
Additionally, in order to further enhance the value of our solutions, we offer specialized industry applications which provide improved visibility and control over multi-enterprise processes. These services, which we brand as our ActiveSM Applications, allow our customers to gain additional advantages around global transaction flows or multi-enterprise business processes, such as identifying exceptions and errors, uncovering inefficiencies, and highlighting opportunities for performance improvement. Our ActiveSM Applications, which are delivered in the cloud as SaaS, complement and improve the performance of internal systems such as Enterprise Resource Planning (“ERP”) or Customer Relationship Management (“CRM”) applications, while allowing us to enhance the value it provides to its customers, lock-in longer term contracts, and improve margins.
We will continue to target large and mid-sized enterprises, for which our value-add Managed Services on GXS Trading Grid® could significantly reduce costs and enable staff to offload non-core functions, as well as increase the performance of our customers’ multi-enterprise business processes, such as order-to-cash, global shipping, new customer enablement, and cash management. We believe this approach will increase our revenues and enhance profitability over the long-term. While Managed Services tends to have lower margins than Messaging Services, particularly as we build out our Managed Services platform and capabilities, we expect productivity enhancements, such as increased use of automation tools to implement new customers and monitor ongoing processing activities, to improve our Managed Services margins over time.
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. Our revenues have been affected by a fluctuating U.S. dollar relative to the foreign currencies in which we transact business. The relative strengthening of the U.S. dollar during the three and nine months ended September 30, 2012, as compared to the three and nine months ended September 30, 2011, resulted in a $4.2 million and $7.2 million decrease in our revenues for the three and nine months ended September 30, 2012, 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 or year, depending on the terms of the specific contracts.
Professional services are usually associated with new project implementation, in which case the associated professional services revenue is deferred over the estimated customer life which approximates the initial contract term. When done under time and material contracts, revenue is recognized as the related services are provided.
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 nine months ended September 30, 2012 and 2011, the breakdown of revenue by service line, along with each service line’s percentage of total revenue, appears below (in thousands of dollars, except for percentages):
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | | | | | | | 2012 | | | 2011 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Messaging Services | | $ | 52,332 | | | | 43.1 | % | | $ | 58,725 | | | | 47.9 | % | | $ | 160,281 | | | | 44.4 | % | | $ | 174,541 | | | | 49.1 | % |
Managed Services | | | 45,102 | | | | 37.2 | % | | | 39,313 | | | | 32.0 | % | | | 130,505 | | | | 36.1 | % | | | 107,611 | | | | 30.2 | % |
B2B Software and Services | | | 12,191 | | | | 10.1 | % | | | 11,661 | | | | 9.5 | % | | | 34,406 | | | | 9.5 | % | | | 34,366 | | | | 9.7 | % |
Data Synchronization | | | 7,916 | | | | 6.5 | % | | | 8,515 | | | | 6.9 | % | | | 24,425 | | | | 6.8 | % | | | 24,907 | | | | 7.0 | % |
Custom Outsourcing Services | | | 3,738 | | | | 3.1 | % | | | 4,502 | | | | 3.7 | % | | | 11,383 | | | | 3.2 | % | | | 14,214 | | | | 4.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenue / percentage | | $ | 121,279 | | | | 100.0 | % | | $ | 122,716 | | | | 100.0 | % | | $ | 361,000 | | | | 100.0 | % | | $ | 355,639 | | | | 100.0 | % |
Each service line includes revenue from transaction processing, professional services, software licensing and software maintenance.
Cost of Revenues
Cost of revenues primarily consists of:
| | · | compensation and related allocated benefit expenses associated with our workforce engaged in service delivery, technical operations and research and development; |
| | · | computer, network and facility operating expenses; |
| | · | royalty payments associated with resale of third party software licenses; and |
| | · | depreciation and amortization expense, including the amortization of our capitalized software costs, deferred implementation costs and acquired intangibles. |
We defer all direct and relevant costs associated with implementation of certain long-term customer contracts to the extent such costs can be recovered through guaranteed minimum revenues. The unamortized balances of these costs as of September 30, 2012 and December 31, 2011 were $29.1 million and $26.4 million, respectively, and are recorded in either “prepaid expenses and other assets” or “other assets” in the condensed consolidated balance sheets, depending on the remaining duration of the underlying contracts.
Operating Expenses
Operating expenses consist of sales and marketing expenses, general and administrative expenses and restructuring charges.
Sales and marketing expenses primarily consist of compensation and related allocated benefit expenses associated with our employees engaged in sales and marketing, including sales commissions, advertising costs, meetings, travel and entertainment expenses and facility costs. Certain sales commissions are considered to be direct and relevant costs of contracts and are deferred over the customer contract period. General and administrative expenses consist of compensation and related allocated benefit expenses associated with our employees engaged in management, finance, legal, and human resources, information technology management and costs, as well as other general business expenses such as accounting and legal fees, outside services and business insurance. Restructuring charges include severance costs associated with workforce reduction efforts and net lease costs related to darkened facilities.
As a result of our significant international operations, the translation of our foreign costs of revenues and operating expenses into U.S. dollars impacts the comparison of our costs of revenues and operating expenses from period to period. Our costs of revenues and operating expenses have been affected by a fluctuating U.S. dollar. The relative strengthening of the U.S. dollar during the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011, resulted in a decrease of $3.1 million and $5.7 million in our costs of revenues and operating expenses for the three and nine months ended September 30, 2012, respectively, 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 nine months ended September 30, 2012 and 2011 (in thousands of dollars):
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
Costs and Operating Expenses | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Cost of revenues | | $ | 67,201 | | | $ | 64,394 | | | $ | 198,809 | | | $ | 190,883 | |
Sales and marketing | | | 17,117 | | | | 17,049 | | | | 50,797 | | | | 48,632 | |
General and administrative | | | 15,033 | | | | 15,365 | | | | 49,862 | | | | 49,819 | |
Restructuring charges | | | 402 | | | | 709 | | | | 1,360 | | | | 2,328 | |
| | | | | | | | | | | | | | | | | |
Total costs and operating expenses | | $ | 99,753 | | | $ | 97,517 | | | $ | 300,828 | | | $ | 291,662 | |
Other Primary Operating Measures
Adjusted EBITDA
Management relies upon adjusted earnings before interest, taxes, depreciation and amortization, and certain other charges (“Adjusted EBITDA”) as a primary measure to review and assess operating performance of its business and management team. Adjusted EBITDA is not a measure of financial performance under U.S. generally accepted accounting principles (“GAAP”) and should not be considered as: (i) an alternative to net income (loss); (ii) a measure of operating income or cash flows from operating, investing and financing activities; or (iii) a measure of liquidity. Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures presented by other companies.
The table below reconciles our net income (loss) to Adjusted EBITDA for the periods presented (in thousands of dollars):
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net income (loss) | | $ | (146 | ) | | $ | 40 | | | $ | (10,472 | ) | | $ | (3,696 | ) |
| | | | | | | | | | | | | | | | | |
| Adjustments: | | | | | | | | | | | | | | | | |
| Income tax expense | | | 1,276 | | | | 1,295 | | | | 3,403 | | | | 2,626 | |
Interest expense, net | | | 21,093 | | | | 21,109 | | | | 63,562 | | | | 61,689 | |
Depreciation and amortization | | | 14,081 | | | | 13,926 | | | | 42,294 | | | | 40,165 | |
Stock compensation expense | | | 230 | | | | 301 | | | | 609 | | | | 787 | |
Other (income) expense, net | | | (697 | ) | | | 2,755 | | | | 3,679 | | | | 3,358 | |
Restructuring charges | | | 402 | | | | 709 | | | | 1,360 | | | | 2,328 | |
| Merger and acquisition fees | | | –– | | | | 62 | | | | 3 | | | | 227 | |
Integration costs (1) | | | –– | | | | –– | | | | –– | | | | 154 | |
Deferred income adjustment (2) | | | –– | | | | 67 | | | | 25 | | | | 1,353 | |
Management fees | | | 1,000 | | | | 1,000 | | | | 3,000 | | | | 3,000 | |
Total adjustments | | | 37,385 | | | | 41,224 | | | | 117,935 | | | | 115,687 | |
| | | | | | | | | | | | | | | | | |
Adjusted EBITDA | | $ | 37,239 | | | $ | 41,264 | | | $ | 107,463 | | | $ | 111,991 | |
____________
| | (1) | Integration costs represented certain incremental operating expenses associated with the integration of the Inovis |
business.
| | (2) | Purchase accounting requires that deferred income of an acquired business be written-down to fair value of the |
underlying obligations plus associated margin at the date of acquisition.
Adjusted EBITDA for the three months ended September 30, 2012 and 2011 was $37.2 million and $41.3 million, respectively. Adjusted EBITDA for the nine months ended September 30, 2012 and 2011 was $107.5 million and $112.0 million, respectively. The decreases in Adjusted EBITDA of $4.1 million (or 9.8%) and $4.5 million (or 4.0%) for the three and nine months ended September 30, 2012, respectively, compared to the three and nine months ended September 30, 2011, are driven by the decreased operating income generated (which is consistent with our planned long-term investment strategy) and the net unfavorable impact of translating foreign currencies into U.S. dollars.
Minimum Contract Value
Management monitors sales performance based on a measure referred to by management as Minimum Contract Value (“MCV”). MCV is the incremental future minimum committed revenue of new sales agreements signed in the current period by our customers. If the new contract signed is to replace an existing revenue stream, the MCV is adjusted to reflect only the incremental value from the sale.
MCV for the three and nine months ended September 30, 2012 was $50.1 million and $155.4 million, respectively, which are increases of $5.4 million (or 12.1%) and $35.7 million (or 29.8%), respectively, when compared to an MCV of $44.7 million and $119.7 million for the three and nine months ended September 30, 2011. The MCV increase for the three months ended September 30, 2012 is primarily due to the effect of both Messaging and Managed Services deals in the Europe-Middle East-Africa (“EMEA”) and Asia-Pacific (“ASPAC”) regions and Brazil. The MCV increase for the nine months ended September 30, 2012 is primarily due to the effect of Managed Services deals in North America (specifically within the Financial Services sector), EMEA, Japan and Brazil.
The MCV calculations are not reflected or recorded within the condensed consolidated financial statements. MCV is not a measure of financial condition or financial performance under U.S. GAAP and should not be considered as an alternative to deferred income or revenues, as a measure of financial condition or operating performance.
Results of Operations
Three months ended September 30, 2012 compared to three months ended September 30, 2011
Revenues. Revenues decreased by $1.4 million, or 1.2%, to $121.3 million for the three months ended September 30, 2012 from $122.7 million for the three months ended September 30, 2011. The decrease was principally due to the unfavorable impact of translating revenues generated in foreign currencies to U.S. dollars. The decrease was partially offset by continued growth of our Managed Services revenues in each of our regions, with the exception of EMEA. The relatively stronger U.S. dollar during the three months ended September 30, 2012, as compared to the three months ended September 30, 2011, resulted in a $4.2 million decrease in our revenues from translating revenues generated in foreign currencies into U.S. dollars. A comparison of our revenues by service line is as follows:
| | · | Messaging Services revenues decreased by $6.4 million, or 10.9%, to $52.3 million for the three months ended September 30, 2012 from $58.7 million for the three months ended September 30, 2011. The decrease resulted principally from $3.7 million in aggregate decreases resulting from price reductions and customer attrition for the three months ended September 30, 2012, along with the $2.7 million unfavorable impact of translating revenues generated in foreign currencies into U.S. dollars for the respective three month periods. |
| | · | Managed Services revenues increased by $5.8 million, or 14.7%, to $45.1 million for the three months ended September 30, 2012 from $39.3 million for the three months ended September 30, 2011. The increase was principally due to $6.7 million of revenue generated by new Managed Services projects for the three months ended September 30, 2012, partially offset by the $0.9 million unfavorable impact of translating revenues generated in foreign currencies into U.S. dollars for the respective three month periods. |
| | · | B2B Software and Services, Data Synchronization and Custom Outsourcing Services revenues decreased in the aggregate by $0.8 million, or 3.4%, to nearly $23.9 million for the three months ended September 30, 2012 from $24.7 million for the three months ended September 30, 2011. The aggregate decrease includes $0.2 million resulting from price reductions and customer attrition, along with $0.6 million of unfavorable impact of translating revenues generated in foreign currencies into U.S. dollars for the respective three month periods. |
Cost of revenues. Cost of revenues increased by $2.8 million, or 4.4%, to $67.2 million for the three months ended September 30, 2012 from $64.4 million for the three months ended September 30, 2011. The increase in cost of revenues for the three months ended September 30, 2012 was consistent with the overall revenue generation activities and costs associated with the planned investments in our business including: data center upgrades, hardware/software maintenance contracts, enhancements to applications hosting and networking services, and increased travel costs associated with the Customer Support organization. Cost of revenues represents 55.4% of revenues for the three months ended September 30, 2012, as compared to 52.5% for the three months ended September 30, 2011.
Sales and marketing. Sales and marketing expenses were essentially unchanged at $17.1 million for both of the three months periods ended September 30, 2012 and 2011. The increases for higher salary and benefit costs plus higher sales commissions were largely driven by planned increases in headcount, but were offset by a reduction in consulting and professional services fees. Sales and marketing expenses represent 14.1% of revenues for the three months ended September 30, 2012, as compared to 13.9% of revenues for the three months ended September 30, 2011.
General and administrative. General and administrative expenses decreased by $0.4 million, or 2.2%, to $15.0 million for the three months ended September 30, 2012 from $15.4 million for the three months ended September 30, 2011. The decrease was primarily due to lower consulting and professional services fees, lower benefit rate utilization in the U.S. and the impact of translating foreign currencies into U.S. dollars. The decrease was partially offset by higher salary and benefit costs associated with increased headcount in the U.K. and increased employee relocation costs within the Customer Support organization. General and administrative expenses represent 12.4% of revenues for the three months ended September 30, 2012, as compared to 12.5% for the three months ended September 30, 2011.
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 $3.1 million lower in aggregate for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011.
Restructuring charges. Restructuring charges were $0.4 million for the three months ended September 30, 2012, compared to $0.7 million for the three months ended September 30, 2011. For the three months ended September 30, 2012, the restructuring charges include $0.3 million of severance related costs for six employees and $0.1 million for facilities. For the three months ended September 30, 2011, the restructuring charges include $0.5 million of severance related costs for eight employees and $0.2 million for facilities.
Operating income. Operating income decreased by $3.7 million to $21.5 million for the three months ended September 30, 2012 compared to $25.2 million for the three months ended September 30, 2011. The 14.6% decrease in operating income for the three months ended September 30, 2012, is primarily attributable to the $2.8 million increase in our cost of revenues and the $1.1 million net unfavorable impact of translating foreign currencies into U.S. dollars for the respective three month periods.
Interest expense, net. Interest expense, net decreased by $0.1 million to $21.0 million for the three months ended September 30, 2012 compared to $21.1 million for the three months ended September 30, 2011. The decrease in interest expense, net between the respective periods is primarily attributable to lower interest costs associated with Revolver borrowings.
Other income (expense), net. Other income (expense), net is primarily comprised of gains and losses on foreign currency transactions. Other income (expense), net was $0.7 million income and $2.8 million expense for the three months ended September 30, 2012 and 2011, respectively.
Income tax expense. Income tax expense was $1.3 million for the three months ended September 30, 2012 compared to $1.3 million for the three months ended September 30, 2011. The income tax expenses for the three months ended September 30, 2012 and 2011, respectively, are related primarily to taxes for foreign jurisdictions in which we have net taxable income.
Net income (loss). Net income (loss) was $0.1 million net loss for the three months ended September 30, 2012 compared to $0.1 million net income for the three months ended September 30, 2011. The $0.2 million decrease in net income for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 is principally due to the decrease in operating income, partially offset by the increased gains on foreign currency transactions between the comparative periods.
Nine months ended September 30, 2012 compared to nine months ended September 30, 2011
Revenues. Revenues increased by $5.4 million, or 1.5%, to $361.0 million for the nine months ended September 30, 2012 from $355.6 million for the nine months ended September 30, 2011. The increase was principally due to continued growth of our Managed Services revenues, particularly in the North America, EMEA and ASPAC regions. The increase was partially offset by competitive pricing pressure and customer attrition in our Messaging Services revenue, the planned de-emphasis of our Custom Outsourcing Services line of business, and the unfavorable impact of translating revenues generated in foreign currencies to U.S. dollars. The relatively stronger U.S. dollar during the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011, resulted in a $7.2 million decrease in our revenues from translating revenues generated in foreign currencies into U.S. dollars. A comparison of our revenues by service line is as follows:
| | · | Messaging Services revenues decreased by $14.2 million, or 8.1%, to $160.3 million for the nine months ended September 30, 2012 from $174.5 million for the nine months ended September 30, 2011. The decrease resulted principally from $9.7 million in aggregate decreases resulting from price reductions and customer attrition for the nine months ended September 30, 2012, along with the $4.5 million unfavorable impact of translating revenues generated in foreign currencies into U.S. dollars for the respective nine month periods. |
| | · | Managed Services revenues increased by $22.9 million, or 21.2%, to $130.5 million for the nine months ended September 30, 2012 from $107.6 million for the nine months ended September 30, 2011. The increase was principally due to $24.3 million of revenue generated by new Managed Services projects for the nine months ended September 30, 2012, partially offset by the $1.4 million unfavorable impacts of translating revenues generated in foreign currencies into U.S. dollars for the respective nine month periods. |
| | · | B2B Software and Services, Data Synchronization and Custom Outsourcing Services revenues decreased in the aggregate by $3.3 million, or 4.5%, to $70.2 million for the nine months ended September 30, 2012 from $73.5 million for the nine months ended September 30, 2011. The aggregate decrease includes $2.0 million resulting from price reductions and customer attrition, along with $1.3 million of unfavorable impact of translating revenues generated in foreign currencies into U.S. dollars for the respective nine month periods. |
Cost of revenues. Cost of revenues increased by $7.9 million, or 4.2%, to $198.8 million for the nine months ended September 30, 2012 from $190.9 million for the nine months ended September 30, 2011. The increases in cost of revenues for the nine months ended September 30, 2012 was consistent with the overall increases in revenues and was driven by increased costs associated with the planned investments in our business including: data center upgrades, hardware/software maintenance contracts, enhancements to applications hosting and networking services, and higher salary and benefit costs associated with increased headcount. Cost of revenues represents 55.1% of revenues for the nine months ended September 30, 2012, as compared to 53.7% for the nine months ended September 30, 2011.
Sales and marketing. Sales and marketing expenses increased by $2.2 million, or 4.5%, to $50.8 million for the nine months ended September 30, 2012 from $48.6 million for the nine months ended September 30, 2011. The increase was primarily due to higher salary and benefit costs along with higher sales commissions largely driven by planned increases in headcount. Sales and marketing expenses represent 14.1% of revenues for the nine months ended September 30, 2012, as compared to 13.7% of revenues for the nine months ended September 30, 2011.
General and administrative. General and administrative expenses increased by $0.1 million, or 0.2%, to $49.9 million for the nine months ended September 30, 2012 from $49.8 million for the nine months ended September 30, 2011. The increase was primarily due to higher salary and benefit costs driven by: increased headcount in the U.K., Japan and Brazil; increased bad debt provisions in the U.K. and Brazil; higher depreciation costs in Brazil resulting from their recently completed office facilities upgrade; and the unfavorable impact of translating foreign currencies into U.S. dollars. The increase was partially offset by lower audit, professional services and contractor fees. General and administrative expenses represent 13.8% of revenues for the nine months ended September 30, 2012, as compared to 14.0% for the nine months ended September 30, 2011.
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 $5.7 million lower in aggregate for the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011.
Restructuring charges. Restructuring charges were $1.4 million for the nine months ended September 30, 2012, compared to $2.3 million for the nine months ended September 30, 2011. For the nine months ended September 30, 2012, the restructuring charges include $0.9 million of severance related costs for 22 employees and $0.5 million for facilities. For the nine months ended September 30, 2011, the restructuring charges include $1.5 million of severance related costs for 57 employees and $0.8 million for facilities.
Operating income. Operating income decreased by $3.8 million to $60.2 million for the nine months ended September 30, 2012 compared to $64.0 million for the nine months ended September 30, 2011. The 5.9% decrease in operating income for the nine months ended September 30, 2012, is primarily attributable to the $2.5 million net increase of our cost of revenues over our revenue increase and the $1.5 million net unfavorable impact of translating foreign currencies into U.S. dollars for the respective nine month periods.
Interest expense, net. Interest expense, net increased by $1.9 million to $63.6 million for the nine months ended September 30, 2012 compared to $61.7 million for the nine months ended September 30, 2011. The increase in interest expense, net between the respective periods is primarily attributable to the combined net effect of interest on the swap and the changes in the fair value of the interest rate swap (which was settled in April 2011 and was reflected as a component of interest expense) of $1.8 million, net for the nine months ended September 30, 2011.
Other income (expense), net. Other income (expense), net is primarily comprised of gains and losses on foreign currency transactions. Other income (expense), net was $3.7 million expense and $3.4 million expense for the nine months ended September 30, 2012 and 2011, respectively.
Income tax expense. Income tax expense was $3.4 million for the nine months ended September 30, 2012 compared to $2.6 million for the nine months ended September 30, 2011. The income tax expenses for the nine months ended September 30, 2012 and 2011, respectively, are related primarily to taxes for foreign jurisdictions in which we have net taxable income.
Net income (loss). Net income (loss) was $10.5 million net loss for the nine months ended September 30, 2012 compared to a $3.7 million net loss for the nine months ended September 30, 2011. The $6.8 million increase in net loss for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 is principally due to the decrease in operating income, the increase in interest expense and the increase in income tax expense between the comparative periods.
Sources and Uses of Cash
The following table is a summary of sources and uses of cash during the nine months ended September 30, 2012 and 2011 (in thousands):
| | | Nine Months Ended September 30, | |
| | | | | | | |
| | | | | | | |
Cash flows provided by operating activities | | $ | 62,830 | | | $ | 52,177 | |
Cash flows used in investing activities | | | (31,405 | ) | | | (35,395 | ) |
Cash flows used in financing activities | | | (3,421 | ) | | | (8,002 | ) |
Effect of exchange rate changes on cash | | | (154 | ) | | | 84 | |
Net increase in cash and cash equivalents | | $ | 27,850 | | | $ | 8,864 | |
Cash and cash equivalents, end of period | | $ | 40,818 | | | $ | 25,190 | |
Nine months ended September 30, 2012 compared to nine months ended September 30, 2011
Net cash provided by operating activities was $62.8 million compared to $52.2 million provided by operating activities for the nine months ended September 30, 2012 and 2011, respectively. The increase in net cash provided by operating activities of $10.6 million was mainly attributable to managing trade payables and improved collections of trade accounts receivable.
Net cash used in investing activities was $31.4 million for the nine months ended September 30, 2012 compared to $35.4 million for the nine months ended September 30, 2011. Net cash used in investing activities for the nine months ended September 30, 2012 consisted of capital expenditures of $31.4 million for software and equipment primarily related to continued enhancements of our service platform. Net cash used in investing activities for the nine months ended September 30, 2011 included $1.1 million for the acquisition of RollStream and capital expenditures of $34.3 million for software and equipment primarily related to continued enhancements of our service platform. Capital expenditures for the nine months ended September 30, 2012 and 2011 included $18.6 million and $19.4 million, respectively, of labor costs capitalized for the development of internal-use software.
Net cash used in financing activities was $3.4 million for the nine months ended September 30, 2012 compared to $8.0 million used in financing activities for the nine months ended September 30, 2011. Net cash used in financing activities for the nine months ended September 30, 2012 was from $3.0 million in net repayments under the Revolver and $0.4 million in deferred financing costs associated with amending the Revolver. Net cash used in financing activities for the nine months ended September 30, 2011 was largely from $8.0 million in net repayments under the Revolver.
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 (the “Senior Secured Notes”) with an original issue discount of $18.6 million.
The Senior Secured Notes carry an interest rate of 9.75% with interest payable on June 15 and December 15 each year. The Senior Secured Notes will mature on June 15, 2015. The optional redemption features on the Senior Secured Notes that are remaining as of September 30, 2012, are summarized as follows:
| | · | We may at any time on or after June 15, 2012, 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. |
| | · | In each case, we must also pay accrued and unpaid 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, if any. |
Following the December 23, 2009 debt refinancing, our principal sources of liquidity have been, and are expected to continue to be, our current cash balances, cash flow from operations and borrowings under the revolving credit facility of our Credit and Guaranty Agreement.
The agreements governing our Senior Secured Notes 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 entered into on December 23, 2009 with various lenders provides us with a Revolver with 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. On February 29, 2012, the Revolver was amended. As amended, the Revolver has the following key terms, among others:
| | · | Expiration date of March 15, 2015, any outstanding borrowings must be repaid in full by this date, and all commitments will terminate on this date; |
| | · | At our option, an interest rate at 4.50% above the London Interbank Offered Rate (“LIBOR”), or a rate that is 3.50% above the administrative agent’s “base rate” per annum; |
| | · | Interest of 0.50% per annum on unused Revolver borrowing capacity; |
| | · | Minimum interest coverage ratio, as defined in the Revolver, of 1.75; and |
| | · | Maximum net leverage ratio, as defined in the Revolver, of 5.75. |
No other covenants or conditions were changed by the amendment. We paid a closing fee of approximately $0.4 million in connection with this amendment.
The Revolver also requires that we meet and maintain certain financial ratios and tests, including those described above. 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 Revolver and the Indenture governing our Senior Secured Notes. At September 30, 2012, we had an interest coverage ratio of 1.93 and a net leverage ratio of 5.01, calculated as defined in the Revolver, and we were in compliance with all financial and nonfinancial covenants.
Cash and cash equivalents were approximately $40.8 million and $13.0 million at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012, there were no borrowings outstanding under the Revolver and at December 31, 2011, there were $3.0 million of outstanding borrowings under the Revolver. At both September 30, 2012 and December 31, 2011, approximately $11.7 million of the $50.0 million of Revolver capacity was pledged as security for certain letters of credit. Therefore, the total available cash liquidity, including cash and cash equivalents and total Revolver capacity, less outstanding borrowings and letters of credit secured by the Revolver, was approximately $79.1 million and $48.3 million at September 30, 2012 and December 31, 2011, respectively.
In May 2012, we deposited approximately $3.3 million as collateral for a bank guarantee in Brazil required in connection with a long-standing tax dispute with a municipality in Brazil. The terms of the bank guarantee require the cash collateral or a letter of credit to remain on deposit as long as the bank guarantee is in place. We can terminate the bank guarantee or replace the cash collateral with a letter of credit at our option at any time and, therefore, have unrestricted access to the cash. However, terminating the bank guarantee would be expected to have detrimental legal and tax consequences that could prevent us from conducting business as usual in Brazil. We intend to replace the bank guarantee and related cash collateral with a letter of credit under our Revolver in the near future upon negotiation of commercially acceptable terms and conditions.
In September 2012, we received approximately $1.1 million, as trustee, from a death benefit insurance policy for a recently deceased employee. We recorded the cash receipt along with a corresponding current liability. We are awaiting distribution instructions from the insurance company which we anticipate receiving before the end of 2012. While the cash is not restricted, we do not intend to use it for Company purposes at any time prior to distribution.
GXS Worldwide, Inc. is a holding company that conducts its operations through its wholly owned subsidiary GXS, Inc. and its domestic and foreign subsidiaries. The financial statements of GXS, Inc. 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. All equity interests pledged as collateral for the Senior Secured Notes, other than those of GXS, Inc., are wholly owned consolidated subsidiaries of GXS, Inc.
We expect that cash flows from foreign operations will be required to meet our domestic debt service requirements. 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 our ability to repatriate these cash flows or increase the tax burden on the collections. However, we have not had, nor do we have any knowledge of, any such limitations currently, nor in the near-term that could impact our ability to meet our operating requirements over the next twelve months.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the U.S. Some accounting policies require us to make estimates and assumptions about future events that affect the amounts reported in our condensed consolidated financial statements and the accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any differences may be material to our condensed consolidated financial statements. A description of all of our significant accounting policies used is included in Note 2 to our condensed consolidated financial statements, included herein. Some of these policies involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our condensed consolidated financial statements.
These critical accounting policies, in management’s judgment, are those described below. If different assumptions or conditions were to prevail, or if our estimates and assumptions prove to be incorrect, actual results could be materially different from those reported.
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. Following the acquisition, revenue and operating income are typically affected by a reduction of deferred revenue over its remaining term to reflect estimated fair value of the obligation which includes estimated cost to deliver and the associated margin.
Revenue Recognition
We have various service lines, specifically including: Messaging Services, Managed Services, B2B Software Services, Data Synchronization, and Custom Outsourcing Services. Our service lines generate revenues from three principal sources, as described in detail below. Regardless of the service line or source, we record revenues net of any taxes (e.g., sales, local, value-added) that are collected from customers and remitted to governmental authorities.
Transaction Processing — We earn 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 are recognized based on the greater of actual transactions or the specified contract minimum amounts.
Professional Services — We earn professional service revenue generally pursuant to time and material contracts and in most instances revenue is recognized as the related services are provided, except when such services are associated with a new project implementation, in which case the associated revenue is deferred over the estimated customer life which approximates the initial contract term as outlined below.
Software Licensing and Maintenance — We earn 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 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 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, we 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. We identified no significant impact on our 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, we allocate 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, we sell transaction processing along with implementation and start-up services. The implementation and start-up services typically do not have stand-alone value and, therefore, they do not qualify as separate units of accounting and are not separated. These implementation and start-up services do not have stand-alone value outside of our ongoing managed services arrangements, the services are not provided by any other vendor, we do not generally sell implementation and start-up services separately, and the results of such services cannot be re-sold by our customers. Revenues related to implementation and start-up services are recognized over the estimated customer life which, based on our current estimate, approximates the term of the related transaction processing arrangement. In some arrangements, we also sell 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.
We defer 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 deferred costs as of September 30, 2012 and December 31, 2011 was $29.1 million and $26.4 million, respectively.
Valuation of Accounts Receivable
We must make estimates of potential uncollectible amounts and credits to be issued in valuing our accounts receivable. We analyze historical credits issued, current economic trends and changes in customer demand and acceptance of our products and services when evaluating the overall adequacy of the provision for sales returns and allowances. We analyze historical bad debts, customer concentrations, customer credit-worthiness, and current economic trends when evaluating the overall adequacy of the allowance for doubtful accounts. However, if the financial condition of our customers were to deteriorate, their ability to make required payments may become impaired, and increases in these allowances may be required.
Capitalization of Software
We capitalize software development costs in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40 – Accounting for the Costs of Computer Software Developed or Obtained for Internal-Use. We begin to capitalize costs for software to be used internally when we enter the application development stage. This occurs when we have completed the preliminary project stage, our management authorizes and commits to funding the project and we believe it is feasible that the project will be completed and the software will perform the intended function. We stop capitalizing costs related to a software project when we believe we have entered the post implementation and operation stage. If we were to make different determinations with respect to the state of development that a software project had achieved, then the amount we capitalize and the amount we charge to expense for that project could differ materially.
The costs we capitalize during the application development stage consist of payroll and related costs for our employees who are directly associated with, and who devote time directly to, a project to develop software for internal-use. We also capitalize the direct costs of materials and services, which generally includes outside contractors, and interest. We do not capitalize any general and administrative or overhead costs or costs incurred during the application development stage related to training or data conversion costs. We capitalize costs related to upgrades and enhancements to internal-use software if those upgrades and enhancements result in additional functionality. If upgrades and enhancements do not result in additional functionality we expense those costs as incurred. If we were to make different determinations with respect to whether upgrades or enhancements to software projects would result in additional functionality, then the amount we capitalize and the amount we charge to expense for that project could differ materially.
We begin to amortize capitalized costs with respect to development projects for internal-use software when the software is ready for use. We generally amortize the capitalized software development costs 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, we consider the effects of obsolescence, technology, competition and other economic factors. If we were to make different determinations with respect to the estimated useful lives of the software, the amount of amortization we charge in a particular period could differ materially.
In accordance with FASB ASC 985-20 – Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, we expense 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, we have not capitalized costs since there is generally 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.
Valuation of Long-lived Assets
We periodically evaluate the estimated useful life of property and equipment and, when appropriate, adjust the useful life thereby increasing or decreasing the depreciation expense recorded in the current and in future reporting periods. We also assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:
| | · | significant underperformance relative to historical or projected future operating results; |
| | · | significant changes in technology or in the manner of our use of the assets or the strategy for our overall business; and |
| | · | significant negative industry or economic trends. |
When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment and our analysis of undiscounted cash flow, we measure any impairment based on the fair value of the asset less selling costs. Fair value is typically estimated based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our business. This process is subjective, as it requires management to make estimates and assumptions about future cash flows and discount rates.
Goodwill
We test 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 quantitative impairment test involves two steps. In the first step we compare 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 September 2011, the FASB issued ASU 2011-08 – Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which is intended to simplify how an entity is required to test goodwill for impairment under ASU 2010-28 (issued in December 2010) by allowing an entity to first assess qualitative factors (which are defined in the new guidance) to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. We adopted ASU 2011-08 on January 1, 2012, as required.
As of December 31, 2011, we completed goodwill impairment testing in accordance with ASU 2010-28 (including performing the required step-two test) and determined that goodwill was not impaired. Our impairment test was 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, 2011. As of September 30, 2012, we assessed the qualitative factors (as defined in ASU 2011-08) and determined that goodwill was not impaired; as it was more likely than not that the fair value of the entity was greater than the carrying amount.
Restructuring
We calculate the facility charge included in the restructuring charges by discounting the net future cash obligation of the existing leases less anticipated rental receipts to be received from existing and potential subleases. This requires significant judgment about the length of time the space will remain vacant, anticipated cost escalators and operating costs associated with the leases, the market rate at which the space will be subleased, and broker fees or other costs necessary to market the space. These judgments are based upon independent market analysis and assessment from experienced real estate brokers. If we were to make different determinations with respect to these factors the amounts of our restructuring charges could differ materially, although most of our vacant space has been sublet with the sublease of our former corporate headquarters.
Deferred Taxes
We consider the scheduled reversal of deferred tax liabilities, projected future income and tax planning strategies in assessing the realization of deferred tax assets. Management believes we will achieve profitable operations in future years that will enable us to recover the benefit of our deferred tax assets. However, we presently do not have sufficient objective evidence that it is more likely than not that we will realize the benefits from our deferred tax assets and, accordingly, have established a full valuation allowance for our U.S. and selected foreign net deferred tax assets as required by U.S. GAAP.
Contingencies
We periodically record the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. These events are called contingencies, and our accounting for these events is prescribed by FASB ASC 450 – Accounting for Contingencies. This standard defines a contingency as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. Contingent losses must be accrued if:
| | · | information is available that indicates it is probable that the loss has been incurred, given the likelihood of the uncertain future events; and |
| | · | the amount of the loss can be reasonably estimated. |
The accrual of a contingency involves considerable judgment on the part of management. Legal proceedings have elements of uncertainty, and in order to determine the amount of accrued liabilities required, if any, we assess the likelihood of any adverse judgments or outcomes to pending and threatened legal matters, as well as the best estimate of or potential ranges of amounts of probable losses. We use internal expertise and outside experts, as necessary, to help estimate the probability that a loss has been incurred and the amount or range of the loss. A determination of the amount of accrued liabilities required for these contingencies is made after analysis of each individual issue. The required accrued liabilities may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy.
| 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 revenues 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 stockholder's deficit 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, European euro, Japanese yen, Brazilian real, Australian dollar and Canadian dollar.
Although much of our revenues are generated in U.S. dollars, approximately $47.7 million, or 39.4%, and $143.2 million, or 39.7%, of our total revenues for the three and nine months ended September 30, 2012, respectively, were generated in non-U.S. dollar denominated currencies. Our revenues generated in non-U.S. dollar denominated currencies for the three and nine months ended September 30, 2011 were $52.1 million, or 42.4%, and 148.0 million, or 41.6%, of our total revenue, respectively.
Our operating expenses are also generally denominated in U.S. dollars; however, approximately $34.1 million, or 34.2%, and $102.4 million, or 34.0%, of our total operating expenses for the three and nine months ended September 30, 2012, respectively, were denominated in foreign currencies. Our operating expenses generated in foreign currencies for the three and nine months ended September 30, 2011 were $33.4 million, or 34.3%, and $96.9 million or 33.2%, of our total operating expenses, respectively.
Due to the relatively stronger U.S. dollar during the three and nine months ended September 30, 2012 and the fact that impact on revenues was greater than the impact on operating expenses, our operating income was unfavorably affected by $1.1 million and $1.5 million when compared to the three and nine months ended September 30, 2011, respectively.
From a sensitivity analysis viewpoint, based on our financial results for the three and nine months ended September 30, 2012, a hypothetical overall 10% change in the U.S. dollar from the average foreign exchange rates during the three and nine months ended September 30, 2012 would have impacted our revenue and operating income by approximately $4.8 million and $1.4 million, respectively, for the three months ended September 30, 2012 and by approximately $14.3 million and $4.1 million, respectively, for the nine months ended September 30, 2012.
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 Revolver and previously to our interest rate swap agreement prior to its expiration in April 2011.
On December 23, 2009, we entered into a Credit and Guaranty Agreement which provides us with a $50.0 million revolving credit facility, or “Revolver.” The Revolver was amended on February 29, 2012 and provides for an interest rate at 4.50% above the LIBOR, or a rate that is 3.50% above the administrative agent’s “base rate”, at our option. Prior to the amendment, 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 the LIBOR and the administrative agent’s “base rate”.
| 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 Securities and Exchange Commission 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 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 September 30, 2012. Based upon that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2012.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended September 30, 2012, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
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 U.S. 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 only one amended claim and its dependent claims. The litigation is currently stayed, but may resume later in 2012, or in 2013. Although we believe that the third party’s patent infringement allegations are without merit, there can be no assurance that we will prevail in the litigation. An amount of potential loss, if any, cannot be determined at this time.
We are also subject to income and other taxes in the U.S. and other foreign jurisdictions and are regularly under audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of any tax audits and related litigation or other proceedings could be materially different than that which is reflected in our tax provisions and accruals. In certain foreign jurisdictions, we may be required to place on deposit or provide a bank guarantee for amounts claimed by tax authorities while we challenge such amounts. Should additional taxes be assessed as a result of an audit or following an unsuccessful challenge by us through litigation, it could have a material effect on our financial position and results of operations in the period or periods for which that determination is made. A bank guarantee totaling approximately $3.3 million was made in May 2012 for a disputed tax matter in Brazil by our subsidiary, GXS Tecnologia da Informacao (Brasil) Ltda. (“GXS Brazil”), in connection with GXS Brazil’s judicial appeal of a tax claim by the municipality of Sao Paulo, Brazil in the approximate amount of $2.5 million as of September 30, 2012. The bank guarantee is collateralized by a deposit of cash with the issuing bank. We intend to replace the bank guarantee with a letter of credit under our Revolver in the near future upon negotiation of commercially acceptable terms and conditions, which would result in a return of the cash deposit. We can terminate the bank guarantee at our option at any time and, therefore, have unrestricted access to the cash. However, terminating the bank guarantee would be expected to have detrimental legal and tax consequences that could prevent us from conducting business as usual in Brazil. We believe that the position of the Brazilian tax authorities is not consistent with the relevant facts. However, there can be no assurance that we will ultimately prevail and it is likely that the bank guarantee and supporting cash collateral, or substituted letter of credit, will remain in place for several years while GXS Brazil pursues the appeal of the tax claim in the courts. While based on information available on the case and other similar matters provided by local counsel, we believe the facts support our position that an unfavorable outcome is not probable and no tax is owed, the ultimate outcome of this matter could result in a loss of up to the claim amount discussed above plus any interest or penalties that may accrue.
GXS Brazil also is subject to potential tax claims by Brazilian tax authorities relating to value-added-tax (“VAT”) 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. We have recorded a reserve of approximately $1.9 million as of September 30, 2012, in respect of these claims, at the then current exchange rate (reflecting the expiration of the statute of limitations with respect to the 2004 and 2005 tax years and the consequent reversal of a previous accrual and reduction of a corresponding receivable for those years). 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 approximately $1.9 million as of September 30, 2012, for the indemnity to offset the potential liability, additional legal action may be required to recover any potential liability under such indemnity.
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 arms-length prices. Accordingly, GXS India 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, GXS India 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 incorrect. GXS India has started appeal procedures and anticipates a settlement with the tax authorities. We have accrued approximately $1.5 million to cover our anticipated financial exposure in this matter. There can be no assurance 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.
In the third quarter of 2012, we were notified by the landlord of one of our leased offices (the “Guildford office”) in the U.K. that the landlord was objecting to our written notice (the “Notice”) given in the first quarter of 2012 to allow us to break the Guildford office lease in October 2012. The lease break provision allows us to cease all rights and obligations of the lease in October 2012, instead of the October 2017 scheduled lease end provided for in the lease. The Guildford office was one of the office locations closed as further described in Note 12 – Restructuring Charges. If the Notice is determined to be invalid, we would be subject to paying the facility costs of the Guildford office through October 2017. We are contesting the landlord’s assertion that the break notice was invalid, and are currently assessing what legal rights we have while engaging in discussions with the landlord and ascertaining the potential for mitigating its obligations through subleasing the Guildford office. If we are unsuccessful in our contention that the lease break is valid, it is possible that we could incur a loss of up to $1,000. A loss, if any, would be recorded as a “restructuring charge”. However, we have concluded a loss is not probable at this time and have not accrued for any potential exposure.
There have been no other material changes in legal proceedings from those described in Part I, Item 3 included in our 2011 Annual Report on Form 10-K.
There have been no material changes in the risk factors affecting us from those described in Part I, Item 1A of our 2011 Annual Report on Form 10-K.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not Applicable.
None.
Exhibit No. | | Description |
| *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. |
| **101.INS | | Instance Document |
| **101.SCH | | Taxonomy Extension Schema |
| **101.CAL | | Taxonomy Extension Calculation Linkbase |
| **101.DEF | | Taxonomy Extension Definition Linkbase |
| **101.LAB | | Taxonomy Extension Label Linkbase |
| **101.PRE | | Taxonomy Extension Presentation Linkbase |
____________
| Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability. |
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: November 9, 2012
| | GXS WORLDWIDE, INC. | |
| | | | |
| | By: | /s/ Robert Segert | |
| | | Name: | Robert Segert | |
| | | Title: | Director, President and Chief Executive Officer | |
| | | | |
| | By: | /s/ Gregg Clevenger | |
| | | Name: | Gregg Clevenger | |
| | | Title: | Executive Vice President, Chief Financial Officerand Principal Financial Officer | |
EXHIBIT INDEX
Exhibit No. | | Description |
| *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. |
| **101.INS | | Instance Document |
| **101.SCH | | Taxonomy Extension Schema |
| **101.CAL | | Taxonomy Extension Calculation Linkbase |
| **101.DEF | | Taxonomy Extension Definition Linkbase |
| **101.LAB | | Taxonomy Extension Label Linkbase |
| **101.PRE | | Taxonomy Extension Presentation Linkbase |
____________
| Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability. |
