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EX-10.4 - EXHIBIT 10.4 - GXS Worldwide, Inc.dp19848_ex1004.htm
EX-10.3 - EXHIBIT 10.3 - GXS Worldwide, Inc.dp19848_ex1003.htm
EX-10.2 - EXHIBIT 10.2 - GXS Worldwide, Inc.dp19848_ex1002.htm
EX-10.1 - EXHIBIT 10.1 - GXS Worldwide, Inc.dp19848_ex1001.htm
EX-31.2 - EXHIBIT 31.2 - GXS Worldwide, Inc.dp19848_ex3102.htm
EX-31.1 - EXHIBIT 31.1 - GXS Worldwide, Inc.dp19848_ex3101.htm
EX-32.1 - EXHIBIT 32.1 - GXS Worldwide, Inc.dp19848_ex3201.htm
 


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

FORM 10-Q

   
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
 
or
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________________  to

Commission file number: 333-167650

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

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

301-340-4000
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer £ Accelerated filer £  Non-accelerated filer R Smaller Reporting company £
(Do not check if a smaller reporting company)

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

As of September 30, 2010, the registrant had 1,000 outstanding shares of common stock, all of which was held by an affiliate of the registrant.



 
 
 
 
 
GXS WORLDWIDE, INC.
 
QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2010
 
 

PART I. FINANCIAL INFORMATION
   
       
Item 1.
Financial Statements
   
       
   
4
       
   
5
     
 
   
6
     
 
   
7
     
 
   
8
     
 
   
9
       
Item 2.
 
27
       
Item 3.
 
34
       
Item 4.
 
35
       
PART II. OTHER INFORMATION
   
       
Item 1.
 
36
       
Item 1A.    
Risk Factors    
       
Item 2.
 
36
       
Item 3.
 
36
       
Item 4.
 
36
       
Item 5.
 
36
       
Item 6.
 
36
 
In this Quarterly Report, all references to “our,” “us,” “we,” “the Company” and “GXS” refer to GXS Worldwide, Inc. and its subsidiaries as a consolidated entity, unless the context otherwise requires or where otherwise indicated.

The common stock of GXS, Inc., GXS Worldwide, Inc.’s only subsidiary, is collateral for the Company’s 9.75% Senior Secured Notes due 2015. Securities and Exchange Commission Rule 3-16 of Regulation S-X (“Rule 3-16”) requires financial statements for each of the registrant’s affiliates whose securities constitute a
 
 
substantial portion of the collateral for registered securities. The common stock of GXS, Inc. is considered to constitute a substantial portion of the collateral for the registered notes. Accordingly, the financials statements of GXS, Inc. would be required by Rule 3-16. Management does not believe the GXS, Inc. financial statements would add meaningful disclosure and has not included those financial statements herein, because they are substantially identical to the GXS Worldwide, Inc. financial statements and the total assets, revenues, operating income, net income (loss) and cash flows of GXS, Inc. are expected to continue to constitute substantially all of the corresponding amounts for GXS Worldwide, Inc. and its subsidiaries.


PART I. FINANCIAL INFORMATION

GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands, except share and per share amounts)
 
 
   
December 31,
2009
   
September 30,
2010
 
         
(unaudited)
 
Assets
           
Current:
           
Cash and cash equivalents
  $ 25,549     $ 30,797  
Receivables, net
    90,028       96,854  
Prepaid expenses and other current assets
    12,760       17,224  
Total current assets
    128,337       144,875  
                 
Restricted cash
    227,580       ––  
Property and equipment, net
    91,208       96,185  
Goodwill
    75,856       250,542  
Other intangible assets, net
    9,254       173,097  
Deferred financing costs
    22,622       20,284  
Other assets
    19,165       22,973  
                 
Total Assets
  $ 574,022     $ 707,956  
                 
Liabilities and Stockholder's Deficit
               
Current:
               
Trade payables
  $ 10,995     $ 8,769  
Deferred income
    23,127       38,444  
Accrued expenses and other current liabilities
    60,232       95,951  
Total current liabilities
    94,354       143,164  
                 
Long-term debt
    766,450       768,428  
Deferred tax liabilities
    1,330       7,952  
Other liabilities
    50,650       42,298  
Total liabilities
    912,784       961,842  
                 
GXS Worldwide, Inc. stockholder's deficit:
               
Common stock $1.00 par value, 1,000 shares authorized, issued and outstanding
    1       1  
Additional paid-in capital
    357,851       427,701  
Accumulated deficit
    (690,147 )     (675,726 )
Accumulated other comprehensive loss
    (6,707 )     (6,045 )
Total GXS Worldwide, Inc. stockholder's deficit
    (339,002 )     (254,069 )
Non-controlling interest
    240       183  
Total deficit
    (338,762 )     (253,886 )
                 
Total Liabilities and Stockholder's Deficit
  $ 574,022     $ 707,956  


See accompanying notes to condensed consolidated financial statements.
 

GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)
 
 
   
Three Months ended September 30,
   
Nine Months ended September 30,
 
   
2009
   
2010
   
2009
   
2010
 
Revenues
  $ 88,729     $ 114,138     $ 259,439     $ 296,473  
                                 
Costs and operating expenses:
                               
Cost of revenues
    49,480       63,567       147,392       158,030  
Sales and marketing
    10,574       14,658       31,759       39,206  
General and administrative
    10,400       15,445       35,792       41,248  
Restructuring charges
    697       1,824       7,298       2,891  
Merger and acquisition fees
    ––       (512 )     ––       8,492  
Operating income
    17,578       19,156       37,198       46,606  
                                 
Other income (expense):
                               
Loss on disposition of assets
    ––       ––       ––       (1,724 )
Interest income
    66       28       204       157  
Interest expense
    (19,362 )     (21,907 )     (46,444 )     (64,845 )
Other income (expense), net
    1,979       1,395       2,600       (17 )
Income (loss) before income taxes
    261       (1,328 )     (6,442 )     (19,823 )
                                 
Income tax expense (benefit)
    1,479       1,674       1,982       (34,187 )
Net income (loss)
    (1,218 )     (3,002 )     (8,424 )     14,364  
Less: Net income (loss) attributable to non-controlling interest
    31       (7 )     32       (57 )
Net income (loss) attributable to GXS Worldwide, Inc.
  $ (1,249 )   $ (2,995 )   $ (8,456 )   $ 14,421  
 
 
See accompanying notes to condensed consolidated financial statements.
 

GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)
 
 
   
Three Months ended September 30,
   
Nine Months ended September 30,
 
   
2009
   
2010
   
2009
   
2010
 
                         
Net income (loss)
  $ (1,218 )   $ (3,002 )   $ (8,424 )   $ 14,364  
Unrealized gain on interest rate swap
    1,426       ––       932       ––  
Foreign currency translation adjustments
    (270 )     1,694       2,774       662  
Comprehensive income (loss)
    (62 )     (1,308 )     (4,718 )     15,026  
Less: Comprehensive income (loss) attributable to non-controlling interest
    31       (7 )     32       (57 )
Comprehensive income (loss) attributable to
                               
GXS Worldwide, Inc.
  $ (93 )   $ (1,301 )   $ (4,750 )   $ 15,083  
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)
 
 
   
Common stock
   
Additional paid-in capital
   
Accumulated deficit
   
Accumulated other comprehensive loss
   
Non- controlling interest
   
Total Stockholder's deficit
 
Balance at December 31, 2009
  $ 1     $ 357,851     $ (690,147 )   $ (6,707 )   $ 240     $ (338,762 )
Net income (loss)
    ––       ––       14,421       ––       (57 )     14,364  
Stock compensation expense
    ––       212       ––       ––       ––       212  
Management fees waived by Francisco Partners
    ––       833       ––       ––       ––       833  
Contribution from GXS Holdings
    ––       68,805       ––       ––       ––       68,805  
Foreign currency translation adjustments
    ––       ––       ––       662       ––       662  
Balance at September 30, 2010
  $ 1     $ 427,701     $ (675,726 )   $ (6,045 )   $ 183     $ (253,886 )
 
 
See accompanying notes to condensed consolidated financial statements.
 

GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)
 
 
   
Nine Months ended September 30,
 
   
2009
   
2010
 
Cash flows from operations:
           
Net income (loss)
  $ (8,424 )   $ 14,364  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
    44,207       33,581  
Deferred income taxes
    (1,239 )     736  
Change in deferred tax asset valuation allowance resulting from business acquisition
    ––       (36,821 )
Loss on disposition of assets
    ––       1,724  
Amortization of deferred financing costs and debt discount
    2,771       5,727  
Unrealized (gain) loss on interest rate swap
    1,655       (5,041 )
Stock compensation expense
    120       212  
Accretion of interest on obligations of GXS Holdings
    3,368       ––  
Changes in operating assets and liabilities, net of effect of business acquisition:
               
Decrease in receivables
    5,914       9,065  
Increase in prepaid expenses and other assets
    (8,039 )     (2,654 )
Decrease in trade payables
    (3,955 )     (15,171 )
Decrease in deferred income
    (1,667 )     (2,312 )
Increase in accrued expenses and other liabilities
    8,111       21,891  
Other
    (183 )     (419 )
Net cash provided by operating activities
    42,639       24,882  
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (21,790 )     (26,907 )
Proceeds from sale of assets
    ––       400  
Business acquisition, net of cash acquired of $14,440
    ––       (220,005 )
Decrease in restricted cash
    ––       227,580  
Net cash used in investing activities
    (21,790 )     (18,932 )
                 
Cash flows from financing activities:
               
Repayment of long-term debt
    (45,138 )     ––  
Borrowings under revolving credit facility
    30,000       23,000  
Repayments of borrowings under revolving credit facility
    (30,000 )     (23,000 )
Payment of financing costs
    (2,621 )     (831 )
Net cash used in financing activities
    (47,759 )     (831 )
                 
Effect of exchange rate changes on cash
    1,666       129  
                 
Increase (decrease) in cash and cash equivalents
    (25,244 )     5,248  
Cash and cash equivalents, beginning of year
    47,863       25,549  
Cash and cash equivalents, end of period
  $ 22,619     $ 30,797  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 36,579     $ 44,065  
Cash paid for income taxes
  $ 1,449     $ 2,466  
                 
Noncash investing and financing activities:
               
Management fees waived by Francisco Partners
  $ 1,500     $ 833  
Fair value of equity securities issued in business acquisition
  $     $ 68,805  
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
(Dollars in thousands, unless otherwise indicated)
 
(1)  Business and Basis of Presentation
 
GXS Worldwide, Inc. and its subsidiaries (GXS Worldwide or the Company) are primarily engaged in the business of providing transaction management infrastructure products and services that enable companies to electronically exchange essential business documents. The Company’s services and solutions enable customers to manage mission critical supply chain functions and financial transactions related to the exchange of goods and services. Customers and their trading partners do business together via GXS Trading Grid®, a globally-accessible, cloud-computing platform specifically designed for B2B e-commerce. The Company is a wholly owned subsidiary of GXS Group, Inc. (GXS Group).
 
On June 2, 2010, GXS Holdings, Inc. (GXS Holdings), a Delaware corporation and our direct parent company, which directly owned 100% of the Company’s issued and outstanding common stock, acquired Inovis International, Inc. (Inovis), a provider of integrated B2B services and solutions that manage the flow of e-commerce information for global trading communities (the Merger). Following the Merger, Inovis was merged with GXS, Inc. (GXSI), an indirect wholly-owned subsidiary, and became an indirect wholly-owned subsidiary of GXS Group, Inc. (previously known as Griris Holding Company, Inc.). Certain foreign subsidiaries of Inovis became wholly owned subsidiaries of GXSI.
 
The Merger was accounted for using the purchase method of accounting prescribed in Financial Accounting Standard Codification 805 – Business Combinations. Under this standard, the excess of the purchase price over net assets acquired and liabilities assumed is recorded as goodwill. Purchase price allocated to property and equipment, trade names, customer contracts and relationships or other identifiable intangible assets will result in additional depreciation and amortization expense after the Merger. The amount of depreciation and amortization will be based upon the amount allocated and the estimated useful lives of the respective assets.  Revenue and operating income in the twelve months following the Merger will be affected by a write-down of deferred revenue to reflect estimated fair value.
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information.  Accordingly, these financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements.  In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring accruals) considered necessary for a fair presentation of the financial position and results of operations.
 
Interim results for the three and nine month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for a full fiscal year.  For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2009, which are included in the Company’s registration statement on Form S-4 filed under the Securities Act with the Securities and Exchange Commission (SEC) on July 27, 2010.
 
Certain reclassifications have been made to the condensed consolidated financial statements as of December 31, 2009 and for the three and nine months ended September 30, 2009 to conform to the presentation at September 30, 2010 and for the three and nine months then ended.
 
(2)  Summary of Significant Accounting Policies
 
(a)  Consolidation
 
The condensed consolidated financial statements represent the consolidation of all companies in which the Company directly or indirectly has a majority ownership interest and controls the operations. All significant intercompany transactions and balances have been eliminated in consolidation. Investments in companies in which the Company has an ownership interest of 50% or less but can exercise significant influence over the investee’s operations and policies are accounted for under the equity method of accounting. The Company uses the cost method to account for investments where it holds less than a 20% ownership interest and where it cannot exercise significant influence over the investee’s operations and policies. At the end of each reporting period, the Company assesses the fair value of its investments to determine if any impairment has occurred. To the extent the Company’s carrying value exceeds the estimated fair value and the loss is considered to be other than a temporary decline, the Company records an impairment charge.

(b)  Foreign Currency
 
The financial statements of most subsidiaries located outside of the United States are measured using the local currency as the functional currency. Assets, including goodwill, and liabilities are translated at the rates of exchange at the balance sheet date. Income
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, unless otherwise indicated)
 
and expense items are translated at average monthly rates of exchange. The resulting translation gains and losses are included as a separate component of other comprehensive income (loss). Gains and losses from transactions in foreign currency are included in the condensed consolidated statements of operations within other income (expense), net.
 
(c)  Cash and Cash Equivalents
 
The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of overnight interest bearing deposits.
 
(d)  Revenue Recognition
 
The Company generates revenues from three principal sources:
 
Transaction Processing — The Company earns recurring transaction processing revenue from facilitating the exchange of business documents among its customers’ computer systems and those of their trading partners. Such revenues are generally based on a per transaction fee or monthly minimum charge and are recognized in the period in which the related transactions are processed. Revenue on contracts with monthly, quarterly or annual minimum transaction levels is recognized based on the greater of actual transactions or the specified contract minimum amounts.
 
Software Licensing and Maintenance — The Company earns revenue from the licensing of software applications that facilitate and automate the exchange of information among disparate business systems and applications. Such revenue is recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection is considered probable. Revenue from licensing software that requires significant customization and modification or where services are otherwise considered essential to the functionality of the software are recognized using the percentage of completion method, based on the costs incurred in relation to the total estimated costs of the contract. Revenue from hosted software applications are recognized ratably over the hosting period unless the customer has the contractual right to take possession of the software without significant penalty and it is feasible for the customer to use the software with its own hardware or contract with another party unrelated to the Company to host the software. Software maintenance revenue is deferred and recognized on a straight-line basis over the life of the related maintenance period, which is typically one year.
 
Professional Services — Professional services are generally conducted under time and material contracts and revenue is recognized as the related services are provided.
 
For arrangements with more than one element of revenue, the Company allocates revenue to each component based on vendor specific objective evidence (VSOE) of fair value. VSOE for software maintenance is based on contractual renewal rates. Professional services are separately priced and are based on standard hourly rates determined by the nature of the service and the experience of the professional performing the service.
 
The Company defers direct costs associated with implementation of certain of its long-term customer contracts to the extent such costs can be recovered through guaranteed contract revenues.  The unamortized balance of those costs as of December 31, 2009 and September 30, 2010 was $14,403 and $17,652, respectively, and are included in other non-current assets in the condensed consolidated balance sheets.

(e)  Comprehensive Loss
 
Comprehensive loss consists of net loss adjusted for increases and decreases affecting accumulated other comprehensive loss in stockholder’s deficit that are excluded from the determination of net loss.
 
Accumulated other comprehensive loss consisted of the following:
 
   
December 31,
2009
   
September 30,
2010
 
Additional minimum pension liability
  $ (963 )   $ (963 )
Foreign currency translation adjustments
    (5,744 )     (5,082 )
Accumulated other comprehensive loss
  $ (6,707 )   $ (6,045 )
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, unless otherwise indicated)
 
(f)  Income Taxes
 
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income tax liabilities are recorded for the impact of positions taken on income tax returns which management believes are not likely to be sustained on tax audit. Interest expense accrued on such unrecognized tax benefits and income tax penalties are recognized through income tax expense.
 
The expected effective income tax rate for the three and nine months ended September 30, 2009 and 2010 differs from the federal statutory rate of 35% principally as a result of state income taxes, differing rates in foreign jurisdictions, the effect of losses in the United States and foreign jurisdictions for which no income tax benefit has been recognized and the decrease in the Company’s deferred tax asset valuation allowance as a result of net deferred tax liabilities assumed and recognized in purchase accounting. Such reduction was recognized as an income tax benefit in the condensed consolidated statement of operations.
 
(g)  Derivative Instruments
 
Derivative instruments are recognized on the condensed consolidated balance sheets at their fair value and changes in the fair value are recognized in income, unless the derivatives qualify as hedges of future cash flows. For derivatives qualifying as hedges of future cash flows, the effective portion of any changes in fair value is recorded temporarily in equity, and then recognized in income along with the related effects of the hedged items. Any ineffective portion of hedges is reported in income as it occurs.
 
The Company determined the fair value of its interest rate swap using pricing models developed based on the LIBOR swap rate and other observable inputs, adjusted to reflect non performance risk of both the counterparty and the Company.  The Company considers the interest rate swap to be included within Level 2 of the fair value hierarchy established by U.S. GAAP, as its fair value is measured primarily utilizing observable market based inputs.
 
(h)  Fair Value of Financial Instruments
 
The Company’s financial instruments consist principally of cash and cash equivalents, receivables, an interest rate swap and long-term debt. Generally, the carrying amounts of current assets and liabilities approximate fair value because of the short-term maturity of these instruments. As of September 30, 2010, the Company’s long-term debt was trading close to the issue price so the Company considers the fair value to approximate the book value. The fair value of the Company’s interest rate swap is discussed further in Note 8.
 
(i)  Use of Estimates
 
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Significant estimates used in preparing the condensed consolidated financial statements include recovery of long-lived assets, valuation of receivables and valuation of deferred tax assets. In addition, estimates are required to recognize revenue for software arrangements with multiple deliverables and to assess the stage at which software development costs should be capitalized.
 
(j)  Recently Released Accounting Standards
 
In September 2009, the FASB issued Accounting Standards Update (ASU) 2009-13 (previously Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple Deliverables). ASU 2009-13 supersedes EITF No. 00-21 and addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 will require companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. Management is currently evaluating the potential impact, if any, of the adoption of ASU 2009-13 on the Company’s consolidated results of operations and financial condition.
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, unless otherwise indicated)
 
(3)  Acquisition of Inovis
 
On June 2, 2010, GXS Holdings acquired all the capital stock of Inovis International, Inc. for total consideration of $303,250, including cash of $129,782 paid to retire the outstanding debt of Inovis and cash of $104,663 paid to the Inovis stockholders. The Inovis stockholders also received common and preferred stock, with a preliminary estimated fair value of $68,805, in a newly formed holding company, GXS Group, Inc., which owns all of the capital stock of GXS Holdings, resulting in Inovis stockholders having an approximate 28.1% ownership interest in the combined company following consummation of the Merger. Concurrent with the Merger, through a series of transactions, the capital stock of Inovis was contributed to GXS, Inc., a wholly-owned subsidiary of the Company and Inovis International, Inc. and certain of its U.S. subsidiaries became wholly-owned subsidiaries of GXS, Inc.

The Company used cash held in escrow of $227,580 obtained from the senior secured notes issuance in December 2009 to retire the Inovis indebtedness and to fund a portion of the cash consideration paid to the Inovis stockholders. Of the $104,663 cash paid to the Inovis stockholders, $10,800 is held in escrow until the indemnification obligations of the Inovis stockholders expire on June 2, 2011.

Inovis was a provider of integrated B2B services and solutions that manage the flow of e-commerce information for global trading communities. The Merger will expand the Company’s customer base in the U.S., Canada and the U.K., broaden its product offerings and increase the functionality of its managed services offering.

The Merger was accounted for using the purchase method of accounting prescribed in Financial Accounting Standard Codification 805 – Business Combinations. Under this standard, the excess of the purchase price over the fair value of net assets acquired and liabilities assumed is recorded as goodwill. The application of purchase accounting for the transaction resulted in a preliminary value of $303,250.  On that basis, the table below shows the preliminary value of the consideration paid in connection with the Merger:
 
Debt of Inovis retired at closing
  $ 129,782  
Cash paid to stockholders of Inovis
    104,663  
Preliminary estimated fair value of equity securities issued to stockholders of Inovis
    68,805  
Total consideration
  $ 303,250  

All expenditures incurred in connection with the Merger were expensed and are included in operating expenses. Transaction costs incurred in connection with the Merger were $8,492 during the nine months ended September 30, 2010, including $3,000 paid to Francisco Partners in June 2010. The results of operations for Inovis have been included in the condensed consolidated results of operations for the period June 2, 2010 through September 30, 2010.
 
The Company has preliminarily allocated the purchase price based on current estimates of the fair values of assets acquired and liabilities assumed in connection with the Inovis acquisition. The table below summarizes the preliminary estimates of fair value of the Inovis assets acquired, liabilities assumed and related deferred income taxes as of the acquisition date. The Company expects to obtain additional information to assist in determining the fair value of the net assets acquired at the acquisition date. Therefore, these preliminary estimates may be revised in future periods during the applicable measurement period and the revisions may materially affect the presentation of our consolidated financial results. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill. The Company expects to finalize the purchase accounting for the acquisition of Inovis, including determining the final valuations for assets and liabilities, by the time it files its Annual Report on Form 10-K for the year ending December 31, 2010.
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, unless otherwise indicated)
 
   
Preliminary Allocation
June 2, 2010
 
Acquired assets:
     
Current assets
  $ 35,517  
Property and equipment
    5,802  
Other non-current assets
    555  
Goodwill
    174,177  
Amortized intangible assets
    171,380  
Total assets
    387,431  
         
Assumed liabilities:
       
Current liabilities
    (38,780 )
Deferred tax liabilties
    (42,836 )
Other non-current liabilities
    (2,565 )
Total liabilities
    (84,181 )
Total consideration
  $ 303,250  

Amortized intangible assets and the related estimated useful lives consist of the following:
 
 
 
Preliminary Estimated Useful Lives
 
Preliminary Estimated Value
June 2, 2010
 
Customer relationships
15-20 years
  $ 149,100  
Product technology
5-10 years
    17,780  
Trademarks
5 years
    4,500  
      $ 171,380  

In connection with the Merger, the Company reduced its deferred tax asset valuation allowance by $36,821 as the result of net deferred tax liabilities assumed and recognized in purchase accounting. Such reduction was recognized as an income tax benefit in the condensed consolidated statements of operations for the three months ended June 30, 2010 and the nine months ended September 30, 2010.

The following schedule presents unaudited consolidated pro forma results of operations data as if the Merger had occurred on January 1, 2009. This information does not purport to be indicative of the actual results that would have occurred if the Merger had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company:

   
Three Months ended
   
Nine Months ended September 30,
 
   
September 30, 2009
   
2009
   
2010
 
Revenues
  $ 124,864     $ 362,125     $ 350,784  
Net income (loss)
    809       (18,256 )     (9,818 )

The Merger was subject to regulatory review.  In connection with the review by the Antitrust Division of the U.S. Department of Justice, the Company divested its catalog service offering.  On May 28, 2010, the Company sold customer contracts and intellectual property rights related to its catalog service offering and recorded a loss on sale of $1,724.
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, unless otherwise indicated)
 
(4)  Accounts Receivable
 
Accounts receivable, net were comprised of the following:
 
   
December 31,
2009
   
September 30,
2010
 
Trade accounts receivable
  $ 79,763     $ 87,433  
Unbilled receivables
    2,200       2,374  
Other receivables
    22,414       19,982  
      104,377       109,789  
Less: allowance for doubtful accounts
    (14,349 )     (12,935 )
Total
  $ 90,028     $ 96,854  

 
(5)  Property and Equipment
 
Property and equipment, net were comprised of the following:
 
   
December 31,
2009
   
September 30,
2010
 
Computer equipment and furniture
  $ 249,125     $ 200,865  
Computer software
    287,216       297,705  
Leasehold improvements
    18,673       17,232  
      555,014       515,802  
Less: accumulated depreciation and amortization
    (463,806 )     (419,617 )
Total
  $ 91,208     $ 96,185  

(6)  Goodwill and Other Acquired Intangible Assets
 
The following represents a summary of changes in goodwill for the nine months ended September 30, 2010:
 
Beginning of year
  $ 75,856  
Merger-related additions
    174,177  
Foreign currency translation
    509  
End of period
  $ 250,542  

 
On June 2, 2010, the Company acquired Inovis for total consideration of $303,250, as more fully discussed in Note 3.  The preliminary aggregate purchase price exceeded the preliminary estimated fair value of the net tangible assets and identified intangible assets by $174,177, which was allocated to goodwill.
 
Other acquired intangible assets were comprised of the following:
 
   
September 30, 2010
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
Amortized intangible assets:
                 
Customer relationships
  $ 247,054     $ (98,510 )   $ 148,544  
Product technology
    17,780       (665 )     17,115  
Trade names and trademarks
    4,500       (300 )     4,200  
Other acquired intangible assets
    3,882       (2,820 )     1,062  
Total
  $ 273,216     $ (102,295 )   $ 170,921  
                         
Unamortized intangible assets:
                       
Trade names and trademarks
  $ 2,176                  
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, unless otherwise indicated)
 
   
December 31, 2009
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
Amortized intangible assets:
                 
Customer relationships
  $ 97,875     $ (92,046 )   $ 5,829  
Other acquired intangible assets
    3,865       (2,585 )     1,280  
Total
  $ 101,740     $ (94,631 )   $ 7,109  
                         
Unamortized intangible assets:
                       
Trade names and trademarks
  $ 2,145                  

 
Intangible assets, except for those with an indefinite life, are amortized over their estimated useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are expected to be consumed or on a straight-line basis. Amortization expense related to intangible assets was $5,062 and $15,318 for the three and nine months ended September 30, 2009, respectively, and $5,846 and $7,664 for the three and nine months ended September 30, 2010. Estimated aggregate amortization expense of intangible assets for the period from October 1, 2010 through December 31, 2010 and for each of the following five years ending December 31 is approximately: $5,125 remaining in 2010, $19,598  in 2011, $18,276 in 2012, $17,118 in 2013, $14,251 in 2014, $12,519 in 2015 and $84,033 thereafter.
 
The gross carrying amounts of certain intangible assets are impacted by certain balances being denominated in foreign currencies.  These balances are translated into U.S. dollars at the exchange rate in effect at the balance sheet date.
 
(7)  Long-Term Debt
 
The carrying values of our notes payable were as follows:

   
December 31,
2009
   
September 30,
2010
 
Senior secured notes
  $ 785,000     $ 785,000  
Less: unamortized original issue discount
    (18,550 )     (16,572 )
Long-term debt
  $ 766,450     $ 768,428  

 
The fair values of the senior secured notes approximate their respective book values at December 31, 2009 and September 30, 2010.
 
Senior Secured Notes
 
On December 23, 2009, the Company issued $785,000 of senior secured notes (the Senior Secured Notes) with an original issue discount of $18,608. Net proceeds from issuance were used to retire all of the outstanding debt under the 2007 Credit Facility (described later in this Note) and $35,000 of GXS Holdings outstanding subordinated notes, pay debt issuance costs and for other general corporate purposes. Under the terms of the indenture, the Company placed $227,580 in an escrow account to fund the Merger. On June 2, 2010, the Company withdrew the funds from the escrow account to fund the Merger as more fully described in Note 3.
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, unless otherwise indicated)
 
On July 27, 2010, the Company filed a registration statement with the SEC as required by the Senior Secured Notes indenture.  On August 11, 2010, the Company filed a prospectus pursuant to Rule 424(b) of the Securities Act with the SEC to offer a public exchange of these notes.  The Company completed the exchange offer and issued $684,555 aggregate principal amount of new registered notes in exchange for like aggregate principal amount of the Senior Secured Notes on September 16, 2010.
 
The Senior Secured Notes bear interest at an annual rate of 9.75%, with interest payable on June 15 and December 15 each year. The Senior Secured Notes mature on June 15, 2015 and are guaranteed on a senior secured basis by all of the Company’s existing and future wholly-owned domestic subsidiaries and all other domestic subsidiaries that guarantee the Company’s other indebtedness; and in certain circumstances are secured by an interest granted on substantially all of the Company’s properties and assets. The Senior Secured Notes contain covenants that, among other things, restrict the Company’s ability to pay dividends, redeem stock, make certain distributions, payments or investments, incur indebtedness, create liens on the collateral, merge, consolidate or sell assets, and enter into transactions with affiliates.
 
Revolving Credit Facility

On December 23, 2009, the Company entered into a Credit and Guaranty Agreement which provides the Company with a $50,000 revolving credit facility. The interest rate for the revolving credit facility is a predetermined amount above the London Interbank Offered Rate (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 revolving credit facility is guaranteed by the guarantors that guarantee the Senior Secured Notes and secured by collateral that secure the Senior Secured Notes. The revolving credit facility is used by the Company, among other things, to fund its working capital needs, support letters of credit and for general corporate purposes. The Company’s ability to borrow additional monies in the future under the revolving credit facility is subject to certain conditions, including compliance with certain covenants. As of September 30, 2010, the Company had outstanding letters of credit of $11,661 and additional available borrowings of $38,339 under the revolving credit facility. Following the December 23, 2009 debt refinancing, the Company’s principal sources of liquidity have been and are expected to be cash, cash flow from operations and borrowings under the revolving credit facility. Any outstanding borrowings under the revolving credit facility shall be repaid in full on December 23, 2012 and the commitments shall terminate on that date.
 
The revolving credit facility requires the Company to maintain certain financial and nonfinancial covenants. Noncompliance with any covenant specified in the Credit and Guaranty Agreement would qualify as an event of default whereby the lenders would have rights to call all outstanding borrowings due and payable. At September 30, 2010, the Company was in compliance with all financial and non-financial covenants.
 
2007 Credit Facility
 
On October 5, 2007, the Company entered into a first lien credit agreement (the First Lien Agreement) and a second lien credit agreement (the Second Lien Agreement and together with the First Lien Agreement, the 2007 Credit Facility). The First Lien Agreement consisted of a $335,000 term credit facility and a $50,000 revolving credit facility. The Second Lien Agreement consisted of a $175,000 term credit facility. Interest expense for the 2007 Credit Facility was $12,884 and $33,941 for the three months and nine months ended September 30, 2009, respectively.
 
All amounts outstanding under the 2007 Credit Facility were retired upon issuance of the Senior Secured Notes on December 23, 2009, and the 2007 Credit Facility was terminated.
 
Obligations of GXS Holdings
 
On October 5, 2007, GXS Holdings issued $55,000 of subordinated notes due September 30, 2017. The notes bear interest at 14.2%, all payable in additional debt securities with the same terms and conditions as the subordinated notes or in cash at the Company’s option. The Company has not guaranteed or pledged any of its assets to secure the notes. The entire proceeds from these subordinated notes were used to fund a capital contribution to the Company which was used, in part, to repay the debt which was refinanced in connection with the closing of the 2007 Credit Facility.
 
The Company repaid $35,000 of the outstanding subordinated notes in December 2009 with a portion of the proceeds from the issuance of the Senior Secured Notes. In the three and nine months ended September 30, 2009, interest expense incurred related to the GXS Holdings debt and included in the Company’s condensed consolidated statements of operations was $1,162 and $3,368, respectively.
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, unless otherwise indicated)
 
Other Information
 
The Company expects that cash flows from foreign operations will be required to meet its domestic debt service requirements. However, there is no assurance that the foreign subsidiaries will generate sufficient cash flow or that the laws in foreign jurisdictions will not change to limit the Company’s ability to repatriate these cash flows or increase the tax burden on the collections.
 
(8)  Financial Instruments
 
The Company has an interest rate swap agreement with a commercial bank with a notional amount of $255,000. The provisions of the agreement provide that the Company will pay the counterparty a fixed rate of 3.86%. The counterparty will pay the Company a variable rate equal to three-month LIBOR, which was 0.51% at September 30, 2010. The fair value of the interest rate swap was $11,848 and $6,807 as of December 31, 2009 and September 30, 2010, respectively. The interest rate swap was recorded in other liabilities in the condensed consolidated balance sheet at December 31, 2009 and accrued expenses and other current liabilities in the condensed consolidated balance sheet at September 30, 2010.  The interest rate swap agreement expires on April 26, 2011.
 
The interest rate swap had previously been designated as a cash flow hedge, and was utilized to manage the Company’s exposure related to changes in the three-month LIBOR rate associated with its variable-rate 2007 Credit Facility. As the hedged future forecasted transactions (variable interest payments on the 2007 Credit Facility) were no longer probable of occurring upon the repayment and extinguishment of the 2007 Credit Facility in December 2009, the effective portion of the hedge was reclassified out of accumulated other comprehensive loss into interest expense in December 2009. In addition, changes in the fair value of the interest rate swap are now recorded through interest expense. The changes in fair value of the interest rate swap of $1,709 and $5,042 were recorded as a reduction to interest expense in the three and nine months ended September 30, 2010.
 
(9)  Contingencies
 
The Company is subject to various legal proceedings and claims, which arise in the ordinary course of its business, none of which management believes are likely to have a material adverse effect on the Company’s financial position or results of operations.
 
In 2006, Inovis became aware of patent infringement allegations by a third party against certain customers of one of Inovis’ software technology products. In July 2007, Inovis filed a complaint for declaratory judgment against the third party in the United States District Court of Delaware, seeking a judgment and declaration that neither Inovis nor any of its customers have infringed on the patent at issue.  Inovis filed a Request for Reexamination of such patent with the U.S. Patent and Trademark Office (the “USPTO”) which was accepted in May 2008, resulting in the amendment and/or cancellation of certain of the patent claims.  In September 2009, the USPTO granted a second Request for Reexamination of the patent filed by Inovis, finding a substantial new question of patentability with respect to all claims.  In March 2010, the USPTO issued an initial ruling rejecting all of the claims in the patent.  The litigation is currently stayed pending the outcome of the second reexamination proceeding.  Although the Company believes that the third party’s patent infringement allegations are without merit, there can be no assurance that the Company will prevail in the litigation.
 
(10)  Restructuring Charges
 
During the past several years, the Company has undertaken a series of restructuring activities, which included closing or consolidating certain office facilities and terminating employees, in order to reduce expenses in response to changing business requirements. The restructuring charges reflect the total estimated net costs of these activities and current period adjustments of revised estimates associated with these restructuring plans.
 
During the three months and nine months ended September 30, 2010, the Company recorded restructuring charges of $1,824 and $2,891, respectively, which principally included charges associated with the consolidation of office space at the former Inovis headquarters and termination of employees associated with the integration of the Inovis business. The Company expects to take further restructuring charges in 2010 and beyond related to exit activities associated with the continued integration of the Inovis business.

The changes in the restructuring accrual for the nine months ended September 30, 2010 are as follows:

   
Severance
   
Facilities
   
Total
 
Balance as of  December 31, 2009
  $ 149     $ 12,480     $ 12,629  
Restructuring charges
    1,922       969       2,891  
Restructuring obligations assumed
in the Merger
    1,345       ––       1,345  
Payments and other adjustments
    (1,691 )     (3,690 )     (5,381 )
Balance as of September 30, 2010
  $ 1,725     $ 9,759     $ 11,484  
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, unless otherwise indicated)
 
In connection with the Merger, the Company assumed obligations for restructuring activities related to the termination of certain Inovis employees of $1,345.

Amounts that are estimated to be payable in the next twelve months totaled $4,553 and $5,271 at December 31, 2009 and September 30, 2010, respectively and are included in accrued expenses and other current liabilities in the condensed consolidated balance sheets.

(11)  Related Party Transactions

Prior to the Merger, the Company had an agreement with Francisco Partners, the controlling shareholder of GXS Holdings, under which the Company had agreed to pay Francisco Partners an annual fee of $2,000 plus expenses for financial advisory and consulting services (the Monitoring Agreement). The expense related to the fees payable under the Monitoring Agreement was $500 and $1,008 for the three months ended September 30, 2009 and 2010, respectively, and $1,500 and $2,159 for the nine months ended September 30, 2009 and 2010, respectively. Francisco Partners waived the payment of $2,000 of fees earned during the year ended December 31, 2009 and $833 of fees earned through June 2, 2010. Such amounts were recorded as contributions to additional paid-in capital in the condensed consolidated statements of changes in stockholder’s deficit.  The Company paid Francisco Partners a merger advisory fee of $3,000 prior to the closing of the Merger.
 
On June 2, 2010, the Company terminated the Monitoring Agreement and entered into a new management agreement pursuant to which the Company agreed to pay in the aggregate an annual fee of $4,000 to Francisco Partners and certain former shareholders of Inovis, Golden Gate Capital and Cerebus Partners, in exchange for financial advisory and consulting services (the Management Agreement). The Management Agreement has a term of ten years. The expense related to the management fee was $1,326 for the period from June 2, 2010 through September 30, 2010 and will be payable in full on December 31, 2010 along with the management fees that will accrue during the remainder of 2010.
 
One of our executives is an investor in Mentora Group, Inc., who provides technology-related consulting and hosting management services for the Company. During the nine months ended September 30, 2010, the Company incurred fees payable to Mentora of $948 for services provided during that period under various service agreements.
 
(12)  Subsequent Events

Management evaluated all events and transactions that occurred after September 30, 2010 and through the date of this report, and determined the Company did not have any material subsequent events that require adjustment to or disclosure in the condensed consolidated financial statements during this period.

(13)  Supplemental Condensed Consolidated Financial Information

The Senior Secured Notes are guaranteed by each of the Company’s United States subsidiaries (the Subsidiary Guarantors). The guarantees are full, unconditional and joint and several. The Subsidiary Guarantors are each wholly-owned by the Company. The ability of the Company’s subsidiaries to make cash distributions and loans to the Company and Subsidiary Guarantors is not expected to be significantly restricted. The following supplemental financial information sets forth, on a condensed consolidating basis, balance sheets, statements of operations and comprehensive income (loss), and statements of cash flows for the Company, Subsidiary Guarantors and the Company’s non-guarantor subsidiaries.
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
December 31, 2009
(In thousands)
(unaudited)
 
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Assets
                             
Current:
                             
Cash and cash equivalents
  $ ––     $ 12,983     $ 12,566     $ ––     $ 25,549  
Receivables, net
    ––       33,946       56,082       ––       90,028  
Prepaid expenses and other assets
    ––       2,459       10,301       ––       12,760  
Advances to subsidiaries
    ––       504,773       198,220       (702,993 )     ––  
Total current assets
    ––       554,161       277,169       (702,993 )     128,337  
Restricted cash
    ––       227,580       ––       ––       227,580  
Investments in subsidiaries
    421,238       4,284       ––       (425,522 )     ––  
Property and equipment, net
    ––       84,196       7,012       ––       91,208  
Goodwill
    ––       58,087       17,769       ––       75,856  
Other intangible assets, net
    ––       700       8,554       ––       9,254  
Deferred financing costs
    22,622       ––       ––       ––       22,622  
Other assets
    ––       12,225       6,940       ––       19,165  
Total Assets
  $ 443,860     $ 941,233     $ 317,444     $ (1,128,515 )   $ 574,022  
                                         
Liabilities and Equity (Deficit)
                                       
Current:
                                       
Trade payables
  $ 950     $ 6,548     $ 3,497     $ ––     $ 10,995  
Other current liabilities
    3,614       31,784       47,961       ––       83,359  
Advances from affiliates
    ––       465,977       237,016       (702,993 )     ––  
Total current liabilities
    4,564       504,309       288,474       (702,993 )     94,354  
Long-term debt
    766,450       ––       ––       ––       766,450  
Other liabilities
    11,848       15,686       24,446       ––       51,980  
Total liabilities
    782,862       519,995       312,920       (702,993 )     912,784  
Equity (Deficit):
                                       
Stockholder’s equity (deficit) GXS Worldwide, Inc.
    (339,002 )     421,238       4,284       (425,522 )     (339,002 )
Non-controlling interest
    ––       ––       240       ––       240  
Total equity (deficit)
    (339,002 )     421,238       4,524       (425,522 )     (338,762 )
Total Liabilities and Equity (Deficit)
  $ 443,860     $ 941,233     $ 317,444     $ (1,128,515 )   $ 574,022  


GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
September 30, 2010
(In thousands)
(Unaudited)
 
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Assets
                             
Current:
                             
Cash and cash equivalents
  $ ––     $ 13,190     $ 17,607     $ ––     $ 30,797  
Receivables, net
    ––       42,339       54,515       ––       96,854  
Prepaid expenses and other assets
    ––       5,313       11,911       ––       17,224  
Advances to subsidiaries
    ––       750,048       201,141       (951,189 )     ––  
Total current assets
    ––       810,890       285,174       (951,189 )     144,875  
Investments in subsidiaries
    525,532       24,392       ––       (549,924 )     ––  
Property and equipment, net
    ––       89,320       6,865       ––       96,185  
Goodwill
    ––       217,741       32,801       ––       250,542  
Other intangible assets, net
    ––       165,722       7,375       ––       173,097  
Deferred financing costs
    20,284       ––       ––       ––       20,284  
Other assets
    ––       14,877       8,096       ––       22,973  
Total Assets
  $ 545,816     $ 1,322,942     $ 340,311     $ (1,501,113 )   $ 707,956  
                                         
Liabilities and Equity (Deficit)
                                       
Current:
                                       
Trade payables
  $ 236     $ 4,305     $ 4,228     $ ––     $ 8,769  
Other current liabilities
    31,221       49,547       53,627       ––       134,395  
Advances from affiliates
    ––       707,034       244,155       (951,189 )     ––  
Total current liabilities
    31,457       760,886       302,010       (951,189 )     143,164  
Long-term debt
    768,428       ––       ––       ––       768,428  
Other liabilities
    ––       36,524       13,726       ––       50,250  
Total liabilities
    799,885       797,410       315,736       (951,189 )     961,842  
Equity (Deficit)
                                       
Stockholder’s equity (deficit) GXS Worldwide, Inc.
    (254,069 )     525,532       24,392       (549,924 )     (254,069 )
Non-controlling interest
    ––       ––       183       ––       183  
Total equity (deficit)
    (254,069 )     525,532       24,575       (549,924 )     (253,886 )
Total Liabilities and Equity (Deficit)
  $ 545,816     $ 1,322,942     $ 340,311     $ (1,501,113 )   $ 707,956  

 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three Months ended September 30, 2009
(In thousands)
(Unaudited)
 
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Revenues
  $ ––     $ 72,241     $ 51,115     $ (34,627 )   $ 88,729  
Costs and operating expenses
    ––       55,421       49,660       (34,627 )     70,454  
Restructuring and related charges
    ––       (317 )     1,014       ––       697  
                                         
Operating income
    ––       17,137       441       ––       17,578  
Other income (expense), net
    (19,366 )     7,904       (5,855 )     ––       (17,317 )
                                         
Income (loss) before income taxes
    (19,366 )     25,041       (5,414 )     ––       261  
Income tax expense
    ––       620       859       ––       1,479  
                                         
                                         
Income (loss) before equity in income (loss) of subsidiaries
    (19,366 )     24,421       (6,273 )     ––       (1,218 )
Equity in income (loss) of subsidiaries
    18,148       (6,273 )     ––       (11,875 )     ––  
                                         
Net income (loss)
    (1,218 )     18,148       (6,273 )     (11,875 )     (1,218 )
Unrealized gain on interest rate swap
    1,426       ––       ––       ––       1,426  
Foreign currency translation adjustments
    ––       ––       (270 )     ––       (270 )
Dividends from subsidiaries
    ––       5,443       ––       (5,443 )     ––  
                                         
Comprehensive income (loss)
    208       23,591       (6,543 )     (17,318 )     (62 )
Less: Comprehensive income attributable to noncontrolling interest
    ––       ––       31       ––       31  
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
  $ 208     $ 23,591     $ (6,574 )   $ (17,318 )   $ (93 )
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Nine Months ended September 30, 2009
(In thousands)
(Unaudited)
 
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Revenues
  $ ––     $ 217,305     $ 145,510     $ (103,376 )   $ 259,439  
Costs and operating expenses
    ––       166,384       151,935       (103,376 )     214,943  
Restructuring and related charges
    ––       4,912       2,386       ––       7,298  
                                         
Operating income (loss)
    ––       46,009       (8,811 )     ––       37,198  
Other income (expense), net
    (46,452 )     13,538       (10,726 )     ––       (43,640 )
                                         
Income (loss) before income taxes
    (46,452 )     59,547       (19,537 )     ––       (6,442 )
Income tax expense
    ––       1,193       789       ––       1,982  
                                         
                                         
Income (loss) before equity in income (loss) of subsidiaries
    (46,452 )     58,354       (20,326 )     ––       (8,424 )
Equity in income (loss) of subsidiaries
    38,028       (20,326 )     ––       (17,702 )     ––  
                                         
Net income (loss)
    (8,424 )     38,028       (20,326 )     (17,702 )     (8,424 )
Unrealized gain on interest rate swap
    932       ––       ––       ––       932  
Foreign currency translation adjustments
    ––       ––       2,774       ––       2,774  
Dividends from subsidiaries
    ––       5,865       ––       (5,865 )     ––  
                                         
Comprehensive income (loss)
    (7,492 )     43,893       (17,552 )     (23,567 )     (4,718 )
Less: Comprehensive income attributable to noncontrolling interest
    ––       ––       32       ––       32  
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
  $ (7,492 )   $ 43,893     $ (17,584 )   $ (23,567 )   $ (4,750 )


 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three Months ended September 30, 2010
(In thousands)
(Unaudited)
 
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Revenues
  $ ––     $ 96,799     $ 52,295     $ (34,956 )   $ 114,138  
Costs and operating expenses
    ––       77,418       51,208       (34,956 )     93,670  
Restructuring and related charges
    ––       1,532       292       ––       1,824  
Merger and acquisition fees
    (512 )     ––       ––       ––       (512 )
                                         
Operating income (loss)
    512       17,849       795       ––       19,156  
Other income (expense), net
    (21,848 )     698       666       ––       (20,484 )
                                         
Income (loss) before income taxes
    (21,336 )     18,547       1,461       ––       (1,328 )
Income tax expense
    ––       361       1,313       ––       1,674  
                                         
Income (loss) before equity in income (loss) of subsidiaries
    (21,336 )     18,186       148       ––       (3,002 )
Equity in income (loss) of subsidiaries
    18,334       148       ––       (18,482 )     ––  
                                         
Net income (loss)
    (3,002 )     18,334       148       (18,482 )     (3,002 )
Foreign currency translation adjustments
    ––       ––       1,694       ––       1,694  
                                         
Comprehensive income (loss)
    (3,002 )     18,334       1,842       (18,482 )     (1,308 )
Less: Comprehensive loss attributable to noncontrolling interest
    ––       ––       (7 )     ––       (7 )
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
  $ (3,002 )   $ 18,334     $ 1,849     $ (18,482 )   $ (1,301 )
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Nine Months ended September 30, 2010
(In thousands)
(Unaudited)
 

   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Revenues
  $ ––     $ 243,386     $ 154,277     $ (101,190 )   $ 296,473  
Costs and operating expenses
    ––       192,163       147,511       (101,190 )     238,484  
Restructuring and related charges
    ––       2,346       545       ––       2,891  
Merger and acquisition fees
    8,492       ––       ––       ––       8,492  
                                         
Operating income (loss)
    (8,492 )     48,877       6,221       ––       46,606  
Other income (expense), net
    (64,825 )     1,153       (2,757 )     ––       (66,429 )
                                         
Income (loss) before income taxes
    (73,317 )     50,030       3,464       ––       (19,823 )
Income tax expense (benefit)
    ––       (35,705 )     1,518       ––       (34,187 )
                                         
Income (loss) before equity in income (loss) of subsidiaries
    (73,317 )     85,735       1,946       ––       14,364  
Equity in income (loss) of subsidiaries
    87,681       1,946       ––       (89,627 )     ––  
                                         
Net income (loss)
    14,364       87,681       1,946       (89,627 )     14,364  
Foreign currency translation adjustments
    ––       ––       662       ––       662  
                                         
Comprehensive income (loss)
    14,364       87,681       2,608       (89,627 )     15,026  
Less: Comprehensive loss attributable to noncontrolling interest
    ––       ––       (57 )     ––       (57 )
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
  $ 14,364     $ 87,681     $ 2,665     $ (89,627 )   $ 15,083  
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Nine Months ended September 30, 2009
(In thousands)
(Unaudited)
 

   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Cash flows from operating activities:
                             
Net income (loss)
  $ (8,424 )   $ 38,028     $ (20,326 )   $ (17,702 )   $ (8,424 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                                       
Depreciation and amortization
    ––       39,075       5,132       ––       44,207  
Deferred income taxes
    ––       ––       (1,239 )     ––       (1,239 )
Amortization of deferred financing fees and debt discount
    2,771       ––       ––       ––       2,771  
Unrealized loss on interest rate swap
    1,655       ––       ––       ––       1,655  
Stock compensation expense
    ––       120       ––       ––       120  
Accretion of interest on obligations of GXS Holdings
    ––       ––       ––       ––       ––  
Equity in net (income) loss of subsidiaries
    (38,028 )     20,326       ––       17,702       ––  
Changes in operating assets and liabilities, net
    89,785       (94,281 )     8,045       ––       3,549  
Net cash provided by (used in) operating activities
    47,759       3,268       (8,388 )     ––       42,639  
                                         
Cash flows from investing activities:
                                       
Purchases of property and equipment
    ––       (21,418 )     (372 )     ––       (21,790 )
Net cash used in investing activities
    ––       (21,418 )     (372 )     ––       (21,790 )
                                         
Cash flows from financing activities:
                                       
Repayment of long-term debt
    (45,138 )     ––       ––       ––       (45,138 )
Borrowings under revolving credit facility
    30,000       ––       ––       ––       30,000  
Payment of borrowings under revolving credit facility
    (30,000 )     ––       ––       ––       (30,000 )
Payment of financing costs
    (2,621 )     ––       ––       ––       (2,621 )
Net cash used in financing activities
    (47,759 )     ––       ––       ––       (47,759 )
                                         
Effect of exchange rate changes on cash
    ––       ––       1,666       ––       1,666  
                                         
Decrease in cash and cash equivalents
    ––       (18,150 )     (7,094 )     ––       (25,244 )
Cash and cash equivalents, beginning of year
    ––       24,671       23,192       ––       47,863  
Cash and cash equivalents, end of period
  $ ––     $ 6,521     $ 16,098     $ ––     $ 22,619  
 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Nine Months ended September 30, 2010
(In thousands)
(Unaudited)
 
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Cash flows from operating activities:
                             
Net income (loss)
  $ 14,364     $ 87,681     $ 1,946     $ (89,627 )   $ 14,364  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                                       
Depreciation and amortization
    ––       29,987       3,594       ––       33,581  
Deferred income taxes
    ––       ––       736       ––       736  
Change in valuation allowance resulting from business acquisition
    ––       (36,821 )     ––       ––       (36,821 )
Loss on disposition of assets
    ––       1,724       ––       ––       1,724  
Amortization of deferred financing fees and debt discount
    5,147       ––       580       ––       5,727  
Unrealized gain on interest rate swap
    (5,041 )     ––       ––       ––       (5,041 )
Stock compensation expense
    ––       212       ––       ––       212  
Equity in net (income) loss of subsidiaries
    (87,681 )     (1,946 )     ––       89,627       ––  
Changes in operating assets and liabilities, net
    74,042       (63,299 )     (343 )     ––       10,400  
Net cash provided by operating activities
    831       17,538       6,513       ––       24,882  
                                         
Cash flows from investing activities:
                                       
Purchases of property and equipment
    ––       (25,306 )     (1,601 )     ––       (26,907 )
Proceeds from sale of assets
    ––       400       ––       ––       400  
Business acquisition, net of cash acquired of $14,440
    ––       (220,005 )     ––       ––       (220,005 )
Decrease in restricted cash
    ––       227,580       ––       ––       227,580  
Net cash used in investing activities
    ––       (17,331 )     (1,601 )     ––       (18,932 )
                                         
Cash flows from financing activities:
                                       
Borrowings under revolving credit facility
    23,000       ––       ––       ––       23,000  
Payment of borrowings under revolving credit facility
    (23,000 )     ––       ––       ––       (23,000 )
Payment of financing costs
    (831 )     ––       ––       ––       (831 )
Net cash used in financing activities
    (831 )     ––       ––       ––       (831 )
                                         
Effect of exchange rate changes on cash
    ––       ––       129       ––       129  
                                         
Increase in cash and cash equivalents
    ––       207       5,041       ––       5,248  
Cash and cash equivalents, beginning of year
    ––       12,983       12,566       ––       25,549  
Cash and cash equivalents, end of period
  $ ––     $ 13,190     $ 17,607     $ ––     $ 30,797  


 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. This discussion contains forward-looking statements that involve risk and uncertainties.  Our actual results could differ materially from those discussed below.  Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed under “Risk Factors” in this Quarterly Report.  The following discussion should also be read in conjunction with our audited consolidated financial statements and related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our registration statement on Form S-4 filed with the U.S. Securities and Exchange Commission (SEC) on July 27, 2010.

Overview
 
We are a leading global provider of B2B e-commerce and integration services and solutions that simplify and enhance business process integration, synchronization and collaboration among businesses. Our services and solutions enable our customers to manage business critical supply chain functions and financial transactions related to the exchange of goods and services. By utilizing these services, our customers realize a number of key benefits such as lower total cost of ownership, accelerated time to market and enhanced reliability and security. Approximately 40,000 global customers and their trading partners do business together via GXS Trading Grid, a globally-accessible, integration cloud platform primarily designed for B2B e-commerce. Our business model is characterized by substantial operating leverage, strong cash flow generation and a recurring revenue model attributable to our transaction processing and software maintenance fees.
 
On June 2, 2010, GXS Holdings, Inc. (GXS Holdings), a Delaware corporation and our direct parent company, which directly owns 100% of our issued and outstanding common stock, acquired Inovis International, Inc. (Inovis), a leading provider of fully integrated B2B services and solutions that manage the flow of critical e-commerce information for global trading communities, which we refer to as the “Merger”. Inovis’s core business has historically been the provision of messaging services to approximately 16,000 customers worldwide with approximately one billion transactions per year, primarily on a fee-per-transaction basis. Following the Merger, Inovis was merged with GXS, Inc. (GXSI), one of our indirect wholly-owned subsidiaries, and we became an indirect wholly-owned subsidiary of GXS Group, Inc. (previously known as Griris Holding Company, Inc.). Certain foreign subsidiaries of Inovis became wholly owned subsidiaries of GXSI.
 
Factors Affecting our Business
 
We have five service lines, with each service line deriving revenue from three separate types of services. Our five service lines are:
 
 
·
Messaging Services, which comprised approximately 54.6% of revenues for the nine months ended September 30, 2010, automates the exchange of electronic documents between businesses and eliminates the complexities of disparate standards and communication protocols;
 
 
·
Managed Services, which comprised approximately 26.6% of revenues for the nine months ended September 30, 2010, allows our customers to offload complex integration functions or outsource entire 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 7.2% of revenues for the nine months ended September 30, 2010, 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;
 
 
·
Custom Outsourcing Services, which comprised approximately 6.0% of revenues for the nine months ended September 30, 2010, relates to our legacy custom outsourcing contracts. Custom outsourcing allows our customers to outsource activities not directly related to supply chain activities but to which our technical solutions and related services can provide value; and
 
 
·
Data Synchronization, which comprised approximately 5.6% of revenues for the nine months ended September 30, 2010, 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.
 
 
 
 
 
Across these five service lines, we derive our revenues from:
 
 
·
transaction processing fees;
 
 
·
professional service fees earned in connection with implementing or supporting our products and services; and
 
 
·
software licensing and maintenance fees for software we develop or procure from others.
 
Over the past five years, our transaction processing revenues in our Messaging Services business have been adversely impacted by a number of factors. First, competitive pricing dynamics across the industry have adversely affected pricing in our Messaging Services business as transaction processing has become more commoditized. Second, several years ago we launched an initiative to pursue the migration of our customers to multi-year contracts. Pursuant to this strategy, we introduced lower price points to encourage increased platform usage, promote volume growth, attract new customers and increase existing customer retention.
 
In order to drive revenue growth, we have focused on investing in Managed Services, where we see significant opportunities for growth which we believe will offset declining revenues from Messaging Services. As part of our strategy of growing Managed Services, we have focused on broadening our product offering and enhancing the functionality of our Managed Services proposition. As a result, we must continue to offer value-added services and solutions to offset pricing pressure as it relates to this trend. In addition, as business processes that utilize a transaction management infrastructure have become increasingly complex and expensive for our customers to maintain in-house, we have seen an increased demand for our Managed Services offering. We will continue to target large and mid-sized enterprises, for which we could eliminate significant costs and staff as well as increase business performance, flexibility and efficiency. We believe this approach will increase our revenues and enhance profitability over the long-term.
 
In addition, as a result of our significant international operations, the translation of our foreign revenues generated in foreign currencies into U.S. dollars impacts the comparison of our revenues and expenses from period to period. As a result, our revenues and expenses in recent periods have been affected by strengthening and weakening of the U.S. dollar relative to the foreign currencies in which we transact business.
 
Our Revenues and Expenses
 
Revenues
 
For transaction processing, we usually charge a transaction processing fee to both the sending and the receiving party. Such revenues are generally recognized on a per transaction basis in the period in which the related transactions are processed. Revenues on contracts with monthly, quarterly or annual minimum transaction levels are recognized based on the greater of the actual transactions or the specified contract minimum amounts during the relevant period. Because the transactions we process, such as the exchange of invoices and purchase orders, are routine and essential to the day-to-day operations of our customers, the revenues generated from these fees tend to be recurring in nature. Customers who are not committed to multi-year contracts generally are under contracts for transaction processing solutions that automatically renew every month.
 
Professional services generally are conducted under time and material contracts and revenue is recognized as the related services are provided. Professional services are separately priced and are based on standard hourly rates determined by the nature of the service and the experience of the professional performing the services.
 
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, 2009 and 2010, the breakdown of revenue by service line appears below (in thousands):
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
Service Line
 
2009
   
2010
   
2009
   
2010
 
Messaging Services
  $ 53,029     $ 58,820     $ 158,328     $ 162,020  
Managed Services
    21,424       30,786       60,369       78,787  
B2B Software and Services
    3,466       10,792       10,086       21,299  
Custom Outsourcing
    7,026       5,171       19,582       17,680  
Data Synchronization
    3,784       8,569       11,074       16,687  
Total revenues
  $ 88,729     $ 114,138     $ 259,439     $ 296,473  

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 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 direct costs associated with implementation of certain multi-year customer contracts to the extent such costs can be recovered through guaranteed minimum revenues. The unamortized balances of these costs as of December 31, 2009 and September 30, 2010 were $14.4 million and $17.7 million, respectively, and are included in other non-current assets in the condensed consolidated balance sheets.
 
Operating Expenses
 
Operating expenses consist of sales and marketing expenses, general and administrative expenses, restructuring charges and merger and acquisition fees.
 
Sales and marketing expenses primarily consist of compensation and related benefit expenses associated with our employees engaged in sales and marketing, including sales commissions, as well as advertising costs, meetings, and  travel and entertainment expenses. General and administrative expenses consists of compensation and related benefit expenses associated with our employees engaged in management, finance, legal, and human resources together with the related information technology management and costs, as well as, facility costs and other general business expenses such as accounting, legal and business insurance. Restructuring charges include severance costs associated with workforce reduction efforts and lease termination costs associated with unused office space. Merger and acquisition fees include transaction costs associated with our acquisition of Inovis.
 
The following is a summary of our costs and operating expenses for the three and nine months ended September 30, 2009 and 2010 (in thousands):
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2010
   
2009
   
2010
 
Costs and operating expenses:
                       
Cost of revenues
  $ 49,480     $ 63,567     $ 147,392     $ 158,030  
Sales and marketing
    10,574       14,658       31,759       39,206  
General and administrative
    10,400       15,445       35,792       41,248  
Restructuring and related charges
    697       1,824       7,298       2,891  
Merger and acquisition fees
    ––       (512 )     ––       8,492  
Total costs and operating expenses
  $ 71,151     $ 94,982     $ 222,241     $ 249,867  
 
 
Other Primary Operating Measures
 
Management relies upon 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. GAAP and should not be considered as an alternative to net income, as a measure of operating performance, or cash flows from operating, investing and financing activities, as 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 net income (loss) to Adjusted EBITDA for the periods presented (in thousands):
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2010
   
2009
   
2010
 
Net income (loss)
  $ (1,218 )   $ (3,002 )   $ (8,424 )   $ 14,364  
Adjustments:
                               
Income tax expense (benefit)
    1,479       1,674       1,982       (34,187 )
Interest expense, net
    19,296       21,879       46,240       64,688  
Depreciation and amortization
    14,877       14,730       44,207       33,581  
Stock compensation expense
    40       129       120       212  
Other (income) expense
    (1,979 )     (1,395 )     (2,600 )     17  
Restructuring charges
    697       1,824       7,298       2,891  
Merger and acquisition fees
    ––       (512 )     ––       8,492  
    Integration costs(1)     ––       359       ––       507  
    Deferred income adjustment(2)     ––       1,408       ––       1,941  
Loss on disposition of assets
    ––       ––       ––       1,724  
Management fee
    500       1,008       1,500       2,159  
Total adjustments
    34,910       41,104       98,747       82,025  
Adjusted EBITDA
  $ 33,692     $ 38,102     $ 90,323     $ 96,389  

(1)
Integration costs represent incremental operating expenses associated with the integration of the Inovis business.
(2)
Purchase accounting requires that deferred income of an acquired business to be written-down to fair value at the date of purchase. In the twelve months following the Merger, revenue and operating income will be impacted by this adjustment.
 
 
Adjusted EBITDA for the three months and nine months ended September 30, 2010 increased $4.4 million and $6.1 million to $38.1 million and $96.4 million, respectively, from $33.7 million  and $90.3 million in the corresponding periods in 2009, respectively. The increase is primarily attributable to the incremental revenues and operating income generated from the acquired Inovis business.
 
The Company’s management monitors sales performance based on a measure referred to by management as Minimum Contract Value (MCV). MCV is the total 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 months and nine months ended September 30, 2010 was $40.5 million and $99.2 million, respectively, compared to $16.6 million and $82.2 million for the comparable periods in 2009. 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 and nine months ended September 30, 2010 compared to three and nine months ended September 30, 2009
 
Revenues. Revenues increased by $25.4 million, or 28.6%, to $114.1 million for the three months ended September 30, 2010 from $88.7 million for the three months ended September 30, 2009. Revenues increased by $37.1 million, or 14.3%, to $296.5 million for the nine months ended September 30, 2010 from $259.4 million for the nine months ended September 30, 2009.  The increase was principally caused by the acquisition of Inovis, which contributed revenues of $31.4 million for the three months ended September 30, 2010 and $42.0 million for the period from June 2, 2010 through September 30, 2010, and the favorable impact of translating revenues generated in foreign currencies to U.S. dollars, partially offset by competitive pricing pressure.  The stronger U.S. dollar during the three  months ended September 30, 2010 as compared to the three  months ended September 30, 2009 resulted in a $0.6 million decrease in our revenues from translating revenues generated in
 
 
foreign currencies into U.S. dollars.  The weaker U.S. dollar during the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009 resulted in a $6.1 million increase in our revenues from translating revenues generated in foreign currencies into U.S. dollars, respectively. Our service line revenues from:
 
 
·
Messaging Services increased by $5.8 million, or 10.9%, to $58.8 million for the three months ended September 30, 2010 from $53.0 million for the three months ended September 30, 2009.  Messaging Services revenue increased by $3.7 million, or 2.3%, to $162.0 million from $158.3 million for the nine months ended September 30, 2009. The increase in revenues from Messaging Services resulted from the incremental revenues generated by the acquired Inovis business of $10.7 million and $14.2 million for the three months and nine months ended September 30, 2010, respectively, and the effect of foreign currency translation partially offset by decreases resulting from price reductions and customer attrition.
 
 
·
Managed Services increased by $9.4 million, or 43.7%, to $30.8 million for the three months ended September 30, 2010 from $21.4 million for the three months ended September 30, 2009.  Managed Services revenue increased by $18.4 million, or 30.5%, to $78.8 million for the nine months ended September 30, 2010 from $60.4 million for the nine months ended September 30, 2009.  The increases are principally due to revenues of $6.9 million and $9.2 million from our acquisition of Inovis for the three and nine months ended September 30, 2010, respectively, the ramp up of services to customers added in previous years, additional professional services provided to existing customers, and impact of translating revenues generated in foreign currencies into U.S. dollars.
 
 
·
Data Synchronization Services, B2B Software and Services and Custom Outsourcing Services revenue increased in the aggregate by $10.3 million, or 71.8%, to $24.5 million for the three months ended September 30, 2010 from $14.3 million for the three months ended September 30, 2009.  Data Synchronization services, B2B Software and Services and Custom Outsourcing Services revenue increased by $16.0 million, or 36.6%, to $56.7 million for the nine months ended September 30, 2010 from $40.7 million for the nine months ended September 30, 2009.  The increases resulted from the incremental revenues generated by the acquired Inovis business of $13.9 million and $18.6 million for the three and nine months ended September 30, 2010, respectively, and the effect of foreign currency translation partially offset by decreases resulting from price reductions, customer attrition and the sale of our catalog service offering.
 
Cost of revenues. Cost of revenues increased by $14.1 million, or 28.5%, to $63.6 million for the three months ended September 30, 2010 from $49.5 million for the three months ended September 30, 2009.  Cost of revenues increased by $10.6 million, or 7.2%, to $158.0 million for the nine months ended September 30, 2010 from $147.4 million for the nine months ended September 30, 2009.  The increase in cost of revenues for the three months ended September 30, 2010 was primarily due to the incremental costs associated with our acquisition of Inovis partially offset by lower depreciation and amortization expense for previously acquired intangible assets which were fully amortized in the fourth quarter of 2009. The increase in cost of revenues for the nine months ended September 30, 2010 was primarily due to the incremental costs associated with our acquisition of Inovis partially offset by lower depreciation and amortization expense of intangible assets that were fully amortized in the fourth quarter of 2009 and the unfavorable impact of translating foreign currencies into U.S. dollars.
 
Sales and marketing. Sales and marketing expenses increased by $4.1 million, or 38.6%, to $14.7 million for the three months ended September 30, 2010 from $10.6 million for the three months ended September 30, 2009. Sales and marketing expenses increased by $7.4 million, or 23.4%, to $39.2 million from $31.8 million for the nine months ended September 30, 2010.  The increases were primarily due to the incremental costs associated with our acquisition of Inovis and the unfavorable impact of translating foreign currencies into U.S. dollars.
 
General and administrative. General and administrative expenses increased by $5.0 million, or 48.5%, to $15.4 million for the three months ended September 30, 2010 from $10.4 million for the three months ended September 30, 2009. General and administrative expenses increased by $5.4 million, or 15.2%, to $41.2 million for the nine months ended September 30, 2010 from $35.8 million for the nine months ended September 30, 2009.  The increases were primarily due to the incremental costs associated with our acquisition of Inovis partially offset by lower facility costs as a result of restructuring activities including relocating our global headquarters to a less expensive facility.
 
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 $0.1 million lower and $3.9 million higher for the three months and nine months ended September 30, 2010, respectively, as compared to the three months and nine months ended September 30, 2009.
 
Restructuring charges. Restructuring charges were $1.8 million and $2.9 million for the three months and nine months ended September 30, 2010, respectively, as a result of management restructuring actions.  During the past several years, the
 
 
Company has undertaken a series of restructuring activities, which included closing or consolidating certain office facilities and terminating employees, in order to reduce expenses in response to changing business requirements. Notably, in 2009, the Company initiated a plan to relocate its global headquarters and sublet its former global headquarters. The relocation was completed in the first quarter of 2010. During the three months ended September 30, 2010, the Company recorded restructuring charges of $1,824, which principally included charges associated with the consolidation of office space at the former Inovis headquarters and termination of employees associated with the integration of the Inovis business. The restructuring charges reflect the total estimated net costs of these activities and current period adjustments of revised estimates associated with these restructuring activities. We expect to incur restructuring and other non-recurring costs in connection with the Merger in the first twelve months after closing the Merger in addition to those we recorded during the three months ended September 30, 2010.
 
Merger and acquisition fees.  Merger and acquisition fees were $8.5 million for the nine months ended September 30, 2010.  These expenses related to the Merger which was consummated on June 2, 2010.
 
Loss on disposition of assets. The Merger was subject to regulatory review.  In connection with the review by the Antitrust Division of the U.S. Department of Justice, the Company divested its catalog service offering.  On May 28, 2010, the Company sold customer contracts and intellectual property rights related to its catalog service offering and recorded a loss on the sale of $1,724. The Company plans to continue providing catalog service offerings associated with the Inovis CatalogueTM.
 
Interest expense. Interest expense increased by $2.5 million to $21.9 million for the three months ended September 30, 2010 compared to $19.4 million for the three months ended September 30, 2009. Interest expense increased by $18.4 million to $64.8 million for the nine months ended September 30, 2010 from $46.4 million for the nine months ended September 30, 2009.  The increases in interest expense are primarily attributable to a higher debt balance as a result of the December 2009 refinancing.
 
Other income (expense), net. Other income (expense) is primarily comprised of gains and losses on foreign currency transactions. Other income was $1.4 million and $2.0 million for the three months ended September 30, 2010 and 2009, respectively, and $2.6 million for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, other income and other expense includes losses from foreign currency transactions in the first six months of the year offset by foreign currency transaction gains in the three months ended September 30, 2010.
 
Income tax expense (benefit). Income tax expense was $1.7 million for the three months ended September 30, 2010 compared to $1.5 million for the three months ended September 30, 2009.  Income tax benefit was $34.2 million for the nine months ended September 30, 2010 compared to income tax expense of $2.0 million for the nine months ended September 30, 2009. The income tax benefit for the nine months ended September 30, 2010 resulted from the reduction of the Company’s deferred tax asset valuation allowance by $36.8 million as the result of net deferred tax liabilities assumed and recognized in purchase accounting related to the acquisition of Inovis. The income tax expense for the three months and nine months ended September 30, 2009 and the three months ended September 30, 2010 related primarily to taxes for foreign jurisdictions in which the Company has income.
 
Net income (loss). Net loss was $3.0 million and $1.2 million for the three months ended September 30, 2010 and  2009, respectively. Net income was $14.4 million for the nine months ended September 30, 2010 compared to a net loss of $8.4 million for the nine months ended September 30, 2009.  The higher net loss for the three months ended September 30, 2010 is primarily due to higher interest expense.  Net income for the nine months ended September 30, 2010  is primarily attributable to the reduction of the Company’s net deferred tax valuation allowance partially offset by higher interest expense and fees incurred in connection with the Merger.
 
Sources and Uses of Cash
 
The following table is a summary of sources and uses of cash during the nine months ended September 30, 2009 and 2010 (in thousands):
 
   
Nine Months Ended September 30,
 
   
2009
   
2010
 
Cash flows provided by operating activities
  $ 42,639     $ 24,882  
Cash flows used in investing activities
    (21,790 )     (18,932 )
Cash flows used in financing activities
    (47,759 )     (831 )
Effect of exchange rate changes on cash
    1,666       129  
Net increase (decrease) in cash and cash equivalents
  $ (25,244 )   $ 5,248  
Cash and cash equivalents, end of period
  $ 22,619     $ 30,797  
 
 
Nine months ended September 30, 2010 compared to nine months ended September 30, 2009
 
Net cash provided by operating activities was $24.9 million and $42.6 million for the nine months ended September 30, 2010 and 2009, respectively.  The decrease in net cash provided by operating activities of $17.7 million was mainly attributable to higher interest payments resulting from the December 2009 debt refinancing and payments for transaction costs associated with our acquisition of Inovis.

Net cash used in investing activities was $18.9 million for the nine months ended September 30, 2010 compared to $21.8 million for the nine months ended September 30, 2009.  Net cash used in investing activities in 2010 included $220.0 million for the acquisition of Inovis, net of cash acquired of $14.4 million, and capital expenditures of $26.9 million for property, software and equipment primarily related to continued enhancements of our service platform offset by a decrease in restricted cash of $227.6 million.  Net cash used in investing activities in 2009 was for capital expenditures for property, software and equipment.  Capital expenditures for the nine months ended September 30, 2009 and 2010 included $13.0 million and $13.4 million, respectively, of cost capitalized for the development of software for internal use.

Net cash used in financing activities was $0.8 million for the nine months ended September 30, 2010 compared to net cash used in financing activities of $47.8 million for the nine months ended September 30, 2009.  Net cash used in financing activities for the nine months ended September 30, 2010 was from deferred financing costs related to our December 2009 refinancing. Net cash used in financing activities for the nine months ended September 30, 2009 was from scheduled payments of our debt under the previous credit facility and fees paid for amendments to our debt agreements.
 
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.  From the proceeds, we repaid all of the debt outstanding under the previously existing credit facilities, used $220.1 million to partially fund the acquisition of Inovis on June 2, 2010 and repaid $35.0 million in debt of GXS Holdings.
 
On July 27, 2010, the Company filed a registration statement with the SEC to register new notes with materially identical terms to the Senior Secured Notes.  On August 11, 2010, the Company filed a prospectus pursuant to Rule 424(b) of the Securities Act with the SEC to offer a public exchange of these notes.  The Company completed the exchange offer and issued $684,555 aggregate principal amount of new registered notes in exchange for like aggregate principal amount of the Senior Secured Notes on September 16, 2010.
 
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.  Following the December 23, 2009 debt refinancing, our principal sources of liquidity have been and are expected to be cash, cash flow from operations and borrowings under the revolving credit facility of our Credit and Guaranty Agreement.
 
The Company expects that cash flows from foreign operations will be required to meet its domestic debt service requirements. However, there is no assurance that the foreign subsidiaries will generate sufficient cash flow or that the laws in foreign jurisdictions will not change to limit the Company’s ability to repatriate these cash flows or increase the tax burden on the collections.
 
In June 2010, the Company borrowed $23.0 million from the revolving credit facility to pay a portion of the interest payable on the Senior Secured Notes. This amount was fully repaid before September 30, 2010 and there were no outstanding borrowings against the revolving credit facility as of that date. We may need to borrow funds from the revolving credit facility in future periods to make such interest payments, including the next interest payment on the Senior Secured Notes, which is due on December 15, 2010.
 
Prior to June 15, 2012, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of the Senior Secured Notes at a redemption price equal to 109.75% of the aggregate principal amount of the Senior Secured Notes redeemed, using the net cash proceeds from certain equity offerings, provided that at least 65% of the original aggregate principal amount of the Senior Secured Notes remain outstanding after the redemption.  We may on any one or more occasions redeem some or all of the Senior Secured Notes at any time prior to June 15, 2012 at a price equal to 100% of the principal amount of the Senior Secured Notes redeemed, plus a make-whole premium.  Any time after June 15, 2012, we may at anytime and from time to time redeem the Senior Secured Notes, in whole or in part, at the redemption prices defined in the indenture governing the Senior Secured Notes. Prior to June 15, 2012, we may on any one or more occasions redeem a portion of the Senior Secured Notes at a redemption price of 103% of the principal amount of the Senior Secured Notes redeemed, provided that in no event may we redeem more than 10% of the original aggregate principal amount of the Senior
 
 
Secured Notes issued during any twelve-month period at this price. In each case, we must also pay accrued and unpaid interest, 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.
 
The Credit and Guaranty Agreement entered into on December 23, 2009 with various lenders provides the Company with a revolving credit facility in an aggregate principal amount of $50.0 million, the proceeds of which shall be used for working capital, supporting letters of credit and general corporate purposes.  The interest rate for the revolving credit facility is a predetermined amount above London Interbank Offered Rate (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 agreements governing the new debt impose limitations of our ability, to among other things, incur additional indebtedness, incur liens, consummate certain asset sales, make certain restricted payments, enter into certain transactions with affiliates, issue capital stock, merge or consolidate with any other person or sell, transfer or otherwise dispose of any assets.  The Credit and Guaranty Agreement also requires that we meet and maintain certain financial ratios and tests, including a minimum interest coverage ratio of 1.75 and a maximum net leverage ratio of 5.25, each as defined in the agreement.  Our ability to comply with these covenants and to meet and maintain the financial ratios is material to the success of our business and may be affected by events beyond our control.  Our failure to comply with these covenants could result in a default under the Credit and Guaranty Agreement and the Indenture governing our Senior Secured Notes. At September 30, 2010, the Company had a coverage ratio of 2.84 and a net leverage ratio of 4.17, calculated as defined, and was in compliance with all financial and nonfinancial covenants.
 
 
Our primary market risk exposures include the effect of foreign currency fluctuations and interest rate changes.
 
Foreign currency risk.  The foreign currency financial statements of our international operations are translated into U.S. dollars at current exchange rates, except revenue and expenses, which are translated at average exchange rates during each reporting period. Net exchange gains or losses resulting from the translation of assets and liabilities are accumulated in a separate section of stockholders' equity titled "accumulated other comprehensive loss." Therefore, our exposure to foreign currency exchange rate risk occurs when translating the financial results of our international operations to U.S. dollars in consolidation. Our foreign currency risk is primarily for transactions denominated in the British pound, European euro, Japanese yen and Brazilian real.
 
Although much of our revenues are generated in U.S. dollars, $138.3 million, or 46.6% of our revenues for the nine months ended September 30, 2010 were generated in non-U.S. dollar denominated currencies. Our operating expenses are also generally denominated in U.S. dollars; however, approximately $80.1 million, or 32.0%, of our expenses for the nine months ended September 30, 2010 were denominated in foreign currencies. Due to the relatively weaker U.S. dollar, as of September 30, 2010, our operating income was favorably affected by $2.2 million when compared to the nine months ended September 30, 2009.
 
From a sensitivity analysis viewpoint, based on our financial results for the nine months ended September 30, 2010, a hypothetical overall 10% change in the U.S. dollar from the average foreign exchange rates during the nine months ended September 30, 2010 would have impacted our revenue and operating income by approximately $13.9 million and $5.9 million, respectively.
 
Interest rate risk.  For fixed rate debt, interest rate changes affect the fair value of financial instruments but do not impact earnings or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. Because our Senior Secured Notes bear interest at a fixed rate of 9.75%, our exposure to market risk for changes in interest rates relates primarily to our Revolving Credit Facility and our interest rate swap agreement which impacts earnings by changes in our interest expense.
 
On December 23, 2009, the Company entered into a Credit and Guaranty Agreement which provides the Company with a $50.0 million revolving credit facility. The interest rate for the revolving credit facility is a predetermined amount above the LIBOR, subject to a floor of 2.0%, or at a predetermined amount above the administrative agent’s “base rate”, subject to a floor of 3.0%, at the Company’s option.  The actual impact of any change in the applicable interest rate on our results of operations could be affected by the existence of interest rate floors established for LIBOR and the administrative agent’s “base rate”.
 
 
The Company has an interest rate swap agreement with a commercial bank with a notional amount of $255.0 million.  The provisions of the agreement provide that the Company will pay the counterparty a fixed rate of 3.86%. The counterparty will pay the Company a variable rate equal to three-month LIBOR, which was 0.51% at September 30, 2010. The fair value of the interest rate swap was $11.8 million and $6.8 million as of December 31, 2009 and September 30, 2010, respectively. The interest rate swap was recorded in other liabilities in the condensed consolidated balance sheet at December 31, 2010 and accrued expenses and other current liabilities in the condensed consolidated balance sheet at September 30, 2010.  The interest rate swap agreement expires on April 26, 2011.
 
The interest rate swap had previously been designated as a cash flow hedge, and was utilized to manage the Company’s exposure related to changes in the three-month LIBOR rate associated with its variable-rate 2007 Credit Facility.  As the hedged future forecasted transactions (variable interest payments on the 2007 Credit Facility) were no longer probable of occurring upon the repayment and extinguishment of the 2007 Credit Facility in December 2009, the effective portion of the hedge was reclassified out of accumulated other comprehensive loss into interest expense in December 2009.  In addition, changes in the fair value of the interest rate swap are now recorded through interest expense, and the increase in fair value of the interest rate swap of $1.7 million and $5.0 million was recorded as a reduction to interest expense in the three and nine months ended September 30, 2010 respectively.
 
If three-month LIBOR were to increase, the amount of variable-rate interest we are paid by the counterparty under our interest rate swap agreement would increase, thus reducing our total consolidated net interest expense. Conversely, a decrease in three-month LIBOR would cause our total consolidated net interest expense to increase. The annual impact on our results of operations of a one-percentage point change in three-month LIBOR would be approximately $2.6 million.
 
 
Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and timely reported as provided in SEC rules and forms. We periodically review the design and effectiveness of our disclosure controls and procedures worldwide, including compliance with various laws and regulations that apply to our operations. We make modifications to improve the design and effectiveness of our disclosure controls and procedures, and may take other corrective action, if our reviews identify a need for such 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, 2010. Based upon that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2010.
 
Changes in Internal Control Over Financial Reporting

As a result of our merger with Inovis, we are integrating certain business processes and systems.  Accordingly, certain changes have been made and will continue to be made to our internal controls over financial reporting until such time as these integrations are complete.  There have been no other changes in our internal control over financial reporting during the quarter ended September 30, 2010 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.
 
There have been no material changes in legal proceedings from those described in Part II, Item 1 included in our June 30, 2010 quarterly report on Form 10-Q.
 
 
There have been no material changes in the risk factors affecting us from those described in “Risk Factors—Risk factors related to our business” included in our registration statement on Form S-4 filed with the SEC on July 27, 2010.
 
 
None.
 
 
None.
 
 
Not Applicable.
 
 
None.
 

Exhibit No. 
 
Description 
*10.1
 
Employment Agreement with Gregg Clevenger dated October 27, 2010.
*10.2
  Form of Option Agreement - CEO.
*10.3
  Form of Option Agreement - CFO.
*10.4
  Form of Option Agreement - Other Executive Officers.
*31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
____________
*
Filed herewith




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 10, 2010
   
 
GXS WORLDWIDE, INC.
 
By: GXS WORLDWIDE, INC.
 
     
       
 
By:
/s/ Robert Segert   
    Name: Robert Segert    
    Title:   Director, President and Chief Executive Officer
       
 
 
By:
/s/ John Duvall  
    Name: John Duvall  
    Title:   Senior Vice President, Chief Financial Officer,
            Treasurer and Principal Accounting Officer
       
 

EXHIBIT INDEX
 
Exhibit No. 
 
Description 
*10.1
 
Employment Agreement with Gregg Clevenger dated October 27, 2010.
*10.2
  Form of Option Agreement - CEO.
*10.3
  Form of Option Agreement - CFO.
*10.4
  Form of Option Agreement - Other Executive Officers.
*31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
____________
*
Filed herewith