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EX-31.2 - EXHIBIT 31.2 - GXS Worldwide, Inc.dp30534_ex3102.htm
EX-32.1 - EXHIBIT 32.1 - GXS Worldwide, Inc.dp30534_ex3201.htm
EX-31.1 - EXHIBIT 31.1 - GXS Worldwide, Inc.dp30534_ex3101.htm
EX-10.1 - EXHIBIT 10-01 - GXS Worldwide, Inc.dp30534_ex1001.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

   
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
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 R  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 May 11, 2012, the registrant had 1,000 outstanding shares of common stock, all of which was held by an affiliate of the registrant.



 
 
 

 
GXS WORLDWIDE, INC.
 
QUARTERLY REPORT FOR THE QUARTER ENDED MARCH 31, 2012
 
 
 
    Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
   4
     
 
   5
     
 
   6
     
 
   7
     
 
8
     
 
9
     
Item 2.
28
     
Item 3.
         40
     
Item 4.
         41
     
PART II.
OTHER INFORMATION
 
     
Item 1.
         43
     
Item 1A.
         44
     
Item 2.
         44
     
Item 3.
         44
     
Item 4.
         44
     
Item 5.
         44
     
Item 6.
         45
     
     
SIGNATURES
 
         46
 
 
2

 
 
In this Quarterly Report on Form 10-Q, all references to “our,” “us,” “we,” “the Company” and “GXS” refer to GXS Worldwide, Inc. and its subsidiaries as a consolidated entity, unless the context otherwise requires or where otherwise indicated.  All references to “Inovis” refer to Inovis International, Inc., which the Company acquired on June 2, 2010, the “Inovis Merger” or the “Merger”.  All references to “RollStream” refer to RollStream, Inc., which the Company acquired on March 28, 2011.

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 financial statements of GXS, Inc. would be required by Rule 3-16.  Management does not believe the GXS, Inc. financial statements would add meaningful disclosure and has not included those financial statements herein, because they are substantially identical to the GXS Worldwide, Inc. financial statements and the total assets, revenues, operating income, net income (loss) and cash flows of GXS, Inc. are expected to continue to constitute substantially all of the corresponding amounts for GXS Worldwide, Inc. and its subsidiaries.
 
 
3

 
 
PART I.     FINANCIAL INFORMATION

GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands, except share and per share amounts)
 
   
March 31,
2012
   
December 31,
2011
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 28,736     $ 12,968  
Receivables, net
    100,728       106,799  
Prepaid expenses and other assets
    30,935       28,881  
Total current assets
    160,399       148,648  
                 
Property and equipment, net
    107,170       105,049  
Goodwill
    269,355       268,767  
Intangible assets, net
    115,728       120,483  
Deferred financing costs
    14,349       15,018  
Other assets
    22,645       23,112  
                 
Total Assets
  $ 689,646     $ 681,077  
                 
Liabilities and Stockholder's Deficit
               
Current liabilities:
               
Borrowings under revolving credit facility
  $ ––     $ 3,000  
Trade payables
    16,468       19,640  
Deferred income
    43,865       46,622  
Accrued expenses and other current liabilities
    64,797       47,369  
Total current liabilities
    125,130       116,631  
                 
Long-term debt
    772,860       772,068  
Deferred income tax liabilities
    10,305       9,961  
Other liabilities
    48,782       46,743  
Total liabilities
    957,077       945,403  
                 
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
    429,242       429,045  
Accumulated deficit
    (692,073 )     (687,446 )
Accumulated other comprehensive loss
    (4,888 )     (6,208 )
Total GXS Worldwide, Inc. stockholder's deficit
    (267,718 )     (264,608 )
Non-controlling interest
    287       282  
Total stockholder’s deficit
    (267,431 )     (264,326 )
                 
Total Liabilities and Stockholder’s Deficit
  $ 689,646     $ 681,077  


See accompanying notes to condensed consolidated financial statements (unaudited)
 
 
4

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
 (In thousands)
(Unaudited)
 
   
Three Months ended March 31,
 
   
2012
   
2011
 
             
Revenues
  $ 118,912     $ 114,108  
                 
Costs and operating expenses:
               
Cost of revenues
    64,750       62,629  
Sales and marketing
    17,150       15,459  
General and administrative
    18,447       18,210  
Restructuring charges
    381       201  
Operating income
    18,184       17,609  
                 
Other income (expense):
               
Interest expense, net
    (21,339 )     (20,949 )
Other income (expense), net
    (718 )     456  
Loss before income taxes
    (3,873 )     (2,884 )
                 
Income tax expense
    749       910  
Net loss
    (4,622 )     (3,794 )
Less:  Net income attributable to non-controlling interest
    5       10  
                 
Net loss attributable to GXS Worldwide, Inc.
  $ (4,627 )   $ (3,804 )


See accompanying notes to condensed consolidated financial statements (unaudited)
 
 
 
5

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)
 
   
Three Months ended March 31,
 
   
2012
   
2011
 
             
Net loss
  $ (4,622 )   $ (3,794 )
Foreign currency translation adjustments
    1,320       1,085  
                 
Comprehensive loss
    (3,302 )     (2,709 )
Less:  Comprehensive income attributable to non-controlling interest
    5       10  
                 
Comprehensive loss attributable to GXS Worldwide, Inc.
  $ (3,307 )   $ (2,719 )


See accompanying notes to condensed consolidated financial statements (unaudited)
 
 
6

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)


   
Common stock
   
Additional paid-in capital
   
Accumulated deficit
   
Accumulated other comprehensive loss
   
Non- controlling interest
   
Total
 
                                     
Balance at December 31, 2011
  $ 1     $ 429,045     $ (687,446 )   $ (6,208 )   $ 282     $ (264,326 )
                                                 
Net income (loss)
    ––       ––       (4,627 )     ––       5       (4,622 )
Stock compensation expense
    ––       197       ––       ––       ––       197  
Foreign currency translation adjustments
    ––       ––       ––       1,320       ––       1,320  
                                                 
Balance at March 31, 2012
  $ 1     $ 429,242     $ (692,073 )   $ (4,888 )   $ 287     $ (267,431 )

 
See accompanying notes to condensed consolidated financial statements (unaudited)
 
 
7

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)

   
Three Months ended March 31,
 
   
2012
   
2011
 
Cash flows from operations:
           
Net loss
  $ (4,622 )   $ (3,794 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    13,863       12,922  
Deferred income taxes
    202       135  
Amortization of deferred financing costs and debt discount
    1,978       1,763  
Unrealized gain on interest rate swap
    ––       (2,365 )
Stock compensation expense
    197       209  
Changes in operating assets and liabilities, net of effect of business acquisitions:
               
(Increase) decrease in receivables
    6,071       (4,731 )
Increase in prepaid expenses and other assets
    (1,521 )     (4,376 )
Decrease in trade payables
    (2,980 )     (1,721 )
Increase (decrease) in deferred income
    (2,757 )     5,365  
Increase in accrued expenses and other liabilities
    19,373       19,544  
Other
    383       (296 )
Net cash provided by operating activities
    30,187       22,655  
                 
Cash flows from investing activities:
               
Purchases of property and equipment (including capitalized interest)
    (11,107 )     (10,790 )
Business acquisition, net of cash acquired ($4 for three months ended March 31, 2011)
    ––       (1,125 )
Net cash used in investing activities
    (11,107 )     (11,915 )
                 
Cash flows from financing activities:
               
Borrowings under revolving credit facility
    7,000       ––  
Repayments under revolving credit facility
    (10,000 )     (8,000 )
Payment of financing costs
    (400 )     (2 )
Net cash used in financing activities
    (3,400 )     (8,002 )
                 
Effect of exchange rate changes on cash
    88       341  
                 
Increase in cash and cash equivalents
    15,768       3,079  
Cash and cash equivalents, beginning of period
    12,968       16,326  
Cash and cash equivalents, end of period
  $ 28,736     $ 19,405  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest, net of amounts capitalized
  $ 311     $ 298  
Cash paid for interest rate swap
  $ ––     $ 2,365  
Cash paid for income taxes
  $ 659     $ 669  
                 
Noncash investing and financing activities:
               
Fair value of equity securities issued in business acquisition
  $ ––     $ 420  


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

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
 
(1) 
Business and Basis of Presentation

GXS Worldwide, Inc. and its subsidiaries (“GXS Worldwide” or the “Company”) are primarily engaged in the business of providing transaction management infrastructure products and services that enable companies to electronically exchange essential business documents.  The Company’s services and solutions enable customers to manage mission critical supply chain functions and financial transactions related to the exchange of goods and services.  Customers and their trading partners do business together via GXS Trading Grid®, a globally-accessible, cloud-computing platform specifically designed for business-to-business (“B2B”) e-commerce.  The Company is a wholly-owned subsidiary of GXS Holdings, Inc. (“GXS Holdings”), its direct parent company, and is an indirect wholly-owned subsidiary of GXS Group, Inc. (“GXS Group”), the ultimate parent company.

On June 2, 2010, GXS Holdings acquired Inovis International, Inc. (“Inovis”), a provider of integrated B2B services and solutions that manage the flow of e-commerce information for global trading communities.  Following the transaction, Inovis was merged with and into GXS, Inc. (“GXSI”), an indirect wholly-owned subsidiary and a guarantor of the Company’s notes, and the Company became an indirect wholly-owned subsidiary of GXS Group (previously known as Griris Holding Company, Inc.).  Certain foreign subsidiaries of Inovis became wholly-owned subsidiaries of GXSI.  The results of operations for Inovis are included in the Company’s condensed consolidated results of operations since its acquisition on June 2, 2010.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information.  Accordingly, these financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements.  In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments considered necessary for fair presentation of the financial position and results of operations.

Interim results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for a full fiscal year.  For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2011, which are included in the Company’s Annual Report on Form 10-K, filed under the Securities Exchange Act of 1934 with the Securities and Exchange Commission (“SEC”) on March 19, 2012.

 
(2) 
Summary of Significant Accounting Policies

(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 percent or less but can exercise significant influence over the investee’s operations and policies are accounted for under the equity method of accounting.  The Company uses the cost method to account for investments where it holds less than a 20 percent ownership interest and where it cannot exercise significant influence over the investee’s operations and policies.  At the end of each reporting period, the Company assesses the fair value of its investments to determine if any impairment has occurred.  To the extent the Company’s carrying value exceeds the estimated fair value and the loss is considered to be other than a temporary decline, the Company records an impairment charge.

(b)  
Acquisition Accounting

Acquisitions are accounted for using the purchase method of accounting prescribed in Financial Accounting Standards (“FAS”) Codification 805 – Business Combinations.  Under this standard, assets and liabilities acquired are recorded at their fair values on the date of acquisition.  Certain long-lived assets recorded at their fair values including property and equipment, trade names, customer contracts and relationships or other identifiable intangible assets will result in additional depreciation and amortization expense after the acquisition.  The amount of depreciation and amortization will be based upon the assets’ fair values at date of acquisition and the estimated useful lives of the respective assets.  Following the acquisition, revenue and operating income are affected by a reduction of deferred revenue over its remaining term to reflect estimated fair value of the obligation which includes estimated cost to deliver and the associated margin.
 
 
9

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

The financial statements of most subsidiaries located outside of the United States (“U.S.”) are measured using the local currency as the functional currency.  Assets and liabilities are translated at rates of exchange that approximate those at the balance sheet date.  Income and expense items are translated at average monthly rates of exchange.  The resulting translation gains and losses are included as a separate component of “accumulated other comprehensive loss” included in stockholder’s deficit.  Gains and losses from transactions in foreign currency are included in the condensed consolidated statements of operations within “other income (expense), net.”

(d)
Cash and Cash Equivalents

The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of overnight interest bearing deposits.

(e)
Revenue Recognition

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

Transaction Processing — The Company earns recurring transaction processing revenue from facilitating the exchange of business documents among its customers’ computer systems and those of their trading partners.  Such revenues are generally based on a per-transaction fee or monthly minimum charge and are recognized in the period in which the related transactions are processed.  Revenue on contracts with monthly, quarterly or annual minimum transaction levels are recognized based on the greater of actual transactions or the specified contract minimum amounts.

Professional Services — The Company earns professional services revenue generally pursuant to time and material contracts and in most instances revenue is recognized as the related services are provided, except when such services are associated with a new project implementation, in which case the associated revenue is deferred over the contract term as outlined below.

Software Licensing and Maintenance — The Company earns revenue from the licensing of software applications that facilitate and automate the exchange of information among disparate business systems and applications.  Such revenue is recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection is considered probable.  Revenue from licensing software that requires significant customization and modification or where services are otherwise considered essential to the functionality of the software are recognized using the percentage of completion method, based on the costs incurred in relation to the total estimated costs of the contract.  Revenue from hosted software applications is recognized ratably over the hosting period unless the customer has the contractual right to take possession of the software without significant penalty and it is feasible for the customer to use the software with its own hardware or contract with another party unrelated to the Company to host the software.  Software maintenance revenue is deferred and recognized on a straight-line basis over the life of the related maintenance period, which is typically one year.

Effective January 1, 2011, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2009-13 – Revenue Arrangements with Multiple Deliverables, which requires companies to allocate the overall arrangement consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor specific objective evidence (“VSOE”) or other third-party evidence of the selling price.  The Company identified no significant impact on its condensed consolidated results of operations and financial condition of adopting ASU 2009-13.  For non-software arrangements with more than one element of revenue with stand-alone value, the Company allocates revenue to each component based on VSOE, or third party evidence of selling price when available, or estimated selling price.  VSOE for software maintenance is based on contractual renewal rates.  Professional services are separately priced and are based on standard hourly rates determined by the nature of the service and the experience of the professional performing the service.

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

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
The Company also defers all direct and relevant costs associated with implementation of long-term customer contracts to the extent such costs can be recovered through guaranteed contract revenues.  The unamortized balance of these costs as of March 31, 2012 and December 31, 2011 was $27,782 and $26,445, respectively, and are recorded in either “prepaid expenses and other assets” (see Note 5) or “other assets” (see Note 8) in the condensed consolidated balance sheets, depending on the remaining duration of the underlying contracts.

(f)
Receivables and Concentration of Credit Risk

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

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

(g)
Property and Equipment

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

(h)
Capitalized Software Costs

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

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

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

During the three months ended March 31, 2012 and 2011, the Company capitalized costs related to the development of internal-use software of $6,067 and $6,056, respectively.  Such amounts include capitalized interest of $150 and $286 for the three months ended March 31, 2012 and 2011, respectively.
 
 
11

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

(i) 
Goodwill

As of March 31, 2012 and December 31, 2011, the Company had goodwill in the amount of $269,355 and $268,767, respectively.  The Company historically tests goodwill and intangible assets with indefinite useful lives for impairment at least annually or whenever there is a change in events or circumstances which may indicate impairment.  The impairment test involves two steps.  In the first step, the Company compares the carrying value of the reporting unit which holds the goodwill with the fair value of the reporting unit.  If the carrying value is less than the fair value, there is no impairment.  If the carrying value exceeds the fair value of the reporting unit, step two is performed to measure the impairment loss.

In December 2010, the FASB issued ASU 2010-28 – Intangibles – Goodwill and Other (Topic 350) (previously Emerging Issues Task Force (“EITF”) Issue No. 10-A – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts).  ASU 2010-28 requires companies that are performing their goodwill impairment testing (either on an annual or interim basis) and have identified a reporting unit with a zero or negative carrying value of equity during step one of the test, to perform step two of the goodwill impairment test and determine if it is more likely than not that a goodwill impairment exists.  ASU 2010-28 became effective prospectively for public entities whose fiscal years, and interim period within those years, began after December 15, 2010.

In September 2011, the FASB issued ASU 2011-08 – Intangibles – Goodwill and Other (Topic 350):  Testing Goodwill for Impairment, which is intended to simplify how an entity is required to test goodwill for impairment under ASU 2010-28 by allowing an entity to first assess qualitative factors (which are defined in the new guidance) to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  The Company adopted ASU 2011-08 on January 1, 2012, as required.

As of March 31, 2012, the Company assessed the qualitative factors (as defined in ASU 2011-08) and determined that goodwill was not impaired; as it was more likely than not that the fair value was greater than the carrying amount.  As of December 31, 2011, the Company completed impairment testing (including performing the required step-two test) and determined that goodwill was not impaired.  The Company’s assessment and impairment test are based on a single operating segment and reporting unit structure.  The fair value of the reporting unit significantly exceeded the carrying value at March 31, 2012 and December 31, 2011.

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

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

(k)
Restructuring

The Company calculates the facility charge included in the restructuring charges by discounting the net future cash obligation of the existing leases less anticipated rental receipts to be received from existing and potential subleases.  This requires significant judgment about the length of time the space will remain vacant, anticipated cost escalators and operating costs associated with the leases, the market rate at which the space will be subleased, and broker fees or other costs necessary to market the space.  These judgments are based upon independent market analysis and assessment from experienced real estate brokers.  If the Company were to make different determinations with respect to these factors the amounts of restructuring charges could differ materially, although most of the vacant space has been sublet with the sublease of the Company’s former corporate headquarters.
 
 
12

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

The Company periodically records the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes.  These events are called contingencies, and the accounting for these events is prescribed by FASB ASC 450 – Accounting for Contingencies.  This standard defines a contingency as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.  Contingent losses must be accrued if:

 
·  
information is available that indicates it is probable that the loss has been incurred, given the likelihood of the uncertain future events; and
 
 
·  
the amount of the loss can be reasonably estimated.

The accrual of a contingency involves considerable judgment on the part of management.  Legal proceedings have elements of uncertainty, and in order to determine the amount of accrued liabilities required, if any, the Company assesses the likelihood of any adverse judgments or outcomes to pending and threatened legal matters, as well as the best estimate of or potential ranges of amounts of probable losses.  The Company uses internal expertise and outside experts, as necessary, to help estimate the probability that a loss has been incurred and the amount or range of the loss.  A determination of the amount of accrued liabilities required for these contingencies is made after analysis of each individual issue.  The required accrued liabilities may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy.

(m)
Comprehensive Loss

Comprehensive loss consists of net income (loss) adjusted for increases and decreases affecting accumulated other comprehensive loss in stockholder’s deficit that are excluded from the determination of net income (loss).

Accumulated other comprehensive loss was comprised of the following:

   
March 31,
2012
   
December 31,
2011
 
Additional minimum pension liability
  $ (461 )   $ (461 )
Foreign currency translation adjustments
    (4,427 )     (5,747 )
Accumulated other comprehensive loss
  $ (4,888 )   $ (6,208 )

(n)
Research and Development

Research and development costs are expensed as incurred.  Research and development costs are reflected within cost of revenues in the condensed consolidated results of operations for the three months ended March 31, 2012 and 2011.

(o)
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 at the time they are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Income tax liabilities are recorded for the impact of positions taken on income tax returns which management believes are not more likely than not to be sustained on tax audit.  Interest expense accrued on such unrecognized tax benefits and income tax penalties are recognized through income tax expense.

The expected effective income tax rate for the three months ended March 31, 2012 and 2011 differs from the federal statutory rate of 35% principally as a result of state income taxes, differing rates in foreign jurisdictions and the effect of expected losses in the U.S. and foreign jurisdictions for which no income tax benefit has been recognized.
 
 
13

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

Derivative instruments are recognized in the condensed consolidated balance sheets at their fair value and changes in the fair value are recognized in income, unless the derivatives qualify as hedges of future cash flows.  For derivatives qualifying as hedges of future cash flows, the effective portion of any changes in fair value is recorded temporarily in equity, and then recognized in income along with the related effects of the hedged items.  Any ineffective portion of hedges is reported in income as it occurs.

The Company considered the interest rate swap, which expired and was settled on April 26, 2011, to be included within Level 2 of the fair value hierarchy established by U.S. GAAP, as its fair value is measured primarily utilizing observable market-based inputs.

(q)
Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash and cash equivalents, receivables, long-term debt and the interest rate swap.  Generally, the carrying amounts of current assets and liabilities approximate fair value because of the short-term maturity of these instruments.  At March 31, 2012, the Company’s long-term debt was trading at 97.50% of its face value or book value, so the Company considered the fair value to be $765,375 at that date.  At December 31, 2011, the Company’s long-term debt was trading at 92.63% of its face value or book value, so the Company considered the fair value to be $727,146 at that date.  The fair value of the Company’s interest rate swap, which expired and was settled on April 26, 2011, is discussed further in Note 12.

The Company considered the long-term debt to be included within Level 2 of the fair value hierarchy established by U.S. GAAP, as its fair value is measured primarily utilizing observable market-based inputs, such as quotes of recent market trades of its debt.

(r)
Stock Option Plans

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

Also in connection with the Inovis Merger, the Company established the 2010 GXS Group, Inc. Long-Term Incentive Plan (“Group LTIP”) in July 2010 that provides for the grant of stock options and certain other types of stock-based compensation awards to employees, directors and consultants of the Company.  The Group LTIP, as amended in May 2012, provides for the grant of awards to acquire up to 17,500 shares of GXS Group common stock and all of the Company’s stock option awards subsequent to July 2010 are being granted through the Group LTIP.

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

(s)
Use of Estimates

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

Significant estimates used in preparing the condensed consolidated financial statements include:  recovery of long-lived assets; useful lives of amortizable intangible assets; valuation of goodwill, deferred tax assets and receivables; and determination of amounts of cost deferrals, tax reserves, deferred tax assets and liabilities, accrued liabilities, and pension liabilities.  In addition, estimates are required to recognize revenue for software and other arrangements with multiple deliverables and to assess the stage at which software development costs should be capitalized.
 
 
14

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

Certain reclassifications have been made to the condensed consolidated financial statements as of December 31, 2011 and for the three months ended March 31, 2011 to conform to the presentation at March 31, 2012 and for the three months then ended.


(3) 
Acquisitions

RollStream, Inc.

On March 28, 2011, GXS Group acquired all of the capital stock of RollStream, Inc. (“RollStream”), a software-as-a-service (“SaaS”) provider of enterprise community management solutions, for total consideration of $1,549, including cash of $1,129 and shares of GXS Group common and preferred stock with a combined fair value of $420, paid to the RollStream stockholders.  The fair value of the stock issued was pushed down to the Company.

The acquisition was accounted for using the purchase method of accounting prescribed in FAS Codification 805 – Business Combinations.  Under this standard, acquired assets and liabilities are recorded at their fair values on the date of acquisition.  The application of purchase accounting for the transaction resulted in a value of $1,549, which was pushed down to the Company.

The impact of the RollStream acquisition on the Company’s condensed consolidated results of operations and financial condition is immaterial and, therefore, pro forma financial information is not provided.

Inovis International, Inc.

On June 2, 2010, GXS Holdings acquired all the capital stock of Inovis for total consideration of $303,250, including cash of $129,782 paid to retire the outstanding debt of Inovis and cash of $104,663 paid to the Inovis stockholders (the “Inovis Merger” or the “Merger”).  The Inovis stockholders also received shares of common and preferred stock with a fair value of $68,805, as determined by an independent third-party valuation services firm, in GXS Group, which owns all of the capital stock of GXS Holdings, resulting in Inovis stockholders having an approximate 28.1% ownership interest in GXS Group following consummation of the Merger.

Inovis was a provider of integrated B2B services and solutions that manage the flow of e-commerce information for global trading communities.  The Merger expanded the Company’s customer base in the U.S., Canada and the United Kingdom (“U.K”.), broadened its product offerings and increased the functionality of its Managed Services offering.

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

Interchange Serviços S.A.

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

During due diligence in 2008, the Company identified a pre-acquisition tax contingency for which the sellers have provided a full indemnification and which the Company believes can be enforced and recovered if needed.  The Company originally accrued an estimated liability of $11,278 upon acquisition and recorded an equal amount as a receivable from the seller, which was classified as an “other receivable” within receivables, net.  The amount of the accrued liability and corresponding indemnification receivable are adjusted each period to reflect the current exchange rates and the periodic expiration of the statute of limitations with respect to certain tax years within the contingency.  As of March 31, 2012 and December 31, 2011 the remaining estimated liability and corresponding indemnification receivable were $2,167 and $2,116, respectively, and continue to be reflected in both “accrued expenses and other current liabilities” (see Note 9) and “other receivables” (see Note 4) in the condensed consolidated balance sheets.
 
 
15

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
(4) 
Revenues and Receivables

The Company operates as a single operating segment and provides products and services to its business customers around the world, both directly, through its foreign subsidiaries, and indirectly through resellers.

Receivables, net were comprised of the following:

   
March 31,
2012
   
December 31, 2011
 
Trade accounts receivable
  $ 102,355     $ 108,289  
Unbilled receivables
    5,511       5,434  
Other receivables
    7,829       7,827  
    Subtotal
    115,695       121,550  
Less:  allowance for doubtful accounts
    (14,967 )     (14,751 )
    Total receivables, net
  $ 100,728     $ 106,799  

Unbilled receivables represent amounts earned and accrued as receivables from customers prior to the end of the period.  Unbilled receivables are expected to be billed and collected within twelve months of the respective balance sheet date.  Other receivables include various value added tax receivables and the indemnification receivable associated with the Interchange tax contingency of $2,167 and $2,116 at March 31, 2012 and December 31, 2011, respectively.  See Note 3 for further discussion of the Interchange transaction.


(5) 
Prepaid Expenses and Other Assets

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

   
March 31,
2012
   
December 31,
2011
 
Prepaid expenses
  $ 14,861     $ 13,886  
Deferred income tax assets, current
    5,360       5,294  
Deferred direct and relevant costs on implementations of contracts, current
    9,485       9,085  
Other
    1,229       616  
    Total
  $ 30,935     $ 28,881  


(6)  
Property and Equipment

Property and equipment, net were comprised of the following:

   
March 31,
2012
   
December 31,
2011
 
Computer equipment and furniture
  $ 203,785     $ 200,542  
Computer software
    334,614       327,388  
Leasehold improvements
    17,553       17,533  
    Gross property and equipment
    555,952       545,463  
Less:  accumulated depreciation and amortization
    (448,782 )     (440,414 )
    Property and equipment, net
  $ 107,170     $ 105,049  

Depreciation and amortization expense related to property and equipment was $8,874 and $7,435 for the three months ended March 31, 2012 and 2011, respectively.
 
 
16

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
(7)  
Goodwill and Other Acquired Intangible Assets

The following represents a summary of changes in goodwill for the three months ended March 31, 2012:

Balance as of December 31, 2011
  $ 268,767  
Foreign currency translation
    588  
Balance as of March 31, 2012
  $ 269,355  

Other acquired intangible assets were comprised of the following:

March 31, 2012
 
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
Amortizable intangible assets:
                 
  Customer relationships
  $ 221,276     $ (125,236 )   $ 96,040  
  Product technology
    18,479       (3,807 )     14,672  
  Trade names and trademarks
    4,368       (1,590 )     2,778  
  Other acquired intangible assets
    3,464       (2,927 )     537  
      Subtotal
    247,587       (133,560 )     114,027  
Non-amortizable intangible assets:
                       
  Trade names and trademarks
    1,701       ––       1,701  
      Total
  $ 249,288     $ (133,560 )   $ 115,728  
                         
December 31, 2011
 
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
Amortizable intangible assets:
                       
  Customer relationships
  $ 221,001     $ (120,944 )   $ 100,057  
  Product technology
    18,445       (3,273 )     15,172  
  Trade names and trademarks
    4,368       (1,372 )     2,996  
  Other acquired intangible assets
    3,428       (2,833 )     595  
      Subtotal
    247,242       (128,422 )     118,820  
Non-amortizable intangible assets:
                       
  Trade names and trademarks
    1,663       ––       1,663  
      Total
  $ 248,905     $ (128,422 )   $ 120,483  

The gross carrying amounts of certain intangible assets are impacted by certain balances being denominated in foreign currencies.  These balances are translated into U.S. dollars at the exchange rate in effect at the balance sheet date.

Intangible assets, except for those with an indefinite life, are amortized over their estimated useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are expected to be consumed or on a straight-line basis.  Amortization expense related to intangible assets was $4,989 and $5,487 for the three months ended March 31, 2012 and 2011, respectively.


(8)  
Other Assets

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

   
March 31,
2012
   
December 31,
2011
 
Deferred direct and relevant costs on implementations of long-term contracts, net
  $ 18,297     $ 17,360  
Refundable deposits
    2,536       2,709  
Other
    1,812       3,043  
    Total
  $ 22,645     $ 23,112  
 
 
17

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
(9)  
Accrued Expenses and Other Liabilities

Accrued expenses and other current liabilities were comprised of the following:

   
March 31,
2012
   
December 31,
2011
 
Accrued interest
  $ 22,644     $ 3,499  
Employee compensation and benefits
    16,060       18,577  
Other non-income taxes accrued
    10,110       10,496  
Restructuring
    3,417       3,394  
Estimated Interchange pre-acquisition tax contingency
    2,167       2,116  
Other
    10,399       9,287  
    Total
  $ 64,797     $ 47,369  


(10)  
Other Liabilities

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

   
March 31,
2012
   
December 31,
2011
 
Pension and related benefits
  $ 19,120     $ 18,524  
Deferred income – non-current
    11,189       9,840  
Deferred rent – non-current
    11,000       10,520  
Rebates due to stockholders of Interchange, net of discount
    3,388       3,082  
Restructuring – non-current
    2,641       3,186  
Other
    1,444       1,591  
    Total
  $ 48,782     $ 46,743  


(11)  
Debt

Debt was comprised of the following:

   
March 31, 2012
   
December 31, 2011
 
   
Book Value
   
Fair Value
   
Book Value
   
Fair Value
 
Revolving credit facility
  $ ––     $ ––     $ 3,000     $ 3,000  
Senior secured notes
    785,000       765,375       785,000       727,146  
Less:  unamortized original issue discount
    (12,140 )     ––       (12,932 )     ––  
Total debt
    772,860       765,375       775,068       730,146  
Less:  current maturities of long-term debt
    ––       ––       (3,000 )     (3,000 )
Total long-term debt
  $ 772,860     $ 765,375     $ 772,068     $ 727,146  

At March 31, 2012, the Company’s long-term debt was trading at 97.50% of its face value or book value, so the Company considered the fair value to be $765,375 at that date.  At December 31, 2011, the Company’s long-term debt was trading at 92.63% of its face value or book value, so the Company considered the fair value to be $727,146 at that date.

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.  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,
 
 
18

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
redeem stock, make certain distributions, payments or investments, incur indebtedness, create liens on the collateral, merge, consolidate or sell assets, and enter into transactions with affiliates.

Revolving Credit Facility

On December 23, 2009, the Company entered into a Credit and Guaranty Agreement which provides the Company with a $50,000 revolving credit facility (“the Revolver”).  Prior to the amendment of the Credit and Guaranty Agreement described below, the interest rate for the Revolver was a predetermined amount above the LIBOR, subject to a floor of 2.0%, or at a predetermined amount above the administrative agent’s “base rate”, subject to a floor of 3.0%, at the Company’s option.  The Revolver is guaranteed by the guarantors that guarantee the Senior Secured Notes and secured by collateral that secures the Senior Secured Notes.  The Revolver is used by the Company to, among other things, fund its working capital needs, support letters of credit and for general corporate purposes.  The Company’s ability to borrow additional monies in the future under the Revolver is subject to certain conditions, including compliance with certain covenants.

On February 29, 2012, the Credit and Guaranty Agreement was amended as follows:  (i) the expiration date of the Revolver was extended from December 23, 2012 to March 15, 2015; (ii) the minimum interest rate “floor” associated with the “base rate” and LIBOR was eliminated; (iii) the applicable margin was reduced with respect to Eurodollar rate loans to 4.50% per annum and with respect to “base rate” loans to 3.50% per annum; (iv) the revolving commitment fee percentage was lowered to 0.50% per annum; and (v) the net leverage ratio covenant was increased to a maximum of 5.75:1 commencing with the fiscal quarter ending March 31, 2012 and for each fiscal quarter ending thereafter.  All other covenants and conditions are unchanged.  The Company paid a closing fee of $375 and professional fees of $46 in connection with this amendment.

In accordance with ASC 470-50 Debt - Modifications and Extinguishments (“ASC 470-50”), the Company accounted for the Revolver amendment by deferring the $421 of direct costs associated with the amendment, combined with the existing unamortized deferred costs of $1,059 from the original agreement, and amortizing the total over the new term of the agreement.

As of March 31, 2012, the Company had outstanding letters of credit of $11,661, no outstanding borrowings, and additional available borrowings of $38,339 under the Revolver.  Any outstanding borrowings against the Revolver shall be repaid in full on March 15, 2015 and the commitments shall terminate on that date.  The Revolver requires the Company to maintain certain financial and nonfinancial covenants.  Noncompliance with any covenant specified in the Credit and Guaranty Agreement would qualify as an event of default whereby the lenders would have rights to call all outstanding borrowings due and payable.  At March 31, 2012, the Company was in compliance with all financial and non-financial covenants.

Other Information

The Company expects that cash flows from foreign operations will be required to meet its domestic debt service requirements.  However, there is no assurance that the foreign subsidiaries will generate sufficient cash flow or that the laws in foreign jurisdictions will not change to limit the Company’s ability to repatriate these cash flows or increase the tax burden on the collections.

 Deferred financing costs are being amortized over the life of the debt using a method that approximates the interest method. Amortization expense related to the deferred financing costs on the Senior Secured Notes and Revolver was $1,091 and $1,025 for the three months ended March 31, 2012 and 2011, respectively.


(12)  
Financial Instruments

Until April 2011, the Company had an interest rate swap agreement with a commercial bank with a notional amount of $255,000.  The provisions of the agreement provided that the Company would pay the counterparty a fixed rate of 3.86%.  The counterparty would pay the Company a variable rate equal to three-month LIBOR, which was 0.30% at March 31, 2011, just prior to the swap agreement’s expiration.  The fair value of the interest rate swap was $2,318 as of March 31, 2011 and was recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheet at March 31, 2011.  The change in fair value of the interest rate swap of $2,365 was recorded as a reduction to interest expense for the three months ended March 31, 2011.  The interest rate swap agreement expired on April 26, 2011 and was settled with the commercial bank with a final payment of $2,318 having been made on that date.
 
 
19

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
(13)  
Restructuring Charges

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

During the three months ended March 31, 2012, the Company recorded restructuring charges of approximately $381, which included charges associated with the further consolidation of office space and involuntary termination of six employees.

The restructuring accrual amounts recorded are net of amounts the Company expects to receive from subleasing vacated space, primarily at its previous corporate headquarters through April 2014.  The facility charge was determined by discounting the net future cash obligation of the existing lease less anticipated rental receipts to be received from existing and potential subleases.  As of March 31, 2012, approximately $5,067 of the facilities restructuring obligations are associated with the Company’s previous global headquarters.  The Company relocated to its current global headquarters facility in March 2010.

The changes in the restructuring accrual for the three months ended March 31, 2012 are as follows:

   
Severance
   
Facilities
   
Total
 
                   
Balance as of December 31, 2011
  $ 488     $ 6,092     $ 6,580  
Restructuring charges
    278       103       381  
Payments and other adjustments
    (316 )     (587 )     (903 )
                         
Balance as of March 31, 2012
  $ 450     $ 5,608     $ 6,058  

The current portion of the above obligations totaled $3,417 and $3,394 at March 31, 2012 and December 31, 2011, respectively, and are included in “accrued expenses and other current liabilities” on the condensed consolidated balance sheets (see Note 9).  The long-term portion of the above obligations totaled $2,641 and $3,186 at March 31, 2012 and December 31, 2011, respectively, and are included in “other liabilities” on the condensed consolidated balance sheets (see Note 10).


(14) 
Contingencies

The Company is subject to various legal proceedings and claims in the U.S. and other foreign jurisdictions, which arise in the ordinary course of its business, none of which management believes are likely to have a material adverse effect on the Company’s condensed consolidated financial position or results of operations.

In 2006, Inovis became aware of patent infringement allegations by a third party against certain customers of one of Inovis’ software technology products.  In July 2007, Inovis filed a complaint for declaratory judgment against the third party in the U.S. District Court of Delaware, seeking a judgment and declaration that neither Inovis nor any of its customers have infringed on the patent at issue.  Inovis filed a Request for Reexamination of such patent with the U.S. Patent and Trademark Office (“the USPTO”), which was accepted in May 2008, resulting in the amendment and/or cancellation of certain of the patent claims.  In September 2009, the USPTO granted a second Request for Reexamination of the patent filed by Inovis, finding a substantial new question of patentability with respect to all claims.  In March 2010, the USPTO issued an initial ruling rejecting all of the claims in the patent, in response to which the patent holder filed amended claims.  In December 2010, the USPTO issued a final ruling cancelling certain of the patent claims and leaving only one amended claim and its dependent claims.  The litigation is currently stayed, but may resume in 2012, or later.  Although the Company believes that the third party’s patent infringement allegations are without merit, there can be no assurance that the Company will prevail in the litigation.  An amount of potential loss, if any, cannot be determined at this time.
 
The Company is also subject to income and other taxes in the U.S. and other foreign jurisdictions and is regularly under audit by tax authorities.  Although the Company believes its tax estimates are reasonable, the final determination of any tax audits and related litigation or other proceedings could be materially different than that which is reflected in the Company’s tax provisions and accruals.  In certain foreign jurisdictions, the Company may be required to place on deposit or provide a bank guarantee for amounts claimed by tax authorities while it challenges such amounts.  Should additional taxes be assessed as a result of an audit or following an unsuccessful challenge by the Company through litigation, it could have a material effect on the Company’s financial position and results of operations in the period or periods for which that determination is made.  Such a bank guarantee totaling $3,325 was made
 
 
20

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
in May 2012 for a disputed tax matter in Brazil by the Company’s subsidiary, GXS Tecnologia da Informacao (Brasil) Ltda. (“GXS Brazil”), in connection with GXS Brazil’s judicial appeal of a tax claim by the municipality of Sao Paulo, Brazil in the approximate amount of $2,500 as of March 31, 2012.  The bank guarantee was collateralized by a deposit of cash with the issuing bank.  The Company believes that the position of the Brazilian tax authorities is not consistent with the relevant facts; however, there can be no assurance that the Company will ultimately prevail and it is likely that the bank guarantee, and supporting cash collateral, will remain in place for several years while GXS Brazil pursues the appeal of the tax claim in the courts.  While based on information available on the case and other similar matters provided by local counsel, the Company believes the facts support its position that an unfavorable outcome is not probable and no tax is owed, the ultimate outcome of this matter could result in a loss of up to the claim amount discussed above plus any future interest or penalties that may accrue.
 
The Company’s Indian subsidiary, GXS India Technology Centre Private Limited (“GXS India”), is subject to potential assessments by Indian tax authorities in the district of Bangalore.  U.S. and Indian transfer pricing regulations require that any international transaction involving associated enterprises be at arms-length prices.  Accordingly, the Company determines the pricing for such transactions on the basis of detailed functional and economic analysis involving benchmarking against similar transactions among entities that are not under common control.  If the applicable tax authorities determine that the transfer price applied was not appropriate, the Company may incur an increased tax liability, including accrued interest and penalties.  GXS India has received assessment orders from the Indian tax authorities alleging that the transfer price applied to intercompany transactions was not appropriate.  Based on advice from its tax advisors, the Company believes that the facts the Indian tax authorities are using to support their assessment are incorrect.  The Company has started appeal procedures and anticipates a settlement with the tax authorities.  The Company has accrued $1,494 to cover its anticipated financial exposure in this matter.  There can be no assurance that appeals will be successful or that these appeals will be finally resolved in the near future.  There is a possibility that the Company may receive similar orders for other years until the above disputes are resolved.


(15) 
Related Party Transactions

In conjunction with the Inovis Merger on June 2, 2010, the Company entered into an amended management agreement pursuant to which the Company agreed to pay in the aggregate an annual fee of $4,000 to Francisco Partners, the controlling shareholder of GXS Holdings, and certain former stockholders of Inovis, Golden Gate Capital (“Golden Gate”) and Cerberus Partners (“Cerberus”), in exchange for financial advisory and consulting services (the “Management Agreement”).  The Management Agreement has a term of ten years and the annual fee is allocated to Francisco Partners, Golden Gate and Cerberus in the annual amounts of $2,868, $566, and $566, respectively. 

The expense accrued for in each of the three month periods ended March 31, 2012 and 2011 was $1,000.  As of March 31, 2012 and December 31, 2011, the Company owed an aggregate of $2,415 and $1,415, respectively, for unpaid management fees earned under the Management Agreement through that date.  These unpaid fees are included in “accrued expenses and other current liabilities” in the condensed consolidated balance sheets.
 
In November 2011, the Company entered into an agreement with a director of the Company to provide consulting services for operational and technology reviews and assessments, as requested by the Company.  The Company considered the director’s experience as a former chief information officer of several public companies to be invaluable in providing useful analysis and feedback.  The agreement covered the period commencing November 15, 2011 through February 28, 2012 and, in accordance with the agreement, the consulting services were completed prior to the end of the first quarter of 2012.  In exchange for the consulting services, the director received a fee of $10 per week during which services are provided, plus reimbursement for any actual and reasonable expenses incurred in performing such services.  During the three months ended March 31, 2012, the Company recorded $50 for services provided under this agreement, plus approximately $4 for expenses incurred.

(16) 
Supplemental Condensed Consolidated Financial Information

The Senior Secured Notes are guaranteed by each of the Company’s U.S. subsidiaries (the “Subsidiary Guarantors”).  The guarantees are full, unconditional and joint and several.  The Subsidiary Guarantors are each wholly-owned by the Company.  The ability of the Company’s subsidiaries to make cash distributions and loans to the Company and its Subsidiary Guarantors is not expected to be significantly restricted.  The following supplemental financial information sets forth, on a consolidating basis, balance sheets, statements of operations and comprehensive income (loss), and statements of cash flows for the Company, its Subsidiary Guarantors and the Company’s non-guarantor subsidiaries.
 
 
21

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
December 31, 2011
(In thousands)
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Assets
                             
Current assets:
                             
Cash and cash equivalents
  $ ––     $ 2,836     $ 10,132     $ ––     $ 12,968  
Receivables, net
    ––       57,294       49,505       ––       106,799  
Prepaid expenses and other assets
    ––       16,887       11,994       ––       28,881  
Advances to subsidiaries
    ––       644,162       81,680       (725,842 )     ––  
Total current assets
    ––       721,179       153,311       (725,842 )     148,648  
                                         
Investments in subsidiaries
    499,003       18,098       ––       (517,101 )     ––  
Property and equipment, net
    ––       97,204       7,845       ––       105,049  
Goodwill
    ––       242,198       26,569       ––       268,767  
Intangible assets, net
    ––       106,404       14,079       ––       120,483  
Deferred financing costs
    15,018       ––       ––       ––       15,018  
Other noncurrent assets
    ––       13,081       10,031       ––       23,112  
                                         
Total Assets
  $ 514,021     $ 1,198,164     $ 211,835     $ (1,242,943 )   $ 681,077  
                                         
Liabilities and Stockholder’s Equity (Deficit)
                                       
Current liabilities:
                                       
Current maturities of long-term debt
  $ 3,000     $ ––     $ ––     $ ––     $ 3,000  
Trade payables
    61       13,910       5,669       ––       19,640  
Other current liabilities
    3,500       50,165       40,326       ––       93,991  
Advances from affiliates
    ––       602,517       123,325       (725,842 )     ––  
Total current liabilities
    6,561       666,592       169,320       (725,842 )     116,631  
                                         
Long-term debt less current maturities
    772,068       ––       ––       ––       772,068  
Other liabilities
    ––       32,569       24,135       ––       56,704  
Total liabilities
    778,629       699,161       193,455       (725,842 )     945,403  
Stockholder’s equity (deficit):
                                       
Stockholder’s equity (deficit) GXS Worldwide, Inc.
    (264,608 )     499,003       18,098       (517,101 )     (264,608 )
Non-controlling interest
    ––       ––       282       ––       282  
Total stockholder’s equity (deficit)
    (264,608 )     499,003       18,380       (517,101 )     (264,326 )
                                         
Total Liabilities and Stockholder’s Equity (Deficit)
  $ 514,021     $ 1,198,164     $ 211,835     $ (1,242,943 )   $ 681,077  
 
 
22

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
March 31, 2012
(In thousands)
(Unaudited)
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Assets
                             
Current assets:
                             
Cash and cash equivalents
  $ ––     $ 14,747     $ 13,989     $ ––     $ 28,736  
Receivables, net
    ––       56,492       44,236       ––       100,728  
Prepaid expenses and other assets
    130       17,638       13,167       ––       30,935  
Advances to subsidiaries
    ––       646,684       82,073       (728,757 )     ––  
Total current assets
    130       735,561       153,465       (728,757 )     160,399  
                                         
Investments in subsidiaries
    513,387       15,166       ––       (528,553 )     ––  
Property and equipment, net
    ––       99,228       7,942       ––       107,170  
Goodwill
    ––       242,199       27,156       ––       269,355  
Intangible assets, net
    ––       102,173       13,555       ––       115,728  
Deferred financing costs
    14,349       ––       ––       ––       14,349  
Other noncurrent assets
    ––       12,331       10,314       ––       22,645  
                                         
Total Assets
  $ 527,866     $ 1,206,658     $ 212,432     $ (1,257,310 )   $ 689,646  
                                         
Liabilities and Stockholder’s Equity (Deficit)
                                       
Current liabilities:
                                       
Trade payables
  $ 79     $ 10,395     $ 5,994     $ ––     $ 16,468  
Other current liabilities
    22,645       49,925       36,092       ––       108,662  
Advances from affiliates
    ––       600,728       128,029       (728,757 )     ––  
Total current liabilities
    22,724       661,048       170,115       (728,757 )     125,130  
                                         
Long-term debt less current maturities
    772,860       ––       ––       ––       772,860  
Other liabilities
    ––       32,223       26,864       ––       59,087  
Total liabilities
    795,584       693,271       196,979       (728,757 )     957,077  
Stockholder’s equity (deficit):
                                       
Stockholder’s equity (deficit) GXS Worldwide, Inc.
    (267,718 )     513,387       15,166       (528,553 )     (267,718 )
Non-controlling interest
    ––       ––       287       ––       287  
Total stockholder’s equity (deficit)
    (267,718 )     513,387       15,453       (528,553 )     (267,431 )
                                         
Total Liabilities and Stockholder’s Equity (Deficit)
  $ 527,866     $ 1,206,658     $ 212,432     $ (1,257,310 )   $ 689,646  
 
 
23

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three Months Ended March 31, 2011
(In thousands)
(Unaudited)
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
                               
Revenues
  $ ––     $ 95,678     $ 52,973     $ (34,543 )   $ 114,108  
                                         
Costs and operating expenses
    26       77,663       53,152       (34,543 )     96,298  
Restructuring charges
    ––       61       140       ––       201  
Operating income (loss)
    (26 )     17,954       (319 )     ––       17,609  
Other income (expense), net
    (21,176 )     486       197       ––       (20,493 )
Income (loss) before income taxes
    (21,202 )     18,440       (122 )     ––       (2,884 )
Provision for income taxes
    ––       63       847       ––       910  
Income (loss) before equity in income (loss) of subsidiaries
    (21,202 )     18,377       (969 )     ––       (3,794 )
Equity in income (loss) of subsidiaries
    17,408       (969 )     ––       (16,439 )     ––  
Net income (loss)
    (3,794 )     17,408       (969 )     (16,439 )     (3,794 )
Foreign currency translation adjustments
    ––       ––       1,085       ––       1,085  
Comprehensive income (loss)
    (3,794 )     17,408       116       (16,439 )     (2,709 )
Less:  Comprehensive income attributable to non-controlling interest
    ––       ––       10       ––       10  
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
  $ (3,794 )   $ 17,408     $ 106     $ (16,439 )   $ (2,719 )
 
 
24

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three Months Ended March 31, 2012
(In thousands)
(Unaudited)
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
                               
Revenues
  $ ––     $ 101,751     $ 53,242     $ (36,081 )   $ 118,912  
                                         
Costs and operating expenses
    34       80,114       56,280       (36,081 )     100,347  
Restructuring charges
    ––       286       95       ––       381  
Operating income (loss)
    (34 )     21,351       (3,133 )     ––       18,184  
Other income (expense), net
    (21,377 )     3       (683 )     ––       (22,057 )
Income (loss) before income taxes
    (21,411 )     21,354       (3,816 )     ––       (3,873 )
Provision for income taxes
    ––       352       397       ––       749  
Income (loss) before equity in income (loss) of subsidiaries
    (21,411 )     21,002       (4,213 )     ––       (4,622 )
Equity in income (loss) of subsidiaries
    16,789       (4,213 )     ––       (12,576 )     ––  
Net income (loss)
    (4,622 )     16,789       (4,213 )     (12,576 )     (4,622 )
Foreign currency translation adjustments
    ––       ––       1,320       ––       1,320  
Comprehensive income (loss)
    (4,622 )     16,789       (2,893 )     (12,576 )     (3,302 )
Less:  Comprehensive income attributable to non-controlling interest
    ––       ––       5       ––       5  
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
  $ (4,622 )   $ 16,789     $ (2,898 )   $ (12,576 )   $ (3,307 )
 
 
25

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2011
(In thousands)
(Unaudited)
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Cash flows from operating activities:
                             
Net income (loss)
  $ (3,794 )   $ 17,408     $ (969 )   $ (16,439 )   $ (3,794 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                                       
Depreciation and amortization
    ––       11,181       1,741       ––       12,922  
Deferred income taxes
    ––       ––       135       ––       135  
Amortization of deferred financing fees and debt discount
    1,706       57       ––       ––       1,763  
Unrealized gain on interest rate swap
    (2,365 )     ––       ––       ––       (2,365 )
Stock compensation expense
    ––       209       ––       ––       209  
Equity in net (income) loss of subsidiaries
    (17,408 )     969       ––       16,439       ––  
Changes in operating assets and liabilities, net
    29,863       (17,666 )     1,588       ––       13,785  
Net cash provided by operating activities
    8,002       12,158       2,495       ––       22,655  
                                         
Cash flows from investing activities:
                                       
Purchases of property and equipment (including capitalized interest)
    ––       (9,899 )     (891 )     ––       (10,790 )
RollStream acquisition, net of cash acquired of $4
    ––       (1,125 )     ––       ––       (1,125 )
Net cash used in investing activities
    ––       (11,024 )     (891 )     ––       (11,915 )
                                         
Cash flows from financing activities:
                                       
Repayments under revolving credit facility
    (8,000 )     ––       ––       ––       (8,000 )
Payment of financing costs
    (2 )     ––       ––       ––       (2 )
Net cash used in financing activities
    (8,002 )     ––       ––       ––       (8,002 )
                                         
Effect of exchange rate changes on cash
    ––       ––       341       ––       341  
                                         
Increase in cash and cash equivalents
    ––       1,134       1,945       ––       3,079  
Cash and cash equivalents, beginning of period
    ––       6,358       9,968       ––       16,326  
                                         
Cash and cash equivalents, end of period
  $ ––     $ 7,492     $ 11,913     $ ––     $ 19,405  
 
 
26

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2012
(In thousands)
(Unaudited)
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Cash flows from operating activities:
                             
Net income (loss)
  $ (4,622 )   $ 16,789     $ (4,213 )   $ (12,576 )   $ (4,622 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                                       
Depreciation and amortization
    ––       12,173       1,690       ––       13,863  
Deferred income taxes
    ––       188       14       ––       202  
Amortization of deferred financing fees and debt discount
    1,881       ––       97       ––       1,978  
Stock compensation expense
    ––       197       ––       ––       197  
Equity in net (income) loss of subsidiaries
    (16,789 )     4,213       ––       12,576       ––  
Changes in operating assets and liabilities, net
    22,930       (11,690 )     7,329       ––       18,569  
                                         
Net cash provided by operating activities
    3,400       21,870       4,917       ––       30,187  
                                         
Cash flows from investing activities:
                                       
Purchases of property and equipment (including capitalized interest)
    ––       (9,959 )     (1,148 )     ––       (11,107 )
Net cash used in investing activities
    ––       (9,959 )     (1,148 )     ––       (11,107 )
                                         
Cash flows from financing activities:
                                       
Borrowings under revolving credit facility
    7,000       ––       ––       ––       7,000  
Repayments under revolving credit facility
    (10,000 )     ––       ––       ––       (10,000 )
Payment of financing costs
    (400 )     ––       ––       ––       (400 )
Net cash used in financing activities
    (3,400 )     ––       ––       ––       (3,400 )
                                         
Effect of exchange rate changes on cash
    ––       ––       88       ––       88  
                                         
Increase in cash and cash equivalents
    ––       11,911       3,857       ––       15,768  
Cash and cash equivalents, beginning of period
    ––       2,836       10,132       ––       12,968  
                                         
Cash and cash equivalents, end of period
  $ ––     $ 14,747     $ 13,989     $ ––     $ 28,736  
 
 
27

 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.  This discussion contains forward-looking statements that involve risk and uncertainties.  Our actual results could differ materially from those discussed below.  Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed under “Risk Factors” in this Quarterly Report on Form 10-Q.  The following discussion should also be read in conjunction with our audited consolidated financial statements and related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 included in our 2011 Annual Report on Form 10-K.

Overview

We are a leading global provider of business-to-business (“B2B”) cloud integration services that simplify and enhance business process integration, data quality and compliance, and collaboration among businesses.  Our services and solutions enable our customers to manage and improve mission critical supply chain functions, securely process financial transactions related to the exchange of goods and services, and automate and control other critical cross-enterprise business processes.  By utilizing these services our customers realize a number of key benefits such as lower total cost of ownership, accelerated time to market and enhanced reliability and security.  Our approximately 40,000 customers and their approximately 360,000 trading partners – a combined trading community of over 400,000 businesses – conduct business together via GXS Trading Grid®, our integration cloud that includes specialized capabilities for automating, assembling, monitoring, and improving multi-enterprise business processes.

As a division of General Electric Company (“GE”), from the 1960’s through 2001, our historical focus was primarily on providing customized information technology solutions to our customers.  As a result, in 2000, 50% of our revenues were generated by custom outsourcing services.  Following Francisco Partners and its co-investors’ acquisition of us from GE in 2002, we began investing in GXS Trading Grid®, a multi-tenant integration cloud platform, and launched our Managed Services offering, which compliments GXS Trading Grid® with shared processes and built-in industry expertise.

In 2005, we expanded the reach and number of integrated businesses on GXS Trading Grid® through the acquisition of IBM’s Business Exchange Services business, thereby further increasing our customer base, expanding our geographic presence and extending our reach into a number of verticals (such as financial services and the automotive sector).

In 2008, we purchased Interchange Serviços S.A. (“Interchange”), located in Brazil, which served to broaden the number of integrated businesses in Brazil on GXS Trading Grid®.

On June 2, 2010, GXS Holdings, Inc. (“GXS Holdings”), our direct parent company, which directly owns 100% of our issued and outstanding common stock, acquired Inovis International, Inc. (“Inovis”), a leading provider of fully integrated B2B services and solutions that manage the flow of critical e-commerce information for global trading communities, which we refer to as the “Inovis Merger” or the “Merger”.  Inovis’ core business had historically been the provisioning of messaging services, catalog and managed services to approximately 16,000 customers worldwide with approximately two billion transactions per year, primarily on a fee-per-transaction basis.  Following the Merger, Inovis was merged with and into GXS, Inc. (“GXSI”), one of our indirect wholly-owned subsidiaries and a guarantor of our notes, 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.

In March 2011, we purchased RollStream, Inc. (“RollStream”), a software-as-a-service (“SaaS”) provider of enterprise community management solutions.  The acquisition advances our objective of simplifying the integration of global business communities for customers by combining data flows across systems, applications and people.

As a result of new investments and repositioning away from customized solutions, the majority of our revenue is generated through data integration fees and subscription services on our platform, frequently wrapped with our Managed Services capabilities.  Currently, we manage approximately twelve billion electronic transactions on an annual basis across an estimated six million integration pairs, or trading partner relationships, creating a combined trading community of over 400,000 businesses.  We have substantial vertical expertise in a variety of key industries such as retail, consumer products, financial services, automotive and high technology.  Recently, we have seen expanded adoption of our services in the media, entertainment and insurance industries.  Today, our platform links businesses across 50 countries, which we support in 15 different languages.  We believe customers view our services and solutions as essential to their day-to-day supply chain operations and they typically enter into long-term contracts with us.  Our recurring revenues, which are primarily attributable to transaction processing and software maintenance fees, represent approximately 86.6% of our total revenue for the three months ended March 31, 2012.  Additionally, 96.0% of our top 50 customers, based on annual revenue in fiscal 2011, have been our customers for five or more years.
 
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Factors Affecting our Business

We have various service lines, with each service line deriving revenue from three principal sources.  Our service lines are:

·  
Messaging Services, which comprised approximately 45.6% of revenues for the three months ended March 31, 2012, automates the exchange of electronic documents between businesses and eliminates the complexities of disparate standards and communication protocols;
 
·  
Managed Services, which comprised approximately 34.9% of revenues for the three months ended March 31, 2012, allows our customers to offload complex integration functions or outsource supply chain management activities to improve speed-to-market, drive higher customer satisfaction, or reduce overall costs from data integration;
 
·  
B2B Software and Services, which comprised approximately 9.0% of revenues for the three months ended March 31, 2012, provides software and services that allow our customers to manage their day-to-day supply chain activities internally.  The majority of our software customers also access GXS Trading Grid® to extend their ability to serve new markets or geographies;
 
·  
Data Synchronization, which comprised approximately 7.2% of revenues for the three months ended March 31, 2012, provides tools and services that enhance our customers’ abilities to improve the quality and accuracy of data exchanged with their trading partners.  Primarily designed for the retail supply chain, our solution improves the ability to ensure the correct product, price and promotion information are synchronized throughout a supply chain; and
 
·  
Custom Outsourcing Services, which comprised approximately 3.3% of revenues for the three months ended March 31, 2012, relates primarily to products and services which do not fit within the definitions of our other service lines.  Custom outsourcing allows our customers to outsource activities not directly related to supply chain activities but to which our technical solutions and related services can provide value.

Across these service lines, we derive our revenues from:

·  
transaction processing fees;
 
·  
professional service fees earned in connection with implementing or supporting our products and services; and
 
·  
software licensing and maintenance fees for software we develop or procure from others.

Over the past several years, our transaction processing revenues in our Messaging Services business have been adversely impacted primarily by the commoditization of the technology and communications required to send and receive business documents.  Competitive pricing dynamics across the industry have also adversely affected pricing in our Messaging Services business.  We believe that our Messaging Services business will continue to face pricing pressure as a result of commoditization and contribute a lower percentage of our revenues over time.

In order to drive revenue growth, we have focused on investing in Managed Services, where we see significant opportunities which we believe will offset the planned declining revenues from Messaging Services.  As part of our strategy of growing Managed Services, we have focused on building and delivering a portfolio of capabilities on GXS Trading Grid® that add value to our customers transactions flows, such as data transformation, transaction monitoring, process visibility and trading partner on-boarding.  As a result, we will continue to offer these higher value integration services to offset pricing pressure as it relates to this trend.  In addition, as business processes that utilize a transaction management infrastructure have become increasingly complex and expensive for our customers to maintain in-house, we have seen an increased demand for our Managed Services.

Additionally, in order to further enhance the value of our solutions, we offer specialized industry applications which provide improved visibility and control over multi-enterprise processes.   These services, which we brand as our ActiveSM Applications, allow our customers to gain additional advantages around global transaction flows or multi-enterprise business processes, such as identifying exceptions and errors, uncovering inefficiencies, and highlighting opportunities for performance improvement.  Our ActiveSM Applications, which are delivered in the cloud as SaaS, complement and improve the performance of internal systems such as Enterprise Resource Planning (“ERP”) or Customer Relationship Management (“CRM”) applications, while allowing us to enhance the value it provides to its customers, lock-in longer term contracts, and improve margins.

 
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We will continue to target large and mid-sized enterprises, for which our value-add Managed Services on GXS Trading Grid® could reduce significant costs and enable staff to offload non-core functions, as well as increase the performance of our customers’ multi-enterprise business processes, such as order-to-cash, global shipping, new customer enablement, and cash management.  We believe this approach will increase our revenues and enhance profitability over the long-term.  While Managed Services tends to have lower margins than Messaging Services, particularly as we build out our Managed Services platform and capabilities, we expect productivity enhancements, such as increased use of automation tools to implement new customers and monitor ongoing processing activities, to improve our Managed Services margins over time.

As a result of our significant international operations, the translation of our foreign revenues generated in foreign currencies into U.S. dollars impacts the comparison of our revenues from period to period.  Our revenues have been affected by a fluctuating U.S. dollar relative to the foreign currencies in which we transact business.  The relative strengthening of the U.S. dollar during the three months ended March 31, 2012, as compared to the three months ended March 31, 2011, resulted in a $0.3 million decrease in our revenues for the three months ended March 31, 2012 from translating revenues generated in foreign currencies into U.S. dollars.

Acquisitions

Inovis International, Inc.

On June 2, 2010, we acquired Inovis, a leading provider of fully integrated B2B services and solutions that manage the flow of critical e-commerce information for global trading communities.  The acquisition allowed us to continue to grow our customer base in the U.S., broaden our product offering and increase the functionality of our Managed Services offering.

The Merger was consummated for total consideration of $303.3 million, including $129.8 million in cash to retire Inovis’ outstanding debt, $104.7 million in cash to the Inovis shareholders, along with the issuance to the Inovis shareholders of common and preferred shares of a newly formed holding company (GXS Group, Inc.), with a fair value of $68.8 million.  This resulted in the Inovis shareholders having approximately 28.1% ownership interest in the combined Company following consummation.  The fair value of the stock issued was pushed down to the Company.

The Merger was accounted for using the purchase method of accounting prescribed in Financial Accounting Standard (“FAS”) Codification 805 – Business Combinations.  Under this standard, the assets acquired and liabilities assumed were recorded at their fair value on the date of acquisition.  The fair values recorded for property and equipment, trade names, customer contracts and relationships or other identifiable intangible assets resulted in additional depreciation and amortization expense after the consummation of the Merger.  The amount of depreciation and amortization is based upon the fair values and the estimated useful lives of the respective assets.  Revenue and operating income were affected by a write-down of deferred revenue to reflect estimated fair value.  Although the adjustment to deferred revenue affected revenue and operating income in the twelve months following the Merger, this adjustment does not have a significant continuing effect on the condensed consolidated results of operations.

RollStream, Inc.

On March 28, 2011, we acquired all of the capital stock of RollStream for total consideration of $1.5 million, including cash of $1.1 million and shares of GXS Group common and preferred stock with a combined fair value of $0.4 million, paid to the RollStream stockholders.  The fair value of the stock issued has been pushed down to the Company.  The acquisition was accounted for using the purchase method of accounting prescribed in FAS Codification 805 – Business Combinations, as previously described.  We considered the overall impact of the RollStream acquisition on our condensed consolidated results of operations and financial condition to be immaterial.

RollStream was a SaaS provider of enterprise community management solutions.  The acquisition advances our objective of simplifying the integration of global business communities for customers by combining data flows across systems, applications and people.

We intend to continue to selectively pursue acquisitions of companies with complementary products and technologies to enhance our ability to provide comprehensive solutions to our customers and to expand our business.  Any such acquisitions could affect our results of operations for the period in which the acquisition is completed and future periods and, depending on the size of the acquisition, could affect the comparability of period-to-period results.  There can be no assurance that we will be successful in consummating future acquisitions or that we will be able to locate adequate financing or successfully integrate future acquisitions.

 
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Our Revenues and Expenses
 
Revenues

For transaction processing, we usually charge a transaction processing fee to both the sending and the receiving party.  Such revenues are generally recognized on a per transaction basis in the period in which the related transactions are processed.  Revenues on contracts with monthly, quarterly or annual minimum transaction levels are recognized based on the greater of the actual transactions or the specified contract minimum amounts during the relevant period.  Because the transactions we process, such as the exchange of invoices and purchase orders, are routine and essential to the day-to-day operations of our customers, the revenues generated from these fees tend to be recurring in nature.  Customers who are not committed to multi-year contracts generally are under contracts for transaction processing solutions that automatically renew every month or year, depending on the terms of the specific contracts.

Professional services are usually associated with new project implementation, in which case the associated professional services revenue is deferred over the contract term.  When done under time and material contracts, revenue is recognized as the related services are provided.

We earn revenue from the licensing of software applications that facilitate and automate the exchange of information among disparate business systems and applications.  Such revenues are recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred and collection is considered probable.  Revenue from licensing software that requires significant customization and modification or where services are otherwise considered essential to the functionality of the software are recognized using the percentage of completion method based on the costs incurred in relation to the total estimated costs of the contract.  Revenue from hosted software applications is recognized ratably over the hosting period unless the customer has the contractual right to take possession of the software without significant penalty and it is feasible for the customer to use the software with its own hardware or contract with another party unrelated to us to host the software.  Software maintenance revenues are deferred and recognized on a straight-line basis over the life of the related contract, which is typically one year.

For the three months ended March 31, 2012 and 2011, the breakdown of revenue by service line, along with each service line’s percentage of total revenue, appears below (in thousands of dollars, except for percentages):

   
Three Months Ended March 31,
 
   
2012
   
2011
 
Service Line
 
Amount
   
%
   
Amount
   
%
 
                         
Messaging Services
  $ 54,274       45.6 %   $ 57,677       50.5 %
Managed Services
    41,538       34.9 %     32,334       28.3 %
B2B Software and Services
    10,706       9.0 %     10,958       9.6 %
Data Synchronization
    8,510       7.2 %     8,065       7.1 %
Custom Outsourcing Services
    3,884       3.3 %     5,074       4.5 %
                                 
    Total revenue / percentage
  $ 118,912       100.0 %   $ 114,108       100.0 %

Each service line includes revenue from transaction processing, professional services, software licensing and software maintenance.

Cost of Revenues

Cost of revenues primarily consists of:

·  
compensation and related allocated benefit expenses associated with our workforce engaged in service delivery, technical operations and research and development;
 
·  
computer, network and facility operating expenses;
 
·  
royalty payments associated with resale of third party software licenses; and
 
 
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·  
depreciation and amortization expense, including the amortization of our capitalized software costs, deferred implementation costs and acquired intangibles.

We defer all direct and relevant costs associated with implementation of certain long-term customer contracts to the extent such costs can be recovered through guaranteed minimum revenues.  The unamortized balances of these costs as of March 31, 2012 and December 31, 2011 were $27.8 million and $26.4 million, respectively, and are recorded in either “prepaid expenses and other assets” or “other assets” in the condensed consolidated balance sheets, depending on the remaining duration of the underlying contracts.

Operating Expenses

Operating expenses consist of sales and marketing expenses, general and administrative expenses and restructuring charges.

Sales and marketing expenses primarily consist of compensation and related allocated benefit expenses associated with our employees engaged in sales and marketing, including sales commissions, advertising costs, meetings, travel and entertainment expenses and facility costs.  Certain sales commissions are considered to be direct and relevant costs of contracts and are deferred over the customer contract period.  General and administrative expenses consist of compensation and related allocated benefit expenses associated with our employees engaged in management, finance, legal, and human resources, information technology management and costs, as well as other general business expenses such as accounting and legal fees, outside services and business insurance.  Restructuring charges include severance costs associated with workforce reduction efforts and net lease costs related to darkened facilities.

As a result of our significant international operations, the translation of our foreign costs of revenues and operating expenses into U.S. dollars impacts the comparison of our costs of revenues and operating expenses from period to period.  Our costs of revenues and operating expenses have been affected by a fluctuating U.S. dollar.  The relative strengthening of the U.S. dollar during the three months ended March 31, 2012 as compared to the three months ended March 31, 2011, resulted in a decrease of $0.5 million in our costs of revenues and operating expenses for the three months ended March 31, 2012, from translation of our expenses incurred in foreign currencies into U.S. dollars.

The following is a summary of our costs and operating expenses for the three months ended March 31, 2012 and 2011 (in thousands of dollars):

   
Three Months Ended March 31,
 
Costs and Operating Expenses
 
2012
   
2011
 
             
Cost of revenues
  $ 64,750     $ 62,629  
Sales and marketing
    17,150       15,459  
General and administrative
    18,447       18,210  
Restructuring charges
    381       201  
                 
Total costs and operating expenses
  $ 100,728     $ 96,499  

Other Primary Operating Measures

Adjusted EBITDA

Management relies upon adjusted earnings before interest, taxes, depreciation and amortization, and certain other charges (“Adjusted EBITDA”) as a primary measure to review and assess operating performance of its business and management team.  Adjusted EBITDA is not a measure of financial performance under U.S. generally accepted accounting principles (“GAAP”) and should not be considered as: (i) an alternative to net income (loss); (ii) a measure of operating income or cash flows from operating, investing and financing activities; or (iii) a measure of liquidity.  Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures presented by other companies.
 
 
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The table below reconciles our net loss to Adjusted EBITDA for the periods presented (in thousands of dollars):
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
             
Net loss
  $ (4,622 )   $ (3,794 )
                 
Adjustments:
               
Income tax expense 
    749       910  
Interest expense, net
    21,339       20,949  
Depreciation and amortization
    13,863       12,922  
Stock compensation expense
    197       209  
Other (income) expense, net
    718       (456 )
Restructuring charges
    381       201  
Merger and acquisition fees 
    3       26  
Integration costs (1) 
    ––       77  
Deferred income adjustment (2) 
    25       846  
Management fees
    1,000       1,000  
Total adjustments
    38,275       36,684  
                 
Adjusted EBITDA
  $ 33,653     $ 32,890  
_______________
 
(1) 
Integration costs represented certain incremental operating expenses associated with the integration of the Inovis business.
 
(2) 
Purchase accounting requires that deferred income of an acquired business be written-down to fair value of the underlying obligations plus associated margin at the date of acquisition.

Adjusted EBITDA for the three months ended March 31, 2012 and 2011 was $33.7 million and $32.9 million, respectively.  The $0.8 million, or 2.3%, increase in Adjusted EBITDA for the three months ended March 31, 2012 compared to the three months ended March 31, 2011, is driven by the incremental revenues and operating income generated and the net favorable impact of translating foreign currencies into U.S. dollars.
 
Minimum Contract Value

Management monitors sales performance based on a measure referred to by management as Minimum Contract Value (“MCV”).  MCV is the incremental future minimum committed revenue of new sales agreements signed in the current period by our customers.  If the new contract signed is to replace an existing revenue stream, the MCV is adjusted to reflect only the incremental value from the sale.

MCV for the three months ended March 31, 2012 and 2011 was $38.6 million and $31.4 million, respectively.  The $7.2 million, or 22.7%, increase in MCV for the three months ended March 31, 2012 compared to the three months ended March 31, 2011, is primarily due to the effect of Managed Services deals in Brazil, Japan and North America.

The MCV calculations are not reflected or recorded within the condensed consolidated financial statements.  MCV is not a measure of financial condition or financial performance under U.S. GAAP and should not be considered as an alternative to deferred income or revenues, as a measure of financial condition or operating performance.

Results of Operations
 
Three months ended March 31, 2012 compared to three months ended March 31, 2011

Revenues.  Revenues increased by $4.8 million, or 4.2%, to $118.9 million for the three months ended March 31, 2012 from $114.1 million for the three months ended March 31, 2011.  The increase was principally due to growth in our Managed Services and Data Synchronization revenues, particularly in the North America, Europe-Middle East-Africa (“EMEA”) and Asia-Pacific (“ASPAC”) regions.  These increases were partially offset by competitive pricing pressure and customer attrition in our Messaging Services revenue, the planned de-emphasis of our Custom Outsourcing Services line of business, and the unfavorable impact of translating revenues generated in foreign currencies to U.S. dollars.  The relatively stronger U.S. dollar during the three months ended March 31, 2012, as compared to the three months ended March 31, 2011, resulted in a $0.3 million decrease in our revenues from translating revenues generated in foreign currencies into U.S. dollars, respectively.  A comparison of our revenues by service line is as follows:
 
 
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·  
Messaging Services revenues decreased by $3.4 million, or 5.9%, to $54.3 million for the three months ended March 31, 2012 from $57.7 million for the three months ended March 31, 2011.  The decrease resulted principally from $3.0 million in aggregate decreases resulting from price reductions and customer attrition along with the $0.3 million unfavorable impact of translating revenues generated in foreign currencies into U.S. dollars.
 
·  
Managed Services revenues increased by $9.2 million, or 28.5%, to $41.5 million for the three months ended March 31, 2012 from $32.3 million for the three months ended March 31, 2011.  The increase was principally due to $9.1 million of revenue generated by new Managed Services projects and a $0.1 million favorable impact of translating revenues generated in foreign currencies into U.S. dollars.
 
·  
B2B Software and Services, Data Synchronization and Custom Outsourcing Services revenues decreased in the aggregate by $1.0 million, or 4.1%, to $23.1 million for the three months ended March 31, 2012 from $24.1 million for the three months ended March 31, 2011.  The Data Synchronization service line increase of $0.4 million was offset by a $0.2 million decrease in B2B Software and Services and a $1.2 million decrease in Custom Outsourcing Services line due to its planned de-emphasis, price reductions and customer attrition, along with a $0.1 million unfavorable impact of translating revenues generated in foreign currencies into U.S. dollars.

Cost of revenues. Cost of revenues increased by $2.1 million, or 3.4%, to $64.7 million for the three months ended March 31, 2012 from $62.6 million for the three months ended March 31, 2011.  The increase in cost of revenues for the three months ended March 31, 2012 was consistent with the overall increase in revenues and was driven by increased costs associated with the data center upgrades, including depreciation, hardware/software maintenance, applications hosting and networking services. Cost of revenues represent 54.5% of revenues for the three months ended March 31, 2012, as compared to 54.9% for the three months ended March 31, 2011.

Sales and marketing.  Sales and marketing expenses increased by $1.7 million, or 10.9%, to $17.2 million for the three months ended March 31, 2012 from $15.5 million for the three months ended March 31, 2011.  The increase was primarily due to higher salary and benefit costs largely driven by increased headcount.  Sales and marketing expense represent 14.4% of revenues for the three months ended March 31, 2012 as compared to 13.6% for the three months ended March 31, 2011.

General and administrative.  General and administrative expenses increased by $0.2 million, or 1.3%, to $18.4 million for the three months ended March 31, 2012 from $18.2 million for the three months ended March 31, 2011.  The increase was primarily due to higher salary and benefit costs driven by increased headcount in the U.K. and Brazil, increased bad debt provisions in the U.K., higher depreciation costs in Brazil resulting from their recently completed office facilities upgrade, and the unfavorable impact of translating foreign currencies into U.S. dollars, partially offset by lower audit, professional services and contractor fees.  General and administrative expenses represent 15.5% of revenues for the three months ended March 31, 2012, as compared to 15.9% for the three months ended March 31, 2011.

The impact of translating foreign currencies into U.S. dollars caused cost of revenues, sales and marketing, and general and administrative expenses to be approximately $0.5 million lower in aggregate for the three months ended March 31, 2012, as compared to the three months ended March 31, 2011.

Restructuring charges.  Restructuring charges were $0.4 million for the three months ended March 31, 2012, compared to $0.2 million for the three months ended March 31, 2011.  For the three months ended March 31, 2012 the restructuring charges include $0.3 million of severance related costs for six employees and $0.1 million for facilities.  For the three months ended March 31, 2011 the restructuring charges include $0.1 million of severance related costs for five employees and $0.1 million for facilities.  We have undertaken a series of restructuring activities during the past several years 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 activities.

Operating income.  Operating income increased by $0.6 million to $18.2 million for the three months ended March 31, 2012 compared to $17.6 million for the three months ended March 31, 2011.  The 3.3% increase in operating income is primarily attributable to increased revenues and the $0.2 million net favorable impact of translating foreign currencies into U.S. dollars.

Interest expense, net.  Interest expense, net increased by $0.3 million to $21.3 million for the three months ended March 31, 2012 compared to $21.0 million for the three months ended March 31, 2011.  The increase in interest expense, net is attributable to increased amortization of deferred financing charges resulting from the Revolver amendment at the end of February 2012 and the net effect for the three months ended march 31, 2011 of the change in the fair value of the interest rate swap, which is reflected as a component of interest expense and which was settled in April 2011.
 
 
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Other income (expense), net.  Other income (expense), net is primarily comprised of gains and losses on foreign currency transactions.  Other income (expense), net was $0.7 million expense for the three months ended March 31, 2012, and $0.5 million income for the three months ended March 31, 2011.
 
Income tax expense.  Income tax expense was $0.7 million for the three months ended March 31, 2012 compared to $0.9 million for the three months ended March 31, 2011.  The income tax expense for the three months ended March 31, 2012 and 2011, respectively, is related primarily to taxes for foreign jurisdictions in which we have net income.

Net loss.  Net loss was $4.6 million for the three months ended March 31, 2012 compared to $3.8 million for the three months ended March 31, 2011.  The $0.8 million increase in net loss for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 is principally due to the increased losses on foreign currency transactions between the comparative periods, which more than offset the increase in operating income.

Sources and Uses of Cash
 
The following table is a summary of sources and uses of cash during the three months ended March 31, 2012 and 2011 (in thousands):

   
Three Months Ended March 31,
 
   
2012
   
2011
 
             
Cash flows provided by operating activities
  $ 30,187     $ 22,655  
Cash flows used in investing activities
    (11,107 )     (11,915 )
Cash flows used in financing activities
    (3,400 )     (8,002 )
Effect of exchange rate changes on cash
    88       341  
Net increase in cash and cash equivalents
  $ 15,768     $ 3,079  
Cash and cash equivalents, end of period
  $ 28,736     $ 19,405  

Three months ended March 31, 2012 compared to three months ended March 31, 2011
 
Net cash provided by operating activities was $30.2 million compared to $22.7 million used in operating activities for the years ended March 31, 2012 and 2011, respectively.  The increase in net cash provided by operating activities of $7.5 million was mainly attributable to improved collections of trade accounts receivable.

Net cash used in investing activities was $11.1 million for the three months ended March 31, 2012 compared to $11.9 million for the three months ended March 31, 2011.  Net cash used in investing activities for the three months ended March 31, 2012 consisted of capital expenditures of $11.1 million for software and equipment primarily related to continued enhancements of our service platform.  Net cash used in investing activities for the three months ended March 31, 2011 included $1.1 million for the acquisition of RollStream and capital expenditures of $10.8 million for software and equipment primarily related to continued enhancements of our service platform.  Capital expenditures for each of the three months ended March 31, 2012 and 2011 included $6.1 million of labor costs capitalized for the development of internal-use software.

Net cash used in financing activities was $3.4 million for the three months ended March 31, 2012 compared to $8.0 million for the three months ended March 31, 2011.  Net cash used in financing activities for the three months ended March 31, 2012 was from $3.0 million in net repayments of amounts outstanding under the Revolver and $0.4 million in deferred financing costs associated with amending the Revolver.  Net cash used in financing activities for the three months ended March 31, 2011 was from $8.0 million in net repayments of amounts outstanding under the Revolver.

Liquidity and Capital Resources

On December 23, 2009, we completed the refinancing of our then outstanding indebtedness by issuing $785.0 million in aggregate principal amount of senior secured notes (the “Senior Secured Notes”) with an original issue discount of $18.6 million.
 
 
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The Senior Secured Notes carry an interest rate of 9.75% with interest payable on June 15 and December 15 each year.  The Senior Secured Notes will mature on June 15, 2015.  The optional redemption features on the Senior Secured Notes are summarized as follows:

·  
We may on any one or more occasions at any time prior to June 15, 2012, 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 at any time prior to June 15, 2012, redeem some or all of the Senior Secured Notes at a price equal to 100% of the principal amount of the Senior Secured Notes redeemed, plus a make-whole premium.
 
·  
We may on any one or more occasions at any time prior to June 15, 2012, 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.
 
·  
We may at any time on or after June 15, 2012, and from time to time redeem the Senior Secured Notes, in whole or in part, at the redemption prices defined in the indenture governing the Senior Secured Notes.
 
·  
In each case, we must also pay accrued and unpaid interest, if any, to the redemption date.
 
·  
In the event of a change in control, we must offer to repurchase any outstanding Senior Secured Notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.
 
Following the December 23, 2009 debt refinancing, our principal sources of liquidity have been, and are expected to continue to be, our current cash balances, cash flow from operations and borrowings under the revolving credit facility of our Credit and Guaranty Agreement.

The agreements governing our Senior Secured Notes impose limitations of our ability, to among other things, incur additional indebtedness, incur liens, consummate certain asset sales, make certain restricted payments, enter into certain transactions with affiliates, issue capital stock, merge or consolidate with any other person or sell, transfer or otherwise dispose of any assets.

The Credit and Guaranty Agreement entered into on December 23, 2009 with various lenders provides us with a Revolver with an aggregate principal amount of $50.0 million, the proceeds of which shall be used for working capital, supporting letters of credit and general corporate purposes.  On February 29, 2012, the Revolver was amended.  As amended, the Revolver has the following key terms, among others:

·  
Expiration date of March 15, 2015, any outstanding borrowings must be repaid in full by this date, and all commitments will terminate on this date;
 
·  
At our option, an interest rate at 4.50% above the London Interbank Offered Rate (“LIBOR”), or a rate that is 3.50% above the administrative agent’s “base rate” per annum;
 
·  
Interest of 0.50% per annum on unused Revolver borrowing capacity;
 
·  
Minimum interest coverage ratio, as defined in the Revolver, of 1.75; and
 
·  
Maximum net leverage ratio, as defined in the Revolver, of 5.75.
 
No other covenants or conditions were changed by the amendment.  We paid a closing fee of approximately $0.4 million in connection with this amendment.

The Revolver also requires that we meet and maintain certain financial ratios and tests, including those described above.  Our ability to comply with these covenants and to meet and maintain the financial ratios is material to the success of our business and may be affected by events beyond our control.  Our failure to comply with these covenants could result in a default under the Revolver and the Indenture governing our Senior Secured Notes.  At March 31, 2012, we had an interest coverage ratio of 2.01 and a net leverage ratio of 4.83, calculated as defined in the Revolver, and we were in compliance with all financial and nonfinancial covenants.
 
 
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Cash and cash equivalents were approximately $28.7 million and $13.0 million at March 31, 2012 and December 31, 2011, respectively.  At March 31, 2012, there were no borrowings outstanding under the Revolver.  At December 31, 2011, there were $3.0 million of outstanding borrowings under the Revolver.  At March 31, 2012 and December 31, 2011, approximately $11.7 million of the $50.0 million of Revolver capacity was pledged as security for certain letters of credit.  Therefore, the total available cash liquidity, including cash and cash equivalents and total Revolver capacity, less outstanding borrowings and letters of credit secured by the Revolver, was approximately $67.0 million and $48.3 million at March 31, 2012 and December 31, 2011, respectively.

In May 2012, we deposited approximately $3.3 million as collateral for a bank guarantee in Brazil required in connection with a long-standing tax dispute with a municipality in Brazil.  The terms of the bank guarantee require the cash collateral to remain on deposit as long as the bank guarantee is in place.  We can terminate the bank guarantee at our option at any time and therefore have unrestricted access to the cash; however, terminating the bank guarantee would be expected to have detrimental legal and tax consequences that would prevent us from conducting business as usual in Brazil.

GXS Worldwide, Inc. is a holding company that conducts its operations through its wholly owned subsidiary GXS, Inc. and its domestic and foreign subsidiaries.  The financial statements of GXS, Inc. are substantially identical to the GXS Worldwide, Inc. financial statements and the total assets, revenues, operating income, net income (loss) and cash flows of GXS, Inc. are expected to continue to constitute substantially all of the corresponding amounts for GXS Worldwide, Inc. and its subsidiaries.  All equity interests pledged as collateral for the Senior Secured Notes, other than those of GXS, Inc., are wholly owned consolidated subsidiaries of GXS, Inc.

We expect that cash flows from foreign operations will be required to meet our domestic debt service requirements.  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 our ability to repatriate these cash flows or increase the tax burden on the collections.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the U.S.  Some accounting policies require us to make estimates and assumptions about future events that affect the amounts reported in our condensed consolidated financial statements and the accompanying notes.  Future events and their effects cannot be determined with absolute certainty.  Therefore, the determination of estimates requires the exercise of judgment.  Actual results could differ from those estimates, and any differences may be material to our condensed consolidated financial statements.  A description of all of our significant accounting policies used is included in Note 2 to our condensed consolidated financial statements, included herein.  Some of these policies involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our condensed consolidated financial statements.

These critical accounting policies, in management’s judgment, are those described below.  If different assumptions or conditions were to prevail, or if our estimates and assumptions prove to be incorrect, actual results could be materially different from those reported.

Revenue Recognition
 
We have various service lines, specifically including:  Messaging Services, Managed Services, B2B Software Services, Data Synchronization, and Custom Outsourcing Services.  Our service lines generate revenues from three principal sources:

Transaction Processing — We earn recurring transaction processing revenue from facilitating the exchange of business documents among its customers’ computer systems and those of their trading partners.  Such revenues are generally based on a per-transaction fee or monthly minimum charge and are recognized in the period in which the related transactions are processed.  Revenue on contracts with monthly, quarterly or annual minimum transaction levels are recognized based on the greater of actual transactions or the specified contract minimum amounts.

Professional Services — We earn professional service revenue generally pursuant to time and material contracts and in most instances revenue is recognized as the related services are provided, except when such services are associated with a new project implementation, in which case the associated revenue is deferred over the contract term as outlined below.
 
 
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Software Licensing and Maintenance — We earn revenue from the licensing of software applications that facilitate and automate the exchange of information among disparate business systems and applications.  Such revenue is recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection is considered probable.  Revenue from licensing software that requires significant customization and modification or where services are otherwise considered essential to the functionality of the software are recognized using the percentage of completion method, based on the costs incurred in relation to the total estimated costs of the contract.  Revenue from hosted software applications is recognized ratably over the hosting period unless the customer has the contractual right to take possession of the software without significant penalty and it is feasible for the customer to use the software with its own hardware or contract with another party unrelated to us to host the software.  Software maintenance revenue is deferred and recognized on a straight-line basis over the life of the related maintenance period, which is typically one year.

Effective January 1, 2011, we adopted the provisions of Accounting Standards Update (“ASU”) 2009-13 – Revenue Arrangements with Multiple Deliverables, which requires companies to allocate the overall arrangement consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor specific objective evidence (“VSOE”) or other third-party evidence of the selling price.  We identified no significant impact on our condensed consolidated results of operations and financial condition of adopting ASU 2009-13.  For non-software arrangements with more than one element of revenue with stand-alone value, we allocate revenue to each component based on VSOE, or third party evidence of selling price when available, or estimated selling price.  VSOE for software maintenance is based on contractual renewal rates.  Professional services are separately priced and are based on standard hourly rates determined by the nature of the service and the experience of the professional performing the service.

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

We defer all direct and relevant costs associated with implementation of long-term customer contracts to the extent such costs can be recovered through guaranteed contract revenues.  The unamortized balance of these deferred costs as of March 31, 2012 and December 31, 2011 was $27.8 million and $26.4 million, respectively.

Valuation of Accounts Receivable

We must make estimates of potential uncollectible amounts and credits to be issued in valuing our accounts receivable.  We analyze historical credits issued, current economic trends and changes in customer demand and acceptance of our products and services when evaluating the overall adequacy of the provision for sales returns and allowances.  We analyze historical bad debts, customer concentrations, customer credit-worthiness, and current economic trends when evaluating the overall adequacy of the allowance for doubtful accounts.  However, if the financial condition of our customers were to deteriorate, their ability to make required payments may become impaired, and increases in these allowances may be required.

Capitalization of Software

We capitalize software development costs in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40 – Accounting for the Costs of Computer Software Developed or Obtained for Internal-Use.  We begin to capitalize costs for software to be used internally when we enter the application development stage.  This occurs when we have completed the preliminary project stage, our management authorizes and commits to funding the project and we believe it is feasible that the project will be completed and the software will perform the intended function.  We stop capitalizing costs related to a software project when we believe we have entered the post implementation and operation stage.  If we were to make different determinations with respect to the state of development that a software project had achieved, then the amount we capitalize and the amount we charge to expense for that project could differ materially.

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

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

In accordance with FASB ASC 985-20 – Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, we expense costs incurred in the development of software sold externally or developed for license to customers until technological feasibility has been established under the working model method.  However, we have not capitalized costs since there is generally such a short period of time between the date technological feasibility is achieved and the date when the product is available for general release to customers, thus any costs incurred have not been material to date.

Valuation of Long-lived Assets

We periodically evaluate the estimated useful life of property and equipment and, when appropriate, adjust the useful life thereby increasing or decreasing the depreciation expense recorded in the current and in future reporting periods.  We also assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Factors we consider important which could trigger an impairment review include the following:

·  
significant underperformance relative to historical or projected future operating results;
 
·  
significant changes in technology or in the manner of our use of the assets or the strategy for our overall business; and
 
·  
significant negative industry or economic trends.

When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment and our analysis of undiscounted cash flow, we measure any impairment based on the fair value of the asset less selling costs.  Fair value is typically estimated based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our business.  This process is subjective, as it requires management to make estimates and assumptions about future cash flows and discount rates.

Goodwill

We test goodwill and intangible assets with indefinite useful lives for impairment at least annually or whenever there is a change in events or circumstances which may indicate impairment.  The impairment test involves two steps.  In the first step we compare the carrying value of the reporting unit which holds the goodwill with the fair value of the reporting unit.  If the carrying value is less than the fair value, there is no impairment.  If the carrying value exceeds the fair value of the reporting unit, step two is performed to measure the impairment loss.

In December 2010, the FASB issued ASU 2010-28 – Intangibles – Goodwill and Other (Topic 350) (previously Emerging Issues Task Force (“EITF”) Issue No. 10-A – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts).  ASU 2010-28 requires companies that are performing their goodwill impairment testing (either on an annual or interim basis) and have identified a reporting unit with a zero or negative carrying value of equity during step one of the test, to perform step two of the goodwill impairment test and determine if it is more likely than not that a goodwill impairment exists.  ASU 2010-28 became effective prospectively for public entities whose fiscal years, and interim period within those years, began after December 15, 2010.

In September 2011, the FASB issued ASU 2011-08 – Intangibles – Goodwill and Other (Topic 350):  Testing Goodwill for Impairment, which is intended to simplify how an entity is required to test goodwill for impairment under ASU 2010-28 by allowing an entity to first assess qualitative factors (which are defined in the new guidance) to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  We adopted ASU 2011-08 as of January 1, 2012, as required.
 
 
 
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As of March 31, 2012, we assessed the qualitative factors (as defined in ASU 2011-08) and determined that goodwill was not impaired; as it was more likely than not that the fair value of the entity was greater than the carrying amount.  As of December 31, 2011, we completed impairment testing (including performing the required step-two test) and determined that goodwill was not impaired.  Our assessment and impairment test are based on a single operating segment and reporting unit structure.  The fair value of the reporting unit significantly exceeded the carrying value at March 31, 2012 and December 31, 2011.

Restructuring

We calculate the facility charge included in the restructuring charges by discounting the net future cash obligation of the existing leases less anticipated rental receipts to be received from existing and potential subleases.  This requires significant judgment about the length of time the space will remain vacant, anticipated cost escalators and operating costs associated with the leases, the market rate at which the space will be subleased, and broker fees or other costs necessary to market the space.  These judgments are based upon independent market analysis and assessment from experienced real estate brokers.  If we were to make different determinations with respect to these factors the amounts of our restructuring charges could differ materially, although most of our vacant space has been sublet with the sublease of our former corporate headquarters.

Deferred Taxes

We consider the scheduled reversal of deferred tax liabilities, projected future income and tax planning strategies in assessing the realization of deferred tax assets.  Management believes we will achieve profitable operations in future years that will enable us to recover the benefit of our deferred tax assets.  However, we presently do not have sufficient objective evidence that it is more likely than not that we will realize the benefits from our deferred tax assets and, accordingly, have established a full valuation allowance for our U.S. and selected foreign net deferred tax assets as required by U.S. GAAP.

Contingencies
 
We periodically record the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes.  These events are called contingencies, and our accounting for these events is prescribed by FASB ASC 450 – Accounting for Contingencies.  This standard defines a contingency as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.  Contingent losses must be accrued if:

·  
information is available that indicates it is probable that the loss has been incurred, given the likelihood of the uncertain future events; and
 
·  
the amount of the loss can be reasonably estimated.

The accrual of a contingency involves considerable judgment on the part of management.  Legal proceedings have elements of uncertainty, and in order to determine the amount of accrued liabilities required, if any, we assess the likelihood of any adverse judgments or outcomes to pending and threatened legal matters, as well as the best estimate of or potential ranges of amounts of probable losses.  We use internal expertise and outside experts, as necessary, to help estimate the probability that a loss has been incurred and the amount or range of the loss.  A determination of the amount of accrued liabilities required for these contingencies is made after analysis of each individual issue.  The required accrued liabilities may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy.


Quantitative and Qualitative Disclosures about Market Risk
 
Our primary market risk exposures include the effect of foreign currency fluctuations and interest rate changes.

Foreign Currency Risk

The foreign currency financial statements of our international operations are translated into U.S. dollars at current exchange rates, except revenues and expenses, which are translated at average exchange rates during each reporting period.  Net exchange gains or losses resulting from the translation of assets and liabilities are accumulated in a separate section of stockholder's deficit titled “accumulated other comprehensive loss.”  Therefore, our exposure to foreign currency exchange rate risk occurs when translating the financial results of our international operations to U.S. dollars in consolidation.  Our foreign currency risk is primarily for transactions denominated in the British pound, European euro, Japanese yen, Brazilian real, Australian dollar and Canadian dollar.
 
 
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Although much of our revenues are generated in U.S. dollars, approximately $47.2 million, or 39.7% of our total revenues for the three months ended March 31, 2012, were generated in non-U.S. dollar denominated currencies.  Our revenues generated in non-U.S. dollar denominated currencies for the three months ended March 31, 2011 were $47.0 million, or 41.2% of our total revenue.

Our operating expenses are also generally denominated in U.S. dollars; however, approximately $32.6 million, or 32.3% of our total operating expenses for the three months ended March 31, 2012, were denominated in foreign currencies.  Our operating expenses generated in foreign currencies for the three months ended March 31, 2011 were $30.9 million, or 32.0% of our total operating expenses.

Due to the relatively stronger U.S. dollar during the three months ended March 31, 2012 and the fact that impact on the operating expenses was greater than the impact on our revenues, our operating income was favorably affected by $0.2 million when compared to the three months ended March 31, 2011.

From a sensitivity analysis viewpoint, based on our financial results for the three months ended March 31, 2012, a hypothetical overall 10% change in the U.S. dollar from the average foreign exchange rates during the three months ended March 31, 2012 would have impacted our revenue and operating income by approximately $4.7 million and $1.4 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 Revolver and previously to our interest rate swap agreement prior to its expiration in April 2011.

On December 23, 2009, we entered into a Credit and Guaranty Agreement which provides us with a $50.0 million revolving credit facility, or “Revolver.”  The Revolver was amended on February 29, 2012 and provides for an interest rate at 4.50% above the LIBOR, or a rate that is 3.50% above the administrative agent’s “base rate”, at our option.  Prior to the amendment, the actual impact of any change in the applicable interest rate on our results of operations could be affected by the existence of interest rate floors established for the LIBOR and the administrative agent’s “base rate”.

Until April 2011, we had an interest rate swap agreement with a commercial bank with a notional amount of $255.0 million.  The provisions of the agreement provided that we would pay the counterparty a fixed rate of 3.86%.  The counterparty would pay us a variable rate equal to the three-month LIBOR, which was 0.30% at March 31, 2011, just prior to the swap agreement’s expiration.  The fair value of the interest rate swap was $2.3 million as of March 31, 2011 and was recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheet as of March 31, 2011.  The change in fair value of the interest rate swap of $2.4 million was recorded as a reduction to interest expense for the three months ended March 31, 2011.  The interest rate swap agreement expired on April 26, 2011 and was settled with the commercial bank with a final payment of $2.3 million having been made on that date.


Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and timely reported as provided in Securities and Exchange Commission rules and forms.  We periodically review the design and effectiveness of our disclosure controls and procedures worldwide, including compliance with various laws and regulations that apply to our operations.  We make modifications to improve the design and effectiveness of our disclosure controls and procedures, and may take other corrective action, if our reviews identify a need for such modifications or actions.  In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
 
 
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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 March 31, 2012.  Based upon that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2012.

Changes in Internal Control Over Financial Reporting

We continue to evaluate and integrate certain business processes and systems.  Accordingly, certain changes have been made, and will continue to be made, to our internal controls over financial reporting.  In February 2012, we created and filled a Director of Finance position in Brazil.

There have been no other changes in our internal control over financial reporting during the three months ended March 31, 2012, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II.     OTHER INFORMATION

Legal Proceedings

We are subject to various legal proceedings and claims which arise in the ordinary course of our business.  Although we cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, we make provision for potential liabilities when we deem them probable and reasonably estimable.  These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.

In 2006, Inovis became aware of patent infringement allegations by a third party against certain customers of one of Inovis’ software technology products.  In July 2007, Inovis filed a complaint for declaratory judgment against the third party in the U.S. District Court of Delaware, seeking a judgment and declaration that neither Inovis nor any of its customers have infringed on the patent at issue.  Inovis filed a Request for Reexamination of such patent with the U.S. Patent and Trademark Office (the “USPTO”), which was accepted in May 2008, resulting in the amendment and/or cancellation of certain of the patent claims.  In September 2009, the USPTO granted a second Request for Reexamination of the patent filed by Inovis, finding a substantial new question of patentability with respect to all claims.  In March 2010, the USPTO issued an initial ruling rejecting all of the claims in the patent, in response to which the patent holder filed amended claims.  In December 2010, the USPTO issued a final ruling cancelling certain of the patent claims and leaving only one amended claim and its dependent claims.  The litigation is currently stayed, but may resume in 2012, or later.  Although we believe that the third party’s patent infringement allegations are without merit, there can be no assurance that we will prevail in the litigation.  An amount of potential loss, if any, cannot be determined at this time.

We are also subject to income and other taxes in the U.S. and other foreign jurisdictions and are regularly under audit by tax authorities.  Although we believe our tax estimates are reasonable, the final determination of any tax audits and related litigation or other proceedings could be materially different than that which is reflected in our tax provisions and accruals.  In certain foreign jurisdictions, we may be required to place on deposit or provide a bank guarantee for amounts claimed by tax authorities while we challenge such amounts.  Should additional taxes be assessed as a result of an audit or following an unsuccessful challenge by us through litigation, it could have a material effect on our financial position and results of operations in the period or periods for which that determination is made.  Such a bank guarantee totaling approximately $3.3 million was made in May 2012 for a disputed tax matter in Brazil by our subsidiary, GXS Tecnologia da Informacao (Brasil) Ltda. (“GXS Brazil”), in connection with GXS Brazil’s judicial appeal of a tax claim by the municipality of Sao Paulo, Brazil in the approximate amount of $2.5 million as of March 31, 2012.  The bank guarantee was collateralized by a deposit of cash with the issuing bank.  We believe that the position of the Brazilian tax authorities is not consistent with the relevant facts; however, there can be no assurance that we will ultimately prevail and it is likely that the bank guarantee, and supporting cash collateral, will remain in place for several years while GXS Brazil pursues the appeal of the tax claim in the courts.  While based on information available on the case and other similar matters provided by local counsel, we believe the facts support our position that an unfavorable outcome is not probable and no tax is owed, the ultimate outcome of this matter could result in a loss of up to the claim amount discussed above plus any interest or penalties that may accrue.

GXS Brazil also is subject to potential tax claims by Brazilian tax authorities relating to value-added-tax (“VAT”) exposure that we identified in the course of conducting due diligence in connection with the acquisition of Interchange.  We believe that VAT may have been underpaid by Interchange during the period from January 2004 to June 2006.  We have recorded a reserve of approximately $2.2 million as of March 31, 2012, in respect of these claims, at the then current exchange rate (reflecting the expiration of the statute of limitations with respect to the 2004 and 2005 tax years and the consequent reversal of a previous accrual and reduction of a corresponding receivable for those years).  Although the sellers of Interchange are contractually obligated to indemnify us pursuant to the stock purchase agreement executed in connection with the acquisition and we have recorded a corresponding receivable of approximately $2.2 million as of March 31, 2012, for the indemnity to offset the potential liability, additional legal action may be required to recover any potential liability under such indemnity.

In addition, our Indian subsidiary, GXS India Technology Centre Private Limited (“GXS India”), is subject to potential assessments by Indian tax authorities in the district of Bangalore.  U.S. and Indian transfer pricing regulations require that any international transaction involving associated enterprises be at arms-length prices.  Accordingly, GXS India determines the pricing for such transactions on the basis of detailed functional and economic analysis involving benchmarking against similar transactions among entities that are not under common control.  If the applicable tax authorities determine that the transfer price applied was not appropriate, GXS India may incur an increased tax liability, including accrued interest and penalties.  GXS India has received assessment orders from the Indian tax authorities alleging that the transfer price applied to intercompany transactions was not appropriate.  Based on advice from our tax advisors, we continue to believe that the facts the Indian tax authorities are using to support their assessment are incorrect.  GXS India has started appeal procedures and
 
 
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anticipates a settlement with the tax authorities.  We have accrued approximately $1.5 million to cover our anticipated financial exposure in this matter.  There can be no assurance that our appeals will be successful or that these appeals will be finally resolved in the near future.  There is a possibility that we may receive similar orders for other years until the above disputes are resolved.

There have been no other material changes in legal proceedings from those described in Part I, Item 3 included in our 2011 Annual Report on Form 10-K.


Risk Factors

There have been no material changes in the risk factors affecting us from those described in Part I, Item 1A of our 2011 Annual Report on Form 10-K.


Unregistered Sales of Equity Securities and Use of Proceeds

None.


Defaults Upon Senior Securities

None.


Mine Safety Disclosures

Not Applicable.


Other Information

In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).  The JOBS Act contains provisions that relax certain requirements for “emerging growth companies” that otherwise apply to larger public companies.  Under the JOBS Act, for as long as a company retains emerging growth company status, which may be through the fiscal year-end after the fifth anniversary of an initial public offering, it will not be required to: (i) comply with any new or revised financial accounting standard applicable to public companies until such standard is also applicable to private companies, or (ii) provide certain disclosure regarding executive compensation required of larger public companies.  We are classified as an emerging growth company under the JOBS Act, and are eligible to take advantage of the provisions described above for as long as we retain this status.  We have elected to take advantage of such provisions, including the transition period described in (i), which is the exemption provided in Section 7(a)(2)(B) of the Securities Act of 1933 and Section 13(a) of the Securities Exchange Act of 1934 (in each case as amended by the JOBS Act) for complying with new or revised financial accounting standards.  We will therefore comply with new or revised financial accounting standards to the extent applicable to an emerging growth company.

On May 9, 2012, John A. McKenna, Jr. resigned from the boards of directors of the Company, GXS Holdings and GXS Group.

On May 10, 2012, pursuant to Delaware Corporation Law Section 228, stockholders holding a majority of the outstanding shares of the common stock and the Series A Preferred Stock of GXS Group (each class together, and collectively on an as converted basis) approved, on the recommendation of the GXS Group board of directors, an amendment to the 2010 GXS Group Long-Term Incentive Plan to increase the number of shares available in connection with grants of stock options and other stock-based compensation awards under the plan from 14.0 million to 17.5 million shares.
 
 
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Exhibits

Exhibit No.
Description
*10.1
Amendment to 2010 GXS Group, Inc. Long Term Incentive Plan
*31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**101.INS
Instance Document
**101.SCH
Taxonomy Extension Schema
**101.CAL
Taxonomy Extension Calculation Linkbase
**101.DEF
Taxonomy Extension Definition Linkbase
**101.LAB
Taxonomy Extension Label Linkbase
**101.PRE
Taxonomy Extension Presentation Linkbase

*
Filed herewith
 
 
**
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
 
 
45

 
 
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:  May 11, 2012
 
GXS WORLDWIDE, INC.
 
     
       
 
By:
/s/ Robert Segert  
    Name:  Robert Segert  
    Title:    Director, President and Chief Executive Officer  
 
 
 
By:
/s/ Gregg Clevenger  
    Name:  Gregg Clevenger  
    Title:    Executive Vice President, Chief Financial Officer
             and Principal Financial Officer
 
 
 
46

 
 
EXHIBIT INDEX

Exhibit No.
Description
*10.1
Amendment to 2010 GXS Group, Inc. Long Term Incentive Plan
*31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**101.INS
Instance Document
**101.SCH
Taxonomy Extension Schema
**101.CAL
Taxonomy Extension Calculation Linkbase
**101.DEF
Taxonomy Extension Definition Linkbase
**101.LAB
Taxonomy Extension Label Linkbase
**101.PRE
Taxonomy Extension Presentation Linkbase

*
Filed herewith
 
 
**
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.