UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2013
	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 £ No R *

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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 November 13, 2013, the registrant had 1,000 outstanding shares of common stock, all of which was held by an affiliate of the registrant.

* The registrant currently is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 and is filing this Quarterly Report on Form 10-Q on a voluntary basis. The registrant 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 as if it were subject to such filing requirements during the entirety of such period.

GXS WORLDWIDE, INC.

QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2013

INDEX

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and
	December 31, 2012	4

	Unaudited Condensed Consolidated Statements of Operations for the three and nine months
	ended September 30, 2013 and 2012	5

	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the
	three and nine months ended September 30, 2013 and 2012	6

	Unaudited Condensed Consolidated Statement of Changes in Stockholder’s Deficit for the
	nine months ended September 30, 2013	7

	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended
	September 30, 2013 and 2012	8

	Notes to Condensed Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results
	of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	45


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	47


SIGNATURES		48

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 “Interchange” refer to Interchange Serviços S.A., which the Company acquired on December 30, 2008. 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 direct subsidiary, is collateral for the Company’s 9.75% Senior Secured Notes due 2015 (the “Senior Secured Notes” or “notes”). 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.

PART I. FINANCIAL INFORMATION

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	September 30, 2013			December 31, 2012
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	66,487		$	35,030
Receivables, net		87,980			99,094
Prepaid expenses and other assets		26,150			28,326
Total current assets		180,617			162,450

Property and equipment, net		113,060			109,307
Goodwill		268,526			269,046
Intangible assets, net		86,785			100,838
Deferred financing costs		7,616			10,988
Other assets		21,002			20,103

Total Assets	$	677,606		$	672,732

Liabilities and Stockholder's Deficit
Current liabilities:
Trade payables	$	17,042		$	20,025
Deferred income		37,239			41,492
Accrued expenses and other current liabilities		66,205			46,029
Total current liabilities		120,486			107,546

Long-term debt		778,016			775,334
Deferred income tax liabilities		10,717			10,753
Other liabilities		54,909			56,541
Total liabilities		964,128			950,174

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		430,867			429,952
Accumulated deficit		(707,173	)		(697,659	)
Accumulated other comprehensive loss		(10,591	)		(10,082	)
Total GXS Worldwide, Inc. stockholder's deficit		(286,896	)		(277,788	)
Non-controlling interest		374			346
Total stockholder’s deficit		(286,522	)		(277,442	)

Total Liabilities and Stockholder’s Deficit	$	677,606		$	672,732

See accompanying notes to condensed consolidated financial statements (unaudited)

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012

Revenues	$	121,768		$	121,279		$	361,287		$	361,000

Costs and operating expenses:
Cost of revenues		65,082			67,201			196,785			198,809
Sales and marketing		17,363			17,117			52,376			50,797
General and administrative		16,843			15,435			51,876			51,222
Operating income		22,480			21,526			60,250			60,172

Other income (expense):
Interest expense, net		(21,083	)		(21,093	)		(63,218	)		(63,562	)
Other income (expense), net		536			697			(3,203	)		(3,679	)
Income (loss) before income taxes		1,933			1,130			(6,171	)		(7,069	)

Income tax expense		1,392			1,276			3,315			3,403
Net income (loss)		541			(146	)		(9,486	)		(10,472	)
Less: Net income attributable to non-controlling interest		51			47			28			32

Net income (loss) attributable to GXS Worldwide, Inc.	$	490		$	(193	)	$	(9,514	)	$	(10,504	)

See accompanying notes to condensed consolidated financial statements (unaudited)

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013			2012

Net income (loss)	$	541	$	(146	)	$	(9,486	)	$	(10,472	)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments		259		1,077			(509	)		2,226

Comprehensive income (loss)		800		931			(9,995	)		(8,246	)
Less: Comprehensive income attributable to non-controlling interest		51		47			28			32

Comprehensive income (loss) attributable to GXS Worldwide, Inc.	$	749	$	884		$	(10,023	)	$	(8,278	)

See accompanying notes to condensed consolidated financial statements (unaudited)

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholder’s Deficit

(In thousands)

(Unaudited)

	Common stock		Additional paid-in capital		Accumulated deficit			Accumulated other comprehensive loss			Non- controlling interest		Total

Balance at December 31, 2012	$	1	$	429,952	$	(697,659	)	$	(10,082	)	$	346	$	(277,442	)

Net income (loss)		––		––		(9,514	)		––			28		(9,486	)
Stock compensation expense		––		915		––			––			––		915
Foreign currency translation adjustments		––		––		––			(509	)		––		(509	)

Balance at September 30, 2013	$	1	$	430,867	$	(707,173	)	$	(10,591	)	$	374	$	(286,522	)

See accompanying notes to condensed consolidated financial statements (unaudited)

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2013			2012
Cash flows from operations:
Net loss	$	(9,486	)	$	(10,472	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		41,784			42,294
Deferred income taxes		943			956
Amortization of deferred financing costs and debt discount		6,405			6,029
Stock compensation expense		915			609
Changes in operating assets and liabilities:
Decrease in receivables		11,114			3,149
Decrease in prepaid expenses and other assets		330			3,901
Decrease in trade payables		(1,806	)		(4,745	)
Decrease in deferred income		(4,253	)		(6,734	)
Increase in accrued expenses and other liabilities		18,193			25,541
Other		1,798			2,302
Net cash provided by operating activities		65,937			62,830
Cash flows from investing activities:
Purchases of property and equipment (including capitalized interest)		(33,561	)		(31,405	)
Net cash used in investing activities		(33,561	)		(31,405	)
Cash flows from financing activities:
Borrowings under revolving credit facility		––			20,000
Repayments under revolving credit facility		––			(23,000	)
Payment of financing costs		––			(421	)
Net cash used in financing activities		––			(3,421	)

Effect of exchange rate changes on cash		(919	)		(154	)

Increase in cash and cash equivalents		31,457			27,850
Cash and cash equivalents, beginning of period		35,030			12,968
Cash and cash equivalents, end of period	$	66,487		$	40,818

Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized	$	38,892		$	39,144
Cash paid for income taxes	$	1,749		$	2,343

See accompanying notes to condensed consolidated financial statements (unaudited)

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

(1)	Business and Basis of Presentation

GXS Worldwide, Inc. and its subsidiaries (“GXS Worldwide” or the “Company”) is a leading global provider of business-to-business (“B2B”) cloud-based integration services and solutions that simplify and enhance business process integration, data quality and compliance, and collaboration among businesses. The Company’s services and solutions enable customers to manage and improve mission critical supply chain functions, securely process financial transactions related to the exchange of goods and services, and automate and control other critical cross-enterprise business processes. By utilizing these services and solutions the Company’s customers realize a number of key benefits such as lower total cost of ownership, accelerated time to market and enhanced reliability and security. Customers and their trading partners do business together primarily via GXS Trading Grid®, a cloud-based integration platform. The Company’s “Managed Services” are hosted services to customers on an outsourced basis, primarily on GXS Trading Grid®.

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.

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

Interim results for the three and nine month periods ended September 30, 2013 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, 2012, which are included in the Company’s Annual Report on Form 10-K, filed under the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission (“SEC”) on March 28, 2013.

(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 typically affected by a reduction of deferred revenue over its remaining term to reflect estimated fair value of the obligation which includes the estimated cost to deliver and associated margin.

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

The financial statements of most subsidiaries located outside of the United States (“U.S.”) are measured using the local currency as the functional currency. Assets and liabilities are translated into U.S. dollars at rates of exchange that approximate those at the balance sheet date. Income and expense items are translated into U.S. dollars 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 five service lines, specifically including: Messaging Services, Managed Services, B2B Software and Services, Data Synchronization and Custom Outsourcing Services. The Company’s service lines generate revenues from three principal sources, as described in detail below. Regardless of the service line or source, the Company records revenues net of any taxes (e.g., sales, local, value-added) that are collected from customers and remitted to governmental authorities.

Transaction Processing — The Company earns recurring transaction processing revenue from facilitating the exchange of business documents among its customers’ computer systems and those of their trading partners. 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 pursuant to either fixed-fee or time and material contracts and in most instances revenue is recognized as the related services are provided, except when such services are associated with a new project implementation, in which case the associated revenue is deferred over the estimated customer life which approximates the initial contract term as outlined below.

Software Licensing and Maintenance — The Company earns revenue from the licensing of software applications that facilitate and automate the exchange of information among disparate business systems and applications. Such revenue is recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection is considered probable. 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.

In accordance with the provisions of Accounting Standards Update (“ASU”) 2009-13 – Revenue Arrangements with Multiple Deliverables, the Company allocates 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. 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, 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 managed services arrangements, the Company sells transaction processing along with implementation and start-up services. The implementation and start-up services typically do not have stand-alone value and, therefore, they do not qualify as separate units of accounting and are not separated. The Company believes these services do not have stand-alone value as the customer generally only receives value from these services in conjunction with the use of the related transaction processing service, the Company does not generally sell such services separately, and the output of such services cannot be re-sold by the customer. Revenues related to implementation and start-up services are recognized over the estimated customer life which, based on the Company’s current estimate, approximates the term of the related transaction processing arrangement. In some arrangements, the Company also sells professional services which do have stand-alone value and can be separated from other elements in the arrangement. The revenue related to these services is recognized as the service is performed.

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

The Company defers all direct and relevant costs associated with implementation of long-term customer contracts to the extent such costs can be recovered through guaranteed contract revenues. The unamortized balance of these costs as of September 30, 2013 and December 31, 2012 was $30,096 and $28,681, respectively, and are recorded in either “prepaid expenses and other assets” (see Note 4) or “other assets” (see Note 7) in the condensed consolidated balance sheets, depending on the remaining duration of the underlying contracts.

(f) Receivables and Concentration of Credit Risk

The Company provides products and services and extends credit to numerous customers in the B2B e-commerce and cloud integration service 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’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. The Company considers such factors as the likelihood of collection based upon an evaluation of the customer’s creditworthiness, historical credits issued, the demand and acceptance of its products and services, 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. The Company believes it has adequate allowances to cover its exposure to potential uncollectible amounts and credits.

(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.

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

The Company capitalized costs related to the development of internal-use software of $7,377 and $22,771 during the three and nine months ended September 30, 2013, respectively, and $6,475 and $18,564 during the three and nine months ended September 30, 2012, respectively. Such amounts include capitalized interest of $439 and $1,194 for the three and nine months ended September 30, 2013, respectively, and $291 and $640 for the three and nine months ended September 30, 2012, respectively.

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

(i)

Goodwill

As of September 30, 2013 and December 31, 2012, the Company had goodwill in the amount of $268,526 and $269,046, respectively. The Company tests goodwill and intangible assets with indefinite useful lives for impairment at least annually (as of December 31), or whenever there is a change in events or circumstances which may indicate impairment. In accordance with ASU 2011-08 – Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, the Company first assesses various qualitative factors (defined in the guidance) to determine whether it is necessary to perform a quantitative goodwill impairment test. Should it be necessary to perform the two-step quantitative goodwill impairment test, the Company first 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, an additional test is performed to measure the impairment loss.

As of September 30, 2013, the Company assessed the qualitative factors and determined that goodwill was not impaired; as it was not more likely than not that the fair value was less than the carrying amount. As of December 31, 2012, the Company completed the required impairment testing 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 exceeded the carrying value at September 30, 2013 and December 31, 2012.

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

The Company reviews long-lived assets and identifiable intangibles for potential 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 any facility-related costs included in 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 advisors. Most of the Company’s vacant space has been sublet with the long-term sublease of the Company’s former corporate headquarters that commenced in 2009. If the Company were to make different determinations with respect to these factors, the amounts of restructuring charges could differ materially.

Restructuring charges also include severance expense (payroll and direct benefits) provided to employees who are involuntarily terminated under the terms of a severance arrangement that has been approved by management, has been communicated to the affected employees, and is not an ongoing benefit arrangement or an individual deferred compensation contract. The Company recognizes the severance liability when all conditions for earning the severance amounts have been fulfilled.

Restructuring charges are reflected within “general and administrative” expenses in the condensed consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012.

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and 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 advisors, 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 Income (Loss)

Comprehensive income (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) and is presented net of tax, which was immaterial for the periods presented.

Accumulated other comprehensive loss was comprised of the following:

	September 30, 2013			December 31, 2012
Additional minimum pension liability	$	(6,788	)	$	(6,788	)
Foreign currency translation adjustments		(3,803	)		(3,294	)
Accumulated other comprehensive loss	$	(10,591	)	$	(10,082	)

There were no reclassifications out of accumulated other comprehensive loss that impacted net income (loss) during the three and nine months ended September 30, 2013 and 2012.

(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 statements of operations for the three and nine months ended September 30, 2013 and 2012.

(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 effective income tax rate for the three and nine months ended September 30, 2013 and 2012 differs from the U.S. federal statutory rate of 35.0% 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.

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

The Company considers the scheduled reversal of deferred tax liabilities, projected future income and tax planning strategies in assessing the realization of deferred tax assets. The Company believes it will achieve profitable operations in future years that will enable recovery of the benefit of its deferred tax assets. However, The Company presently does not have sufficient objective evidence that it is more likely than not that it will realize the benefits from the deferred tax assets and, accordingly, has established a full valuation allowance for its U.S. and selected foreign net deferred tax assets as required by U.S. GAAP.

(p) Fair Value of Financial Instruments

The Company’s financial instruments consist principally of receivables and long-term debt. Generally, the carrying amounts of current assets and liabilities approximate fair value because of the short-term maturity of these instruments. At September 30, 2013, the Company’s long-term debt was valued at 103.10% of its face value, so the Company considered the fair value to be $809,335 at that date. At December 31, 2012, the Company’s long-term debt was valued at 104.75% of its face value, so the Company considered the fair value to be $822,288 at that date.

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

(q) Stock Option Plans

The GXS Holdings, Inc. Stock Incentive Plan (or “Holdings Plan”) provided 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. On June 2, 2010, GXS Holdings acquired Inovis International, Inc. (“Inovis”) in a transaction referred to as the “Inovis Merger” or the “Merger”. Effective with the Inovis Merger, 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 Inovis 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 have been, or will be, made from this plan; therefore the maximum number of plan options in the pool equals the number of options outstanding at the end of a measurement period.

Following 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 last amended in May 2013, provides for the grant of awards to acquire up to 23,700 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.

(r) 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 long-lived assets and 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 arrangements with multiple deliverables or software, and to assess the stage at which software development costs should be capitalized.

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

(s) Reclassifications

Certain reclassifications have been made to the condensed consolidated financial statements as of December 31, 2012 and for the three and nine months ended September 30, 2012 to conform to the presentation at September 30, 2013 and for the three and nine months then ended.

(t) Recently Released Accounting Standards

In February 2013, the FASB issued ASU 2013-02 – Comprehensive Income (Topic 220): Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires an entity to provide additional details regarding any amounts reclassified out of accumulated other comprehensive income by component, and present, either on the face of the statement where net income (loss) is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income (loss). For public entities, the ASU is effective prospectively for reporting periods after December 15, 2012. The Company has adopted ASU 2013-02 and there was no significant impact on its condensed consolidated financial statements presentation.

(3)	Revenue and Receivables

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

Receivables, net were comprised of the following:

	September 30, 2013			December 31, 2012
Trade accounts receivable	$	88,482		$	99,575
Unbilled trade receivables		7,882			8,407
Other receivables		4,860			6,150
Subtotal		101,224			114,132
Less: allowance for doubtful accounts		(13,244	)		(15,038	)
Total receivables, net	$	87,980		$	99,094

Unbilled trade receivables represent amounts earned and accrued as receivables from customers prior to the end of the period. Unbilled trade receivables are expected to be billed and collected within twelve months of the respective balance sheet date. Other receivables primarily includes various value-added tax receivables.

(4)	Prepaid Expenses and Other Assets

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

	September 30, 2013		December 31, 2012
Deferred direct and relevant costs on implementations of contracts, current	$	12,024	$	11,707
Prepaid expenses		7,901		10,083
Deferred income tax assets, current		3,978		4,925
Other		2,247		1,611
Total	$	26,150	$	28,326

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

(5)	Property and Equipment

Property and equipment, net were comprised of the following:

	September 30, 2013			December 31, 2012
Computer software	$	362,886		$	347,893
Computer equipment and furniture		175,277			208,958
Leasehold improvements		12,508			13,832
Gross property and equipment		550,671			570,683
Less: accumulated depreciation and amortization		(437,611	)		(461,376	)
Property and equipment, net	$	113,060		$	109,307

Depreciation and amortization expense related to property and equipment was $9,737 and $27,940 for the three and nine months ended September 30, 2013, respectively, and $9,256 and $27,555 for the three and nine months ended September 30, 2012, respectively.

(6)	Goodwill and Other Acquired Intangible Assets

The following represents a summary of changes in goodwill for the nine months ended September 30, 2013:

Balance as of December 31, 2012	$	269,046
Foreign currency translation		(520	)
Balance as of September 30, 2013	$	268,526

Other acquired intangible assets were comprised of the following:

September 30, 2013	Gross Carrying Amount		Accumulated Amortization			Net
Amortizable intangible assets:
Customer relationships	$	220,050	$	(147,769	)	$	72,281
Product technology		18,494		(6,971	)		11,523
Trade names and trademarks		4,368		(2,901	)		1,467
Other acquired intangible assets		3,184		(3,121	)		63
Subtotal		246,096		(160,762	)		85,334
Non-amortizable intangible assets:
Trade names and trademarks		1,451		––			1,451
Total	$	247,547	$	(160,762	)	$	86,785

December 31, 2012	Gross Carrying Amount		Accumulated Amortization			Net
Amortizable intangible assets:
Customer relationships	$	220,583	$	(136,802	)	$	83,781
Product technology		18,503		(5,392	)		13,111
Trade names and trademarks		4,368		(2,246	)		2,122
Other acquired intangible assets		3,294		(3,022	)		272
Subtotal		246,748		(147,462	)		99,286
Non-amortizable intangible assets:
Trade names and trademarks		1,552		––			1,552
Total	$	248,300	$	(147,462	)	$	100,838

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 exchange rates that approximate those at the balance sheet date.

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

Intangible assets, except for those with an indefinite life (certain trade names and trademarks), are amortized over their estimated useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are expected to be consumed or on a straight-line basis.

Amortization expense related to intangible assets was $4,522 and $13,844 for the three and nine months ended September 30, 2013, respectively, and $4,825 and $14,739 for the three and nine months ended September 30, 2012, respectively.

(7)	Other Assets

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

	September 30, 2013		December 31, 2012
Deferred direct and relevant costs on implementations of long-term contracts, net	$	18,072	$	16,974
Refundable deposits		1,608		1,914
Other		1,322		1,215
Total	$	21,002	$	20,103

(8)	Accrued Expenses and Other Current Liabilities

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

	September 30, 2013		December 31, 2012
Accrued interest	$	22,527	$	3,402
Employee compensation and benefits		21,589		21,856
Other non-income taxes accrued		7,696		8,191
Rebates due on 2008 acquisition		4,401		––
Restructuring		2,257		3,142
Other		7,735		9,438
Total	$	66,205	$	46,029

(9)	Other Liabilities

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

	September 30, 2013		December 31, 2012
Pension and related benefits	$	28,101	$	26,650
Deferred income – non-current		14,390		13,120
Deferred rent – non-current		11,031		10,757
Rebates due on 2008 acquisition		––		3,407
Restructuring – non-current		––		767
Other		1,387		1,840
Total	$	54,909	$	56,541

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

(10)

Debt

Debt was comprised of the following:

	September 30, 2013					December 31, 2012
	Book Value			Fair Value		Book Value			Fair Value
Senior secured notes	$	785,000		$	809,335	$	785,000		$	822,288
Less: unamortized original issue discount		(6,984	)		––		(9,666	)		––
Total long-term debt	$	778,016		$	809,335	$	775,334		$	822,288

The Company had no outstanding borrowings on its revolving credit facility at September 30, 2013 and December 31, 2012.

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, 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.

The common stock of GXS, Inc., the Company’s only direct subsidiary, is collateral for the Company’s Senior Secured Notes. SEC 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. The Company 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 Company’s financial statements and the total assets, revenues, cost of 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 the Company and its subsidiaries.

Revolving Credit Facility

On December 23, 2009, the Company entered into a Credit and Guaranty Agreement which provides the Company with a $50,000 revolving credit facility (the “Revolver”). The Revolver is guaranteed by the guarantors that guarantee the Senior Secured Notes and secured by collateral that secures the Senior Secured Notes. The Revolver is used by the Company to, among other things, fund its working capital needs, support its issued 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 Revolver was amended. As amended, the Revolver has the following key terms, among others: (i) an expiration date of March 15, 2015; (ii) at the Company’s 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; (iii) an interest rate of 0.50% per annum on unused Revolver borrowing capacity; (iv) a minimum interest coverage ratio covenant, as defined in the Revolver, of 1.75; and (v) a maximum net leverage ratio covenant, as defined in the Revolver, of 5.75. No other covenants or conditions were changed by the amendment.

As of September 30, 2013, the Company had outstanding letters of credit of $10,939, no outstanding borrowings, and additional available borrowings of $39,061 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 non-financial covenants. Noncompliance with any covenant specified in the Revolver would qualify as an event of default whereby the lenders would have rights to call all outstanding borrowings due and payable. At September 30, 2013, the Company had an interest coverage ratio of 1.90 and a net leverage ratio of 4.94, both calculated as defined in the Revolver, and was in compliance with all of the Revolver’s financial and non-financial covenants.

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

Other Information

The Company expects that cash flows from foreign operations will be required to meet its domestic debt service requirements. There is no assurance that the foreign subsidiaries will generate sufficient cash flow or that the laws in foreign jurisdictions will not change to limit the Company’s ability to repatriate these cash flows or increase the tax burden on the collections. However, the Company has not had, nor does it have any knowledge of, any such limitations currently, nor in the near-term that could impact its ability to meet its operating requirements over the next twelve months.

Deferred financing costs are being amortized over the life of the applicable debt using the effective interest method. Amortization expense related to the deferred financing costs on the Senior Secured Notes and Revolver was $1,125 and $3,372 for the three and nine months ended September 30, 2013, respectively, and $1,121 and $3,331 for the three and nine months ended September 30, 2012, respectively.

(11)	Restructuring Charges

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

During the three and nine months ended September 30, 2013, the Company incurred restructuring charges of approximately $242 and $1,461, respectively, which included charges associated with consolidation of office space and the involuntary termination of six and 31 employees, respectively. During the three and nine months ended September 30, 2012, the Company incurred restructuring charges of approximately $402 and $1,360, respectively, which included charges associated with consolidation of office space and the involuntary termination of six and 22 employees, respectively. These charges are recorded within “general and administrative” expenses in the condensed consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012.

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, when the underlying lease obligation ends. The facility charge was determined by discounting the net future cash obligation of the existing lease less anticipated rental receipts to be received from existing and potential subleases. As of September 30, 2013, approximately $1,749 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 Company’s restructuring accrual for the nine months ended September 30, 2013 are as follows:

	Severance			Facilities			Total

Balance as of December 31, 2012	$	147		$	3,762		$	3,909
Restructuring charges		876			585			1,461
Payments and other adjustments		(746	)		(2,367	)		(3,113	)
Balance as of September 30, 2013	$	277		$	1,980		$	2,257

The current portion of the above obligations totaled $2,257 and $3,142 at September 30, 2013 and December 31, 2012, respectively, and are included in “accrued expenses and other current liabilities” on the condensed consolidated balance sheets (see Note 8). The long-term portion of the above obligations totaled $767 at December 31, 2012 and is included in “other liabilities” on the condensed consolidated balance sheets (see Note 9).

(12) Contingencies

The Company is subject to various legal proceedings and claims in the United States 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.

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

A bank guarantee totaling $3,325 was made in May 2012 for a disputed tax matter in Brazil by the Company’s subsidiary, GXS Tecnologia da Informacao (Brasil) Ltda. (“GXS Brazil”), in connection with GXS Brazil’s judicial appeal of a tax claim by the municipality of Sao Paulo, Brazil in the approximate amount of $2,500 as of September 30, 2013. The bank guarantee is collateralized by a deposit of cash with the issuing bank. In April 2013, GXS Brazil made an additional deposit of $353 to the bank guarantee. The Company may replace the bank guarantee with a letter of credit, likely under the Revolver, upon negotiation of commercially acceptable terms and conditions, if any, which would result in a return of the cash deposit. The Company can terminate the bank guarantee or replace the cash with a letter of credit at its option at any time and, therefore, have unrestricted access to the cash. However, terminating the bank guarantee without replacing it with a letter of credit would be expected to have detrimental legal and tax consequences that could prevent it from conducting business as usual in Brazil. The Company believes that the position of the Sao Paulo tax authorities is not consistent with the relevant facts. However, there can be no assurance that the Company will ultimately prevail and it is likely that the bank guarantee and supporting cash collateral, or the substituted letter of credit, could remain in place for several years while GXS Brazil pursues the appeal of the tax claim in the courts. While based on information available on the case and other similar matters provided by local counsel, the Company believes the facts support its position that an unfavorable outcome is not probable and no tax is owed, the ultimate outcome of this matter could result in a loss of up to the claim amount discussed above plus any future interest or penalties that may accrue.

At September 30, 2013, one of GXS Brazil’s large customers has notified GXS Brazil that it is now disputing certain invoices previously rendered by GXS Brazil, almost all of which were previously accepted and paid by the customer. The invoices cover the period from June 1, 2010 through August 5, 2013 and total approximately $2,100. The customer has provided its own internal assessment with which the Company vigorously disagrees as being fundamentally flawed. The parties are actively working to resolve the issue but it is possible that in the event of a settlement, the Company could ultimately pay the customer an amount of liquidated damages. However, the Company is unable to estimate the likelihood or amount of a potential loss, if any, and has not accrued for any potential exposure.

The Company charges certain costs to its subsidiaries, including GXS Brazil, primarily based on historical transfer pricing studies that intend to reflect the costs incurred by such subsidiaries. Although GXS Brazil has generally accrued and not paid such charges, the Company may be required to withhold taxes and pay certain social tax charges on certain charges. It is also possible that Brazilian tax authorities could challenge the allocation methodologies employed by the Company. The Company believes that an unfavorable outcome is not probable; however, any potential loss, including any interest or penalties that may accrue, cannot currently be determined.

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. Both 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 filed appeals and anticipates an eventual settlement with the Indian 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.

As of September 30, 2013, the State of Michigan is conducting an audit of certain tax returns for seller’s use tax, and single business tax, filed by Inovis for various tax filing periods from 2004 through 2009. Although audit determinations have been received from the State of Michigan for a total alleged liability of approximately $800, including penalties and interest, the Company is contesting such determinations and will commence legal proceedings as provided for in state statutes, if necessary. As a required step in the State of Michigan’s Court of Claims filing process, the Company made a $698 deposit under protest with the State of Michigan in November 2013. At this time, the Company has concluded that a loss is not probable and therefore has not accrued for any potential exposure in these matters.

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

The Company is also subject to income and other taxes in the United States 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 condensed consolidated financial position and results of operations in the period or periods for which that determination is made.

(13) Related Party Transactions

In conjunction with the Inovis Merger in June 2010, the Company entered into a new management agreement pursuant to which the Company agreed to pay in the aggregate an annual fee of $4,000 to Francisco Partners and certain former stockholders of Inovis, Golden Gate Capital (“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 Management Agreement provides for a re-calculation of the annual fee allocation upon changes in the stock ownership percentages of Francisco Partners, Golden Gate and Cerberus, if any. Changes in stock ownership percentages have been nominal to date and the allocation methodology has not been changed.

The expense accrued in each of the three month periods ended September 30, 2013 and 2012 was $1,000 and the expense accrued in each of the nine month periods ended September 30, 2013 and 2012 was $3,000. The Company made aggregate management fee payments of approximately $1,141 and $5,415 during the three and nine months ended September 30, 2013, respectively, and aggregate management fee payments of approximately $1,858 were made during both the three and nine months ended September 30, 2012, respectively. As of September 30, 2013 and December 31, 2012, the Company owed an aggregate of $1,142 and $3,557, respectively, for unpaid management fees earned under the Management Agreement through those dates. These unpaid fees are included in “accrued expenses and other current liabilities” in the condensed consolidated balance sheets as of the respective dates.

(14) Subsequent Event

On November 4, 2013, the Company’s ultimate parent, GXS Group, Inc. (“GXS Group”), entered into an Agreement and Plan of Merger (“Merger Agreement”) whereby GXS Group will be acquired by Open Text Corporation (“OpenText”) pursuant to which GXS Group will become a wholly-owned subsidiary of OpenText. The total purchase price of the transaction is approximately $1,165,000, with OpenText paying an aggregate of $1,065,000 in cash and $100,000 in OpenText common shares, in accordance with the terms of the Merger Agreement. The Company expects that a portion of the cash consideration will be used to repay, defease or redeem the Company’s outstanding Revolver and Senior Secured Notes. The Merger Agreement has been approved by the board of directors of both OpenText and GXS Group, including shareholders holding more than 85% of voting securities of GXS Group, and is subject to customary regulatory approvals and closing conditions. The transaction is expected to close in the first quarter of 2014.

(15) Supplemental Condensed Consolidated Financial Information

The Senior Secured Notes are guaranteed by each of the Company’s U.S. subsidiaries (the “Subsidiary Guarantors”). The guarantees are full, unconditional and joint and several. The Subsidiary Guarantors are each wholly-owned by the Company, either directly or indirectly. The ability of the Company’s subsidiaries to make cash distributions and loans to the Company and its Subsidiary Guarantors is not expected to be significantly restricted. The following supplemental financial information sets forth, on a consolidating basis, balance sheets, statements of operations and comprehensive income (loss), and statements of cash flows for the Company, its Subsidiary Guarantors and the Company’s non-guarantor subsidiaries. (Also see Note 10 for further discussion of Rule 3-16 and the financial statements of GXS, Inc., the Company’s only direct subsidiary and a guarantor.)

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

September 30, 2013

(In thousands)

(Unaudited)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	––		$	46,366		$	20,121		$	––		$	66,487
Receivables, net		––			48,967			39,013			––			87,980
Prepaid expenses and other assets		40			14,417			11,693			––			26,150
Advances to subsidiaries		––			641,515			85,067			(726,582	)		––
Total current assets		40			751,265			155,894			(726,582	)		180,617

Investments in subsidiaries		507,180			(16,007	)		––			(491,173	)		––
Property and equipment, net		––			105,279			7,781			––			113,060
Goodwill		––			242,256			26,270			––			268,526
Intangible assets, net		––			78,078			8,707			––			86,785
Deferred financing costs		7,616			––			––			––			7,616
Other noncurrent assets		––			8,785			12,217			––			21,002

Total Assets	$	514,836		$	1,169,656		$	210,869		$	(1,217,755	)	$	677,606

Liabilities and Stockholder’s Equity (Deficit)
Current liabilities:
Trade payables	$	––		$	12,722		$	4,320		$	––		$	17,042
Other current liabilities		23,716			43,542			36,186			––			103,444
Advances from subsidiaries		––			569,570			157,012			(726,582	)		––
Total current liabilities		23,716			625,834			197,518			(726,582	)		120,486

Long-term debt less current maturities		778,016			––			––			––			778,016
Other liabilities		––			36,642			28,984			––			65,626
Total liabilities		801,732			662,476			226,502			(726,582	)		964,128
Stockholder’s equity (deficit):
Stockholder’s equity (deficit) GXS Worldwide, Inc.		(286,896	)		507,180			(16,007	)		(491,173	)		(286,896	)
Non-controlling interest		––			––			374			––			374
Total stockholder’s equity (deficit)		(286,896	)		507,180			(15,633	)		(491,173	)		(286,522	)

Total Liabilities and Stockholder’s Equity (Deficit)	$	514,836		$	1,169,656		$	210,869		$	(1,217,755	)	$	677,606

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

December 31, 2012

(In thousands)

	Parent			Guarantors		Non-Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	––		$	14,854	$	20,176	$	––		$	35,030
Receivables, net		––			53,699		45,395		––			99,094
Prepaid expenses and other assets		152			17,292		10,882		––			28,326
Advances to subsidiaries		––			687,956		104,109		(792,065	)		––
Total current assets		152			773,801		180,562		(792,065	)		162,450

Investments in subsidiaries		489,808			3,222		––		(493,030	)		––
Property and equipment, net		––			100,695		8,612		––			109,307
Goodwill		––			242,758		26,288		––			269,046
Intangible assets, net		––			89,856		10,982		––			100,838
Deferred financing costs		10,988			––		––		––			10,988
Other noncurrent assets		––			9,051		11,052		––			20,103

Total Assets	$	500,948		$	1,219,383	$	237,496	$	(1,285,095	)	$	672,732

Liabilities and Stockholder’s Equity (Deficit)
Current liabilities:
Trade payables	$	––		$	14,453	$	5,572	$	––		$	20,025
Other current liabilities		3,402			49,398		34,721		––			87,521
Advances from subsidiaries		––			628,601		163,464		(792,065	)		––
Total current liabilities		3,402			692,452		203,757		(792,065	)		107,546

Long-term debt less current maturities		775,334			––		––		––			775,334
Other liabilities		––			37,123		30,171		––			67,294
Total liabilities		778,736			729,575		233,928		(792,065	)		950,174
Stockholder’s equity (deficit):
Stockholder’s equity (deficit) GXS Worldwide, Inc.		(277,788	)		489,808		3,222		(493,030	)		(277,788	)
Non-controlling interest		––			––		346		––			346
Total stockholder’s equity (deficit)		(277,788	)		489,808		3,568		(493,030	)		(277,442	)

Total Liabilities and Stockholder’s Equity (Deficit)	$	500,948		$	1,219,383	$	237,496	$	(1,285,095	)	$	672,732

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Three Months Ended September 30, 2013

(In thousands)

(Unaudited)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated

Revenues	$	––		$	103,557		$	54,270		$	(36,059	)	$	121,768

Costs and operating expenses		1,637			76,177			57,533			(36,059	)		99,288
Operating income (loss)		(1,637	)		27,380			(3,263	)		––			22,480
Other income (expense), net		(21,427	)		328			552			––			(20,547	)
Income (loss) before income taxes		(23,064	)		27,708			(2,711	)		––			1,933
Income tax expense		––			686			706			––			1,392
Income (loss) before equity in income (loss) of subsidiaries		(23,064	)		27,022			(3,417	)		––			541
Equity in income (loss) of subsidiaries		23,605			(3,417	)		––			(20,188	)		––
Net income (loss)		541			23,605			(3,417	)		(20,188	)		541
Foreign currency translation adjustments		––			––			259			––			259
Dividends from subsidiaries		––			783			––			(783	)		––
Comprehensive income (loss)		541			24,388			(3,158	)		(20,971	)		800
Less: Comprehensive income attributable to non-controlling interest		––			––			51			––			51
Comprehensive income (loss) attributable to GXS Worldwide, Inc.	$	541		$	24,388		$	(3,209	)	$	(20,971	)	$	749

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Nine Months Ended September 30, 2013

(In thousands)

(Unaudited)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated

Revenues	$	––		$	307,958		$	164,822		$	(111,493	)	$	361,287

Costs and operating expenses		1,637			235,406			175,487			(111,493	)		301,037
Operating income (loss)		(1,637	)		72,552			(10,665	)		––			60,250
Other income (expense), net		(64,179	)		2,493			(4,735	)		––			(66,421	)
Income (loss) before income taxes		(65,816	)		75,045			(15,400	)		––			(6,171	)
Income tax expense		––			1,688			1,627			––			3,315
Income (loss) before equity in income (loss) of subsidiaries		(65,816	)		73,357			(17,027	)		––			(9,486	)
Equity in income (loss) of subsidiaries		56,330			(17,027	)		––			(39,303	)		––
Net income (loss)		(9,486	)		56,330			(17,027	)		(39,303	)		(9,486	)
Foreign currency translation adjustments		––			––			(509	)		––			(509	)
Dividends from subsidiaries		––			1,299			––			(1,299	)		––
Comprehensive income (loss)		(9,486	)		57,629			(17,536	)		(40,602	)		(9,995	)
Less: Comprehensive income attributable to non-controlling interest		––			––			28			––			28
Comprehensive income (loss) attributable to GXS Worldwide, Inc.	$	(9,486	)	$	57,629		$	(17,564	)	$	(40,602	)	$	(10,023	)

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Three Months Ended September 30, 2012

(In thousands)

(Unaudited)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated

Revenues	$	––		$	101,257		$	55,133		$	(35,111	)	$	121,279

Costs and operating expenses		––			79,024			55,840			(35,111	)		99,753
Operating income (loss)		––			22,233			(707	)		––			21,526
Other income (expense), net		(21,347	)		538			413			––			(20,396	)
Income (loss) before income taxes		(21,347	)		22,771			(294	)		––			1,130
Income tax expense		––			659			617			––			1,276
Income (loss) before equity in income (loss) of subsidiaries		(21,347	)		22,112			(911	)		––			(146	)
Equity in income (loss) of subsidiaries		21,201			(911	)		––			(20,290	)		––
Net income (loss)		(146	)		21,201			(911	)		(20,290	)		(146	)
Foreign currency translation adjustments		––			––			1,077			––			1,077
Dividends from subsidiaries		––			469			––			(469	)		––
Comprehensive income (loss)		(146	)		21,670			166			(20,759	)		931
Less: Comprehensive income attributable to non-controlling interest		––			––			47			––			47
Comprehensive income (loss) attributable to GXS Worldwide, Inc.	$	(146	)	$	21,670		$	119		$	(20,759	)	$	884

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Nine Months Ended September 30, 2012

(In thousands)

(Unaudited)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated

Revenues	$	––		$	306,318		$	163,590		$	(108,908	)	$	361,000

Costs and operating expenses		48			238,602			171,086			(108,908	)		300,828
Operating income (loss)		(48	)		67,716			(7,496	)		––			60,172
Other income (expense), net		(64,053	)		1,970			(5,158	)		––			(67,241	)
Income (loss) before income taxes		(64,101	)		69,686			(12,654	)		––			(7,069	)
Income tax expense		––			1,790			1,613			––			3,403
Income (loss) before equity in income (loss) of subsidiaries		(64,101	)		67,896			(14,267	)		––			(10,472	)
Equity in income (loss) of subsidiaries		53,629			(14,267	)		––			(39,362	)		––
Net income (loss)		(10,472	)		53,629			(14,267	)		(39,362	)		(10,472	)
Foreign currency translation adjustments		––			––			2,226			––			2,226
Dividends from subsidiaries		––			1,062			––			(1,062	)		––
Comprehensive income (loss)		(10,472	)		54,691			(12,041	)		(40,424	)		(8,246	)
Less: Comprehensive income attributable to non-controlling interest		––			––			32			––			32
Comprehensive income (loss) attributable to GXS Worldwide, Inc.	$	(10,472	)	$	54,691		$	(12,073	)	$	(40,424	)	$	(8,278	)

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2013

(In thousands)

(Unaudited)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(9,486	)	$	56,330		$	(17,027	)	$	(39,303	)	$	(9,486	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		––			37,398			4,386			––			41,784
Deferred income taxes		––			1,033			(90	)		––			943
Amortization of deferred financing fees and debt discount		6,054			––			351			––			6,405
Stock compensation expense		––			915			––			––			915
Equity in net (income) loss of subsidiaries		(56,330	)		17,027			––			39,303			––
Changes in operating assets and liabilities, net		59,762			(49,921	)		15,535			––			25,376
Net cash provided by operating activities		––			62,782			3,155			––			65,937

Cash flows from investing activities:
Purchases of property and equipment (including capitalized interest)		––			(31,270	)		(2,291	)		––			(33,561	)
Net cash used in investing activities		––			(31,270	)		(2,291	)		––			(33,561	)

Cash flows from financing activities:
Borrowings under revolving credit facility		––			––			––			––			––
Repayments under revolving credit facility		––			––			––			––			––
Payment of financing costs		––			––			––			––			––
Net cash used in financing activities		––			––			––			––			––

Effect of exchange rate changes on cash		––			––			(919	)		––			(919	)

Increase (decrease) in cash and cash equivalents		––			31,512			(55	)		––			31,457
Cash and cash equivalents, beginning of period		––			14,854			20,176			––			35,030

Cash and cash equivalents, end of period	$	––		$	46,366		$	20,121		$	––		$	66,487

GXS WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2012

(In thousands)

(Unaudited)

	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(10,472	)	$	53,629		$	(14,267	)	$	(39,362	)	$	(10,472	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		––			37,589			4,705			––			42,294
Deferred income taxes		––			481			475			––			956
Amortization of deferred financing fees and debt discount		5,756			––			273			––			6,029
Stock compensation expense		––			609			––			––			609
Equity in net (income) loss of subsidiaries		(53,629	)		14,267			––			39,362			––
Changes in operating assets and liabilities, net		61,766			(59,041	)		20,689			––			23,414
Net cash provided by operating activities		3,421			47,534			11,875			––			62,830

Cash flows from investing activities:
Purchases of property and equipment (including capitalized interest)		––			(28,070	)		(3,335	)		––			(31,405	)
Net cash used in investing activities		––			(28,070	)		(3,335	)		––			(31,405	)

Cash flows from financing activities:
Borrowings under revolving credit facility		20,000			––			––			––			20,000
Repayments under revolving credit facility		(23,000	)		––			––			––			(23,000	)
Payment of financing costs		(421	)		––			––			––			(421	)
Net cash used in financing activities		(3,421	)		––			––			––			(3,421	)

Effect of exchange rate changes on cash		––			––			(154	)		––			(154	)

Increase in cash and cash equivalents		––			19,464			8,386			––			27,850
Cash and cash equivalents, beginning of period		––			2,836			10,132			––			12,968

Cash and cash equivalents, end of period	$	––		$	22,300		$	18,518		$	––		$	40,818

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risk and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed under “Risk Factors” in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements and related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 included in our 2012 Annual Report on Form 10-K.

Overview

We are a leading global provider of business-to-business (“B2B”) integration solutions. Our solutions enable our customers to effectively manage the flow of electronic transaction information with their trading partners. We combine our global community of approximately 550,000 business partners, information technology (“IT”) infrastructure, software-as-a-service (“SaaS”) applications and broad expertise to address the critical B2B challenges of our customers. By utilizing our B2B integration solutions, our customers realize a number of key benefits such as lower total cost of ownership, accelerated time to market and enhanced reliability and security.

We operated as a division of General Electric Company (“GE”) prior to the 2002 acquisition by Francisco Partners and its co-investors. We subsequently began investing in GXS Trading Grid®, our cloud-based integration platform, and launched our Managed Services solution. Over the course of the past several years, we also acquired several companies to expand the number of customers and functional capabilities of GXS Trading Grid®. These acquisitions included:

IBM’s global electronic data interchange (“EDI”) business;

Interchange Serviços S.A. (“Interchange”), a provider of B2B integration services in Brazil;

Inovis International, Inc. (“Inovis”), a provider of B2B integration services; and

RollStream, Inc. (“RollStream”) a SaaS provider of enterprise community management solutions.

On November 4, 2013, subsequent to the end of the third quarter of 2013, our ultimate parent, GXS Group, Inc. (“GXS Group”), entered into an Agreement and Plan of Merger (“Merger Agreement”) whereby GXS Group will be acquired by Open Text Corporation (“OpenText”) pursuant to which GXS Group will become a wholly-owned subsidiary of OpenText. The total purchase price of the transaction is approximately $1.2 billion, consisting of an aggregate of $1.1 billion in cash and $100.0 million in OpenText common shares, in accordance with the Merger Agreement. We expect that a portion of the cash consideration will be used to repay, defease or redeem our outstanding Revolver and Senior Secured Notes. The Merger Agreement has been approved by the respective boards of directors and is subject to customary regulatory approvals and closing conditions. The transaction is expected to close in the first quarter of 2014.

GXS Trading Grid® is the foundation of our B2B integration solution suite. GXS Trading Grid® consists of the IT platform, software applications and a global community of over 550,000 business partners that enable the secure and reliable flow of transactions between business partners.

Through GXS Trading Grid®, we provide our core B2B integration solutions, Messaging Services and Managed Services. Messaging Services allows for the automated and reliable exchange of electronic transaction information such as purchase orders, invoices, shipment notices and other files, amongst businesses worldwide. Managed Services, our fastest growing solution, provides an end-to-end fully outsourced B2B integration solution to our customers, including program implementation, operational management, customer support and a suite of value-added SaaS applications, which we refer to as GXS ActiveSM Applications. GXS ActiveSM Applications are offered to customers across all our service lines and enhance our customers’ visibility into, and control of, their supply chains and supporting business processes. In addition, we have the B2B integration expertise and process experience to best serve our customers’ needs.

We also provide B2B Software and Services solutions, which allow our customers to deploy B2B integration gateways on their premises in order to connect their internal systems and processes to their partners through an external network, such as our GXS Trading Grid®; Data Synchronization services which enable the exchange of product and price information between the suppliers of consumer products and the retailers that sell them; and Custom Outsourcing Services, which allows our customers to outsource activities not directly related to supply chain activities but for which our outsourcing capabilities and expertise can provide greater value to our customers than they could otherwise realize by managing these applications themselves.

We have deep vertical expertise in a variety of key industries such as retail, consumer products, financial services, automotive, manufacturing, and information technology, and serve a broad base of large, multi-national enterprises. As of December 31, 2012, we had over 40,000 direct-billed, active customers on our platform across 59 countries, including more than 56.0% of the Forbes Global 1000.

The majority of our revenue is generated through transaction processing and subscription service fees from both Managed Services and Messaging Services. Managed Services revenue grew at a three year compounded annual growth rate (“CAGR”) of 29.8% from 2009 to 2012 and represented approximately 37.0% of our total revenue for the year ended December 31, 2012 and approximately 41.4% and 39.8% of our total revenue for the three and nine months ended September 30, 2013, respectively. During the three months ended September 30, 2013, our Managed Services revenue exceeded our Messaging Services revenue for the first time in our history. We believe customers view our solutions as essential to their day-to-day supply chain operations and they typically enter into long-term contracts with us. Our transaction processing and software maintenance fees, which are recurring in nature, represented approximately 84.5% and 85.2% of our total revenue for the three and nine months ended September 30, 2013, respectively. Additionally, approximately 92.0% of our top 50 customers, based on annual revenue in fiscal 2012, have been our customers for five or more years.

Factors and Trends Affecting Our Business

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

Messaging Services, which comprised 41.0% and 42.0% of revenues for the three and nine months ended September 30, 2013, automates the exchange of electronic documents between businesses and eliminates the complexities of disparate standards and communication protocols;

Managed Services, which comprised 41.4% and 39.8% of revenues for the three and nine months ended September 30, 2013, allows our customers to offload complex integration functions or outsource supply chain management activities to us in order to improve speed-to-market, drive higher customer satisfaction, or reduce overall costs from data integration;

B2B Software and Services, which comprised 8.7% and 8.9% of revenues for the three and nine months ended September 30, 2013, 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 6.6% and 6.6% of revenues for the three and nine months ended September 30, 2013, 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 2.3% and 2.7% of revenues for the three and nine months ended September 30, 2013, 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 for which our outsourcing capabilities and expertise can provide greater value to our customers than they could otherwise realize by managing these applications themselves.

Across each of 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 solutions have been adversely impacted by pricing pressure even as our transaction volumes have increased. We are investing in new functionality and value-added capabilities that can be used by our Messaging Services customers, such as near real-time disaster recovery and the ability to monitor data quality and quarantine data that does not adhere to select business rules. As a result of these investments and the increase in volume we have seen in this service line, the rate of decline in our Messaging Services revenue has decreased in recent periods and is expected to continue to decrease in the near-term.

We believe the growing complexity of business processes, the acceptance of SaaS and cloud-based delivery models and the importance of real-time information and analytics are driving the need for robust B2B integration services, and in particular, the adoption of GXS’ Managed Services solutions in the marketplace. GXS’ Managed Services offers an alternative delivery model designed for companies that may be struggling to achieve returns from B2B integration software investments or are unable to handle the considerable tasks associated with managing worldwide B2B programs. In our model, there is no need for our customers to purchase or manage their own B2B integration software, hardware or people. Instead, companies leverage GXS Trading Grid® by outsourcing the management of the underlying server hardware, storage platforms and B2B translation technology. Through this model, companies are able to achieve their B2B integration goals faster and at a lower cost than through in-house and software-based approaches.

Representing nearly 37.0% of our revenues in 2012 and approximately 41.4% and 39.8% of our revenues for the three and nine months ended September 30, 2013, respectively, we believe Managed Services will become an increasing percentage of our total revenues over time, and represent, along with our Messaging Services, the largest portion of our total revenues. During the three months ended September 30, 2013, Managed Services revenue exceeded Messaging Services revenue for the first time in our history. We also believe that our other service lines, such as B2B Software and Services, Data Synchronization and Customer Outsourcing Services will represent a smaller portion of our total revenues over time.

Our Revenues and Expenses

Revenues

We charge our customers a fee for processing transactions. 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. Because the transactions we process, such as the exchange of invoices and purchase orders, are routine and essential to the day-to-day operations of our customers, the revenues generated from these fees tend to be recurring in nature. Customers who are not committed to multi-year contracts generally are under contracts for transaction processing solutions that automatically renew every month or year, depending on the terms of the specific contracts.

Professional services are usually associated with new project implementation, in which case the associated professional services revenue is deferred over the estimated customer life which, based on our current estimates, approximates the initial contract term. When professional services are performed under either fixed-fee or 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. Software maintenance revenues are deferred and recognized on a straight-line basis over the life of the related contract, which is typically one year.

For the three and nine months ended September 30, 2013 and 2012, the breakdown of revenue by service line, along with each service line’s percentage of total revenue, appears below (in thousands, except for percentages):

	Three Months Ended September 30,										Nine Months Ended September 30,
	2013					2012					2013					2012
Service Line	Amount		%			Amount		%			Amount		%			Amount		%
Messaging Services	$	49,966		41.0	%	$	52,332		43.1	%	$	151,710		42.0	%	$	160,281		44.4	%
Managed Services		50,396		41.4	%		45,102		37.2	%		143,897		39.8	%		130,505		36.1	%
B2B Software and Services		10,529		8.7	%		12,191		10.1	%		32,192		8.9	%		34,406		9.5	%
Data Synchronization		8,046		6.6	%		7,916		6.5	%		23,823		6.6	%		24,425		6.8	%
Custom Outsourcing Services		2,831		2.3	%		3,738		3.1	%		9,665		2.7	%		11,383		3.2	%

Total revenue / percentage	$	121,768		100.0	%	$	121,279		100.0	%	$	361,287		100.0	%	$	361,000		100.0	%

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

As a result of our significant international operations, the translation of our foreign revenues generated in foreign currencies into U.S. dollars impacts the comparison of our revenues from period to period. Our revenues have been affected by a fluctuating U.S. dollar relative to the foreign currencies in which we transact business. The relative strengthening of the U.S. dollar during the three and nine months ended September 30, 2013, as compared to the three and nine months ended September 30, 2012, resulted in a $1.9 million and a $5.7 million decrease in our revenues for the three and nine months ended September 30, 2013, respectively, from translating revenues generated in foreign currencies into U.S. dollars. (See “Item 3—Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”)

Cost of Revenues

Cost of revenues primarily consists of:

compensation and related allocated benefit expenses associated with our workforce engaged in service delivery, technical operations and research and development;

computer, network and facility operating expenses;

royalty payments associated with resale of third-party software licenses; and

depreciation and amortization expense, including the amortization of our capitalized software costs, deferred implementation costs and acquired intangibles.

We defer all direct and relevant costs associated with implementation of certain long-term customer contracts to the extent such costs can be recovered through guaranteed minimum revenues. The unamortized balances of these costs as of September 30, 2013 and December 31, 2012 were $30.1 million and $28.7 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 primarily consists of sales and marketing expenses, and general and administrative expenses.

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 senior 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. General and administrative expenses also includes restructuring charges consisting of severance costs associated with workforce reduction efforts and net lease costs related to darkened facilities.

As a result of our significant international operations, the translation of our foreign costs of revenues and operating expenses into U.S. dollars impacts the comparison of our costs of revenues and operating expenses from period to period. Our costs of revenues and operating expenses have been affected by a fluctuating U.S. dollar. The relative strengthening of the U.S. dollar during the three and nine months ended September 30, 2013, as compared to the three and nine months ended September 30, 2012 resulted in a $1.6 million and $4.0 decrease in our costs of revenues and operating expenses for the three and nine months ended September 30, 2013, respectively, from translation of our expenses incurred in foreign currencies into U.S. dollars. (See “Item 3—Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”)

The following is a summary of our costs and operating expenses for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
Costs and Operating Expenses	2013		2012		2013		2012

Cost of revenues	$	65,082	$	67,201	$	196,785	$	198,809
Sales and marketing		17,363		17,117		52,376		50,797
General and administrative		16,843		15,435		51,876		51,222

Total costs and operating expenses	$	99,288	$	99,753	$	301,037	$	300,828

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 (“U.S. GAAP”) and should not be considered as: (i) an alternative to net income (loss); (ii) a measure of operating income or cash flows from operating, investing and financing activities; or (iii) a measure of liquidity. Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures presented by other companies.

The table below reconciles net income (loss) to Adjusted EBITDA for the periods presented (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012

Net income (loss)	$	541		$	(146	)	$	(9,486	)	$	(10,472	)

Adjustments:
Income tax expense		1,392			1,276			3,315			3,403
Interest expense, net		21,083			21,093			63,218			63,562
Depreciation and amortization		14,259			14,081			41,784			42,294
Stock compensation expense		333			230			915			609
Other (income) expense, net		(536	)		(697	)		3,203			3,679
Restructuring charges		242			402			1,461			1,360
Write-off of unrealizable financing costs		1,637			––			1,637			––
Merger and acquisition fees		––			––			––			3
Deferred income adjustment (1)		––			––			––			25
Management fees		1,000			1,000			3,000			3,000
Total adjustments		39,410			37,385			118,533			117,935

Adjusted EBITDA	$	39,951		$	37,239		$	109,047		$	107,463

____________

(1)

Purchase accounting requires that deferred income of an acquired business be written down to fair value of the

underlying obligations plus associated margin at the date of acquisition.

Adjusted EBITDA for the three months ended September 30, 2013 and 2012 was $40.0 million and $37.2 million, respectively. Adjusted EBITDA for the nine months ended September 30, 2013 and 2012 was $109.0 million and $107.5 million, respectively. The increase in Adjusted EBITDA of $2.8 million (or 7.3%) for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 was driven by slightly increased revenue along with decreased cost of revenues and general and administrative operating expenses which resulted in increased operating income being generated. The increase in Adjusted EBITDA of $1.5 million (or 1.4%) for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 was also driven by slightly increased revenue along with decreased cost of revenues and general and administrative operating expenses resulting in increased operating income being generated.

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 value of new sales agreements signed in the current period by our customers. If the new contract signed is to replace an existing revenue stream, the MCV is adjusted to reflect only the incremental value from the sale.

MCV for the three and nine months ended September 30, 2013 was $65.1 million and $164.6 million, respectively, which were increases of $15.0 million (or 29.8%) and $9.2 million (or 5.9%), respectively, when compared to MCV of $50.1 million and $155.4 million for the three and nine months ended September 30, 2012. The MCV increases were primarily due to the effect of Managed Services deals in Europe, Middle-East and Africa (“EMEA”) and North America for the three months ended September 30, 2013 and due to the effect of Managed Services deals in EMEA, North America and Japan for the nine months ended September 30, 2013.

Managed Services deals accounted for approximately 86% and 70% of the MCV for the three months ended September 30, 2013 and 2012, respectively, and approximately 82% and 76% of the MCV for the nine months ended September 30, 2013 and 2012, respectively. Messaging Services deals accounted for approximately 6% and 16% of the MCV for the three months ended September 30, 2013 and 2012, respectively, and approximately 9% and 12% of the MCV for the nine months ended September 30, 2013 and 2012, respectively. Approximately 96% of Managed Services’ MCV for each of the three and nine months ended September 30, 2013, respectively, was generated from the North America, EMEA and Japan regions compared to approximately 86% and 93% of Managed Services’ MCV for the three and nine months ended September 30, 2012, respectively, being generated from these same regions.

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 revenues, deferred income, as a measure of financial condition, or operating performance.

Results of Operations

Three months ended September 30, 2013 compared to three months ended September 30, 2012

Revenues. Revenues increased by $0.5 million, or 0.4%, to $121.8 million for the three months ended September 30, 2013 from $121.3 million for the three months ended September 30, 2012. The increase was principally due to the continued growth of our Managed Services revenues in nearly all regions, but particularly in the EMEA, North America and Brazil regions, partially offset by decreases in our Messaging Services revenues and decreases in our other revenue service lines as a result of expected competitive pricing pressure and customer attrition, along with the $1.9 million unfavorable impact of translating revenues generated in foreign currencies to U.S. dollars. A comparison of our revenues by service line is as follows:

Messaging Services revenues decreased by $2.3 million, or 4.5%, to $50.0 million for the three months ended September 30, 2013 from $52.3 million for the three months ended September 30, 2012. The decrease resulted principally from $1.0 million in net decreases on Messaging Services projects due to price reductions and customer attrition for the three months ended September 30, 2013, along with the $1.3 million unfavorable impact of translating revenues generated in foreign currencies into U.S. dollars for the respective three month periods.

Managed Services revenues increased by $5.3 million, or 11.7%, to $50.4 million for the three months ended September 30, 2013 from $45.1 million for the three months ended September 30, 2012. The increase was principally due to $5.8 million of revenue generated by new Managed Services projects for the three months ended September 30, 2013, partially offset by the $0.5 million unfavorable impacts

GXS Worldwide, Inc. 10-Q