ASPECT SOFTWARE GROUP HOLDINGS LTD. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q, or this "Quarterly Report", and in conjunction with our Annual Report on Form 10-K (File No. 333-170936).

This Quarterly Report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report, including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "intends," "may," "plans," "projects," "should," "will" and "would," and words of similar import and the negatives thereof, are forward-looking statements.

Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the "Risk Factors," "Quantitative and Qualitative Disclosures of Market Risks," and "Liquidity and Capital Resources" sections contained in this Quarterly Report, and the risks discussed in our other SEC filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.

We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. We claim the protection of the Private Securities Litigation Reform Act of 1995 for all forward-looking statements in this report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.

The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements.

Overview We are a leading global provider of business communications solutions and services. We develop, market, license and sell software and hardware products that enable businesses to manage communications with their customers and employees more efficiently and effectively. In addition to our contact center products, we provide enterprise-wide unified communications and collaboration services, which allow companies to expand the role of customer contact in their enterprises by utilizing various communications technologies, such as voice, email, instant messaging and video, on an integrated software platform. We believe this type of technology will be foundational as traditional contact centers evolve into customer contact hubs that engage with customers through social media and provide customer access to experts throughout the enterprise.

In 2008, Microsoft purchased an equity stake in our company and entered into a strategic alliance with us to integrate our contact center products into Microsoft's own industry-leading unified communications offerings. We believe this alliance increases our influence and visibility with new and existing customers.

New Executives and Review of Business Strategy On August 5, 2012, Stewart Bloom became our Chief Executive Officer and a member of our Board of Directors. Mr. Bloom is engaging in a review of the Company's business strategy to enhance long term shareholder value. As part of that review, Mr. Bloom intends to review with the Board of Directors, among other things, the Company's growth and acquisition strategy and the Company's cash position and planned capital allocation strategy. This review process may lead to a reevaluation of, or changes to our current plans. Additionally, we had a number of other key executive additions during the third quarter of 2012: On July 5, 2012, Robert Krakauer became our Chief Financial Officer; On September 5, 2012, James Freeze became our Senior Vice President and Chief Marketing Officer; On September 17, 2012, Chris Koziol became President and General Manager of our Interactive Management business; and On September 17, 2012, Spence Mallder became General Manager of our Workforce Optimization business and our Chief Technology Officer.

General There have been significant challenges to face this year regarding the state of the global economy with respect to persistent high unemployment, modest economic growth and the Eurozone crisis, all of which are contributing to low global economic growth. As a result, we are hearing a more cautious tone from our customers regarding their spending outlook. In addition, 20-------------------------------------------------------------------------------- Table of Contents Signature Dialer migrations, which accounted for nearly 25% of our product bookings in 2011, are substantially complete and we do not expect to see these sizable Dialer migration deals to reoccur in 2012. We are now in the process of migrating our Automatic Call Distributor customer base to Unified IP, but are experiencing lengthening decision and approval cycles as customers remain cautious with capital investments. These economic and market challenges combined with the successful migration of the majority of our Signature Dialer base to Unified IP in 2011 have negatively impacted our sales for 2012. In August 2012, we launched our Unified IP 7.1 product release, which we have code named Tiger Shark. Aspect Unified IP 7.1 delivers new capability and strengthens integration with our Workforce Optimization solution.

We have identified certain items that management uses as performance indicators to manage our business, including revenue, certain elements of operating expenses and cash flow from operations, and we describe these items further below.

Financial Summary The following table sets forth the unaudited results of our operations expressed in dollars and as a percentage of net revenue for the three and nine months ended September 30, 2012 and 2011: (Dollars in millions) Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011 2012 2011 2012 2011 Net revenues $ 111.5 $ 133.2 100 % 100 % $ 333.1 $ 391.1 100 % 100 % Total cost of revenues 42.4 53.4 38 % 40 % 133.2 156.0 40 % 40 % Gross profit 69.1 79.8 62 % 60 % 199.9 235.1 60 % 60 % Operating expenses 50.3 48.9 45 % 37 % 150.4 151.5 45 % 39 % Income from operations 18.8 30.9 17 % 23 % 49.5 83.6 15 % 21 % Interest and other expense, net (16.7 ) (15.7 ) (15 )% (12 )% (51.3 ) (48.7 ) (15 )% (12 )% Income (loss) before income taxes 2.1 15.2 2 % 11 % (1.8 ) 34.9 (1 )% 9 % (Benefit from) provision for income taxes (5.7 ) 4.9 (5 )% 3 % (0.9 ) 9.5 - % 3 % Net income (loss) $ 7.8 $ 10.3 7 % 8 % $ (0.9 ) $ 25.4 - % 6 % Adjusted EBITDA Earnings before interest, depreciation and amortization, as adjusted ("Adjusted EBITDA") is used in our debt agreements to determine compliance with financial covenants and our ability to engage in certain activities, such as making certain payments. In addition to covenant compliance, our management also uses Adjusted EBITDA along with certain other pro forma adjustments to assess our operating performance and to calculate performance-based cash bonuses which are tied to pro forma EBITDA targets. Adjusted EBITDA contains other charges and gains, for which we believe adjustment is permitted under our senior secured credit agreement. Adjusted EBITDA is not a measure of our liquidity or financial performance under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. The use of Adjusted EBITDA instead of income from operations has limitations as an analytical tool, including the failure to reflect changes in cash requirements, including cash requirements necessary to service principal or interest payments on our debt, or changes in our working capital needs. Management compensates for these limitations by relying primarily on our GAAP results and by using Adjusted EBITDA on a supplemental basis. Other companies in our industry may calculate this measure differently than we do, limiting its usefulness as a comparative measure.

The following is a reconciliation of income from operations to Adjusted EBITDA: (In millions) Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change ($) 2012 2011 Change ($) Income from operations $ 18.8 $ 30.9 $ (12.1 ) $ 49.5 $ 83.6 $ (34.1 ) Depreciation and amortization 10.4 13.4 (3.0 ) 32.4 41.9 (9.5 ) Stock based compensation (0.2 ) 0.2 (0.4 ) 0.3 0.6 (0.3 ) Sponsor management fees 0.5 0.5 - 1.5 1.5 - Other (1) 4.1 3.3 0.8 9.0 4.3 4.7 Adjusted EBITDA $ 33.6 $ 48.3 $ (14.7 ) $ 92.7 $ 131.9 $ (39.2 ) 21-------------------------------------------------------------------------------- Table of Contents (1) These costs represent amounts that are allowed to be added back for calculation of compliance with our debt agreement covenants including acquisition related adjustments to revenue, strategic investment costs, legal entity rationalization, IRS audit, debt issuance, Sarbanes-Oxley compliance, foreign withholding taxes, and non-recurring charges.

Net Revenue The following table presents the breakdown of net revenues between product, maintenance and services revenue: (In millions) Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change ($) 2012 2011 Change ($) Product revenue $ 19.5 $ 33.8 $ (14.3 ) $ 53.2 $ 92.6 $ (39.4 ) Maintenance revenue 69.8 75.2 (5.4 ) 213.2 227.4 (14.2 ) Services revenue 22.2 24.2 (2.0 ) 66.7 71.1 (4.4 ) Total revenue $ 111.5 $ 133.2 $ (21.7 ) $ 333.1 $ 391.1 $ (58.0 ) The decline in product revenue in both periods of 2012 when compared to the prior year periods is primarily related to several significant expansion orders and extraordinarily large one time dialer migrations that occurred in 2011. With the majority of migrations of our Dialer customer base to Unified IP completed, we are now in the process of migrating our Automatic Call Distributor (ACD) customers, but we continue to experience lengthening decision and approval cycles as economic uncertainty has resulted in customers remaining cautious with capital investments.

During 2012, we experienced reductions in our maintenance revenue when compared to the prior year as our customers consolidated due to agent downsizing and license decommissioning and we also experienced competitive displacements. In some cases our customers began migrating to the competitive platform in previous years and completed the migration during 2012. In addition, the lower volume of product bookings in 2012 resulted in lower first year maintenance revenue.

The decline in services revenue for the three and nine months ended September 30, 2012 as compared to the same periods in the prior year is primarily the result of reduced product volume as a majority of our customers also purchase installation services with their product order.

Revenue by Geography The following table presents the breakdown of net revenues by geographic location: (In millions) Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change 2012 2011 Change % of Total % of Total % of Total % of Total Revenue Revenue Revenue Revenue ($) Revenue Revenue Revenue Revenue ($) United States and Canada $ 75.0 67.3 % $ 88.0 66.1 % $ (13.0 ) $ 220.9 66.3 % $ 258.9 66.2 % $ (38.0 ) Latin America 5.9 5.3 % 4.7 3.5 % 1.2 15.4 4.6 % 10.4 2.7 % 5.0 Europe and Africa 21.5 19.3 % 28.2 21.2 % (6.7 ) 68.4 20.5 % 87.4 22.3 % (19.0 ) Asia Pacific (including Middle East) 9.1 8.1 % 12.3 9.2 % (3.2 ) 28.4 8.6 % 34.4 8.8 % (6.0 ) Total revenue $ 111.5 100.0 % $ 133.2 100.0 % $ (21.7 ) $ 333.1 100.0 % $ 391.1 100.0 % $ (58.0 ) The decrease in United States and Canada net revenues for the three and nine ended September 30, 2012 compared to the same periods in the prior year 2011 is primarily related to extraordinarily large one time dialer migration deals in the prior year. Favorable net revenues for Latin America for the three and nine month periods are driven primarily by the acquisition of Corsidian, which occurred in July 2011. The decrease in Europe and Africa net revenues for the three and nine months ended September 30, 2012 compared to the same periods in the prior year is driven by lower product revenue primarily due to declining add-on demand from our Signature base as customers delay purchases while they determine their migration strategy. In addition, continued economic uncertainty has resulted in some hesitancy with customers in releasing capital funding. The decrease in Asia Pacific net revenues for the three and nine months ended September 30, 2012 compared to the same periods in the prior year is primarily related to lower product revenue primarily due to larger dialer migrations and expansion orders in 2011.

22-------------------------------------------------------------------------------- Table of Contents Cost of Revenue The following table presents the breakdown of cost of revenues between product, maintenance and services revenue and amortization expense for acquired intangible assets: (In millions) Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change ($) 2012 2011 Change ($) Cost of product revenue $ 5.0 $ 7.9 $ (2.9 ) $ 17.8 $ 23.9 $ (6.1 ) Cost of maintenance revenue 18.5 22.1 (3.6 ) 56.5 64.2 (7.7 ) Cost of services revenue 17.6 19.9 (2.3 ) 54.7 57.1 (2.4 ) Amortization expense for acquired intangible assets 1.3 3.5 (2.2 ) 4.2 10.8 (6.6 ) Total cost of goods sold $ 42.4 $ 53.4 $ (11.0 ) $ 133.2 $ 156.0 $ (22.8 ) The following table presents gross profit as a percentage of related revenue: Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change (pts) 2012 2011 Change (pts) Product gross margin 74.4 % 76.7 % (2.3 ) 66.6 % 74.2 % (7.6 ) Maintenance gross margin 73.5 % 70.8 % 2.7 73.6 % 71.9 % 1.7 Services gross margin 20.8 % 16.1 % 4.7 17.9 % 19.2 % (1.3 ) The deterioration in product gross margin for the nine months ended September 30, 2012 when compared to the same period in the prior year is primarily related to an increase of approximately $2.5 million in excess Signature inventory reserves in 2012 resulting from a significant decline in anticipated future sales of this product. In addition, our product gross margin for both the three and nine months ended September 30, 2012 were unfavorably impacted by lower sales volume in 2012 which reduced the leverage on our fixed costs.

During the first quarter of 2012 we redesigned the structure of our support and professional services organizations to realign, invest and hire the skill sets necessary to better meet customer experience expectations. These actions had a favorable impact on our maintenance and services gross margins for both the three and nine months ended September 30, 2012 as they reduced our total headcount in these organizations by approximately 10% as of September 30, 2012, when compared to the prior year period. For the nine months ended September 30, 2012, these cost saving initiatives were more than offset by the reduced volume of services revenue which did not allow us to leverage our fixed costs.

During the three and nine months ended September 30, 2012, amortization expense for acquired intangible assets decreased as compared to the same periods in the prior year as the result of certain assets becoming fully amortized.

Operating Expenses (In millions) Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change ($) 2012 2011 Change ($) Research and development $ 10.4 $ 9.8 $ 0.6 $ 30.1 $ 29.3 $ 0.8 Selling, general and administrative 32.3 31.4 0.9 94.9 96.8 (1.9 ) Amortization expense for acquired intangible assets 7.6 7.8 (0.2 ) 23.1 22.7 0.4 Restructuring charges - (0.1 ) 0.1 2.3 2.7 (0.4 ) Total $ 50.3 $ 48.9 $ 1.4 $ 150.4 $ 151.5 $ (1.1 ) The increase in research and development expenses for the three and nine months ended September 30, 2012, is primarily related to an increase in headcount of approximately 15% as of September 30, 2012, when compared to the prior year period. During 2012, we increased our research and development spend as we sought to expand our product development portfolio with next generation customer contact solutions. Customer contact solutions are evolving with consumers to provide multichannel interactions utilizing unified communications and collaboration platforms to improve agent productivity and customer satisfaction.

These additional investments during 2012 were partially offset by lower employee incentive plan expenses, which are driven by our actual financial results relative to established targets.

23-------------------------------------------------------------------------------- Table of Contents The increase in selling, general and administrative expenses is primarily related to separation costs resulting from the departure of our chief executive officer and our chief financial officer during the three months ended September 30, 2012. Partially offsetting these additional costs were lower employee incentive plan expenses in 2012, which are driven by our actual financial results relative to established targets. During the nine months ended September 30, 2011 we had approximately $2.8 million of additional expenses related to the acquisition of Corsidian.

Restructuring charges during 2012 consisted of a workforce reduction in the second quarter in response to lower revenue levels as well as the aforementioned realignment of our support and professional services organizations in the first quarter of 2012. In addition, we incurred restructuring charges relating to reducing our office space in the United Kingdom during the first quarter of 2012. Our 2011 restructuring charges relate to the realignment of our cost structure and staffing profile as well as establishing a presence in Ireland for operations and certain back office functions which resulted in employee related separation costs.

Interest and Other Expense, Net The components of interest and other expense, net, were as follows: (In millions) Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change ($) 2012 2011 Change ($) Interest expense, net $ 16.3 $ 16.9 $ (0.6 ) $ 49.3 $ 51.2 $ (1.9 ) Exchange rate loss (gain) 0.9 (1.1 ) 2.0 2.7 (2.1 ) 4.8 Other income, net (0.5 ) (0.1 ) (0.4 ) (0.7 ) (0.4 ) (0.3 ) Total interest and other expense, net $ 16.7 $ 15.7 $ 1.0 $ 51.3 $ 48.7 $ 2.6 Interest expense for the three and nine months ended September 30, 2012 decreased as compared to the prior year periods due to lower debt levels resulting from $29.5 million of principal payments since September 30, 2011.

Also, in the first quarter of 2011, there was $0.3 million in interest expense related to a legal settlement.

For the three and nine months ended September 30, 2012 as compared to the prior year periods, we experienced an exchange rate loss primarily due to the strengthening of the United States dollar against foreign currencies.

Income Taxes The following table presents (benefit from) provision for income taxes and the effective tax rate: (Dollars in millions) Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 Change 2012 2011 Change (Benefit from) provision for income taxes $ (5.7 ) $ 4.9 $ (10.6 ) $ (0.9 ) $ 9.5 $ (10.4 ) Effective tax rate (265.6 )% 32.2 % (297.8) pts 52.3 % 27.4 % 24.9 pts The change in income tax (benefit) provision for the three months ended September 30, 2012 as compared to the same period in 2011 is due primarily to the release of $3.5 million of ASC 740-10 reserves related to the recently settled IRS audit, foreign tax credits of $2.8 million, foreign operations in lower tax jurisdictions and lower U.S. earnings in the third quarter of 2012 as compared to 2011. These benefits were partially offset by adjustments to current and deferred tax liabilities in the third quarter of 2012 of $0.9 million. For the nine months ended September 30, 2012 as compared to the same period in 2011, the change in income tax (benefit) provision is due to the release of $4.9 million of ASC 740-10 reserves, foreign tax credits of $2.8 million, foreign operations in lower tax jurisdictions and lower U.S. earnings for the nine month period in 2012 as compared to 2011. These benefits were offset by an adjustment to current and deferred tax liabilities of $1.7 million and a partial valuation allowance of $10.4 million placed on our U.S. deferred tax assets of $23.7 million. Based upon consideration of a number of factors, including a determination of the recoverability of these deferred tax assets weighing all evidence available as of September 30, 2012, it was determined that it was more likely than not that these deferred tax assets were not realizable and required a valuation allowance.

In accordance with ASC 740, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. We are required, at the end of each interim reporting period, to make our best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. However, if we are unable to make a reliable estimate of our annual effective tax rate, the actual effective tax rate for the year-to-date may be the best estimate of the annual effective tax rate. Due to our tax structure and near breakeven projection for the year, minor changes in estimated annual ordinary income have significant effects on the estimated annual effective tax rate. In this situation, we have provided for income tax based on the actual effective tax rate for the year to date results through September 30, 2012, which is consistent with the methodology that was applied for the three and six month periods ended June 30, 2012.

24-------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $7.3 million to $148.6 million at September 30, 2012 from $141.3 million at December 31, 2011. Our existing cash balance generated by operations and borrowings available under our credit facilities are our primary sources of short-term liquidity. Based on our current level of operations, we believe these sources will be adequate to meet our liquidity needs for at least the next 12 months.

A condensed statement of cash flows for the nine months ended September 30, 2012 and 2011 follows: (In millions) Nine Months Ended September 30, 2012 2011 Net cash (used for) provided by: Net (loss) income $ (0.9 ) $ 25.4 Adjustments to net (loss) income for non-cash items 45.6 36.9 Changes in operating assets and liabilities (6.6 ) 18.7 Operating activities 38.1 81.0 Investing activities (3.7 ) (16.0 ) Financing activities (28.2 ) (10.9 ) Effect of exchange rate changes 1.1 (3.2 ) Net change in cash and cash equivalents 7.3 50.9 Cash and cash equivalents at beginning of period 141.3 86.4 Cash and cash equivalents at end of period $ 148.6 $ 137.3 Net Cash Provided by Operating Activities The decrease in net cash provided by operating activities was primarily due to lower net income in the nine months ended September 30, 2012. Additionally, negative cash flows from our working capital accounts contributed to lower net cash provided by operating activities in 2012 as accounts payable and accrued liability balances have been reduced versus prior year as a result of lower accrued tax and compensation balances.

Net Cash Used In Investing Activities Net cash used in investing activities for the nine months ended September 30, 2011 primarily consisted of $12.9 million of cash paid for the Corsidian acquisition, net of cash acquired. Capital expenditures increased approximately $0.6 million due to training equipment purchases associated with our expansion into the Latin American region as well as additional lab and testing equipment for our research and development initiatives.

Net Cash Used In Financing Activities Net cash used in financing activities increased $17.3 million during the nine months ended September 30, 2012, as compared to the prior year period primarily due to increased principal payments under our debt facilities as the result of a mandatory prepayment for excess cash flow which was remitted in April 2012.

Debt Covenants We were in compliance with all of our financial debt covenants as of September 30, 2012.

On November 14, 2012, we amended our Credit Facility to provide the appropriate level of flexibility to execute our strategy and absorb the current volatility inherent in our business. The amended Credit Facility maintains the $463.0 million senior secured term loan ("Term Loan") and a $30.0 million senior secured revolving facility ("Revolver") both maturing May 7, 2016. The Credit Facility can be increased by $100.0 million under certain circumstances.

The Credit Facility contains three financial maintenance covenants, each measured for the most recent four fiscal quarter period: 1) a leverage ratio (debt divided by EBITDA, each as defined in the Credit Facility) 2) a Term loan leverage ratio (Term Loan debt divided by EBITDA, each as defined in the Credit Facility) and 3) an interest coverage ratio (EBITDA divided by cash interest expense, each as defined in the Credit Facility). EBITDA, as defined in the Credit Facility, excludes certain items including non-recurring charges, acquisition related adjustments to revenue, stock compensation and impairments.

25-------------------------------------------------------------------------------- Table of Contents In exchange for the lenders resetting the loan covenants for the third quarter of 2012 and future periods, the amendment required us to pay consent fees that totaled approximately $2.3 million and increased the interest rate from LIBOR plus 4.50% to LIBOR plus 5.25%. The interest rate increased on a prospective basis and will continue until the maturity date. The increase in the interest rate is subject to a further 25 basis point increase if our most recently announced corporate credit rating is below the following criteria: (1) Moody's is not B2 or better and (2) Standard & Poor's is not B or better. In addition, on November 14, 2012 we paid down $50.0 million of our first lien debt as part of this amendment.

Off-Balance Sheet Arrangements In our Annual Report on Form 10-K (333-170936), we included a discussion of our off-balance sheet arrangements under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Off-Balance Sheet Arrangements." There have been no significant changes to our off-balance sheet arrangements since December 31, 2011.

Critical Accounting Policies Our financial statements are prepared in accordance with Generally Accepted Accounting Principles ("GAAP") in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. Management evaluates its estimates on an on-going basis. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from the estimates used. Our actual results have generally not differed materially from our estimates. However, we monitor such differences and, in the event that actual results are significantly different from those estimated, we disclose any related impact on our results of operations, financial position and cash flows.

During the first nine months of fiscal 2012, there were no significant changes to our critical accounting policies and estimates. For a complete discussion of all other critical accounting policies, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K (File No. 333-170936).

Item 3. Quantitative and Qualitative Disclosure of Market Risks During the first nine months of fiscal 2012, there were no significant changes to our quantitative and qualitative disclosures about market risk. Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations-Quantitative and Qualitative Disclosures of Market Risks" in our Annual Report on Form 10-K (File No. 333-170936), for a more complete discussion of the market risks we encounter.

Item 4. Controls and Procedures Disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of September 30, 2012 and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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