##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
20549  FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission file number 333-106143 GXS CORPORATION (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    35-2181508(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
   100 Edison Park Drive, Gaithersburg, MD
    
    20878(Address of Principal Executive Offices)
    
    (Zip Code)
 (301) 340-4000 
 (Registrants Telephone Number, Including Area Code) 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 [X] Indicate by a check mark whether the registrant is an accelerated filer
(as determined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X] As of November 12, 2004, the registrant had 100 outstanding shares of common
stock, all of which was held by affiliates of the registrant.




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INDEX TO QUARTERLY REPORT Page No.Part I. Financial InformationItem 1. Financial StatementsUnaudited Condensed Consolidated Financial Statements of GXS CorporationCondensed Consolidated Balance Sheets as of December 31, 2003 and
September 30, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2003 and 2004
    
    
    4Condensed Consolidated Statements of Comprehensive Loss
for the three and nine months ended September 30, 2003 and 2004
    
    
    5Condensed Consolidated Statement of Stockholders Equity (Deficit) for the
nine months ended September 30, 2004
    
    
    6Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2004
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    39Part II. Other InformationItem 6. Exhibits
    
    
    40Signatures
    
    
    41




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GXS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands of dollars, except per share amounts) December 31,
    
    September 30,2003 (1)
    
    2004(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    46,730
    
    
    $
    28,365Receivables:Trade
    
    
    53,069
    
    
    
    44,107Other
    
    
    4,178
    
    
    
    3,677General Electric Company
    
    
    5,081
    
    
    
    3,770Deferred income taxes
    
    
    1,729
    
    
    
    318Prepaid expenses and other assets
    
    
    8,660
    
    
    
    9,718Total current assets
    
    
    119,447
    
    
    
    89,955Investment in affiliates
    
    
    2,929
    
    
    
    2,267Property and equipment, net
    
    
    132,701
    
    
    
    108,674Deferred income taxes
    
    
    3,034
    
    
    
    2,217Deferred financing costs
    
    
    15,886
    
    
    
    13,213Other assets
    
    
    4,342
    
    
    
    4,714Other acquired intangible assets, net
    
    
    1,168
    
    
    
    11,781Goodwill
    
    
    11,929
    
    
    
    28,004Total Assets
    
    $
    291,436
    
    
    $
    260,825Liabilities, Minority Interest and Stockholders Equity (Deficit)Current liabilities:Trade payables
    
    $
    12,139
    
    
    $
    14,808Deferred income
    
    
    10,368
    
    
    
    15,686Accrued expenses and other liabilities
    
    
    63,405
    
    
    
    80,724Total current liabilities
    
    
    85,912
    
    
    
    111,218Long-term debt
    
    
    405,520
    
    
    
    406,243Other liabilities
    
    
    23,929
    
    
    
    25,400Total liabilities
    
    
    515,361
    
    
    
    542,861Minority interest
    
    
    810
    
    
    
    316Stockholders equity (deficit):Common stock $1.00 par value, 100 shares authorized, issued
and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    258,386
    
    
    
    279,249Retained earnings (deficit)
    
    
    (477,616
    )
    
    
    (557,055
    )Foreign currency translation
    
    
    (5,505
    )
    
    
    (4,546
    )Total stockholders equity (deficit)
    
    
    (224,735
    )
    
    
    (282,352
    )Total Liabilities, Minority Interest and Stockholders Equity (Deficit)
    
    $
    291,436
    
    
    $
    260,825
  (1)
    
    Amounts are derived from December 31, 2003 audited consolidated financial
statements See accompanying notes to condensed consolidated financial statements 3




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GXS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Revenues
    
    $
    91,716
    
    
    $
    81,409
    
    
    $
    274,095
    
    
    
    247,559Costs and operating expenses:Cost of revenues
    
    
    54,621
    
    
    
    46,950
    
    
    
    159,990
    
    
    
    155,866Sales and marketing
    
    
    16,538
    
    
    
    13,227
    
    
    
    48,638
    
    
    
    46,612General and administrative
    
    
    11,346
    
    
    
    10,363
    
    
    
    36,873
    
    
    
    40,651Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    (700
    )
    
    
    Restructuring and related charges
    
    
    1,331
    
    
    
    6,348
    
    
    
    4,464
    
    
    
    23,403Asset impairment charges
    
    
    6,500
    
    
    
    6,509
    
    
    
    6,500
    
    
    
    6,509Operating income (loss)
    
    
    1,380
    
    
    
    (1,988
    )
    
    
    18,330
    
    
    
    (25,482
    )Other income (expense):Proportionate share of income (losses) in investee
companies and investment write-downs
    
    
    (112
    )
    
    
    130
    
    
    
    (872
    )
    
    
    (596
    )Write-off of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    (5,548
    )
    
    
    Interest income
    
    
    219
    
    
    
    58
    
    
    
    711
    
    
    
    416Interest expense
    
    
    (12,856
    )
    
    
    (15,054
    )
    
    
    (36,449
    )
    
    
    (44,768
    )Other income (expense), net
    
    
    536
    
    
    
    (451
    )
    
    
    1,160
    
    
    
    (1,866
    )Loss before income taxes
    
    
    (10,833
    )
    
    
    (17,305
    )
    
    
    (22,668
    )
    
    
    (72,296
    )Provision (benefit) for income taxes
    
    
    (3,318
    )
    
    
    1,833
    
    
    
    (5,072
    )
    
    
    7,143Net loss
    
    $
    (7,515
    )
    
    $
    (19,138
    )
    
    $
    (17,596
    )
    
    
    (79,439
    )
 See accompanying notes to condensed consolidated financial statements 4




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GXS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited) Three months ended September 30,
    
    Nine months ended September 30,2003
    
    2004
    
    2003
    
    2004Net loss
    
    $
    (7,515
    )
    
    $
    (19,138
    )
    
    $
    (17,596
    )
    
    $
    (79,439
    )Foreign currency translation adjustments
    
    
    389
    
    
    
    486
    
    
    
    311
    
    
    
    959Comprehensive loss
    
    $
    (7,126
    )
    
    $
    (18,652
    )
    
    $
    (17,285
    )
    
    $
    (78,480
    )
 See accompanying notes to condensed consolidated financial statements 5




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GXS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders Equity (Deficit)
(In thousands)
(Unaudited) ForeignAdditional
    
    Retained
    
    currency
    
    TotalCommon
    
    paid-in
    
    earnings/
    
    translation
    
    stockholder'sstock
    
    capital
    
    (deficit)
    
    adjustments
    
    deficitBalance at December 31, 2003
    
    $
    
    
    
    $
    258,386
    
    
    $
    (477,616
    )
    
    $
    (5,505
    )
    
    $
    (224,735
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (79,439
    )
    
    
    
    
    
    
    (79,439
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    959
    
    
    
    959Capital contribution by GXS Holdings
in connection with acquisition of HAHT
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    15,000Contributions from General Electric
Company (note 1)
    
    
    
    
    
    
    5,863
    
    
    
    
    
    
    
    
    
    
    
    5,863Balance at September 30, 2004
    
    $
    
    
    
    $
    279,249
    
    
    $
    (557,055
    )
    
    $
    (4,546
    )
    
    $
    (282,352
    )
 See accompanying notes to condensed consolidated financial statements 6




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GXS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited) Nine months ended September 30,2003
    
    2004Cash flows from operating activities:Net loss
    
    $
    (17,596
    )
    
    $
    (79,439
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    35,556
    
    
    
    42,446Asset impairment charges
    
    
    6,500
    
    
    
    6,509Deferred income taxes
    
    
    (990
    )
    
    
    1,948Gain on sale of assets
    
    
    (700
    )
    
    
    Write-off of deferred financing costs
    
    
    5,548
    
    
    
    Amortization of deferred financing costs and debt discount
    
    
    2,392
    
    
    
    3,525Minority interest
    
    
    (609
    )
    
    
    (494
    )Proportionate share of losses in investee companies
and investment write-downs
    
    
    872
    
    
    
    596Changes in operating assets and liabilities, net of effect of
business acquisition:Decrease in receivables
    
    
    11,788
    
    
    
    12,914Decrease in prepaid expense and other assets
    
    
    772
    
    
    
    59Increase (decrease) in accounts payable
    
    
    (5,263
    )
    
    
    2,461Increase in deferred income
    
    
    447
    
    
    
    2,136Increase in accrued expenses and other liabilities
    
    
    5,302
    
    
    
    15,463Other
    
    
    (2,439
    )
    
    
    868Net cash provided by operating activities
    
    
    41,580
    
    
    
    8,992Cash flows from investing activities:Purchases of property and equipment
    
    
    (22,841
    )
    
    
    (23,314
    )Proceed from sale of assets
    
    
    600
    
    
    
    Purchase of HAHT, net of cash acquired of $4,526
    
    
    
    
    
    
    (9,724
    )Net cash used in investing activities
    
    
    (22,241
    )
    
    
    (33,038
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    (174,562
    )
    
    
    Proceeds from long-term debt issuances
    
    
    169,750
    
    
    
    Capital contributions from General Electric Company
    
    
    12,893
    
    
    
    5,863Payment of financing costs
    
    
    (12,131
    )
    
    
    (129
    )Net cash provided by (used in) financing activities
    
    
    (4,050
    )
    
    
    5,734Effect of exchange rate changes on cash
    
    
    2,606
    
    
    
    (53
    )Increase (decrease) in cash and cash equivalents
    
    
    17,895
    
    
    
    (18,365
    )Cash and cash equivalents, beginning of year
    
    
    37,333
    
    
    
    46,730Cash and cash equivalents, end of period
    
    $
    55,228
    
    
    $
    28,365
 Supplemental disclosure of non-cash, investing and financing activities: In connection with the acquisition of HAHT Commerce, GXS Holdings issued common
and preferred stock with an estimated fair value of $15,000. Such amount has
been reflected as an increase to additional paid-in capital and goodwill. A
cash deposit of $750 towards the purchase price was paid in cash in 2003 and
recorded to other non-current assets. During 2004 this amount was reclassified
to goodwill. In connection with the acquisition of Celarix in 2003, the estimated value of
the common stock and preferred stock issued of $600 has been allocated to the
fair value of the assets purchased and the liabilities assumed with a
corresponding increase in additional paid-in capital. See accompanying notes to condensed consolidated financial statements 7




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GXS CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2003 and 2004
(Unaudited)
(In thousands of dollars) (1) Business and Basis of Presentation The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information. Accordingly,
these financial statements do not include all the information and notes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, the
unaudited condensed consolidated financial statements include all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position and results of operations. Interim results for the three and nine-month period ended September 30, 2004
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, 2003, not included
herein. GXS Holdings, Inc. (GXS Holdings) (formerly RMS Electronic Commerce Systems,
Inc.) and GE Information Services, Inc. (GEIS), prior to September 27, 2002,
were wholly owned subsidiaries of GE Investments, Inc. (GE Investments), which
is a wholly owned subsidiary of General Electric Company (GE). On September 9,
2002, GXS Holdings formed GXS Corporation (GXS) and GXS Holdings contributed
all of its assets to GXS in exchange for all of the common stock of GXS. In
addition, GE Investments transferred 100% of the common stock that it held in
GEIS to GXS and GEIS became a wholly owned subsidiary of GXS. For financial
reporting purposes, this transaction was accounted for as a combination of
companies under common control. The consolidated financial statements have been
prepared as if the assets, liabilities and results of operations of GXS
Holdings were consolidated with those of GEIS, (now called Global eXchange
Services, Inc.) for all periods presented. GXS and subsidiaries (the Company)
are primarily engaged in the business of providing transaction management
infrastructure products and services that enable companies to electronically
exchange essential business documents. On June 21, 2002, GE, GE Investments and Global Acquisition Company, a
subsidiary of Francisco Partners, L.P. (Francisco Partners), signed a
definitive agreement to effect a recapitalization (the Recapitalization
Agreement) of the Company. The recapitalization was consummated on September
27, 2002 (the Recapitalization) and resulted in the Company issuing $175,000 of
debt under a senior term loan agreement and $235,000 of debt under a senior
subordinated reset note agreement (see note 5). Proceeds, in the amount of
$350,000, were distributed by the Company to GE pursuant to the terms of the
Recapitalization Agreement. In addition, Francisco Partners and its
co-investors, through a direct or indirect subsidiary, acquired 90% of the
outstanding common stock and preferred stock of GXS Holdings for $407,773. The
Company incurred $30,085 of fees to consummate the Recapitalization including
$20,000 for services rendered by Francisco Partners. The Recapitalization was accounted for as a leveraged recapitalization since
greater than 5% of the voting common stock of GXS Holdings was retained by GE.
Under leveraged recapitalization accounting, the transfer of a controlling
interest in GXS Holdings to Francisco Partners does not result in a change in
the accounting basis in the assets and liabilities of GXS Holdings or its
subsidiaries including GXS. Accordingly, the assets and liabilities of GXS have
been recorded at their historical cost basis in the accompanying consolidated
financial statements. Additionally, the costs incurred to effect the
Recapitalization were expensed as incurred. GE agreed to reimburse the Company for certain defined operating and
restructuring costs following the Recapitalization. During the nine months
ended September 30, 2003 and 2004, GE reimbursed the Company approximately
$12,900 and $5,900 of these costs, respectively. These costs include
approximately $800 of costs and expenses incurred with closing a data center in
Rockville, Maryland, $5,700 of costs incurred in connection with a services
agreement with MCI (formerly called WorldCom), $2,200 for notice pay and
severance in connection with a reduction in force and facility exit costs,
$1,500 for costs and expenses incurred for rebranding products and implementing
an internal systems infrastructure, $1,200 representing payments made on behalf
of certain employees in the United Kingdom covered under the GE pension plan,
$600 interest subsidy payment, $1,600 representing certain employee bonus
payments made following the closing of the Recapitalization, $1,400
representing payments 8




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GXS CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2003 and 2004
(Unaudited)
(In thousands of dollars) made on behalf of certain employees in the Netherlands covered under the GE
pension plan, and approximately $3,800 for certain taxes. These reimbursements
have been recorded as contributions to additional paid-in capital. Additionally, in connection with the Recapitalization, GE agreed to reimburse
the Company for the managed network fee related to the portion of the network
being used by them following the Recapitalization. A reimbursement during the
nine months ended September 30, 2003 of approximately $1,750 was credited to
cost of revenues. In connection with the Recapitalization, the Companys acquiror and the
acquirors common parent made an election under US Income Tax Regulations that
allowed the Company to revalue its assets and liabilities for income tax
purposes. The tax benefit of the revaluation was approximately $242,000. Such
benefit was reflected as a contribution to additional paid-in capital at the
date of the Recapitalization. Management believes the Company will achieve
profitable operations in future years that will enable the Company to recover
the benefit of this deferred tax asset. However, the Company presently does not
have sufficient objective evidence to support managements belief and,
accordingly, established a full valuation allowance for this asset in the
fourth quarter of 2003 as required by generally accepted accounting principles.
Recording this valuation allowance does not impact the Companys ability to
realize the benefit of this asset. (2) Summary of Significant Accounting Policies (a) Consolidation The consolidated financial statements represent the consolidation of all
companies in which the Company directly or indirectly has a majority ownership
and controls the operations. All significant intercompany transactions and
balances have been eliminated in the consolidation. Investments in companies in
which the Company has a 50% or less ownership interest but can exercise
significant influence over the investees operations and policies are accounted
for under the equity method of accounting. The Company uses the cost method to
account for investments where it holds less than a 20% ownership interest and
where it cannot exercise significant influence over the investees operations
and policies. At 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 such loss is
considered to be an other than temporary decline, the Company records an
impairment charge. (b) Revenue Recognition The Company generates revenues from three principal sources:  Transaction Processing The Company earns recurring transaction processing
fees from facilitating the exchange of business documents among its
customers computer systems and those of their trading partners. Such
revenues are based on a per transaction fee and are recognized in the period
in which the related transactions are processed. Revenue on contracts with
monthly or quarterly minimum transaction levels is recognized based on the
greater of actual transactions or the specified contract minimum amounts.Software Licensing 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 revenues are recognized
when the license agreement is signed, the license fee is fixed and
determinable, delivery has occurred, and collection is considered probable.
Revenue from licensing software that requires significant customization and
modification or where services are otherwise considered essential to the
functionality of the software are recognized using the percentage of
completion method, based on the costs incurred in relation to the total
estimated costs of the contract. Revenue from hosted software applications
are recognized ratably over the hosting period unless the customer has the
contractual right to take possession of the software without significant
penalty and it is feasible for the customer to use the software with its own
hardware or contract with another party unrelated to the Company to host the
software. 9




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GXS CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2003 and 2004
(Unaudited)
(In thousands of dollars)  Professional Services and Software Maintenance Professional services are
generally conducted under time and material contracts and revenue is
recognized as the related services are provided. Software maintenance revenue
is deferred and recognized on a straight-line basis over the life of the
related contract, which is typically one year. For arrangements with more than one element of revenue, the Company allocates
revenue to each component based on vendor specific objective evidence (VSOE),
in accordance with the criteria established in AICPA Statement of Position
97-2, Software Revenue Recognition,as amended, or fair value in accordance
with the criteria established in Emerging Issues Task Force (EITF) Issue No.
00-21, Revenue Arrangements with Multiple Deliverables,as appropriate. 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. (c) Use of Estimates Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the condensed consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods to prepare these condensed consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America. Actual results could differ from those estimates. (d) Reclassification of certain costs Certain costs for the three and nine months ended September 30, 2003 have been
reclassified to conform to the presentation shown for the three and nine months
ended September 30, 2004. (3) Revenues and Receivables The Company provides e-commerce and network services to various GE businesses
in the normal course of business. Sales to GE businesses and affiliates
amounted to approximately $9,809 and $8,972 for the three-month periods ended
September 30, 2003 and 2004, respectively and $23,560 and $23,467 for the
nine-month periods ended September 30, 2003 and 2004, respectively. Trade
receivables as of December 31, 2003 and September 30, 2004 resulting from
normal trade activity with GE were $5,081 and $3,770, respectively. Pursuant
to the terms of the Recapitalization Agreement, GE was required for the
two-year period ended September 27, 2004, to maintain its affiliates
respective business arrangements with the Company on terms and conditions
substantially similar to those in effect at the time of the completion of the
Recapitalization and to purchase products and services from the Company
totaling $30,600 in each of the four calendar quarters ending September 2003
and September 2004. For the twelve-month periods ended September 30, 2003 and
September 30, 2004, the Company considered GE to have met the obligation. While the Company expects GE to continue to be a very important and significant
customer, based on current estimates, which are subject to revision, the
Company does expect that the revenue in 2005 will decline by at least
50% from the previously contracted annual amount of $30,600. However,
there can be no assurance that the decline will not be greater. The allowance for doubtful accounts and sales allowances at December 31, 2003
was $11,345 and at September 30, 2004 was $11,281. (4) Other Related Party Transactions Trade payables as of December 31, 2003 and September 30, 2004 resulting from
normal activity with GE were $1,177 and $497, respectively. 10




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##### 



GXS CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2003 and 2004
(Unaudited)
(In thousands of dollars) GE has provided a variety of services to the Company. These services include
administering certain employee benefit plans and paying related claims,
provision of voice telecommunication services, outsourcing of certain
functions, centralized financial and administrative activities involved with
transaction processing, centralized purchasing of desk top software and other
corporate services. Such services have been charged to the Company as utilized
by the Company. Billings for these services, which are included in operating
expenses, amounted to $3,691 and $1,512 for the three months ended September
30, 2003 and 2004, respectively, and $10,689 and $4,453 for the nine months
ended September 30, 2003 and 2004, respectively. As part of the
Recapitalization, GE will continue to provide these services on an as needed
basis until the end of 2004. The Company has migrated substantially all of
these services to alternative providers, or brought some of the services
in-house. The remaining services will be migrated to alternative providers or
brought in-house by the end of 2004. Management believes that the amounts paid
to GE approximate the cost at which these services could be obtained from a
third party. In connection with the Recapitalization, the Company entered into an agreement
with Francisco Partners under which the Company has agreed to pay to Francisco
Partners a fee of $2,000 annually plus expenses for financial advisory and
consulting services. Francisco Partners has informed the Company of its intent
to defer receipt of the fee. The expense related to the management fee
amounted to $500 and $1,500 for the three and nine-month periods ended
September 30, 2003 and 2004, respectively. The Company reimbursed Francisco
Partners for additional expenses of $479, which were incurred during the nine
months ended September 30, 2004. As of December 31, 2003 and September 30,
2004, the Company owed Francisco Partners $3,071 and $4,254, respectively. (5) Long-Term Debt Long-term debt consists of the following at September 30, 2004: Term loan facility
    
    $
    70,000Senior secured floating rate notes,
net of debt discount of $3,757
    
    
    101,243Senior subordinated reset notes
    
    
    235,000Long-term debt
    
    $
    406,243
 Credit Facility: The Company entered into a credit facility on September 27, 2002 which
consisted of a $175,000 term loan facility (Term Loan Facility) and a $35,000
revolving credit facility. To consummate the Recapitalization, the Company
borrowed $175,000 under the Term Loan Facility and $235,000 under the Senior
Subordinated Reset Notes (Reset Notes). The Company entered into a New Credit Facility on March 21, 2003 consisting of
a $70,000 term loan (the New Term Loan Facility) and a $30,000 revolving credit
facility (the New Revolving Credit Facility). On March 21, 2003, the Company
also issued $105,000 of Senior Secured Floating Rate Notes (Floating Notes) for
proceeds of $99,750. These proceeds, cash on hand and the borrowings under the
New Term Loan Facility were used to repay borrowings outstanding under the Term
Loan Facility. In connection with the refinancing, the Company wrote off $5,548
of deferred financing costs that the Company had incurred in establishing the
original Credit Facility. The ability to borrow under the New Credit Facility is subject to a borrowing
base, calculated monthly, at an amount equal to 90.0% of EDI Services Revenue
for the immediately preceding six consecutive completed months. The New Term
Loan Facility bears interest, at the Companys option, at either a floating
base rate plus 4.0% per annum or floating LIBOR plus 6.0% per annum. The New
Revolving Credit Facility bears interest, at the Companys option, at either a
floating base rate plus 2.0% per annum or floating LIBOR plus 4.25% per annum.
The base rate and LIBOR rate used to calculate the applicable interest rate on
the New Term Loan Facility and the New Revolving 11




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##### 



GXS CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2003 and 2004
(Unaudited)
(In thousands of dollars) Credit Facility may not be less than 4.25% and 2.25%, respectively. Outstanding
borrowings under the New Term Loan Facility as of September 30, 2004 bear
interest at a base rate of 4.25% plus 4.0%. Interest is payable monthly in
arrears for base rate loans and on the last day of selected interest periods,
but no later than every three months, for LIBOR rate loans. Borrowings
outstanding under the New Term Loan Facility and the New Revolving Credit
Facility mature on March 21, 2007. The New Revolving Credit Facility enables the Company to obtain revolving
credit loans and to issue letters of credit for working capital, acquisitions
and general corporate purposes. At September 30, 2004, the Company had
outstanding letters of credit of $8,900 and available borrowings of $21,100
under the New Revolving Credit Facility. The outstanding letters of credit
relate to performance obligations of the Company. The Company pays 0.75% per
annum on the unused portion of the New Revolving Credit Facility. In October
2004, the Company borrowed $14,100 under the New Revolving Credit Facility for
general corporate purposes. The Company has repaid $4,731 of these borrowings
under the New Revolving Credit Facility. The obligations of the Company under the New Credit Facility are guaranteed by
all of the Companys existing and future domestic subsidiaries (the
Guarantors). The obligations of the Company under the New Credit Facility are
secured by first-priority liens on substantially all of the Companys and the
Guarantors existing and after-acquired property, both tangible and intangible.
The obligations of the Company and the Guarantors are secured by a pledge of
all of the Companys capital stock or other equity interests of the Companys
existing and future domestic subsidiaries and a pledge of 66.0% of the capital
stock of the Companys material first-tier foreign subsidiaries. If the Company were to repay the borrowings under the New Credit Facility prior
to the maturity date, the Company would be required to pay a prepayment premium
equal to 1.00% of the maximum facility amount for each full or partial year
remaining until the maturity date. If the New Credit Facility is repaid with
the proceeds of a private placement of subordinated debt or equity, an initial
public offering of equity or a sale of substantially all of the Companys
assets or stock, the prepayment premium would be reduced by half. In addition, the New Credit Facility contains various covenants that restrict
the Company from taking various actions and require the Company to achieve and
maintain certain financial ratios. In March and June 2004, the Company
negotiated amended covenants for 2004 and 2005. As of September 30, 2004, the
Company was in compliance with these covenants. Senior Secured Floating Rate Notes: On March 21, 2003, the Company issued $105,000 of Floating Notes for proceeds
of $99,750. The Floating Notes mature on July 15, 2008 and bear interest at a
floating rate based on six-month LIBOR plus 9%, but never less than 12%. The
interest rate at September 30, 2004 was 12%. The Floating Notes are secured by
second-priority security interests in substantially all of the assets and stock
of GXS and its domestic subsidiaries and 66% of the stock of the Companys
material first-tier foreign subsidiaries. In addition, the Floating Notes are
guaranteed fully and unconditionally by the Companys domestic subsidiaries.
The debt discount of $5,250 is being amortized over the life of the Floating
Notes using the interest method. Amortization for the period from issuance
through September 30, 2004 was $1,493. Interest is payable semi-annually in
arrears on January 15 and July 15 of each year commencing on July 15, 2003. The Floating Notes are redeemable at the option of the Company any time after
October 1, 2004, in whole or in part, at a redemption price equal to par plus
accrued and unpaid interest, plus a redemption premium. The premium is 3% for
the twelve months ending October 1, 2005 reducing to 1.5% for the twelve months
ending October 1, 2006. After October 1, 2006, the Floating Notes can be
redeemed at par plus accrued and unpaid interest. Upon the occurrence of a
change of control, as defined in the Indenture governing the Floating Notes,
each holder of the Floating Notes will have the right to require the Company to
repurchase such holders notes at an offer price in cash equal to 101% of the
aggregate principle amount thereof plus accrued and unpaid interest and
liquidated damages, if any, thereon to the date of purchase. 12




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##### 



GXS CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2003 and 2004
(Unaudited)
(In thousands of dollars) In certain situations, the Company must offer to redeem outstanding Floating
Notes with Excess Cash Flows as defined in the Floating Notes Indenture. In addition to the restrictions on incurrence of indebtedness, the Company may
not, and may not permit any of its subsidiaries to, directly or indirectly,
create, incur, issue, assume, guarantee or allow to exist or otherwise directly
or indirectly become liable, contingently or otherwise, for any indebtedness
secured by any of the assets of the Company or any subsidiary of the Company in
an aggregate principal amount, at any time, in excess of two times EDI Services
Revenues, as defined, for the most recently ended two fiscal quarter period of
the Company. Senior Subordinated Reset Notes: On September 27, 2002, the Company issued $235,000 of Reset Notes. The Reset
Notes, which mature on September 27, 2009, bear interest at a rate of 12% until
September 27, 2003. From and after September 27, 2003, interest on the notes
will be reset, with such reset to be based on a variety of factors including
the portion of the notes owned by GECC and the then-current market conditions
for similar securities. The Company is currently in discussions with GECC
concerning the interest rate on the Reset Notes. If the interest rate on the
Reset Notes is increased to the maximum rate of 17% from 12%, the Companys
annual interest expense would increase by $11.8 million, $7.1 million of which
the Company would be required to pay in cash. For the period from September 27,
2003 to September 30, 2004, the Company accrued interest at a rate of 15%, the
rate which management believes to be the best estimate of where the
negotiations will conclude. To the extent the reset rate exceeds 15%, the
Company will have the option to pay cash interest of 15% and add the additional
interest to the balance of the reset notes. Interest is payable semi-annually
on April 15 and October 15 of each year commencing April 15, 2003. The Reset
Notes are general unsecured obligations of the Company and are guaranteed by
all of the Companys domestic subsidiaries. The Reset Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after September 27, 2006 at a redemption price equal to
par plus accrued and unpaid interest, plus a declining redemption premium. In
addition, at any time prior to September 27, 2005, the Company may on any one
or more occasions redeem up to 35% of the aggregate principal amount of the
Reset Notes at a redemption price of 100% of the principal amount thereof, plus
accrued and unpaid interest, at the redemption date plus a premium, if any, as
defined in the agreement, with the net cash proceeds of one or more equity
offerings, provided that the redemption occurs within 90 days of the date of
the closing of such equity offering. Upon the occurrence of a change of
control, as defined in the Indenture governing the Reset Notes, each holder of
the Reset Notes will have the right to require the Company to repurchase such
holders notes at an offer price in cash equal to 101% of the aggregate
principle amount thereof plus accrued and unpaid interest and liquidated
damages, if any, thereon to the date of purchase. The Indentures governing the Floating Notes and the Reset Notes contain certain
covenants that limit, among other things, the ability of the Company to (i) pay
dividends, redeem capital stock or make certain other restricted payments, (ii)
incur additional indebtedness or issue certain preferred equity interests,
(iii) merge into or consolidate with certain other entities or sell all or
significant portions of its assets, (iv) create liens on assets and (v) enter
into certain transactions with affiliates or related persons. The Company expects that cash flows from foreign operations will be required to
meet its domestic debt service requirements. Such cash flows are expected to be
generated from the sale of network and processing resources, software licenses
and software maintenance contracts to the foreign operations. However, there is
no assurance that the foreign subsidiaries will generate sufficient cash flow
or that the laws in foreign jurisdictions will not change to limit collections
on these sales or increase the tax burden on the collections. The Company paid interest of $5,692 and $7,972 for the three months ending
September 30, 2003 and 2004, respectively and $24,995 and $31,585 for the nine
months ending September 30, 2003 and 2004, respectively. 13




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##### 



GXS CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2003 and 2004
(Unaudited)
(In thousands of dollars) (6) Contingencies The Company has received a decision from the State of Tennessees Department of
Revenue upholding a sales tax audit assessment totaling approximately $4,600,
including interest and penalties, for the period from May 1, 1994 to December
31, 2000. GE, on behalf of the Company, has filed a complaint in the Tennessee
Chancery Court challenging the decision. In addition, the Department of Revenue
issued an assessment of $1,100, including interest and penalties, to GE for the
period December 1, 1992 to April 30, 1994, when the Company was a division of
GE. GE, on behalf of the Company, has filed a complaint in the Tennessee
Chancery Court challenging this assessment. The Company does not believe that
the resolution of these matters will have a material effect on the financial
position of the Company. Pursuant to the Tax Matters Agreement that was entered
into in connection with the Recapitalization Agreement, GE has agreed to
indemnify the Company against losses associated with this and other tax matters
relating to the periods prior to the Recapitalization. The Company is subject to various other legal proceedings and claims, which
arise in the ordinary course of its business none of which management believes
is likely to result in any material losses to the Company. (7) Restructuring During the three and nine months ended September 30, 2003, the Company incurred
approximately $1,331 and $4,464, respectively, in restructuring costs related
to facility and equipment lease buy-outs, facility exit costs including a
restoration obligation, and headcount reductions of approximately 17 people
primarily in its data center, engineering, and services organizations. Of
these costs, $4,455 were reimbursed by General Electric as part of the
Recapitalization Agreement. On June 8, 2004, the Company announced a restructuring program which includes
consolidating development and operations functions, streamlining business
processes, making technology investments to lower its worldwide service
delivery costs and vacating additional facilities. As a result, during the
three and nine months ended September 30, 2004, the Company incurred
approximately $6,348 and $23,403, respectively, in restructuring costs. The
amount recorded is net of amounts the Company expects to receive from
subleasing vacated space at its headquarters. 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. This requires significant judgments 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 were based upon independent market analysis and assessment from
experienced real estate brokers. The Company expects to reduce its global employee workforce by approximately
300 positions, or approximately 20 percent, by the end of calendar year 2004
from the level that existed as of June 8, 2004; as of September 30, 2004,
approximately 150 positions had been impacted. The Company has revised its
estimate of restructuring charges downward and expects to incur up to $5,000 of
additional charges during the fourth quarter of 2004 relating to the closing of
facilities in Europe. 14




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##### 



GXS CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2003 and 2004
(Unaudited)
(In thousands of dollars) A rollforward of the restructuring activities is as follows: Restructuring ActivitiesSeverance2003
    
    2004
    
    TotalBalance as of December 31, 2003
    
    $
    9,654
    
    
    $
    
    
    
    $
    9,654Restructuring expense
    
    
    (124
    )
    
    
    
    
    
    
    (124
    )Payments and other adjustments
    
    
    (2,691
    )
    
    
    
    
    
    
    (2,691
    )Balance as of March 31, 2004
    
    
    6,839
    
    
    
    
    
    
    
    6,839Restructuring expense
    
    
    
    
    
    
    17,034
    
    
    
    17,034Payments and other adjustments
    
    
    (4,460
    )
    
    
    (1,640
    )
    
    
    (6,100
    )Balance as of June 30, 2004
    
    
    2,379
    
    
    
    15,394
    
    
    
    17,773Restructuring expense
    
    
    
    
    
    
    1,779
    
    
    
    1,779Payments and other adjustments
    
    
    (1,433
    )
    
    
    (4,613
    )
    
    
    (6,046
    )Balance as of September 30, 2004
    
    $
    946
    
    
    $
    12,560
    
    
    $
    13,506
 Restructuring ActivitiesFacilities2003
    
    2004
    
    TotalBalance as of December 31, 2003
    
    $
    12,184
    
    
    $
    
    
    
    $
    12,184Restructuring expense
    
    
    
    
    
    
    
    
    
    
    Payments and other adjustments
    
    
    (663
    )
    
    
    
    
    
    
    (663
    )Balance as of March 31, 2004
    
    
    11,521
    
    
    
    
    
    
    
    11,521Restructuring expense
    
    
    145
    
    
    
    
    
    
    
    145Payments and other adjustments
    
    
    (692
    )
    
    
    
    
    
    
    (692
    )Balance as of June 30, 2004
    
    
    10,974
    
    
    
    
    
    
    
    10,974Restructuring expense
    
    
    (78
    )
    
    
    4,647
    
    
    
    4,569Payments and other adjustments
    
    
    (621
    )
    
    
    489
    
    
    
    (132
    )Balance as of September 30, 2004
    
    $
    10,275
    
    
    $
    5,136
    
    
    $
    15,411
 The majority of the severance accruals will be paid by the end of 2005. The
facility accruals will be paid in various amounts through 2014. (8) Acquisition of HAHT On February 13, 2004, the Company acquired all of the capital stock of HAHT
Commerce, Inc. (HAHT) for consideration of $15,001 in cash plus common and
preferred shares of GXS Holdings valued at approximately $15,000. 15




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##### 



GXS CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2003 and 2004
(Unaudited)
(In thousands of dollars) HAHT was a provider of demand chain management applications that strategically
automated, integrated and optimized order management, product information
management (PIM), channel management, business intelligence and customer
services between manufacturers, their channel partners and business customers. A summary of the estimated purchase price and the related allocation follows.
Such allocation is preliminary and subject to change. Changes, if any, are not
expected to be material. Identifiable intangible assets principally consist of
customer relationships, PIM software and Order Management software which will
be amortized over five years. Amortization expense of $2,017 will be recorded
in 2004 and amortization expense of $2,305 will be recorded in 2005, 2006,
2007 and 2008. Cash
    
    $
    15,001Estimated fair value of capital stock issued by GXS Holdings, Inc.
    
    
    15,000Total purchase price
    
    $
    30,001Cash
    
    $
    4,526Other current assets
    
    
    2,673Property and equipment
    
    
    155Estimated fair value of liabilities assumed
    
    
    (6,622
    )Estimated transaction costs
    
    
    (300
    )Identifiable intangible assets
    
    
    12,225Goodwill
    
    
    15,866Other assets
    
    
    1,478$
    30,001
 On a pro forma basis, assuming the acquisition had been consummated on January
1, 2003, the Companys revenue and net loss for the nine-month periods ended
September 30, 2003 and 2004 would have been as follows: Nine months ended September 30,2003
    
    2004Revenue
    
    $
    284,714
    
    
    $
    248,823Net loss
    
    $
    (26,865
    )
    
    $
    (78,189
    )
 (9) Asset Impairment During the nine months ended September 30, 2003 and 2004, the Company recorded
impairment charges of $6,500 and $6,509, respectively, related to certain
internally developed software for which management has estimated that the
future cash flows were less than the carrying value of the software. (10) Supplemental Condensed Consolidated Financial Information The Reset Notes and the Floating Notes issued by the Company are guaranteed by
each of the Companys U.S. subsidiaries (the Subsidiary Guarantors). The Reset
Notes and the Floating Notes are not, however, guaranteed by the Companys
foreign subsidiaries. The guarantees are full, unconditional and joint and
several. The Subsidiary Guarantors are each wholly owned by the Company. The
ability of the Companys subsidiaries to make cash distributions and loans to
the Company and Subsidiary Guarantors is not expected to be significantly
restricted. The 16




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##### 



GXS CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2003 and 2004
(Unaudited)
(In thousands of dollars) 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, Subsidiary Guarantors
and the Companys nonguarantor subsidiaries. 17




---



##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Balance Sheet
December 31, 2003
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    19,389
    
    
    $
    27,341
    
    
    $
    
    
    
    $
    46,730Receivables
    
    
    
    
    
    
    33,963
    
    
    
    28,365
    
    
    
    
    
    
    
    62,328Other current assets
    
    
    15
    
    
    
    8,750
    
    
    
    1,624
    
    
    
    
    
    
    
    10,389Advances to subsidiaries
    
    
    262
    
    
    
    176,669
    
    
    
    96,517
    
    
    
    (273,448
    )
    
    
    Total current assets
    
    
    277
    
    
    
    238,771
    
    
    
    153,847
    
    
    
    (273,448
    )
    
    
    119,447Investments in affiliates
    
    
    
    
    
    
    2,403
    
    
    
    526
    
    
    
    
    
    
    
    2,929Investments in subsidiaries
    
    
    203,797
    
    
    
    33,472
    
    
    
    
    
    
    
    (237,269
    )
    
    
    Property and equipment, net
    
    
    235
    
    
    
    127,476
    
    
    
    4,990
    
    
    
    
    
    
    
    132,701Goodwill, net
    
    
    
    
    
    
    6,953
    
    
    
    4,976
    
    
    
    
    
    
    
    11,929Other noncurrent assets
    
    
    10,659
    
    
    
    4,204
    
    
    
    5,431
    
    
    
    (11,750
    )
    
    
    8,544Deferred financing costs
    
    
    15,886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,886$
    230,854
    
    
    $
    413,279
    
    
    $
    169,770
    
    
    $
    (522,467
    )
    
    $
    291,436Liabilities, Minority
Interest, and
Stockholders
Equity (Deficit)Current liabilities:Trade payables
    
    $
    1,311
    
    
    $
    7,495
    
    
    $
    3,333
    
    
    $
    
    
    
    $
    12,139Other current liabilities
    
    
    15,319
    
    
    
    40,797
    
    
    
    17,657
    
    
    
    
    
    
    
    73,773Advances from affiliates
    
    
    33,439
    
    
    
    136,299
    
    
    
    103,710
    
    
    
    (273,448
    )
    
    
    Total current liabilities
    
    
    50,069
    
    
    
    184,591
    
    
    
    124,700
    
    
    
    (273,448
    )
    
    
    85,912Long-term debt
    
    
    405,520
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    405,520Other liabilities
    
    
    
    
    
    
    24,891
    
    
    
    10,788
    
    
    
    (11,750
    )
    
    
    23,929Total liabilities
    
    
    455,589
    
    
    
    209,482
    
    
    
    135,488
    
    
    
    (285,198
    )
    
    
    515,361Minority interest
    
    
    
    
    
    
    
    
    
    
    810
    
    
    
    
    
    
    
    810Stockholders equity (deficit)
    
    
    (224,735
    )
    
    
    203,797
    
    
    
    33,472
    
    
    
    (237,269
    )
    
    
    (224,735
    )$
    230,854
    
    
    $
    413,279
    
    
    $
    169,770
    
    
    $
    (522,467
    )
    
    $
    291,436
 18




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##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Balance Sheet
September 30, 2004
(Unaudited)
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    7,128
    
    
    $
    21,237
    
    
    $
    
    
    
    $
    28,365Receivables
    
    
    
    
    
    
    27,335
    
    
    
    24,219
    
    
    
    
    
    
    
    51,554Other current assets
    
    
    24
    
    
    
    
    
    
    
    11,980
    
    
    
    (1,968
    )
    
    
    10,036Advances to subsidiaries
    
    
    262
    
    
    
    166,788
    
    
    
    120,695
    
    
    
    (287,745
    )
    
    
    Total current assets
    
    
    286
    
    
    
    201,251
    
    
    
    178,131
    
    
    
    (289,713
    )
    
    
    89,955Investments in affiliates
    
    
    
    
    
    
    1,741
    
    
    
    526
    
    
    
    
    
    
    
    2,267Investments in subsidiaries
    
    
    199,946
    
    
    
    47,859
    
    
    
    
    
    
    
    (247,805
    )
    
    
    Property and equipment, net
    
    
    235
    
    
    
    105,107
    
    
    
    3,332
    
    
    
    
    
    
    
    108,674Goodwill, net
    
    
    
    
    
    
    22,916
    
    
    
    5,088
    
    
    
    
    
    
    
    28,004Other noncurrent assets
    
    
    1,484
    
    
    
    23,836
    
    
    
    5,142
    
    
    
    (11,750
    )
    
    
    18,712Deferred financing costs
    
    
    13,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,213$
    215,164
    
    
    $
    402,710
    
    
    $
    192,219
    
    
    $
    (549,268
    )
    
    $
    260,825Liabilities, Minority
Interest, and Stockholders
Equity (Deficit)Current liabilities:Trade payables
    
    $
    1,311
    
    
    $
    11,086
    
    
    $
    2,411
    
    
    $
    
    
    
    $
    14,808Other current liabilities
    
    
    23,332
    
    
    
    47,770
    
    
    
    27,276
    
    
    
    (1,968
    )
    
    
    96,410Advances from affiliates
    
    
    66,630
    
    
    
    117,231
    
    
    
    103,884
    
    
    
    (287,745
    )
    
    
    Total current liabilities
    
    
    91,273
    
    
    
    176,087
    
    
    
    133,571
    
    
    
    (289,713
    )
    
    
    111,218Long-term debt
    
    
    406,243
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406,243Other liabilities
    
    
    
    
    
    
    26,677
    
    
    
    10,473
    
    
    
    (11,750
    )
    
    
    25,400Total liabilities
    
    
    497,516
    
    
    
    202,764
    
    
    
    144,044
    
    
    
    (301,463
    )
    
    
    542,861Minority interest
    
    
    
    
    
    
    
    
    
    
    316
    
    
    
    
    
    
    
    316Stockholders equity (deficit)
    
    
    (282,352
    )
    
    
    199,946
    
    
    
    47,859
    
    
    
    (247,805
    )
    
    
    (282,352
    )$
    215,164
    
    
    $
    402,710
    
    
    $
    192,219
    
    
    $
    (549,268
    )
    
    $
    260,825
 19




---



##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Operations and Comprehensive Income (Loss)
Three months ended September 30, 2003
(Unaudited)
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    70,548
    
    
    $
    36,898
    
    
    $
    (15,730
    )
    
    $
    91,716Costs and operating expenses
    
    
    
    
    
    
    68,439
    
    
    
    29,796
    
    
    
    (15,730
    )
    
    
    82,505Restructuring and related charges
    
    
    
    
    
    
    1,331
    
    
    
    
    
    
    
    
    
    
    
    1,331Asset impairment charges
    
    
    
    
    
    
    6,500
    
    
    
    
    
    
    
    
    
    
    
    6,500Operating income (loss)
    
    
    
    
    
    
    (5,722
    )
    
    
    7,102
    
    
    
    
    
    
    
    1,380Other expense, net
    
    
    (7,810
    )
    
    
    (3,586
    )
    
    
    (817
    )
    
    
    
    
    
    
    (12,213
    )Income (loss) before income taxes
    
    
    (7,810
    )
    
    
    (9,308
    )
    
    
    6,285
    
    
    
    
    
    
    
    (10,833
    )Provision (benefit) for income taxes
    
    
    
    
    
    
    (5,403
    )
    
    
    2,085
    
    
    
    
    
    
    
    (3,318
    )Income (loss) before equity in income
of subsidiaries
    
    
    (7,810
    )
    
    
    (3,905
    )
    
    
    4,200
    
    
    
    
    
    
    
    (7,515
    )Equity in income of subsidiaries
    
    
    295
    
    
    
    4,200
    
    
    
    
    
    
    
    (4,495
    )
    
    
    Net income (loss)
    
    
    (7,515
    )
    
    
    295
    
    
    
    4,200
    
    
    
    (4,495
    )
    
    
    (7,515
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    389
    
    
    
    
    
    
    
    389Comprehensive income (loss)
    
    $
    (7,515
    )
    
    $
    295
    
    
    $
    4,589
    
    
    $
    (4,495
    )
    
    $
    (7,126
    )
 20




---



##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Operations and Comprehensive Income (Loss)
Nine months ended September 30, 2003
(Unaudited)
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    216,711
    
    
    $
    104,872
    
    
    $
    (47,488
    )
    
    $
    274,095Costs and operating expenses
    
    
    192
    
    
    
    207,136
    
    
    
    85,661
    
    
    
    (47,488
    )
    
    
    245,501Gains on sale of assets
    
    
    
    
    
    
    (700
    )
    
    
    
    
    
    
    
    
    
    
    (700
    )Restructuring and related charges
    
    
    
    
    
    
    4,464
    
    
    
    
    
    
    
    
    
    
    
    4,464Asset impairment charges
    
    
    
    
    
    
    6,500
    
    
    
    
    
    
    
    
    
    
    
    6,500Operating income (loss)
    
    
    (192
    )
    
    
    (689
    )
    
    
    19,211
    
    
    
    
    
    
    
    18,330Other income (expense), net
    
    
    (45,995
    )
    
    
    4,285
    
    
    
    712
    
    
    
    
    
    
    
    (40,998
    )Income (loss) before income taxes
    
    
    (46,187
    )
    
    
    3,596
    
    
    
    19,923
    
    
    
    
    
    
    
    (22,668
    )Provision (benefit) for income taxes
    
    
    
    
    
    
    (12,670
    )
    
    
    7,598
    
    
    
    
    
    
    
    (5,072
    )Income (loss) before equity in income
of subsidiaries
    
    
    (46,187
    )
    
    
    16,266
    
    
    
    12,325
    
    
    
    
    
    
    
    (17,596
    )Equity in income of subsidiaries
    
    
    28,591
    
    
    
    12,325
    
    
    
    
    
    
    
    (40,916
    )
    
    
    Net income (loss)
    
    
    (17,596
    )
    
    
    28,591
    
    
    
    12,325
    
    
    
    (40,916
    )
    
    
    (17,596
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    311
    
    
    
    
    
    
    
    311Comprehensive income (loss)
    
    $
    (17,596
    )
    
    $
    28,591
    
    
    $
    12,636
    
    
    $
    (40,916
    )
    
    $
    (17,285
    )
 21




---



##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Operations and Comprehensive Income (Loss)
Three months ended September 30, 2004
(Unaudited)
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    58,596
    
    
    $
    44,696
    
    
    $
    (21,883
    )
    
    $
    81,409Costs and operating expenses
    
    
    
    
    
    
    60,025
    
    
    
    32,398
    
    
    
    (21,883
    )
    
    
    70,540Restructuring and related charges
    
    
    
    
    
    
    4,432
    
    
    
    1,916
    
    
    
    
    
    
    
    6,348Asset impairment charges
    
    
    
    
    
    
    6,509
    
    
    
    
    
    
    
    
    
    
    
    6,509Operating income (loss)
    
    
    
    
    
    
    (12,370
    )
    
    
    10,382
    
    
    
    
    
    
    
    (1,988
    )Other income (expense), net
    
    
    (14,864
    )
    
    
    245
    
    
    
    (698
    )
    
    
    
    
    
    
    (15,317
    )Income (loss) before income taxes
    
    
    (14,864
    )
    
    
    (12,125
    )
    
    
    9,684
    
    
    
    
    
    
    
    (17,305
    )Provision for income taxes
    
    
    
    
    
    
    314
    
    
    
    1,519
    
    
    
    
    
    
    
    1,833Income (loss) before equity in income
(loss) of subsidiaries
    
    
    (14,864
    )
    
    
    (12,439
    )
    
    
    8,165
    
    
    
    
    
    
    
    (19,138
    )Equity in income (loss) of subsidiaries
    
    
    (4,274
    )
    
    
    8,165
    
    
    
    
    
    
    
    (3,891
    )
    
    
    Net income (loss)
    
    
    (19,138
    )
    
    
    (4,274
    )
    
    
    8,165
    
    
    
    (3,891
    )
    
    
    (19,138
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    486
    
    
    
    
    
    
    
    486Comprehensive income (loss)
    
    $
    (19,138
    )
    
    $
    (4,274
    )
    
    $
    8,651
    
    
    $
    (3,891
    )
    
    $
    (18,652
    )
 22




---



##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Operations and Comprehensive Income (Loss)
Nine months ended September 30, 2004
(Unaudited)
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    198,431
    
    
    $
    120,071
    
    
    $
    (70,943
    )
    
    $
    247,559Costs and operating expenses
    
    
    
    
    
    
    219,278
    
    
    
    94,794
    
    
    
    (70,943
    )
    
    
    243,129Restructuring and related charges
    
    
    
    
    
    
    15,803
    
    
    
    7,600
    
    
    
    
    
    
    
    23,403Asset impairment charges
    
    
    
    
    
    
    6,509
    
    
    
    
    
    
    
    
    
    
    
    6,509Operating income (loss)
    
    
    
    
    
    
    (43,159
    )
    
    
    17,677
    
    
    
    
    
    
    
    (25,482
    )Other expense, net
    
    
    (45,591
    )
    
    
    (78
    )
    
    
    (1,145
    )
    
    
    
    
    
    
    (46,814
    )Income (loss) before income taxes
    
    
    (45,591
    )
    
    
    (43,237
    )
    
    
    16,532
    
    
    
    
    
    
    
    (72,296
    )Provision for income taxes
    
    
    
    
    
    
    1,109
    
    
    
    6,034
    
    
    
    
    
    
    
    7,143Income (loss) before equity in income
(loss) of subsidiaries
    
    
    (45,591
    )
    
    
    (44,346
    )
    
    
    10,498
    
    
    
    
    
    
    
    (79,439
    )Equity in income (loss) of subsidiaries
    
    
    (33,848
    )
    
    
    10,498
    
    
    
    
    
    
    
    23,350
    
    
    
    Net income (loss)
    
    
    (79,439
    )
    
    
    (33,848
    )
    
    
    10,498
    
    
    
    23,350
    
    
    
    (79,439
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    959
    
    
    
    
    
    
    
    959Comprehensive income (loss)
    
    $
    (79,439
    )
    
    $
    (33,848
    )
    
    $
    11,457
    
    
    $
    23,350
    
    
    $
    (78,480
    )
 23




---



##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Cash Flows
Nine months ended September 30, 2003
(Unaudited)
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (17,596
    )
    
    $
    28,591
    
    
    $
    12,325
    
    
    $
    (40,916
    )
    
    $
    (17,596
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    
    
    
    
    33,200
    
    
    
    2,356
    
    
    
    
    
    
    
    35,556Asset impairment charges
    
    
    
    
    
    
    6,500
    
    
    
    
    
    
    
    
    
    
    
    6,500Deferred income taxes
    
    
    
    
    
    
    (12,127
    )
    
    
    11,137
    
    
    
    
    
    
    
    (990
    )Gain on sale of assets
    
    
    
    
    
    
    (700
    )
    
    
    
    
    
    
    
    
    
    
    (700
    )Write-off of deferred financing costs
    
    
    5,548
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,548Amortization of deferred financing costs and debt discount
    
    
    2,392
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,392Minority interest
    
    
    
    
    
    
    
    
    
    
    (609
    )
    
    
    
    
    
    
    (609
    )Equity in net income of subsidiaries
    
    
    (28,591
    )
    
    
    (12,325
    )
    
    
    
    
    
    
    40,916
    
    
    
    Changes in operating assets and
liabilities, net
    
    
    42,380
    
    
    
    (18,010
    )
    
    
    (12,891
    )
    
    
    
    
    
    
    11,479Net cash provided by operating activities
    
    
    4,133
    
    
    
    25,129
    
    
    
    12,318
    
    
    
    
    
    
    
    41,580Cash flows for investing activities:Purchases of property and equipment
    
    
    (83
    )
    
    
    (21,569
    )
    
    
    (1,189
    )
    
    
    
    
    
    
    (22,841
    )Proceeds from sale of assets
    
    
    
    
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    600Net cash used for investing activities
    
    
    (83
    )
    
    
    (20,969
    )
    
    
    (1,189
    )
    
    
    
    
    
    
    (22,241
    )Cash flows from financing activities:Net contributions from General Electric Company and affiliates
    
    
    12,893
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,893Repayment of long-term debt
    
    
    (174,562
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174,562
    )Proceeds from long-term debt issuances
    
    
    169,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169,750Payment of financing costs
    
    
    (12,131
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,131
    )Net cash used for financing activities
    
    
    (4,050
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,050
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    2,606
    
    
    
    
    
    
    
    2,606Increase in cash and cash equivalents
    
    
    
    
    
    
    4,160
    
    
    
    13,735
    
    
    
    
    
    
    
    17,895Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    21,940
    
    
    
    15,393
    
    
    
    
    
    
    
    37,333Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    26,100
    
    
    $
    29,128
    
    
    $
    
    
    
    $
    55,228
 24




---



##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Cash Flows
Nine months ended September 30, 2004
(Unaudited)
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (79,439
    )
    
    $
    (33,848
    )
    
    $
    10,498
    
    
    $
    23,350
    
    
    $
    (79,439
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    
    
    
    
    40,465
    
    
    
    1,981
    
    
    
    
    
    
    
    42,446Asset impairment charges
    
    
    
    
    
    
    6,509
    
    
    
    
    
    
    
    
    
    
    
    6,509Deferred income taxes
    
    
    
    
    
    
    100
    
    
    
    1,848
    
    
    
    
    
    
    
    1,948Amortization of deferred financing costs and debt discount
    
    
    3,525
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,525Minority interest
    
    
    
    
    
    
    
    
    
    
    (494
    )
    
    
    
    
    
    
    (494
    )Equity in net income (loss) of subsidiaries
    
    
    33,848
    
    
    
    (10,498
    )
    
    
    
    
    
    
    (23,350
    )
    
    
    Changes in operating assets and
liabilities, net
    
    
    36,339
    
    
    
    17,719
    
    
    
    (19,561
    )
    
    
    
    
    
    
    34,497Net cash provided by (used in) operating activities
    
    
    (5,727
    )
    
    
    20,447
    
    
    
    (5,728
    )
    
    
    
    
    
    
    8,992Cash flows for investing activities:Purchases of property and equipment
    
    
    (7
    )
    
    
    (22,984
    )
    
    
    (323
    )
    
    
    
    
    
    
    (23,314
    )Purchase of HAHT, net of $4,526 cash acquired
    
    
    
    
    
    
    (9,724
    )
    
    
    
    
    
    
    
    
    
    
    (9,724
    )Net cash used in investing activities
    
    
    (7
    )
    
    
    (32,708
    )
    
    
    (323
    )
    
    
    
    
    
    
    (33,038
    )Cash flows from financing activities:Net contributions from General Electric Company and affiliates
    
    
    5,863
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,863Payment of financing costs
    
    
    (129
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129
    )Net cash provided by financing activities
    
    
    5,734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,734Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    
    
    
    
    (53
    )Decrease in cash and cash equivalents
    
    
    
    
    
    
    (12,261
    )
    
    
    (6,104
    )
    
    
    
    
    
    
    (18,365
    )Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    19,389
    
    
    
    27,341
    
    
    
    
    
    
    
    46,730Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    7,128
    
    
    $
    21,237
    
    
    $
    
    
    
    $
    28,365
 25




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our consolidated financial condition
and results of operations should be read in conjunction with our unaudited
condensed consolidated financial statements and the accompanying notes, which
are included elsewhere in this document. The following discussion and analysis may contain forward-looking statements,
which reflect the expectations, beliefs, plans and objectives of management
about future financial performance and/or assumptions underlying our judgments
concerning matters discussed below. These statements, accordingly, involve
estimates, assumptions, judgments and uncertainties. In particular, this
pertains to managements comments on financial resources, capital spending, the
outlook for our business and our potential combination with G International,
Inc. Actual results or outcomes may differ materially from those in such
forward-looking statements. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Factors That Could Affect
Future Results in our Annual Report on Form 10-K filed on March 30, 2004. Overview We provide software-based products and services which enable businesses to
electronically exchange business documents and automate related processes. Our
offerings are categorized into three lines of business: EDI Services, Other
Business to Business Solutions, and Custom Messaging and Network Solutions. EDI
Services are our principal offerings; they enable our customers to exchange
business documents in an automated and secure environment. With our EDI
Services offerings, we typically provide value added services such as
non-repudiation, document translation, enhanced security, format conversions
and support of various communication protocols. Other Business to Business
Solutions includes our hosted applications and integration software; these
solutions facilitate integration of internal information and collaboration
between trading partners. Custom Messaging and Network Solutions primarily
includes legacy offerings such as custom applications for individual customers.
In general, we derive our revenue from:  
    
    recurring transaction processing fees;
    
    software licensing;
    
    software maintenance; and
    
    professional services provided in connection with implementation and use of our products. For most transactions, we charge a transaction-processing fee to both the
sending and the receiving party. 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 highly recurring in nature. While many of our larger customers are
committed to multi-year contracts, our typical contract for EDI services
automatically renews every month. However, we are moving towards longer term
contracts for both new and existing customers. Transaction processing revenues
are recognized on a per transaction basis in the period the related transaction
is processed. Revenues on contracts with monthly or quarterly minimum
transaction levels are recognized based on the greater of actual transactions
processed or the specified contract minimums. We also license our software either for perpetual use or for a fixed term.
Licensing revenues are generally recognized when the license agreement is
signed, the license fee is fixed and determinable, delivery has occurred and
collection is probable. In connection with the licensing of our software
products, we provide software maintenance services that also generate recurring
revenues. We typically charge between 15% and 20% of the initial license fee on
an annual basis for these maintenance services. We recognize software
maintenance revenues over the life of the related maintenance contracts, which
is typically one year. We provide professional services in connection with our
entire range of products and services. These services are typically provided
under time and material contracts and revenue is recognized as the related
services are provided. Most of our costs are relatively fixed and primarily
consist of salary compensation and related benefits, as well as expenses for
infrastructure equipment, such as hardware and software, and costs associated
with the procurement of our telecommunications network. 26




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##### 



On September 28, 2004, we introduced Trading Grid, a integration services
platform developed exclusively to enable and streamline cross-enterprise
business processes. Trading Grid offers unique capabilities that ensure
synchronized product information, optimize inventory levels and demand
forecasts, and ultimately provide true end-to-end business process visibility.
We designed and developed Trading Grid to combine the reliability and best
practices of our Value-Added Networks, or VANs, with the speed and agility of
the Internet. While VANs primarily move data, Trading Grid provides
capabilities that get more out of the data and manage overall business
processes. Some capabilities of Trading Grid are available today; others will
be introduced periodically for the foreseeable future. Over the past several years, general economic conditions and the proliferation
of the Internet and other technological advances in computing and
telecommunications have and continue to transform the transaction management
industry. Our business has been impacted in several ways including a decline in
revenue in each of our three categories of products and services. In addition,
competitive pricing dynamics across the industry have adversely impacted our
core EDI Services revenues. We responded to these market conditions and
corresponding effect on demand for our products and services, by:  
    
    reducing our cost structure through the removal of excess capacity in our sales
force, our professional services organization and our computing and network
infrastructure;
    
    consolidating facility space;
    
    offering selected customers lower pricing in exchange for longer contract terms;
    
    canceling and consolidating various marketing and development programs related
to products and services that were not generating sufficient revenues to
support the continued investment; and
    
    reducing back-office personnel and moving work to lower cost countries. On June 8, 2004, we announced a restructuring program which includes
consolidating development and operations functions, streamlining business
processes, making technology investments to lower our worldwide service
delivery costs and vacating additional facilities. We expect to reduce our
global employee workforce by approximately 300 positions, or approximately 20
percent, by the end of calendar year 2004 from the level existing as of June 8,
2004; as of September 30, 2004, approximately 150 positions has been impacted.
As a result, we incurred approximately $23.4 million in restructuring costs,
the majority of which we expect to disburse by the end of 2005. The amount
recorded is net of amounts we expect to receive from subleasing vacated space
at our headquarters. We calculated the facility charge included in the
restructuring costs by discounting the net future cash obligation of the
existing lease less anticipated rental receipts to be received from existing
and potential subleases. This requires significant judgments 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 were based upon independent market analysis and assessment from
experienced real estate brokers. We have revised our estimate of restructuring charges downward and expect to
incur additional charges of up to $5.0 million during the fourth quarter of
2004. These additional charges relate to the closing of facilities in Europe.
The majority of the severance costs will be paid out by the end of 2005 and the
balance of the restructuring costs primarily relating to facilities will be
paid in somewhat equal amounts through 2014. We expect competitive pricing dynamics will continue to put pressure on the
revenue from our EDI Services. We continue to focus on maintaining a cost
structure that is appropriate for our existing revenue base and revenue
expectations. In addition, we expect to continue to both develop and acquire
products and services which add value for our customers. Historically our EDI
Services revenues have been transaction based. We expect the revenues will
become more driven by subscriptions and payment for value added services which
utilize information about the transactions and information contained within the
transaction to give our customers more insight into their supply chain
performance and a greater ability to optimize processes between trading
partners. Pursuant to the terms of the Recapitalization Agreement, General Electric
Company was required to maintain its affiliates respective business
arrangements with us on terms and conditions substantially similar to those in
effect at the time of the completion of our recapitalization and to continue to
purchase products and services from us totaling $30.6 million in each year of
the four calendar quarters ended September 2003 and September 2004. While we
expect General Electric to continue to be a very important and significant
customer, based on current estimates, 27




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##### 



which are subject to
revision, we do expect that the revenue in 2005 will decline by at least 50% from the previously contracted annual
amount of $30.6 million. However, there can be no assurance that the decline
will not be greater. On February 13, 2004, we acquired all of the capital stock of HAHT Commerce,
Inc. for consideration of $15.0 million in cash plus common and preferred
shares of GXS Holdings, Inc. valued at approximately $15.0 million. HAHT
Commerce is a provider of demand chain management applications that automate,
integrate and optimize order management, product information management,
channel management, business intelligence and customer services between
manufacturers, their channel partners and business customers. By combining HAHT Commerces software with our other products, we are able to
offer customers an end-to-end data synchronization solution, including software
to integrate data from back-end systems, management tools to publish product
information, transaction delivery services to move the information and a means
to electronically connect multiple trading partners in a retail supply chain. On October 13, 2004, our indirect parent, Francisco Partners, L.P., through a
majority owned acquisition vehicle, signed a definitive agreement to acquire G
International Inc., a business established to own and operate International
Business Machine Corporations Electronic Data Interchange and Business
Exchange Services businesses. By virtue of the ownership of Francisco
Partners, we will be under common control with G International. Francisco
Partners intends, subject to entering into definitive documentation with
various parties, to combine G International with us or one of our subsidiaries
within the next six months. On November 1, 2004, we entered into an Employee
Services Agreement with G International whereby certain of our executive
officers will provide management services to G International and other
personnel will provide support services to G International. On November 8, 2004, we announced a strategic partnership with webMethods, Inc.
to jointly resell, develop and market end-to-end business integration
solutions. The agreement will allow businesses to collaborate more effectively
with their global vendors and partners. Central to the strategic relationship
will be the use of webMethods Fabric, a leading suite of business integration
software, in our Trading Grid. Critical Accounting Policies Managements discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which are
prepared in accordance with accounting principles generally accepted in the
United States. Some accounting policies require us to make estimates and
assumptions about future events that affect the amounts reported in our
financial statements and the accompanying notes. Future events and their
effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
could differ from those estimates, and any differences may be material to the
financial statements. A description of all of our significant accounting
policies used is described in Note 2 to our audited consolidated financial
statements, included in our Annual Report on Form 10-K dated December 31, 2003.
Some of our policies involve a higher degree of judgment and complexity in
their application and represent the critical accounting policies used in the
preparation of our financial statements. A summary of our critical accounting
policies can be found in our Annual Report on Form 10-K dated December 31,
2003. If different assumptions or conditions were to prevail or if our
estimates and assumptions prove to be incorrect, actual results could be
materially different from those reported. Employment Employment was 1,536 and 1,401 as of December 31, 2003 and September 30, 2004,
respectively. The employment decrease is a result of the restructuring
activities that have taken place this year offset partially by employees added
as result of the HAHT Commerce acquisition. 28




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##### 



Results of Operations A summary of our revenue by line of business follows: Three Months Ended September 30
    
    Nine Months Ended September 302003
    
    2004
    
    2003
    
    2004(in thousands of dollars)
    
    (in thousands of dollars)$
    
    %
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %Revenues:EDI Services
    
    
    60,377
    
    
    
    65.9
    %
    
    
    54,452
    
    
    
    66.9
    %
    
    
    180,045
    
    
    
    65.7
    %
    
    
    168,011
    
    
    
    67.9
    %Other Business to Business Solutions
    
    
    16,081
    
    
    
    17.5
    %
    
    
    13,997
    
    
    
    17.2
    %
    
    
    47,214
    
    
    
    17.2
    %
    
    
    38,205
    
    
    
    15.4
    %Custom Messaging and Network Solutions
    
    
    15,258
    
    
    
    16.6
    %
    
    
    12,960
    
    
    
    15.9
    %
    
    
    46,836
    
    
    
    17.1
    %
    
    
    41,343
    
    
    
    16.7
    %Total revenues
    
    
    91,716
    
    
    
    100.0
    %
    
    
    81,409
    
    
    
    100.0
    %
    
    
    274,095
    
    
    
    100.0
    %
    
    
    247,559
    
    
    
    100.0
    %
 Three and Nine Months Ended September 30, 2004 Compared to Three and Nine
Months Ended September 30, 2003 Revenues. Revenues decreased in both the third quarter and the first nine
months of 2004 when compared to the same periods in 2003. Additionally,
revenue in the third quarter of 2004 was down $1.0 million when compared to the
second quarter of 2004. EDI Servicesrevenue, our main product and service grouping, declined in both
the first nine months and third quarter of 2004 when compared to the same
periods in 2003 as we continued to see both contraction of our customer base
and lower realized prices in the United States, offset somewhat by strength in
our foreign operations. EDI Services revenue was aided in part by the strength
of the Euro and British pound relative to the dollar. Third quarter 2004 EDI
Services revenue was down $2.3 million when compared to the second quarter of
2004. This decrease was primarily due to customer cancellations and lower
prices in all of our regions. We have been experiencing reduced realized price
levels in the United States for the past several quarters and expect this trend
to continue as we see aggressive competition in the marketplace and we pursue a
strategy of offering customers more attractively priced packages of services in
exchange for longer term commitments. During the first nine months of 2004, we
entered agreements to host several Country Data Pools. Data Pools provide a
mechanism for trading partners, primarily in the retail supply chain, to share
and synchronize product data for greater efficiencies and increased
profitability across global supply chains, through participation in a global
organization called the Global Data Synchronization Network, or GDSN. Revenues
derived from our relationship with these Data Pools is not expected to
significantly impact our operations until 2005 and later years. Other Business to Business Solutionsrevenue, which includes software sales and
related services and online marketplaces, declined in both the first nine
months and third quarter of 2004 when compared to the same periods in 2003. We
continue to see customer reluctance to commit to major new systems
implementations. In addition, our online marketplaces implemented during the
past several years are yielding lower monthly revenues as they mature in terms
of usage and number of participants. However, third quarter 2004 revenues were
up $2.1 million when compared to the second quarter of 2004 principally
attributable to increases in data synchronization solutions and software sales. Custom Messaging and Network Solutionsrevenue declined in both the first nine
months and third quarter of 2004 when compared to the same periods in 2003, as
well as in the third quarter of 2004 when compared to the second quarter of
2004 ($13.0 million versus $13.7 million) as customers continue to migrate away
from hosted legacy applications and computer systems to either in-house
implementations or alternate solutions. These declines, which are in line with
or slightly slower than we had expected, will continue and perhaps be
accelerated at times as we reallocate resources towards a consolidated
computing infrastructure and focus resources on newer service offerings. Year
over year declines in these offerings were mitigated somewhat by favorable
impact of foreign currency exchange of $1.5 million for the nine-month period. 29




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##### 



The relative strength of foreign currencies caused an increase in revenues of
approximately $2.4 million and $10.7 million, respectively, during the three
and nine months ended September 30, 2004 compared with the three and nine
months ended September 30, 2003. A summary of our costs and operating expenses follows: Three Months Ended September 30
    
    Nine Months Ended September 302003
    
    2004
    
    2003
    
    2004(in thousands of dollars)Costs and operating expenses:Cost of revenues
    
    $
    54,621
    
    
    $
    46,950
    
    
    $
    159,990
    
    
    $
    155,866Sales and marketing
    
    
    16,538
    
    
    
    13,227
    
    
    
    48,638
    
    
    
    46,612General and administrative
    
    
    11,346
    
    
    
    10,363
    
    
    
    36,873
    
    
    
    40,651Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    (700
    )
    
    
    Restructuring and related charges
    
    
    1,331
    
    
    
    6,348
    
    
    
    4,464
    
    
    
    23,403Asset impairment charges
    
    
    6,500
    
    
    
    6,509
    
    
    
    6,500
    
    
    
    6,509Total costs and operating expenses
    
    $
    90,336
    
    
    $
    83,397
    
    
    $
    255,765
    
    
    $
    273,041
 Cost of revenues. Cost of revenues decreased by $7.6 million, or 13.9%, to
$47.0 million for the three months ended September 30, 2004 from $54.6 million
for the three months ended September 30, 2003. For the nine months ended
September 30, 2004, cost of revenues decreased by $4.1 million, or 2.6%, to
$155.9 million from $160.0 million for the nine months ended September 30,
2003. The decreases in cost of revenues for the three and nine-months periods
are primarily driven by lower depreciation and amortization expense, decreased
royalty payments as a result of lower software sales, and decreases in
compensation and related employee expenses as we continue to move forward with
our transformation plan. Sales and marketing.Sales and marketing expense decreased by $3.3 million, or
20.0%, to $13.2 million for the three months ended September 30, 2004 from
$16.5 million for the three months ended September 30, 2003. Sales and
marketing expense decreased $2.0 million, or 4.1%, to $46.6 million for the
nine months ended September 30, 2004 from $48.6 million for the nine months
ended September 30, 2003. The decrease is primarily due to decreases in
compensation and related employee expenses as a result of restructuring actions
that took place during 2003 and 2004 and lower commission expense in line with
the decrease in revenue. These decreases are somewhat offset by increases in
advertising and sales promotion activities as we strive to enhance our brand
awareness in the marketplace, as well as expenses associated with HAHT
Commerce. General and administrative.General and administrative expenses decreased $0.9
million, or 8.0%, to $10.4 million for the three months ended September 30,
2004 from $11.3 million for the three months ended September 30, 2003. General
and administrative expenses increased $3.8 million, or 10.3%, to $40.7 million
for the nine months ended September 30, 2004 from $36.9 million for the nine
months ended September 30, 2003. The increase for the nine months ended
September 30, 2004 was primarily driven by an increase in consulting expenses
and professional fees during the first six months of 2004. Consulting expenses
and professional fees were unusually high, approximately $2.7 million for the
first six months of 2004. Consulting expenses and professional fees included
fees paid to management consultants engaged in December 2003 to work together
with our management team to solidify our business strategy and lay a foundation
for our cost transformation actions. These engagements were substantially
completed by the end of the second quarter; as a result, general and
administrative expenses decreased during the three months ended September 30,
2004. The weakening dollar caused cost of revenues, sales and marketing and general
and administrative expenses to be approximately $1.5 million and $8.4 million
higher, respectively, during the three and nine months ended September 30, 2004
compared to the three and nine months ended September 30, 2003. 30




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Restructuring and related charges.Restructuring and related charges were
$23.4 million for the nine months ended September 30, 2004. The majority of
the charges relate to a restructuring program announced on June 8, 2004 which
includes facility exit costs, consolidating development and operations
functions, streamlining business processes and making technology investments to
lower our worldwide service delivery costs. We expect to reduce our global
workforce by the end of calendar year 2004 by approximately 300 positions, or
approximately 20 percent, from the level that existed as of June 8, 2004; as of
September 30, 2004, approximately 150 positions had been impacted. We also
expect to shift some employment to lower cost countries, particularly India and
the Philippines. Restructuring and related
charges were $4.5 million for the nine months ended
September 30, 2003. The 2003 charges related to facility and equipment lease
buy-outs, facility exit costs including a restoration obligation, and headcount
reductions primarily in our operations, engineering and service organizations.
Substantially all of these costs were reimbursed by General Electric as part of
the September 2002 recapitalization agreement. We have revised our estimate of restructuring charges downward and expect to
record additional restructuring charges of up to $5.0 million during the fourth
quarter of 2004 associated with the closing of facilities in Europe. The
majority of these costs will be paid out by the end of 2005 and the balance of
these costs will be paid in somewhat equal amounts through 2014. Write-off of deferred financing costs.Deferred financing costs of $5.5 million
were written-off in March 2003. The write-off was related to the refinancing
of our previous senior term loan. Interest expense.Interest expense of $15.1 million and $44.8 million for the
three and nine months ended September 30, 2004, respectively, and $12.9 million
and $36.4 million for the three and nine months ended September 30, 2003,
respectively, was primarily driven by interest on our long-term debt issued in
connection with the recapitalization. The increase over the prior year
relates to the increase in the interest rate on our $235.0 million senior
subordinated reset notes from 12% to 15% and increased interest and higher
amortization of deferred financing costs related to the March 2003 issuance of
our $105.0 million of senior secured floating rate notes and our new credit
facility. Our senior subordinated reset notes bore interest at 12% per annum before
September 27, 2003. After September 27, 2003, the senior subordinated reset
notes will bear interest at a reset rate between 8% and 17%. The reset rate
will be determined by negotiations between General Electric Capital
Corporation, or GECC, and us that began in July 2003 and are continuing. The
parties have not reached an agreement on the reset rate and have each engaged
investment bankers to determine the reset rate. For the period from September
27, 2003 to September 30, 2004, the Company accrued interest at a rate of 15%,
the rate which management believes to be the best estimate of where the
negotiations will conclude. To the extent the reset rate exceeds 15%, we will
have the option to pay cash interest of 15% and add the additional interest to
the balance of the reset notes. A 1% change in the reset rate upon final
negotiations will change interest expense by $0.6 million per quarter, or $2.4
million annually. Other income (expense), net. Other expense of $0.5 million for the three
months ended September 30, 2004, was primarily driven by realized losses on
foreign currency transactions. Other expense was $1.9 million for the nine
months ended September 30, 2004 which included $0.8 million in fees relating to
interest rate determination for our senior subordinated reset notes and $1.6
million of realized losses on foreign currency transactions, offset partially
by $0.5 million of minority interest income. Other income was $0.5 million for the three months ended September 30, 2003.
Other income was $1.2 million for the nine months ended September 30, 2003,
which included $0.3 million of realized gains on foreign currency transactions
and $0.6 million of minority interest income. Provision for income taxes.Income tax expense was $1.8 million for the three
months ended September 30, 2004 compared to income tax benefit of $3.3 million
for the three months ended September 30, 2003. Income tax expense was $7.1
million for the nine months ended September 30, 2004 compared to income tax
benefit of $5.1 million for the nine months ended September 30, 2003. Our tax
rate for the nine months ended September 30, 2004 differs from the federal
statutory rate of 35% principally as a result of foreign taxes paid or accrued
in jurisdictions where we are profitable and the effect of losses both foreign
and domestic for which no benefit has been recognized. Our tax rate for the
nine months ended September 30, 2003 differed from the federal statutory rate
of 35% 31




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##### 



principally as result of state income taxes and the effect of losses in foreign
jurisdictions for which no income tax benefits have been recognized. Net loss.Net loss increased by $11.6 million to a net loss of $19.1 million
for the three months ended September 30, 2004 compared to a net loss of $7.5
million for the three months ended September 30, 2003. Net loss increased by
$61.8 million to a net loss of $79.4 million for the nine months ended
September 30, 2004 compared to a net loss of $17.6 million for the nine months
ended September 30, 2003. The increase in net loss of $11.6 million and $61.8
million for the three and nine months ended September 30, 2004, respectively,
was a result of the matters discussed above. Liquidity and Capital Resources Sources and Uses of Cash The following table is a summary of our sources and uses of cash during the
nine months ended September 30, 2003 and 2004: Nine months ended September 30,2003
    
    2004(in thousands of dollars)Cash flows from operating activities
    
    $
    41,580
    
    
    $
    8,992Cash flows from investing activities
    
    
    (22,241
    )
    
    
    (33,038
    )Cash flows from financing activities
    
    
    (4,050
    )
    
    
    5,734Effect of exchange rate changes on cash
    
    
    2,606
    
    
    
    (53
    )Net increase (decrease) in cash and cash equivalents
    
    $
    17,895
    
    
    $
    (18,365
    )Cash and cash equivalents, end of period
    
    $
    55,228
    
    
    $
    28,365
 Net cash provided by operating activities was $9.0 million for the nine months
ended September 30, 2004 compared net cash provided by operating activities of
$41.6 million for the nine months ended September 30, 2003. The decrease in net
cash provided by operating activities was mainly attributable to the $61.8
million increase in net loss offset to some extent by increases in deferred
income and accrued expenses. Accrued expenses and other liabilities include $28.9 million of restructuring
charges. The majority of these costs will be paid out by the end of 2005 with
the balance being paid in somewhat equal amounts through 2014. In addition, we
have revised our estimate of restructuring charges downward and expect to
record additional charges of up to $5.0 million during the balance of 2004.
The majority of these costs will paid out by the end of 2005 with the balance
being paid in somewhat equal amounts through 2014. Net cash used in investing activities was $33.0 million for the nine months
ended September 30, 2004 compared to $22.2 million for the nine months ended
September 30, 2003. Net cash used in investing activities for the nine months
ended September 30, 2004 and September 30, 2003 included capital expenditures
of $23.3 million and $22.8 million, respectively, for property, software and
equipment. Net cash used in investing activities for the nine months ended
September 30, 2004 also included $15.0 million for the purchase of HAHT
Commerce, net of $4.5 million of cash acquired. Capital expenditures for the
first nine months of 2003 and 2004 include $15.7 million and $11.9 million,
respectively, of costs capitalized for the development of software for internal
use. Net cash provided by financing activities was $5.7 million for the nine months
ended September 30, 2004 compared to net cash used in financing activities of
$4.1 million for the nine months ended September 30, 2003. Cash provided by
financing activities for the nine months ended September 30, 2004 consisted
primarily of a $5.9 million 32




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##### 



reimbursement by General Electric pursuant to the recapitalization agreement,
as discussed in note 1 of our financial statements included herein. Cash usage
for the nine months ended September 30, 2003 was driven by $12.1 million of
professional and banking fees related to our debt refinancing, and cash of
$174.6 million used to retire borrowings under our previous term loan, offset
by $169.8 million from the refinancing and a $12.9 million reimbursement by
General Electric pursuant to the recapitalization agreement. Our principal sources of liquidity have been available cash and cash flows from
operations. We expect our principal uses of cash to be working capital, capital
expenditures and debt service. As of September 30, 2004, we had outstanding
debt of approximately $406.2 million, which consisted of $235.0 million of
outstanding senior subordinated reset notes, $101.2 million of outstanding
senior secured floating rate notes and a $70.0 million senior term loan. The
senior secured floating rate notes are net of a debt discount of $3.8 million. Borrowings under our revolving credit facility bear interest, at our option, at
either a floating base rate plus 2.00% per annum or floating LIBOR plus 4.25%
per annum. Borrowings under our senior term loans bear interest, at our option,
at either the base rate plus 4.00% per annum or LIBOR plus 6.00% per annum. The
base rate and LIBOR rate used to calculate the applicable interest rates on
revolving credit loans and senior term loans may not be less than 4.25% and
2.25%, respectively. Interest is payable monthly in arrears for base rate loans
and on the last day of selected interest periods, but no later than every three
months for LIBOR rate loans. The maturity date of the revolving credit facility
and the senior term loan are March 21, 2007, at which time all principal is due
and payable. At September 30, 2004, we had $70.0 million outstanding under the senior term
loan facility. Borrowings outstanding under the facility at September 30, 2004
bear interest at 8.25%. In addition, as of the date of this report, we have
approximately $8.9 million of letters of credit outstanding under our revolving
credit facility. The amount that can be borrowed under the revolving credit
facility is limited to a percentage of EDI revenues as defined in the agreement
governing the credit facility, and is subject to our compliance with financial
covenants and other customary conditions, including that no event of default
under the facility has occurred and is continuing. Available borrowings under
our revolving credit facility were $21.1 million at
September 30, 2004.  In
October 2004, we borrowed $14.1 million under the New Revolving Credit Facility
for general corporate purposes. We have repaid $4.7 million of these
borrowings under the New Revolving Credit Facility. Our obligations under our credit facility are guaranteed by all of our existing
and future U.S. subsidiaries and are also secured by first-priority liens on
substantially all of our and the guarantors assets and property, including a
pledge of 100% of the capital stock or other equity interests of our existing
and future U.S. subsidiaries and 66% of the capital stock or other equity
interests of our material first-tier foreign subsidiaries. We are also subject
to a negative pledge on all of our assets and the assets of our subsidiaries. The agreements governing our outstanding debt impose limitations on our ability
to, among other things, incur additional indebtedness including capital leases,
incur liens, pay dividends or make certain other restricted payments,
consummate certain asset sales, enter into certain transactions with
affiliates, issue preferred stock, merge or consolidate with any other person
or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets. The indentures governing our notes contain
similar limitations. In addition, the indenture governing our senior secured
floating rate notes limits our ability to maintain secured indebtedness in
excess of certain limits related to our EDI services revenue. Our credit
facility, as amended, also requires that we meet and maintain certain financial
ratios and tests, including an annual capital expenditures limitation, minimum
consolidated trailing twelve month EBITDA and a maximum consolidated leverage
ratio (total senior debt to EBITDA). Our ability to comply with these covenants
and to meet and maintain such financial ratios and tests is material to the
success of our business and may be affected by events beyond our control. Our
failure to comply with these covenants could create a default under the credit
facility, the indenture governing the floating notes, and the indenture
governing the reset notes. In March and June 2004, we negotiated amended
covenants under our credit facility for 2004 and 2005. The amended EBITDA
covenant has a requirement of $62.5 million for 2004, $75.0 million for the
twelve-month period ended March 31, 2005 and $85.0 million for the twelve-month
periods ending June 30, September 30 and December 31, 2005, a minimum
consolidated leverage ratio requirement of 3.30 to 1.0 for 2004, 2.80 to 1.0
for the twelve-month period ended March 31, 2005 and 2.40 to 1.0 for the
twelve-month periods ending June 30, September 30 and December 31, 2005. Our
ability to comply with each of the EBITDA and consolidated leverage ratio
covenants will primarily depend on the performance of our business in future
periods and, specifically, our ability to generate revenues and control
operating costs. Under our credit facility, EBITDA is calculated each quarter
for the latest twelve-month period and is adjusted to exclude specific costs
and expenses. 33




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##### 



The excluded costs and expenses include fees related to the recapitalization,
non-cash charges, restructuring charges, costs reimbursed by General Electric,
and other adjustments. As defined under our credit facility, EBITDA for the
three and twelve-months periods ended September 30, 2004 is equal to $23.3
million and $75.0 million, respectively. For the twelve-month period ended
September 30, 2004, our consolidated leverage ratio was equal to 2.50 to 1.0,
based on senior debt of $183.9 million and EBITDA of $75.0 million. EBITDA is
not a presentation made in accordance with accounting principles generally
accepted in the United States. Accordingly, EBITDA is not intended to be used
as an alternative to net income or any other measure of performance in
accordance with accounting principles generally accepted in the United States,
and EBITDA is not necessarily an indication of whether we will be able to fund
our cash requirements. The credit facility also requires that we limit our
capital expenditures to $42.5 million during each fiscal year. For the year
ended December 31, 2003, our capital expenditures totaled $29.4 million. We
expect that we will be able to comply with this covenant in future periods. The senior secured floating rate notes will mature on July 15, 2008 and bear
interest at a floating rate based on six-month LIBOR plus 9%, but never less
than 12%. The interest rate at September 30, 2004 was 12%. The senior secured
floating rate notes are secured by second-priority security interests in
substantially all of our assets and our domestic subsidiaries and 66% of the
stock of our material foreign subsidiaries. In addition, the senior secured
floating rate notes are guaranteed fully and unconditionally by our domestic
subsidiaries. Interest is payable semi-annually in arrears on January 15 and
July 15 of each year commencing on July 15, 2003. The senior secured floating rate notes are redeemable at our option any time
after October 1, 2004, in whole or in part, at a redemption price equal to par
plus accrued and unpaid interest, plus a redemption premium. The premium is 3%
for the twelve months ending October 1, 2005 and 1.5% for the twelve months
ending October 1, 2006. After October 1, 2006, the senior secured floating rate
notes can be redeemed at par plus accrued and unpaid interest. Upon the
occurrence of a change of control, as defined in the indenture governing the
senior secured floating rate notes, each holder of the senior secured floating
rate notes will have the right to require us to repurchase such holders notes
at an offer price in cash equal to 101% of the aggregate principle amount
thereof plus accrued and unpaid interest and liquidated damages, if any,
thereon to the date of purchase. Our senior subordinated reset notes mature on September 27, 2009 and bore
interest at 12% per annum before September 27, 2003. After September 27, 2003,
the senior subordinated reset notes will bear interest at a reset rate between
8% and 17%. The reset rate will be determined by negotiations between GECC and
us that began in July 2003 and are continuing. The parties have not reached an
agreement on the reset rate and have each engaged investment bankers to
determine the reset rate. For the period from September 27, 2003 to September
30, 2004, the Company accrued interest at a rate of 15%, the rate which
management believes to be the best estimate of where the negotiations will
conclude. To the extent the reset rate exceeds 15%, we will have the option to
pay cash interest of 15% and add the additional interest to the balance of the
reset notes. Interest is payable semi-annually on April 15 and October 15 of
each year commencing April 15, 2003. The senior subordinated reset notes are
general unsecured obligations and are guaranteed by all of our domestic
subsidiaries. The senior subordinated reset notes are redeemable at our option,
in whole or in part, at any time on or after September 27, 2006 at a redemption
price equal to par plus accrued and unpaid interest, plus a declining
redemption premium. In addition, prior to September 27, 2005, we may, on any
one or more occasions, redeem up to 35% of the aggregate principal amount of
the senior subordinate reset notes with the net cash proceeds of one or more
equity offerings at a redemption price of 100% of the principal amount plus a
premium equal to the reset rate and accrued and unpaid interest, provided that
the redemption occurs within 90 days of the date of the closing of such equity
offering and at least 65% of the senior subordinated reset notes issued remain
outstanding immediately after the occurrence of such redemption. Upon the
occurrence of a change of control, as defined in the Indenture governing the
senior subordinated reset notes, each holder of the senior subordinated reset
notes will have the right to require us to repurchase such holders notes at an
offer price in cash equal to 101% of the aggregate principle amount thereof
plus accrued and unpaid interest and liquidated damages, if any, thereon to the
date of purchase. Our debt service requirements consist primarily of interest expense on the term
loan portion of our credit facility, the senior secured floating notes and the
senior subordinated reset notes and on any future borrowings under the
revolving credit portion of our credit facility. Our short-term cash
requirements are expected to consist mainly of cash to fund our operations,
interest payments on our debt and cash payments for various operating leases
and capital expenditures. 34




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Although we do not have an extensive history of acquisitions, we intend to
continue to pursue acquisition opportunities. We expect to finance any future
acquisitions using cash, capital stock, notes and/or assumption of
indebtedness. However, the restrictions imposed on us by the agreements
governing our debt outstanding at the time may affect this strategy. In
addition, to fully implement our growth strategy and meet the resulting capital
requirements, we may be required to request increases in amounts available
under our revolving credit facility, enter into new credit facilities, issue
new debt securities or raise additional capital through equity financing. We
may not be able to obtain an increase in the amounts available under our credit
facility, if requested, on satisfactory terms and we may not be able to
successfully complete any future bank financing or other debt or equity
financing on satisfactory terms, if at all. As a result, our ability to make
future acquisitions is uncertain. As discussed previously, we have recently
completed the acquisitions of Celarix, Inc. and HAHT Commerce. Based upon our current operations and historical results, we believe that our
cash flow from operations, together with available cash and borrowings under
our revolving credit facility, will be adequate to meet our anticipated
requirements for working capital, capital expenditures, lease payments and
scheduled interest payments for the next twelve months. To the extent
additional funding is required, we expect to seek additional financing in the
public or private debt or equity capital markets. We cannot be certain that we
will be successful in obtaining additional financing, if needed, or that, if
available, any additional financing will be on terms favorable to us. Neither
Francisco Partners nor General Electric is obligated to provide financing to us
as General Electric and its affiliates have in the past. If we are unable to
obtain the capital we require to implement our business strategy, or to obtain
the capital we will require on acceptable terms or in a timely manner, we would
attempt to take appropriate responsive actions to tailor our activities to our
available financing, including revising our business strategy and future growth
plans to accommodate the amount of financing available to us. 35




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Contractual Obligations and Other Commitments Our principal contractual obligations and commercial commitments include our
existing senior term loan and revolving credit facility, the senior
subordinated reset notes, the senior secured floating rate notes, operating
leases and other commitments principally relating to multi-year software
maintenance agreements. The following tables summarize these obligations at
September 30, 2004 and their expected effect on our liquidity and cash flows in
future periods. Payments due by Calendar Period2004
    
    2007To
    
    And
    
    AfterTotal
    
    2006
    
    2008
    
    2008Contractual Obligations:Long-term debt
    
    $
    410,000
    
    
    $
    
    
    
    $
    175,000
    
    
    $
    235,000Operating leases
    
    
    94,599
    
    
    
    30,367
    
    
    
    19,372
    
    
    
    44,860Other commitments
    
    
    1,950
    
    
    
    1,829
    
    
    
    121
    
    
    
    Total contractual cash obligations
    
    $
    506,549
    
    
    $
    32,196
    
    
    $
    194,493
    
    
    $
    279,860
 Minority shareholders in one of our consolidated subsidiaries have rights, in
certain circumstances, to require us to purchase some or all of their interests
in this subsidiary at a specified price. Management estimates that this price
generally equates to the fair market value of the holders interests and that
the potential obligation as of September 30, 2004 was approximately $0.6
million in the aggregate. 36




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ITEM 3. Quantitative and Qualitative Disclosures Regarding Market Risk We are exposed to certain market risks as part of our ongoing business
operations, including risks from changes in interest rates and foreign currency
exchange rates that could impact our financial condition, results of operations
and cash flows. We have managed our exposure to these and other market risks
through regular operating and financing activities. We may use derivative
financial instruments on a limited basis as additional risk management tools
and not for speculative investment purposes. Interest Rate Risk.We are exposed to interest rate risk as a result of our
outstanding debt obligations. We plan to manage this risk through the use of a
combination of fixed and variable rate debt. As of September 30, 2004,
$171.2 million of our debt bears interest at variable rates. The interest rate
on our $235.0 million senior subordinated reset notes was to be reset on
September 27, 2003 for the balance of their six-year term. We are currently in
discussions with GECC, the holder of the senior subordinated reset notes,
concerning the interest rate on the senior subordinated reset notes. The
maximum rate to which the interest rate may be reset is 17%, with amounts above
15% payable in kind at our option. Because the interest rate on the senior
subordinated reset notes will reset to a market rate, we believe that the
carrying value of the senior subordinated reset notes will approximate fair
value. A one-point change in the interest rates on our variable-rate long-term
debt would affect interest expense by approximately $4.1 million on an annual
basis. We believe the interest rates on our variable-rate long-term debt
reflect market rates and, therefore, we believe the carrying value of our
variable-rate long-term debt approximates fair value. Foreign Currency Risk.We are exposed to foreign currency risks that arise from
normal business operations. These risks include the translation of local
currency balances of our foreign subsidiaries, intercompany loans with foreign
subsidiaries and transactions denominated in foreign currencies. Our objective
is to minimize our exposure to these risks through our normal operating
activities and, where appropriate, through foreign currency forward contracts.
For the three months ended September 30, 2004, approximately 44% of our total
revenues were derived from customers outside of the United States, with
approximately 42% of our total revenues denominated in currencies other than
the United States dollar. For the nine months ended September 30, 2004,
approximately 42% of our total revenues were derived from customers outside of
the United States, with approximately 42% denominated in currencies other than
the United States dollar. We estimate that revenue and expenses for the three
months ended September 30, 2004 were higher by $2.4 million and $1.5 million,
respectively, as a result of changes in exchange rates as compared to the three
months ended September 30, 2003. For the nine months ended September 30, 2004,
revenue and expenses were higher by $10.7 million and $8.4 million,
respectively, as compared to the nine months ended September 30, 2003 as a
result of changes in exchange rates. At September 30, 2004, we had $34.5
million of working capital (current assets minus current liabilities)
denominated in foreign currencies. At September 30, 2004, we had no
outstanding foreign currency forward contracts. The following table shows the
approximate split of these foreign currency exposures by principal currency: Foreign Currency Exposureat September 30, 2004UK
    
    Canadian
    
    
    
    
    
    TotalEuro
    
    Pound
    
    Dollar
    
    Other
    
    ExposureRevenues (nine months ended)
    
    
    37
    %
    
    
    37
    %
    
    
    9
    %
    
    
    17
    %
    
    
    100
    %Expenses (nine months ended)
    
    
    46
    %
    
    
    24
    %
    
    
    4
    %
    
    
    26
    %
    
    
    100
    %Working Capital
    
    
    35
    %
    
    
    36
    %
    
    
    13
    %
    
    
    16
    %
    
    
    100
    %
 A hypothetical 10% strengthening of the dollar during the first nine months of
2004 versus the foreign currencies in which we have exposure would have reduced
revenue by approximately $10.3 million and reduced operating expenses by
approximately $8.2 million, resulting in operating income of $2.1 million less
than actually reported. Working capital at September 30, 2004 would have been
approximately $3.5 million lower than actually reported if we had used this
hypothetical stronger dollar. These numbers were estimated using the different
hypothetical rate for the entire period and applying it evenly to all non
United States dollar transactions and balances. 37




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Inflation.We believe that inflation has not had a material impact on our
results of operations for the three and nine months ended September 30, 2004.
However, we cannot assure that future inflation would not have an adverse
impact on our operating results and financial condition. 38




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Item 4. Controls and Procedures Disclosure Controls and Procedures. As of the end of the period covered by
this quarterly report, the Companys management, including the Chief Executive
Officer and Chief Financial Officer, has conducted an evaluation of the
effectiveness of the Companys disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934).
Based on that evaluation, the Companys management has concluded that its
disclosure controls and procedures are effective in ensuring that information
required to be disclosed by the Company in the reports it files or furnishes
pursuant to the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Commissions
rules and forms, and that such information is accumulated and communicated to
the management of the Company as appropriate to allow timely decisions
regarding required disclosure. Internal Controls. Since the date of the evaluation described above, there
have not been any significant changes in the Companys internal control over
financial reporting that have materially affected, or are reasonable likely to
materially affect, the Companys internal control. 39




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PART II. OTHER INFORMATION Item 6. Exhibits A. Exhibits Exhibit Number
    
    Description10.39
    
    Employment Agreement dated August 26, 2004, by and among Global eXchange
Services, Inc., GXS Holdings Inc., and Louis Salamone, Jr.10.40
    
    Employee Services Agreement, dated as of November 1, 2004, by and
between GXS Corporation and G International, Inc.31.1
    
    Form of Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Form of Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 40




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. GXS CORPORATIONBy:
    
    /s/ Louis Salamone, Jr.Name:
    
    Louis Salamone, Jr.Title:
    
    Senior Vice President,
Chief Financial Officer
and TreasurerNovember 12, 2004By:
    
    /s/ John DuvallName:
    
    John DuvallTitle:
    
    Controller and
Chief Accounting OfficerNovember 12, 2004
 41