##### 



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 March 31, 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
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)100 Edison Park Drive, Gaithersburg, MD
    
    20878(Address of Principal Executive Offices)
    
    (Zip Code)
 (301) 340-4000 
  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 May 13, 2004, the Registrant had 100 outstanding shares of common stock,
significantly 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
March 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2004
    
    
    4Condensed Consolidated Statements of Comprehensive Loss
for the three months ended March 31, 2003 and 2004
    
    
    5Condensed Consolidated Statement of Stockholders Equity (Deficit) for the
three months ended March 31, 2004
    
    
    6Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2004
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    33Part II. Other InformationItem 6. Exhibits and Reports on Form 8-K
    
    
    34Signatures
    
    
    35




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GXS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands of dollars, except per share amounts) December 31,
    
    March 31,2003 (1)
    
    2004(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    46,730
    
    
    $
    39,168Receivables:Trade
    
    
    53,069
    
    
    
    53,342Other
    
    
    4,178
    
    
    
    4,721General Electric Company
    
    
    5,081
    
    
    
    2,352Deferred income taxes
    
    
    1,729
    
    
    
    1,729Prepaid expenses and other assets
    
    
    8,660
    
    
    
    11,638Total current assets
    
    
    119,447
    
    
    
    112,950Investment in affiliates
    
    
    2,929
    
    
    
    2,932Property and equipment, net
    
    
    132,701
    
    
    
    125,423Deferred income taxes
    
    
    3,034
    
    
    
    2,543Deferred financing costs
    
    
    15,886
    
    
    
    15,081Other assets
    
    
    4,342
    
    
    
    4,503Other acquired intangible assets, net
    
    
    1,168
    
    
    
    13,105Goodwill
    
    
    11,929
    
    
    
    27,943Total Assets
    
    $
    291,436
    
    
    $
    304,480Liabilities, Minority Interest and Stockholders Equity (Deficit)Current liabilities:Trade payables
    
    $
    12,139
    
    
    $
    17,162Deferred income
    
    
    10,368
    
    
    
    18,796Accrued expenses and other liabilities
    
    
    63,405
    
    
    
    66,714Total current liabilities
    
    
    85,912
    
    
    
    102,672Long-term debt
    
    
    405,520
    
    
    
    405,751Other liabilities
    
    
    23,929
    
    
    
    23,588Total liabilities
    
    
    515,361
    
    
    
    532,011Minority interest
    
    
    810
    
    
    
    644Stockholders equity (deficit):Common stock $1.00 par value, 100 shares authorized, issued
and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    258,386
    
    
    
    276,898Retained earnings (deficit)
    
    
    (477,616
    )
    
    
    (500,360
    )Foreign currency translation
    
    
    (5,505
    )
    
    
    (4,713
    )Total stockholders equity (deficit)
    
    
    (224,735
    )
    
    
    (228,175
    )Total Liabilities, Minority Interest and Stockholders Equity (Deficit)
    
    $
    291,436
    
    
    $
    304,480
  (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 March 31,2003
    
    2004Revenues
    
    $
    91,288
    
    
    $
    83,759Costs and operating expenses:Cost of revenues
    
    
    51,884
    
    
    
    55,992Sales and marketing
    
    
    15,391
    
    
    
    17,635General and administrative
    
    
    13,100
    
    
    
    14,263Restructuring and related charges
    
    
    2,547
    
    
    
    (124
    )Operating income (loss)
    
    
    8,366
    
    
    
    (4,007
    )Other income (expense):Proportionate share of losses in investee
companies and investment write-downs
    
    
    (649
    )
    
    
    Write-off of deferred financing costs
    
    
    (5,548
    )
    
    
    Interest income
    
    
    300
    
    
    
    145Interest expense
    
    
    (10,815
    )
    
    
    (15,208
    )Other income (expense), net
    
    
    805
    
    
    
    (1,569
    )Loss before income taxes
    
    
    (7,541
    )
    
    
    (20,639
    )Provision (benefit) for income taxes
    
    
    (1,438
    )
    
    
    2,105Net loss
    
    $
    (6,103
    )
    
    $
    (22,744
    )
 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 March 31,2003
    
    2004Net loss
    
    $
    (6,103
    )
    
    $
    (22,744
    )Foreign currency translation adjustments
    
    
    (1,170
    )
    
    
    792Comprehensive loss
    
    $
    (7,273
    )
    
    $
    (21,952
    )
 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
    
    
    
    
    
    
    
    
    
    
    (22,744
    )
    
    
    
    
    
    
    (22,744
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    792
    
    
    
    792Capital contribution by GXS Holdings
in connection with acquisition of HAHT
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    15,000Contributions from General Electric
Company
    
    
    
    
    
    
    3,512
    
    
    
    
    
    
    
    
    
    
    
    3,512Balance at March 31, 2004
    
    $
    
    
    
    $
    276,898
    
    
    $
    (500,360
    )
    
    $
    (4,713
    )
    
    $
    (228,175
    )
 See accompanying notes to condensed consolidated financial statement 6




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GXS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited) Three months ended March 31,2003
    
    2004Cash flows from operating activities:Net loss
    
    $
    (6,103
    )
    
    $
    (22,744
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    11,085
    
    
    
    14,858Deferred income taxes
    
    
    (4,439
    )
    
    
    211Write-off of deferred financing costs
    
    
    5,548
    
    
    
    Amortization of deferred financing costs and debt discount
    
    
    250
    
    
    
    1,165Minority interest
    
    
    (304
    )
    
    
    (166
    )Changes in operating assets and liabilities, net of effect of business acquisition:Decrease in receivables
    
    
    3,816
    
    
    
    4,053Increase in prepaid expense and other assets
    
    
    (3,730
    )
    
    
    (1,803
    )Increase in accounts payable
    
    
    299
    
    
    
    4,815Increase in deferred income
    
    
    4,509
    
    
    
    5,246Increase (decrease) in accrued expenses and other liabilities
    
    
    6,770
    
    
    
    (359
    )Other
    
    
    (1,368
    )
    
    
    624Net cash provided by operating activities
    
    
    16,333
    
    
    
    5,900Cash flows for investing activities:Purchases of property and equipment
    
    
    (7,302
    )
    
    
    (7,137
    )Purchase of HAHT, net of cash acquired of $4,526
    
    
    
    
    
    
    (9,724
    )Net cash used in investing activities
    
    
    (7,302
    )
    
    
    (16,861
    )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
    
    
    8,972
    
    
    
    3,512Payment of financing costs
    
    
    (9,383
    )
    
    
    (129
    )Other
    
    
    1,981
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (3,242
    )
    
    
    3,383Effect of exchange rate changes on cash
    
    
    622
    
    
    
    16Increase (decrease) in cash and cash equivalents
    
    
    6,411
    
    
    
    (7,562
    )Cash and cash equivalents, beginning of year
    
    
    37,333
    
    
    
    46,730Cash and cash equivalents, end of period
    
    $
    43,744
    
    
    $
    39,168
 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 2003 and
recorded to other non-current assets. During the quarter this amount was reclassified to goodwill. See accompanying notes to condensed consolidated financial statements 7




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GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three months ended March 31, 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-month period ended March 31, 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 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 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 have been expensed as incurred. GE has agreed to reimburse the Company for certain defined operating and
restructuring costs following the Recapitalization. During the three months
ended March 31, 2003 and 2004, GE has reimbursed the Company
approximately $4,000 and $3,512 of these costs, respectively. These costs
include approximately $1,900 of costs and expenses incurred with closing a data
center in Rockville, Maryland, $3,300 of costs incurred in connection with a
services agreement with MCI (formerly called WorldCom), $1,700 for notice pay
and severance in connection with a reduction in force and facility exit costs,
$500 for costs and expenses incurred for rebranding products and implementing
an internal systems infrastructure and approximately $200 for certain taxes. 8




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GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three months ended March 31, 2003 and 2004
(Unaudited)
(In thousands of dollars) 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
three months ended March 31, 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 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.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 9




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GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three months ended March 31, 2003 and 2004
(Unaudited)
(In thousands of dollars)  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 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 months ended March 31, 2003 have been reclassified
to conform to the presentation shown for the three months ended March 31, 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 $5,670 and $7,515 for the three-month periods ended
March 31, 2003 and 2004, respectively. Trade receivables as of December 31,
2003 and March 31, 2004 resulting from normal trade activity with GE were
$5,081 and $2,352, respectively. Pursuant to the terms of the Recapitalization
Agreement, GE is required for the two-year period ending 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 continue 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 period
ending September 30, 2003, the Company considered GE to have met the obligation
based on sales plus orders placed during the year. The allowance for doubtful accounts and sales allowances at December 31, 2003
was $11,345 and at March 31, 2004 was $10,281. (4) Other Related Party Transactions Trade payables as of December 31, 2003 and March 31, 2004 resulting from normal
activity with GE were $1,177 and $891, respectively. GE provides 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 $3,964 and $1,988 for the three months ended March 31,
2003 and 2004, respectively. As part of the Recapitalization, GE will continue
to provide these services on an as needed basis until September 2004. The
Company has migrated most of these services to alternative providers, or
brought some of the services in-house. The remaining services will be migrated 10




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GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three months ended March 31, 2003 and 2004
(Unaudited)
(In thousands of dollars) to alternative providers or brought in-house during 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 for each of the three-month periods ended March 31, 2003 and
2004. The Company reimbursed Francisco Partners for additional expenses of
$185 which were incurred during the three months ended March 31, 2003. As of
December 31, 2003 and March 31, 2004, the Company owed Francisco Partners
$3,071 and $3,571, respectively. (5) Long-Term Debt Long-term debt consists of the following at March 31, 2004: Term loan facility
    
    $
    70,000Senior secured floating rate notes,
net of debt discount of $4,249
    
    
    100,751Senior subordinated reset notes
    
    
    235,000Long-term debt
    
    $
    405,751
 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 Credit Facility may not be
less than 4.25% and 2.25%, respectively. Outstanding borrowings under the New
Term Loan Facility as of March 31, 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 March 31, 2004, the Company had 11




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##### 



GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three months ended March 31, 2003 and 2004
(Unaudited)
(In thousands of dollars) 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. 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 2004, the Company negotiated amended
covenants for 2004 and 2005. As of March 31, 2004 the Company is 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 March 31, 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 March 31, 2004 was $1,001. 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. 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. 12




---



##### 



GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three months ended March 31, 2003 and 2004
(Unaudited)
(In thousands of dollars) 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 March 31, 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. 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 $2,547 and $7,876 for the three months ending
March 31, 2003 and 2004, respectively. (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 or results of operations 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. 13




---



##### 



GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three months ended March 31, 2003 and 2004
(Unaudited)
(In thousands of dollars) 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 months ended March 31, 2003, the Company incurred
approximately $2,547 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 our data center,
engineering, and services organizations. Of these costs, $2,538 were
indemnified by General Electric as part of the Recapitalization Agreement. During the three months ended March 31, 2004, the Company did not incur any
restructuring costs, however the Company did reverse $124 of accruals related
to severance payments which the Company determined were no longer needed. Severance
    
    Facilities
    
    Other
    
    TotalBalance at December 31, 2002
    
    $
    334
    
    
    $
    2,457
    
    
    $
    
    
    
    $
    2,791Restructuring expense
    
    
    13,573
    
    
    
    12,650
    
    
    
    448
    
    
    
    26,671Payments and other
    
    
    (4,315
    )
    
    
    (2,861
    )
    
    
    (448
    )
    
    
    (7,624
    )Balance at December 31, 2003
    
    
    9,592
    
    
    
    12,246
    
    
    
    
    
    
    
    21,838Restructuring expense
    
    
    (124
    )
    
    
    
    
    
    
    
    
    
    
    (124
    )Payments
    
    
    (2,426
    )
    
    
    (723
    )
    
    
    
    
    
    
    (3,149
    )Balance at March 31, 2004
    

    $
    7,042
    
    
    $
    11,523
    
    
    $
    
    
    
    $
    18,565
 (8) Acquisition of HAHT On February 13, 2004, the Company acquired all of the capital stock of HAHT
Commerce, Inc. (HAHT) for consideration of $15,000 in cash plus common and
preferred shares of GXS Holdings valued at approximately $15,000, subject to
adjustment as provided in the Agreement and Plan of Merger, dated as of January
14, 2004.
HAHT is a provider of demand chain management applications that strategically
automate, integrate and optimize order management, product information
management, 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. Estimated amortization expense of $2, 017 will be recorded in 2004 and estimated amortization
expense of $2,305 will be recorded in 2005, 2006, 2007 and 2008. 14




---



##### 



GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three months ended March 31, 2003 and 2004
(Unaudited)
(In thousands of dollars) Cash
    
    $
    15,000Estimated fair value of capital stock issued by GXS Holdings, Inc.
    
    
    15,000Total purchase price
    
    $
    30,000Cash
    
    $
    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
    
    
    15,865Other assets
    
    
    1,478$
    30,000
 On a pro forma basis, assuming the acquisition had been consummated on January
1, 2003, the Companys revenue and net loss for the three-month periods ended
March 31, 2003 and 2004 would have been as follows: Three months ended March 31,2003
    
    2004Revenue
    
    $
    96,039
    
    
    $
    85,023Net loss
    
    $
    (10,882
    )
    
    $
    (24,418
    )
 (9) 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 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. 15




---



##### 



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
 16




---



##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Balance Sheet
March 31, 2004
(Unaudited)
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    16,853
    
    
    $
    22,315
    
    
    $
    
    
    
    $
    39,168Receivables
    
    
    
    
    
    
    32,350
    
    
    
    28,065
    
    
    
    
    
    
    
    60,415Other current assets
    
    
    24
    
    
    
    8,342
    
    
    
    5,001
    
    
    
    
    
    
    
    13,367Advances to subsidiaries
    
    
    262
    
    
    
    167,530
    
    
    
    97,052
    
    
    
    (264,844
    )
    
    
    Total current assets
    
    
    286
    
    
    
    225,075
    
    
    
    152,433
    
    
    
    (264,844
    )
    
    
    112,950Investments in affiliates
    
    
    
    
    
    
    2,406
    
    
    
    526
    
    
    
    
    
    
    
    2,932Investments in subsidiaries
    
    
    225,411
    
    
    
    36,003
    
    
    
    
    
    
    
    (261,414
    )
    
    
    Property and equipment, net
    
    
    242
    
    
    
    120,610
    
    
    
    4,571
    
    
    
    
    
    
    
    125,423Goodwill, net
    
    
    
    
    
    
    22,819
    
    
    
    5,124
    
    
    
    
    
    
    
    27,943Other noncurrent assets
    
    
    1,485
    
    
    
    24,935
    
    
    
    5,481
    
    
    
    (11,750
    )
    
    
    20,151Deferred financing costs
    
    
    15,081
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,081$
    242,505
    
    
    $
    431,848
    
    
    $
    168,135
    
    
    $
    (538,008
    )
    
    $
    304,480Liabilities, Minority Interest, and
Stockholders Equity (Deficit)Current liabilities:Trade payables
    
    $
    1,311
    
    
    $
    13,219
    
    
    $
    2,632
    
    
    $
    
    
    
    $
    17,162Other current liabilities
    
    
    20,982
    
    
    
    42,530
    
    
    
    21,998
    
    
    
    
    
    
    
    85,510Advances from affiliates
    
    
    42,636
    
    
    
    125,797
    
    
    
    96,411
    
    
    
    (264,844
    )
    
    
    Total current liabilities
    
    
    64,929
    
    
    
    181,546
    
    
    
    121,041
    
    
    
    (264,844
    )
    
    
    102,672Long-term debt
    
    
    405,751
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    405,751Other liabilities
    
    
    
    
    
    
    24,891
    
    
    
    10,447
    
    
    
    (11,750
    )
    
    
    23,588Total liabilities
    
    
    470,680
    
    
    
    206,437
    
    
    
    131,488
    
    
    
    (276,594
    )
    
    
    532,011Minority interest
    
    
    
    
    
    
    
    
    
    
    644
    
    
    
    
    
    
    
    644Stockholders equity (deficit)
    
    
    (228,175
    )
    
    
    225,411
    
    
    
    36,003
    
    
    
    (261,414
    )
    
    
    (228,175
    )$
    242,505
    
    
    $
    431,848
    
    
    $
    168,135
    
    
    $
    (538,008
    )
    
    $
    304,480
 17




---



##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Operations and Comprehensive Income (Loss)
Three months ended March 31, 2003
(Unaudited)
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    74,256
    
    
    $
    32,648
    
    
    $
    (15,616
    )
    
    $
    91,288Costs and operating expenses
    
    
    77
    
    
    
    68,130
    
    
    
    27,784
    
    
    
    (15,616
    )
    
    
    80,375Restructuring and related charges
    
    
    
    
    
    
    2,547
    
    
    
    
    
    
    
    
    
    
    
    2,547Operating income (loss)
    
    
    (77
    )
    
    
    3,579
    
    
    
    4,864
    
    
    
    
    
    
    
    8,366Other income (expense), net
    
    
    (15,753
    )
    
    
    (376
    )
    
    
    222
    
    
    
    
    
    
    
    (15,907
    )Income (loss) before income taxes
    
    
    (15,830
    )
    
    
    3,203
    
    
    
    5,086
    
    
    
    
    
    
    
    (7,541
    )Provision (benefit) for income taxes
    
    
    
    
    
    
    (3,123
    )
    
    
    1,685
    
    
    
    
    
    
    
    (1,438
    )Income (loss) before equity in income (loss) of subsidiaries
    
    
    (15,830
    )
    
    
    6,326
    
    
    
    3,401
    
    
    
    
    
    
    
    (6,103
    )Equity in income (loss) of subsidiaries
    
    
    9,727
    
    
    
    3,401
    
    
    
    
    
    
    
    (13,128
    )
    
    
    Net income (loss)
    
    
    (6,103
    )
    
    
    9,727
    
    
    
    3,401
    
    
    
    (13,128
    )
    
    
    (6,103
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    (1,170
    )
    
    
    
    
    
    
    (1,170
    )Comprehensive income (loss)
    
    $
    (6,103
    )
    
    $
    9,727
    
    
    $
    2,231
    
    
    $
    (13,128
    )
    
    $
    (7,273
    )
 18




---



##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Operations and Comprehensive Income (Loss)
Three months ended March 31, 2004
(Unaudited)
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    70,765
    
    
    $
    35,258
    
    
    $
    (22,264
    )
    
    $
    83,759Costs and operating expenses
    
    
    
    
    
    
    79,221
    
    
    
    30,933
    
    
    
    (22,264
    )
    
    
    87,890Restructuring and related charges
    
    
    
    
    
    
    (124
    )
    
    
    
    
    
    
    
    
    
    
    (124
    )Operating income (loss)
    
    
    
    
    
    
    (8,332
    )
    
    
    4,325
    
    
    
    
    
    
    
    (4,007
    )Other income, net
    
    
    (15,854
    )
    
    
    137
    
    
    
    (915
    )
    
    
    
    
    
    
    (16,632
    )Income (loss) before income taxes
    
    
    (15,854
    )
    
    
    (8,195
    )
    
    
    3,410
    
    
    
    
    
    
    
    (20,639
    )Provision (benefit) for income taxes
    
    
    
    
    
    
    301
    
    
    
    1,804
    
    
    
    
    
    
    
    2,105Income (loss) before equity in income (loss) of subsidiaries
    
    
    (15,854
    )
    
    
    (8,496
    )
    
    
    1,606
    
    
    
    
    
    
    
    (22,744
    )Equity in income (loss) of subsidiaries
    
    
    (6,890
    )
    
    
    1,606
    
    
    
    
    
    
    
    5,284
    
    
    
    Net income (loss)
    
    
    (22,744
    )
    
    
    (6,890
    )
    
    
    1,606
    
    
    
    5,284
    
    
    
    (22,744
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    792
    
    
    
    
    
    
    
    792Comprehensive income (loss)
    
    $
    (22,744
    )
    
    $
    (6,890
    )
    
    $
    2,398
    
    
    $
    5,284
    
    
    $
    (21,952
    )
 19




---



##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Cash Flows
Three months ended March 31, 2003
(Unaudited)
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (6,103
    )
    
    $
    9,727
    
    
    $
    3,401
    
    
    $
    (13,128
    )
    
    $
    (6,103
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    
    
    
    
    9,752
    
    
    
    1,333
    
    
    
    
    
    
    
    11,085Deferred income taxes
    
    
    (5,300
    )
    
    
    (3,425
    )
    
    
    4,286
    
    
    
    
    
    
    
    (4,439
    )Write-off of deferred financing costs
    
    
    5,548
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,548Amortization of deferred financing costs and debt discount
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250Minority interest
    
    
    
    
    
    
    
    
    
    
    (304
    )
    
    
    
    
    
    
    (304
    )Equity in net (income) loss of subsidiaries
    
    
    (9,727
    )
    
    
    (3,401
    )
    
    
    
    
    
    
    13,128
    
    
    
    Changes in operating assets and
liabilities, net
    
    
    12,975
    
    
    
    (2,622
    )
    
    
    (57
    )
    
    
    
    
    
    
    10,296Net cash provided by (used in) operating activities
    
    
    (2,357
    )
    
    
    10,031
    
    
    
    8,659
    
    
    
    
    
    
    
    16,333Cash flows for investing activities  purchases
of property and equipment
    
    
    (9
    )
    
    
    (6,860
    )
    
    
    (433
    )
    
    
    
    
    
    
    (7,302
    )Cash flows from financing activities:Net contributions from General Electric Company and affiliates
    
    
    
    
    
    
    8,972
    
    
    
    
    
    
    
    
    
    
    
    8,972Advance to from subsidiaries
    
    
    14,644
    
    
    
    (10,300
    )
    
    
    (4,344
    )
    
    
    
    
    
    
    Repayment of long-term debt
    
    
    (174,562
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174,562
    )Proceeds from long-term debt issuances
    
    
    169,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169,750Payment of financing costs
    
    
    (9,383
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,383
    )Other
    
    
    1,981
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,981Net cash provided by (used in) financing activities
    
    
    2,430
    
    
    
    (1,328
    )
    
    
    (4,344
    )
    
    
    
    
    
    
    (3,242
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    622
    
    
    
    
    
    
    
    622Increase in cash and cash equivalents
    
    
    64
    
    
    
    1,843
    
    
    
    4,504
    
    
    
    
    
    
    
    6,411Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    21,940
    
    
    
    15,393
    
    
    
    
    
    
    
    37,333Cash and cash equivalents, end of period
    
    $
    64
    
    
    $
    23,783
    
    
    $
    19,897
    
    
    $
    
    
    
    $
    43,744
 20




---



##### 



GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Cash Flows
Three months ended March 31, 2004
(Unaudited)
(In thousands) Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (22,744
    )
    
    $
    (6,890
    )
    
    $
    1,606
    
    
    $
    5,284
    
    
    $
    (22,744
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    
    
    
    
    14,258
    
    
    
    600
    
    
    
    
    
    
    
    14,858Deferred income taxes
    
    
    
    
    
    
    100
    
    
    
    111
    
    
    
    
    
    
    
    211Amortization of deferred financing costs and debt discount
    
    
    1,165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,165Minority interest
    
    
    
    
    
    
    
    
    
    
    (166
    )
    
    
    
    
    
    
    (166
    )Equity in net loss of subsidiaries
    
    
    6,890
    
    
    
    (1,606
    )
    
    
    
    
    
    
    (5,284
    )
    
    
    Changes in operating assets and
liabilities, net
    
    
    11,313
    
    
    
    8,275
    
    
    
    (7,012
    )
    
    
    
    
    
    
    12,576Net cash provided by (used in) operating activities
    
    
    (3,376
    )
    
    
    14,137
    
    
    
    (4,861
    )
    
    
    
    
    
    
    5,900Cash flows for investing activities:Purchases of property and equipment
    
    
    (7
    )
    
    
    (6,949
    )
    
    
    (181
    )
    
    
    
    
    
    
    (7,137
    )Purchase of HAHT, net of cash acquired of $4,526
    
    
    
    
    
    
    (9,724
    )
    
    
    
    
    
    
    
    
    
    
    (9,724
    )Net cash used in investing activities
    
    
    (7
    )
    
    
    (16,673
    )
    
    
    (181
    )
    
    
    
    
    
    
    (16,861
    )Cash flows from financing activities:Net contributions from General Electric Company and affiliates
    
    
    3,512
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,512Payment of financing costs
    
    
    (129
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129
    )Net cash provided by (used in) financing activities
    
    
    3,383
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,383Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    16Increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    (2,536
    )
    
    
    (5,026
    )
    
    
    
    
    
    
    (7,562
    )Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    19,389
    
    
    
    27,341
    
    
    
    
    
    
    
    46,730Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    16,853
    
    
    $
    22,315
    
    
    $
    
    
    
    $
    39,168
 21




---



##### 



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 and
the outlook for our business. Actual results or outcomes may differ
materially from those in such forward-looking statements. 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 which include 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 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. 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. 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 the weakening general economic
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;
    
    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 22




---



##### 




    
    reducing back-office personnel. 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. 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, subject to
adjustment. 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 will be able
to offer customers an end-to-end data synchronization solution, 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 June 3, 2003, we acquired substantially all of the assets of Celarix, Inc.
related to its logistics integration and visibility solutions business. We
estimate the value of the preferred and common stock issued as consideration
for the Celarix assets to be approximately $0.6 million and the value of the
assumed liabilities to be approximately $1.3 million. The logistics integration
and visibility solutions acquired from Celarix help organizations to connect to
logistics trading partners and retrieve, use and share shipment status
information throughout their supply chains. 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 dated March 30, 2004. Some of these
policies involve a higher degree of judgment and complexity in their
application and represent the critical accounting policies used in the
preparation of our financial statements. These critical accounting policies, in
managements judgment, are those described below. If different assumptions or
conditions were to prevail or if our estimates and assumptions prove to be
incorrect, actual results could be materially different from those reported. Revenue Recognition.Most of our revenue is recognized in the month in which
service is performed, but in many cases, our recognition of revenue from the
licensing of our software products requires judgment. When our software
requires significant customization and modification, we estimate the total cost
of the contract and recognize revenue based on actual costs incurred in
relation to the total estimated cost. If we made different judgments or
utilized different estimates of the total amount of work we expect to be
required to customize or modify the software, the timing of our revenue
recognition and our margins from period to period may have differed materially
from that reported. In situations where we host software, we estimate the
feasibility of the customer either running the software on its own systems or
contracting with another party to host the software. If neither is feasible,
license revenue is recognized over the term of the hosting contract. If either
is feasible, license revenue is recognized when the software is delivered, and
hosting revenue is recognized over the life of the hosting contract. If our
assessment of this feasibility, including any penalties under the customer
contracts, were different, the timing of our revenue recognition could differ
materially. In many cases, we deliver multiple products and services to the same customer.
In these cases, we allocate revenue to each component of the arrangement using
the residual value method. This means that we defer revenue from the total fees
associated with the arrangement in an amount equal to the fair value of the
elements of the arrangements that have not been delivered. The fair value of
any undelivered element is established by using historical evidence specific to
us. If we were to allocate the respective fair values of the elements
differently, the timing of our revenue recognition could differ materially. Valuation of Accounts Receivable.We must make estimates of potential sales
returns, allowances and bad debts in valuing our accounts receivable. We
analyze historical returns, current economic trends and changes in customer
demand and acceptance of our products and services when evaluating the adequacy
of the provision for sales returns and allowances. We analyze historical bad
debts, customer concentrations, customer credit-worthiness, and current
economic trends when evaluating the adequacy of the allowance for doubtful
accounts. However, if the financial condition of our customers were to
deteriorate, their ability to make 23




---



##### 



required payments may become impaired, and increases in these allowances may be
required. As of December 31, 2003 and March 31, 2004, we had allowances for
doubtful accounts and sales allowances of $11.3 million and $10.3 million,
respectively. Capitalization of Software.We capitalize software development costs in
accordance with AICPA Statement Of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.We begin to
capitalize costs for software to be used internally when we enter the
application development stage. This occurs when we have completed the
preliminary project stage, our management authorizes and commits to funding the
project and we believe it is feasible that the project will be completed and
the software will perform the intended function. We stop capitalizing costs
related to a software project when we believe we have entered the post
implementation and operation stage. We capitalized approximately $19.5 million
in software development costs during 2003 and $4.5 million for the three months
ended March 31, 2004. If we were to make different determinations with respect
to the state of development that a software project had achieved, then the
amount we capitalize and the amount we charge to expense for that project could
differ materially. The costs we capitalize during the application development stage consists of
payroll and related costs for our employees who are directly associated with
and who devote time directly to a project to develop software for internal use.
We also capitalize the direct costs of materials and services, which generally
includes outside contractors. We do not capitalize any general and
administrative overhead costs or costs incurred during the application
development stage related to training or data conversion costs. We also
capitalize costs related to upgrades and enhancements to internal-use software
if those upgrades and enhancements result in additional functionality. If
upgrades and enhancements do not result in additional functionality we expense
those costs as incurred. If we were to make different determinations with
respect to whether upgrades or enhancements to software projects would result
in additional functionality, then the amount we capitalize and the amount we
charge to expense for that project could differ materially. We begin to amortize capitalized costs with respect to development projects for
software for internal use when the software is ready for use. We generally
amortize the capitalized software development costs using the straight-line
method over a five-year period. In determining and reassessing the estimated
useful life over which the cost incurred for the software should be amortized,
we consider the effects of obsolescence, technology, competition and other
economic factors. Amortization expense related to software for internal use was
$17.2 million during 2003 and $5.1 million for the three months ended March 31,
2004. If we were to make different determinations with respect to the estimated
useful lives of the software, then the amount of amortization we charge in a
particular period could differ materially. In accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed,we expense as incurred costs associated with software developed for
license to customers because we apply the working model method and, as such,
the costs incurred from the date of working model to commercial release to
customers have not been material. Valuation of Long-lived Assets.Long-lived assets, which consist primarily of
property and equipment, including capitalized costs for software developed for
internal use, acquired intangible assets and goodwill totaled $145.8 million as
of December 31, 2003 and $166.5 million as of March 31, 2004. We periodically
evaluate the estimated useful life of property and equipment and, when
appropriate, adjust the useful life thereby increasing or decreasing the
depreciation expense recorded in the current and in future reporting periods.
We also assess the impairment of long-lived assets on an annual basis and
whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. Factors we consider important which could trigger an
impairment review include the following:  
    
    significant underperformance relative to historical or projected future operating results;
    
    significant changes in technology or in the manner of our use of the assets or the strategy for our overall business; and
    
    significant negative industry or economic trends. When we determine that the carrying value of long-lived assets may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, we measure any impairment based on a projected discounted cash flow
method using a discount rate determined by our management to be commensurate
with the risk inherent in our business. This process is inherently subjective,
as it requires management to make estimates and assumptions about future cash
flows. In 2003, we recorded an impairment charge of $6.5 million related to
certain internally developed software for which management has estimated that
future cash flows were less than the carrying value of the software. 24




---



##### 



Deferred Tax Assets.As of December 31, 2003 and March 31, 2004, we had net
deferred tax assets of approximately $4.8 million and $4.3 million,
respectively. In connection with the recapitalization, we made a tax election
in the United States that allowed us to revalue our assets and liabilities for
U.S. federal income taxes purposes. We have estimated the tax benefit of this
revaluation to be approximately $242.0 million. We consider the scheduled
reversal of deferred tax liabilities, projected future income and tax planning
strategies in assessing the realizability of deferred tax assets. Management
believes the Company will achieve profitable operations in future years that
will enable the Company to recover the benefit of its deferred tax asset.
However, the Company presently does not have sufficient objective evidence to
support managements belief and, accordingly, has established a full valuation
allowance for its U.S. and selected foreign net deferred tax assets as required
by generally accepted accounting principles. Recording this valuation allowance
does not impact the Companys ability to realize the benefit of these assets. Contingencies.We periodically record the estimated impacts of various
conditions, situations or circumstances involving uncertain outcomes. These
events are called contingencies and our accounting for these events is
prescribed by SFAS No. 5, Accounting for Contingencies.SFAS No. 5 defines a
contingency as an existing condition, situation, or set of circumstances
involving uncertainty as to possible gain or loss to an enterprise that will
ultimately be resolved when one or more future events occur or fail to occur.
Contingent losses must be accrued if:  
    
    information is available that indicates it is probable that the loss
has been incurred, given the likelihood of the uncertain future
events; and
    
    That the amount of the loss can be reasonably estimated. The accrual of a contingency involves considerable judgment on the part of
management. Legal proceedings have elements of uncertainty, and in order to
determine the amount of reserves required, if any, we assess the likelihood of
any adverse judgments or outcomes to pending and threatened legal matters, as
well as potential ranges of probable losses. We use internal expertise and
outside experts, as necessary, to help estimate the probability that a loss has
been incurred and the amount or range of the loss. A determination of the
amount of reserves required for these contingencies is made after analysis of
each individual issue. The required reserves may change in the future due to
new developments in each matter or changes in approach such as a change in
settlement strategy. In the event that we incur a loss in the future with
respect to a contingency for which General Electric has indemnified us, the
resulting loss will be recorded in our net income for that period along with a
corresponding capital contribution from General Electric. Employment Employment was 1,536 and 1,604 as of December 31, 2003 and March 31, 2004,
respectively. The employment increase is attributable to the acquisition of
HAHT Commerce as well as new hires in the America, primarily due to the upgrade in our sales force and the conversion of contractors to full-time employees in Asia. The increase was offset by
terminations as a result of the restructuring activities that took place in
January 2004. 25




---



##### 



Results of Operations A summary of our revenue by line of business follows: Three Months Ended March 312003
    
    2004(in thousands of dollars)$
    
    %
    
    $
    
    %Revenues:EDI Services
    
    
    59,547
    
    
    
    65.2
    %
    
    
    56,724
    
    
    
    67.7
    %Other Business to Business Solutions
    
    
    16,916
    
    
    
    18.6
    %
    
    
    12,328
    
    
    
    14.7
    %Custom Messaging and Network Solutions
    
    
    14,825
    
    
    
    16.2
    %
    
    
    14,707
    
    
    
    17.6
    %Total revenues
    
    
    91,288
    
    
    
    100.0
    %
    
    
    83,759
    
    
    
    100.0
    %
 Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 Revenues. Revenues decreased by $7.5 million, or 8.2%, to $83.8 million for
the three months ended March 31, 2004 from $91.3 million for the three months
ended March 31, 2003. EDI Services.Revenues from EDI Services decreased by $2.8 million, or 4.7%, to
$56.7 million for the three months ended March 31, 2004 from $59.5 for the
three months ended March 31, 2003. The $2.8 million decrease in EDI Services
revenue was comprised of a $5.5 million revenue decline in the Americas
resulting from lower EDI*Express pricing and volume, partially offset by
increases in revenue of our foreign subsidiaries resulting from the favorable
impact of foreign currency exchange of $3.0 million. Decreased volumes were attributable primarily to customer cancellations in the
Americas during 2003. We achieved a net increase in the number of customers
during the first quarter of 2004. The highly competitive marketplace we
operate in, as well as our own efforts to sign multi-year agreements with both
new and existing customers in order to stabilize the customer base, has
negatively impacted pricing. Other Business to Business Solutions.Revenues from Other Business to Business
Solutions decreased by $4.6 million, or 27.2%, to $12.3 million for the three
months ended March 31, 2004 from $16.9 million for the three months ended March
31, 2003. The $4.6 million revenue decrease is primarily driven by the
termination of two customer contracts and decreased software sales, partially
offset by HAHT revenue of $1.4 million and a favorable foreign currency
exchange impact of $0.3 million. The shift from historical products and
services towards newer offerings is expected to continue. Custom Messaging and Network Solutions.Revenues from Custom Messaging and
Network Solutions decreased $0.1 million, or 0.7%, to $14.7 million for the
three months ended March 31, 2004 from $14.8 million for the three months ended
March 31, 2003. Decreased business volume was offset by a favorable impact of
foreign currency exchange of $1.0 million. The decrease in revenue is in line
with expectations as customers continue to migrate away from legacy
applications to open systems-based solutions. Cost of revenues. Cost of revenues increased by $4.1 million, or 7.9%, to
$56.0 million for the three months ended March 31, 2004 from $51.9 million for
the three months ended March 31, 2003. The increase in cost of revenues is
driven by higher depreciation and amortization expense associated with higher
levels of internally developed software and computer hardware deployed in
production. Sales and marketing.Sales and marketing expense increased by $2.2 million, or
14.3%, to $17.6 million for the three months ended March 31, 2004 from $15.4
million for the three months ended March 31, 2003. The increase is primarily
due to expenses related to the upgrade of our sales force and an increase in
advertising and sales promotion activities. These actions resulted in an
increase of $0.8 million in compensation, contractors and related costs and an
increase of $0.8 million related to advertising and sales promotions expenses. 26




---



##### 



General and administrative.General and administrative expenses increased $1.2
million, or 9.2%, to $14.3 million for the three months ended March 31, 2004
from $13.1 million for the three months ended March 31, 2003. The increase was
primarily driven by an increase in consulting expenses.
The weakening dollar caused cost of revenues, sales and marketing and general
and administrative expenses to be approximately $3.3 million higher in the
first quarter of 2004 compared to 2003. Restructuring and related charges.Restructuring and related charges were $2.5
million for the three months ended March 31, 2003. These charges related to

facility and equipment lease buy-outs, facility exit costs including a
restoration obligation, and headcount reductions of approximately 17 people
primarily in our operations, engineering and service organizations. These
costs were reimbursed by General Electric as part of the September 2002
recapitalization agreement. Write-off of deferred financing costs.Deferred financing costs of $5.5 million
were written off during the three months ended March 31, 2003. The write-off
was related to the refinancing of our previous senior term loan. Interest expense.Interest expense of $15.2 million for the three months
ended March 31, 2004, and $10.8 million for the three months ended March 31,
2003, 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 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 issuance of our $105.0
million of senior secured floating rate notes in March 2003 and our new credit
facility. Other income (expense), net. Other expense was $1.6 million for the three
months ended March 31, 2004. Other expense included $0.8 million in fees
relating to interest rate determination for our Senior Subordinated Reset
Notes, $1.0 million of losses on foreign currency transactions, offset by $0.2
million of minority interest income. Other income was $0.8 million for the
three months ended March 31, 2003, which included $0.5 million of gains on
foreign currency transactions and $0.3 million of minority interest income. Provision for income taxes.Income tax expense was $2.1 million for the three
months ended March 31, 2004 compared to income tax benefit of $1.4 million for
the three months ended March 31, 2003. Our tax rate for the three months ended
March 31, 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 three months ended March
31, 2003 differed from the federal statutory rate of 35% 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 $16.6 million to a net loss of $22.7 million
for the three months ended March 31, 2004 compared a net loss of $6.1 million
for the three months ended March 31, 2003. The increase of $16.6 million was a
result of the matters discussed above. 27




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Liquidity and Capital Resources Sources and Uses of Cash The following table is a summary of our sources and uses of cash during the
three months ended March 31, 2003 and 2004: Three months ended March 31,2003
    
    2004(in thousands of dollars)Cash flows from operating activities
    
    $
    16,333
    
    
    $
    5,900Cash flows from investing activities
    
    
    (7,302
    )
    
    
    (16,861
    )Cash flows from financing activities
    
    
    (3,242
    )
    
    
    3,383Effect of exchange rate changes on cash
    
    
    622
    
    
    
    16Net increase (decrease) in cash and cash equivalents
    
    $
    6,411
    
    
    $
    (7,562
    )Cash and cash equivalents, end of period
    
    $
    43,744
    
    
    $
    39,168
 Net cash provided by operating activities was $5.9 million for the three months
ended March 31, 2004 compared $16.3 million for the three months ended March
31, 2003. The decrease in net cash provided by operating activities was mainly
attributable to the $16.6 million increase in net loss offset by changes in
working capital and higher depreciation and amortization. Net cash used in investing activities was $16.9 million for the three months
ended March 31, 2004 compared to $7.3 million for the three months ended March
31, 2003. Net cash used in investing activities for the three months ended
March 31, 2004 included capital expenditures of $7.1 million for property,
software and equipment and $15.0 million for the purchase of HAHT Commerce, net
of $4.5 million of cash acquired. Net cash used in investing activities for the
three months ended March 31, 2003 consisted primarily of capital expenditures
for software and equipment of approximately $7.3 million. Capital expenditures
for the first quarter of 2003 and 2004 include $3.5 million and $4.5 million,
respectively, of costs capitalized for the development of software for internal
use. Net cash provided by financing activities was $3.4 million for the three
months ended March 31, 2004 compared to net cash used in financing activities
of $3.2 million for the three months ended March 31, 2003. Cash provided by
financing activities for the three months ended March 31, 2004 consisted
primarily of a $3.5 million reimbursement by General Electric pursuant to the
recapitalization agreement. The usage for the three months ended March 31,
2003 was driven by $9.4 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
$9.0 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 March 31, 2004, we had outstanding debt of
approximately $405.8 million, which consisted of $235.0 million of outstanding
senior subordinated reset notes, $100.8 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 $4.2 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 March 31, 2004, we had $70.0 million outstanding under the senior term loan
facility. Borrowings outstanding under the facility at March 31, 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 28




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covenants and other customary conditions, including that no event of default
under the facility have occurred and be continuing. Available borrowings under
our revolving credit facility were $21.1 million at March 31, 2004. 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 2004, we negotiated amended covenants for
2004 and 2005. The amended EBITDA covenant has a requirement of $62.3 million
and $85.0 million and a minimum consolidated leverage ratio requirement of 3.30
to 1.0 and 2.40 to 1.0, for 2004 and 2005, respectively. 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. 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 March 31, 2004 is equal to $11.2 million and
$84.9 million, respectively. For the twelve-month period ended March 31, 2004,
our consolidated leverage ratio was equal to 2.2 to 1.0, based on senior debt
of $183.9 million and EBITDA of $84.9 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 March 31, 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 until 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 March 31,
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 29




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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. 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 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. In
addition, prior to the recapitalization, we were part of the General Electric
group of companies and received financing from General Electric and its
affiliates. 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. 30




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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
March 31, 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
    
    
    103,264
    
    
    
    39,277
    
    
    
    19,143
    
    
    
    44,844Other commitments
    
    
    1,802
    
    
    
    1,802
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    515,066
    
    
    $
    41,079
    
    
    $
    194,143
    
    
    $
    279,844
 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 March 31, 2004 was approximately $0.9 million in
the aggregate. 31




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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 March 31, 2004, $405.8
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 March 31, 2004, approximately 41% of our total
revenues were derived from customers outside of the United States, with
approximately 40% of our total revenues denominated in currencies other than
the United States dollar. We estimate that revenue and expenses for the three
months ended March 31, 2004 were higher by $4.3 million and $3.3 million,
respectively, as a result of changes in exchange rates as compared to the three
months ended March 31, 2003. At March 31, 2004 we had $32.3 million of working
capital (current assets minus current liabilities) denominated in foreign
currencies. At March 31, 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 March 31, 2004UK
    
    Canadian
    
    
    
    
    
    TotalEuro
    
    Pound
    
    Dollar
    
    Other
    
    ExposureRevenues (three months ended)
    
    
    39
    %
    
    
    35
    %
    
    
    9
    %
    
    
    17
    %
    
    
    100
    %Expenses (three months ended)
    
    
    42
    %
    
    
    25
    %
    
    
    6
    %
    
    
    27
    %
    
    
    100
    %Working Capital
    
    
    45
    %
    
    
    17
    %
    
    
    11
    %
    
    
    27
    %
    
    
    100
    %
 A hypothetical 10% strengthening of the dollar during the three months ended
March 31, 2004 versus the foreign currencies in which we have exposure would
have reduced revenue by approximately $3.4 million and reduced operating
expenses by approximately $2.6 million, resulting in operating income of $0.8
million less than actually reported. Working capital at March 31, 2004 would
have been approximately $3.2 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 quarter and applying it evenly to
all non United States dollar transactions and balances. Inflation.We believe that inflation has not had a material impact on our
results of operations for the three months ended March 31, 2004. However, we
cannot assure that future inflation would not have an adverse impact on our
operating results and financial condition. 32




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Item 4. 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. 33




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PART II. OTHER INFORMATION Item 6. Exhibits and Current Reports A. Exhibits Exhibit Number
    
    Description21
    
    Subsidiaries of GXS Corporation.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
 B. Reports on Form 8-K  a)
    
    Form 8-K, as filed on January 7, 2004 announcing restructuring
activities.b)
    
    Form 8-K, as filed on January 20, 2004 announcing the plans to acquire
HAHT Commerce, Inc.c)
    
    Form 8-K, as filed on February 27, 2004 announcing the completion of the
acquisition of HAHT Commerce, Inc. 34




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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/ John SoenksenName: John SoenksenTitle: Senior Vice President,
Chief Financial Officer
and TreasurerMay 13, 2004By: /s/ John DuvallName: John DuvallTitle: Controller and
Chief Accounting OfficerMay 13, 2004
 35