GXS CORP - 10-Q Quarterly Report

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 June 30, 2004


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 333-106143

GXS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


Delaware (State or other jurisdiction of incorporation or organization)		35-2181508 (I.R.S. Employer Identification No.)


100 Edison Park Drive, Gaithersburg, MD (Address of Principal Executive Offices)		20878 (Zip Code)

(301) 340-4000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]

Indicate by a check mark whether the registrant is an accelerated filer (as determined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

As of August 13, 2004, the Registrant had 100 outstanding shares of common stock, significantly all of which was held by affiliates of the Registrant.

GXS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(In thousands of dollars, except per share amounts)


	December 31,			June 30,
	2003 (1)			2004
				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	46,730		$	27,280
Receivables:
Trade		53,069			51,091
Other		4,178			4,888
General Electric Company		5,081			1,722
Deferred income taxes		1,729			318
Prepaid expenses and other assets		8,660			10,380

Total current assets		119,447			95,679
Investment in affiliates		2,929			2,174
Property and equipment, net		132,701			118,713
Deferred income taxes		3,034			2,505
Deferred financing costs		15,886			14,147
Other assets		4,342			4,328
Other acquired intangible assets, net		1,168			12,529
Goodwill		11,929			28,027

Total Assets	$	291,436		$	278,102

Liabilities, Minority Interest and Stockholder’s Equity (Deficit)
Current liabilities:
Trade payables	$	12,139		$	13,747
Deferred income		10,368			20,100
Accrued expenses and other liabilities		63,405			80,208

Total current liabilities		85,912			114,055
Long-term debt		405,520			405,997
Other liabilities		23,929			21,422

Total liabilities		515,361			541,474

Minority interest		810			496

Stockholder’s equity (deficit):
Common stock $1.00 par value, 100 shares authorized, issued and outstanding		—			—
Additional paid-in capital		258,386			279,081
Retained earnings (deficit)		(477,616	)		(537,917	)
Foreign currency translation		(5,505	)		(5,032	)

Total stockholder’s equity (deficit)		(224,735	)		(263,868	)

Total Liabilities, Minority Interest and Stockholder’s Equity (Deficit)	$	291,436		$	278,102

(1) Amounts are derived from December 31, 2003 audited consolidated financial statements

See accompanying notes to condensed consolidated financial statements

GXS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2003			2004			2003			2004
Revenues	$	91,091		$	82,391		$	182,379		$	166,150
Costs and operating expenses:
Cost of revenues		53,484			52,924			105,369			108,916
Sales and marketing		16,708			15,750			32,100			33,385
General and administrative		12,429			15,997			25,527			30,260
Gain on sale of assets		(700	)		28			(700	)		28
Restructuring and related charges		586			17,179			3,133			17,055

Operating income (loss)		8,584			(19,487	)		16,950			(23,494	)
Other income (expense):
Proportionate share of losses in investee companies and investment write-downs		(111	)		(726	)		(760	)		(726	)
Write-off of deferred financing costs		—			—			(5,548	)		—
Interest income		192			213			492			358
Interest expense		(12,778	)		(14,506	)		(23,593	)		(29,714	)
Other income (expense), net		(181	)		154			624			(1,415	)

Loss before income taxes		(4,294	)		(34,352	)		(11,835	)		(54,991	)
Provision (benefit) for income taxes		(316	)		3,205			(1,754	)		5,310

Net loss	$	(3,978	)	$	(37,557	)	$	(10,081	)	$	(60,301	)

See accompanying notes to condensed consolidated financial statements

GXS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)


	Six months ended June 30,
	2003			2004
Cash flows from operating activities:
Net loss	$	(10,081	)	$	(60,301	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		23,427			29,330
Deferred income taxes		(2,028	)		1,660
Gain on sale of assets		(700	)		—
Write-off of deferred financing costs		5,548			—
Amortization of deferred financing costs and debt discount		1,263			2,345
Minority interest		(483	)		(314	)
Changes in operating assets and liabilities, net of effect of business acquisition:
Decrease in receivables		12,191			6,767
Increase in prepaid expense and other assets		(1,319	)		(370	)
Increase (decrease) in accounts payable		(3,446	)		1,400
Increase in deferred income		2,112			6,550
Increase in accrued expenses and other liabilities		1,770			10,969
Other		(1,618	)		873

Net cash provided by (used in) operating activities		26,636			(1,091	)

Cash flows from investing activities:
Purchases of property and equipment		(15,448	)		(14,323	)
Proceed from sale of assets		600			—
Purchase of HAHT, net of cash acquired of $4,526		—			(9,724	)

Net cash used in investing activities		(14,848	)		(24,047	)

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		8,693			5,695
Payment of financing costs		(10,426	)		(129	)

Net cash provided by (used in) financing activities		(6,545	)		5,566

Effect of exchange rate changes on cash		1,971			122

Increase (decrease) in cash and cash equivalents		7,214			(19,450	)
Cash and cash equivalents, beginning of year		37,333			46,730

Cash and cash equivalents, end of period	$	44,547		$	27,280

Supplemental disclosure of non-cash, investing and financing activities:

In connection with the acquisition of HAHT Commerce, GXS Holdings issued common and preferred stock with an estimated fair value of $15,000. Such amount has been reflected as an increase to additional paid-in capital and goodwill. A cash deposit of $750 towards the purchase price was paid in cash in 2003 and recorded to other non-current assets. During 2004 this amount was reclassified to goodwill.

In connection with the acquisition of Celarix in 2003, the estimated value of the common stock and preferred stock issued of $600 has been allocated to the fair value of the assets purchased and the liabilities assumed with a corresponding increase in additional paid-in capital.

See accompanying notes to condensed consolidated financial statements

GXS CORPORATION AND SUBSIDIAIRIES

Notes to Unaudited Condensed Consolidated Financial Statements
Three and six months ended June 30, 2003 and 2004
(Unaudited)
(In thousands of dollars)

(1) Business and Basis of Presentation

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

Interim results for the three and six-month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2003, not included herein.

GXS Holdings, Inc. (GXS Holdings) (formerly RMS Electronic Commerce Systems, Inc.) and GE Information Services, Inc. (GEIS), prior to September 27, 2002, were wholly owned subsidiaries of GE Investments, Inc. (GE Investments), which is a wholly owned subsidiary of General Electric Company (GE). On September 9, 2002, GXS Holdings formed GXS Corporation (GXS) and GXS Holdings contributed all of its assets to GXS in exchange for all of the common stock of GXS. In addition, GE Investments transferred 100% of the common stock that it held in GEIS to GXS and GEIS became a wholly owned subsidiary of GXS. For financial reporting purposes, this transaction was accounted for as a combination of companies under common control. The consolidated financial statements have been prepared as if the assets, liabilities and results of operations of GXS Holdings were consolidated with those of GEIS, (now called Global eXchange Services, Inc.) for all periods presented. GXS and subsidiaries (the Company) are primarily engaged in the business of providing transaction management infrastructure products and services that enable companies to electronically exchange essential business documents.

On June 21, 2002, GE, GE Investments and Global Acquisition Company, a subsidiary of Francisco Partners, L.P. (Francisco Partners), signed a definitive agreement to effect a recapitalization (the Recapitalization Agreement) of the Company. The recapitalization was consummated on September 27, 2002 (the Recapitalization) and resulted in the Company issuing $175,000 of debt under a senior term loan agreement and $235,000 of debt under a senior subordinated reset note agreement (see note 5). Proceeds, in the amount of $350,000, were distributed by the Company to GE pursuant to the terms of the Recapitalization Agreement. In addition, Francisco Partners and its co-investors, through a direct or indirect subsidiary, acquired 90% of the outstanding common stock and preferred stock of GXS Holdings for $407,773. The Company incurred $30,085 of fees to consummate the Recapitalization including $20,000 for services rendered by Francisco Partners.

The Recapitalization was accounted for as a leveraged recapitalization since greater than 5% of the voting common stock of GXS Holdings was retained by GE. Under leveraged recapitalization accounting, the transfer of a controlling interest in GXS Holdings to Francisco Partners does not result in a change in the accounting basis in the assets and liabilities of GXS Holdings or its subsidiaries including GXS. Accordingly, the assets and liabilities of GXS have been recorded at their historical cost basis in the accompanying consolidated financial statements. Additionally, the costs incurred to effect the Recapitalization were expensed as incurred.

GE agreed to reimburse the Company for certain defined operating and restructuring costs following the Recapitalization. During the six months ended June 30, 2003 and 2004, GE reimbursed the Company approximately $8,700 and $5,700 of these costs, respectively. These costs include approximately $800 of costs and expenses incurred with closing a data center in Rockville, Maryland, $5,700 of costs incurred in connection with a services agreement with MCI (formerly called WorldCom), $2,100 for notice pay and severance in connection with a reduction in force and facility exit costs, $1,500 for costs and expenses incurred for rebranding products and implementing an internal systems infrastructure, $1,600 representing certain employee bonus payments made following the closing of the Recapitalization, $1,400 representing payments made on behalf of certain employees in

GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and six months ended June 30, 2003 and 2004
(Unaudited)
(In thousands of dollars)

the Netherlands covered under the GE pension plan, and approximately $1,300 for certain taxes. These reimbursements have been recorded as contributions to additional paid-in capital.

Additionally, in connection with the Recapitalization, GE agreed to reimburse the Company for the managed network fee related to the portion of the network being used by them following the Recapitalization. A reimbursement during the six months ended June 30, 2003 of approximately $1,750 was credited to cost of revenues.

In connection with the Recapitalization, the Company’s acquiror and the acquiror’s common parent made an election under US Income Tax Regulations that allowed the Company to revalue its assets and liabilities for income tax purposes. The tax benefit of the revaluation was approximately $242,000. Such benefit was reflected as a contribution to additional paid-in capital at the date of the Recapitalization. Management believes the Company will achieve profitable operations in future years that will enable the Company to recover the benefit of this deferred tax asset. However, the Company presently does not have sufficient objective evidence to support management’s belief and, accordingly, established a full valuation allowance for this asset in the fourth quarter of 2003 as required by generally accepted accounting principles. Recording this valuation allowance does not impact the Company’s ability to realize the benefit of this asset.

(2) Summary of Significant Accounting Policies

(a) Consolidation

The consolidated financial statements represent the consolidation of all companies in which the Company directly or indirectly has a majority ownership and controls the operations. All significant intercompany transactions and balances have been eliminated in the consolidation. Investments in companies in which the Company has a 50% or less ownership interest but can exercise significant influence over the investee’s operations and policies are accounted for under the equity method of accounting. The Company uses the cost method to account for investments where it holds less than a 20% ownership interest and where it cannot exercise significant influence over the investee’s operations and policies. At each reporting period, the Company assesses the fair value of its investments to determine if any impairment has occurred. To the extent the Company’s carrying value exceeds the estimated fair value and such loss is considered to be an other than temporary decline, the Company records an impairment charge.

(b) Revenue Recognition

The Company generates revenues from three principal sources:

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

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

GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and six months ended June 30, 2003 and 2004
(Unaudited)
(In thousands of dollars)

Professional Services and Software Maintenance — Professional services are generally conducted under time and material contracts and revenue is recognized as the related services are provided. Software maintenance revenue is deferred and recognized on a straight-line basis over the life of the related contract, which is typically one year.

For arrangements with more than one element of revenue, the Company allocates revenue to each component based on vendor specific objective evidence (VSOE), in accordance with the criteria established in AICPA Statement of Position 97-2, Software Revenue Recognition, as amended, or fair value in accordance with the criteria established in Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, as appropriate. VSOE for software maintenance is based on contractual renewal rates. Professional services are separately priced and are based on standard hourly rates determined by the nature of the service and the experience of the professional performing the service.

(c) Use of Estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods to prepare these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

(d) Reclassification of certain costs

Certain costs for the three and six months ended June 30, 2003 have been reclassified to conform to the presentation shown for the three and six months ended June 30, 2004.

(3) Revenues and Receivables

The Company provides e-commerce and network services to various GE businesses in the normal course of business. Sales to GE businesses and affiliates amounted to approximately $8,091 and $6,979 for the three-month periods ended June 30, 2003 and 2004, respectively and $13,761 and $14,495 for the six-month periods ended June 30, 2003 and 2004, respectively. Trade receivables as of December 31, 2003 and June 30, 2004 resulting from normal trade activity with GE were $5,081 and $1,722, 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. For the nine-month period ending June 30, 2004, sales to GE have totaled $23,930.

The allowance for doubtful accounts and sales allowances at December 31, 2003 was $11,345 and at June 30, 2004 was $9,818.

(4) Other Related Party Transactions

Trade payables as of December 31, 2003 and June 30, 2004 resulting from normal activity with GE were $1,177 and $505, 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

GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and six months ended June 30, 2003 and 2004
(Unaudited)
(In thousands of dollars)

Company. Billings for these services, which are included in operating expenses, amounted to $3,034 and $953 for the three months ended June 30, 2003 and 2004, respectively, and $6,998 and $2,941 for the six months ended June 30, 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 substantially all of these services to alternative providers, or brought some of the services in-house. The remaining services will be migrated to alternative providers or brought in-house 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 and $1,000 for the three and six-month periods ended June 30, 2003 and 2004, respectively. The Company reimbursed Francisco Partners for additional expenses of $215 which were incurred during the six months ended June 30, 2004. As of December 31, 2003 and June 30, 2004, the Company owed Francisco Partners $3,071 and $4,070, respectively.

(5) Long-Term Debt

Long-term debt consists of the following at June 30, 2004:


Term loan facility	$	70,000
Senior secured floating rate notes, net of debt discount of $4,003		100,997
Senior subordinated reset notes		235,000

Long-term debt	$	405,997

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 June 30, 2004 bear interest at a base rate of 4.25% plus 4.0%. Interest is payable monthly in arrears for base rate loans and on the last day of selected interest periods, but no later than every three months, for

GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and six months ended June 30, 2003 and 2004
(Unaudited)
(In thousands of dollars)

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 June 30, 2004, the Company had outstanding letters of credit of $8,900 and available borrowings of $21,100 under the New Revolving Credit Facility. The outstanding letters of credit relate to performance obligations of the Company. The Company pays 0.75% per annum on the unused portion of the New Revolving Credit Facility.

The obligations of the Company under the New Credit Facility are guaranteed by all of the Company’s existing and future domestic subsidiaries (the Guarantors). The obligations of the Company under the New Credit Facility are secured by first-priority liens on substantially all of the Company’s and the Guarantors’ existing and after-acquired property, both tangible and intangible. The obligations of the Company and the Guarantors are secured by a pledge of all of the Company’s capital stock or other equity interests of the Company’s existing and future domestic subsidiaries and a pledge of 66.0% of the capital stock of the Company’s material first-tier foreign subsidiaries.

If the Company were to repay the borrowings under the New Credit Facility prior to the maturity date, the Company would be required to pay a prepayment premium equal to 1.00% of the maximum facility amount for each full or partial year remaining until the maturity date. If the New Credit Facility is repaid with the proceeds of a private placement of subordinated debt or equity, an initial public offering of equity or a sale of substantially all of the Company’s assets or stock, the prepayment premium would be reduced by half.

In addition, the New Credit Facility contains various covenants that restrict the Company from taking various actions and require the Company to achieve and maintain certain financial ratios. In March and June 2004, we negotiated amended covenants for 2004 and 2005. As of June 30, 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 June 30, 2004 was 12%. The Floating Notes are secured by second-priority security interests in substantially all of the assets and stock of GXS and its domestic subsidiaries and 66% of the stock of the Company’s material first-tier foreign subsidiaries. In addition, the Floating Notes are guaranteed fully and unconditionally by the Company’s domestic subsidiaries. The debt discount of $5,250 is being amortized over the life of the Floating Notes using the interest method. Amortization for the period from issuance through June 30, 2004 was $1,247. 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

GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and six months ended June 30, 2003 and 2004
(Unaudited)
(In thousands of dollars)

indirectly become liable, contingently or otherwise, for any indebtedness secured by any of the assets of the Company or any subsidiary of the Company in an aggregate principal amount, at any time, in excess of two times EDI Services Revenues, as defined, for the most recently ended two fiscal quarter period of the Company.

Senior Subordinated Reset Notes:

On September 27, 2002, the Company issued $235,000 of Reset Notes. The Reset Notes, which mature on September 27, 2009, bear interest at a rate of 12% until September 27, 2003. From and after September 27, 2003, interest on the notes will be reset, with such reset to be based on a variety of factors including the portion of the notes owned by GECC and the then current market conditions for similar securities. The Company is currently in discussions with GECC concerning the interest rate on the Reset Notes. If the interest rate on the Reset Notes is increased to the maximum rate of 17% from 12%, the Company’s annual interest expense would increase by $11.8 million, $7.1 million of which the Company would be required to pay in cash. For the period from September 27, 2003 to June 30, 2004, the Company accrued interest at a rate of 15%, the rate which management believes to be the best estimate of where the negotiations will conclude. To the extent the reset rate exceeds 15%, the Company will have the option to pay cash interest of 15% and add the additional interest to the balance of the Reset Notes. Interest is payable semi-annually on April 15 and October 15 of each year commencing April 15, 2003. The Reset Notes are general unsecured obligations of the Company and are guaranteed by all of the Company’s domestic subsidiaries.

The Reset Notes are redeemable at the option of the Company, in whole or in part, at any time on or after September 27, 2006 at a redemption price equal to par plus accrued and unpaid interest, plus a declining redemption premium. In addition, at any time prior to September 27, 2005, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of the Reset Notes at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, at the redemption date plus a premium, if any, as defined in the agreement, with the net cash proceeds of one or more equity offerings, provided that the redemption occurs within 90 days of the date of the closing of such equity offering. Upon the occurrence of a change of control, as defined in the Indenture governing the Reset Notes, each holder of the Reset Notes will have the right to require the Company to repurchase such holder’s notes at an offer price in cash equal to 101% of the aggregate principle amount thereof plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of purchase.

The Indentures governing the Floating Notes and the Reset Notes contain certain covenants that limit, among other things, the ability of the Company to (i) pay dividends, redeem capital stock or make certain other restricted payments, (ii) incur additional indebtedness or issue certain preferred equity interests, (iii) merge into or consolidate with certain other entities or sell all or significant portions of its assets, (iv) create liens on assets and (v) enter into certain transactions with affiliates or related persons.

The Company expects that cash flows from foreign operations will be required to meet its domestic debt service requirements. Such cash flows are expected to be generated from the sale of network and processing resources, software licenses and software maintenance contracts to the foreign operations. However, there is no assurance that the foreign subsidiaries will generate sufficient cash flow or that the laws in foreign jurisdictions will not change to limit collections on these sales or increase the tax burden on the collections.

The Company paid interest of $1,246 and $15,737 for the three months ending June 30, 2003 and 2004, respectively and $3,793 and $23,613 for the six months ending June 30, 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

GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and six months ended June 30, 2003 and 2004
(Unaudited)
(In thousands of dollars)

and penalties, to GE for the period December 1, 1992 to April 30, 1994, when the Company was a division of GE. GE, on behalf of the Company, has filed a complaint in the Tennessee Chancery Court challenging this assessment. The Company does not believe that the resolution of these matters will have a material effect on the financial position of the Company. Pursuant to the Tax Matters Agreement that was entered into in connection with the Recapitalization Agreement, GE has agreed to indemnify the Company against losses associated with this and other tax matters relating to the periods prior to the Recapitalization.

The Company is subject to various other legal proceedings and claims, which arise in the ordinary course of its business none of which management believes is likely to result in any material losses to the Company.

(7) Restructuring

During the three and six months ended June 30, 2003, the Company incurred approximately $586 and $3,133, respectively, in restructuring costs related to facility and equipment lease buy-outs, facility exit costs including a restoration obligation, and headcount reductions of approximately 17 people primarily in its data center, engineering, and services organizations. Of these costs, $2,538 were reimbursed by General Electric as part of the Recapitalization Agreement.

On June 8, 2004, the Company announced a restructuring program which includes consolidating development and operations functions, streamlining business processes, making technology investments to lower its worldwide service delivery costs and vacating additional facilities. As a result, the Company incurred approximately $17,034 in restructuring costs. The Company expects to reduce its global employee workforce by approximately 300 positions, or approximately 20 percent, by the end of calendar year 2004. The Company expects to incur additional restructuring charges of approximately $11,000 to $15,000 during the balance of 2004. A rollforward of the restructuring activities is as follows:


	Restructuring Activities
	Severance
	2003			2004			Total
Balance as of December 31, 2003	$	9,654		$	—		$	9,654
Restructuring expense		(124	)		—			(124	)
Payments and other adjustments		(2,691	)		—			(2,691	)

Balance as of March 31, 2004		6,839			—			6,839
Restructuring expense		—			17,034			17,034
Payments and other adjustments		(5,774	)		(326	)		(6,100	)

Balance as of June 30, 2004	$	1,065		$	16,708		$	17,773

GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and six months ended June 30, 2003 and 2004
(Unaudited)
(In thousands of dollars)


	Restructuring Activities
	Facilities
	2003			2004		Total
Balance as of December 31, 2003	$	12,184		$	—	$	12,184
Payments and other adjustments		(663	)		—		(663	)

Balance as of March 31, 2004		11,521			—		11,521
Restructuring expense		145			—		145
Payments and other adjustments		(692	)		—		(692	)

Balance as of June 30, 2004	$	10,974		$	—	$	10,974

The majority of the severance accruals will be paid by the end of 2004. The facility accruals will be paid in various amounts through 2014.

(8) Acquisition of HAHT

On February 13, 2004, the Company acquired all of the capital stock of HAHT Commerce, Inc. (HAHT) for consideration of $15,000 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 (PIM), channel management, business intelligence and customer services between manufacturers, their channel partners and business customers.

A summary of the estimated purchase price and the related allocation follows. Such allocation is preliminary and subject to change. Changes, if any, are not expected to be material. Identifiable intangible assets principally consist of customer relationships, PIM software and Order Management software which will be amortized over five years. Amortization expense of $2,017 will be recorded in 2004 and amortization expense of $2,305 will be recorded in 2005, 2006, 2007 and 2008.


Cash	$	15,000
Estimated fair value of capital stock issued by GXS Holdings, Inc.		15,000

Total purchase price	$	30,000

Cash	$	4,526
Other current assets		2,673
Property and equipment		155
Estimated fair value of liabilities assumed		(6,622	)
Estimated transaction costs		(300	)
Identifiable intangible assets		12,225
Goodwill		15,865
Other assets		1,478

	$	30,000

GXS CORPORATION AND SUBSIDIAIRIES
Notes to Unaudited Condensed Consolidated Financial Statements
Three and six months ended June 30, 2003 and 2004
(Unaudited)
(In thousands of dollars)

On a pro forma basis, assuming the acquisition had been consummated on January 1, 2003, the Company’s revenue and net loss for the six-month periods ended June 30, 2003 and 2004 would have been as follows:


	Six months ended June 30,
	2003			2004
Revenue	$	190,722		$	167,414
Net loss	$	(18,479	)	$	(60,800	)

(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.

GXS CORPORATION AND SUBSIDIARIES
Consolidating Balance Sheet
December 31, 2003
(In thousands)


						Non-
	Parent			Guarantors		Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—		$	19,389	$	27,341	$	—		$	46,730
Receivables		—			33,963		28,365		—			62,328
Other current assets		15			8,750		1,624		—			10,389
Advances to subsidiaries		262			176,669		96,517		(273,448	)		—

Total current assets		277			238,771		153,847		(273,448	)		119,447
Investments in affiliates		—			2,403		526		—			2,929
Investments in subsidiaries		203,797			33,472		—		(237,269	)		—
Property and equipment, net		235			127,476		4,990		—			132,701
Goodwill, net		—			6,953		4,976		—			11,929
Other noncurrent assets		10,659			4,204		5,431		(11,750	)		8,544
Deferred financing costs		15,886			—		—		—			15,886

	$	230,854		$	413,279	$	169,770	$	(522,467	)	$	291,436

Liabilities, Minority Interest, and Stockholder’s Equity (Deficit)
Current liabilities:
Trade payables	$	1,311		$	7,495	$	3,333	$	—		$	12,139
Other current liabilities		15,319			40,797		17,657		—			73,773
Advances from affiliates		33,439			136,299		103,710		(273,448	)		—

Total current liabilities		50,069			184,591		124,700		(273,448	)		85,912
Long-term debt		405,520			—		—		—			405,520
Other liabilities		—			24,891		10,788		(11,750	)		23,929

Total liabilities		455,589			209,482		135,488		(285,198	)		515,361
Minority interest		—			—		810		—			810
Stockholder’s equity (deficit)		(224,735	)		203,797		33,472		(237,269	)		(224,735	)

	$	230,854		$	413,279	$	169,770	$	(522,467	)	$	291,436

GXS CORPORATION AND SUBSIDIARIES
Consolidating Balance Sheet
June 30, 2004
(Unaudited)
(In thousands)


						Non-
	Parent			Guarantors		Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—		$	11,873	$	15,407	$	—		$	27,280
Receivables		—			27,362		30,339		—			57,701
Other current assets		24			7,915		2,759		—			10,698
Advances to subsidiaries		262			163,147		109,862		(273,271	)		—

Total current assets		286			210,297		158,367		(273,271	)		95,679
Investments in affiliates		—			1,648		526		—			2,174
Investments in subsidiaries		203,565			38,246		—		(241,811	)		—
Property and equipment, net		235			114,684		3,794		—			118,713
Goodwill, net		—			22,819		5,208		—			28,027
Other noncurrent assets		1,484			24,268		5,360		(11,750	)		19,362
Deferred financing costs		14,147			—		—		—			14,147

	$	219,717		$	411,962	$	173,255	$	(526,832	)	$	278,102

Liabilities, Minority Interest, and Stockholder’s Equity (Deficit)
Current liabilities:
Trade payables	$	1,311		$	9,965	$	2,471	$	—		$	13,747
Other current liabilities		17,669			60,602		22,037		—			100,308
Advances from affiliates		58,608			114,846		99,817		(273,271	)		—

Total current liabilities		77,588			185,413		124,325		(273,271	)		114,055
Long-term debt		405,997			—		—		—			405,997
Other liabilities		—			22,984		10,188		(11,750	)		21,422

Total liabilities		483,585			208,397		134,513		(285,021	)		541,474
Minority interest		—			—		496		—			496
Stockholder’s equity (deficit)		(263,868	)		203,565		38,246		(241,811	)		(263,868	)

	$	219,717		$	411,962	$	173,255	$	(526,832	)	$	278,102

GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Operations and Comprehensive Income (Loss)
Six months ended June 30, 2003
(Unaudited)
(In thousands)


							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	146,163		$	67,974		$	(31,758	)	$	182,379
Costs and operating expenses		192			138,697			55,865			(31,758	)		162,996
Gains on sales of assets		—			(700	)		—			—			(700	)
Restructuring and related charges		—			3,133			—			—			3,133

Operating income (loss)		(192	)		5,033			12,109			—			16,950
Other income, net		(38,185	)		7,871			1,529						(28,785	)

Income (loss) before income taxes		(38,377	)		12,904			13,638			—			(11,835	)
Provision (benefit) for income taxes		—			(7,267	)		5,513			—			(1,754	)

Income (loss) before equity in income (loss) of subsidiaries		(38,377	)		20,171			8,125			—			(10,081	)
Equity in income (loss) of subsidiaries		28,296			8,125			—			(36,421	)		—

Net income (loss)		(10,081	)		28,296			8,125			(36,421	)		(10,081	)
Foreign currency translation adjustments		—			—			(78	)		—			(78	)

Comprehensive income (loss)	$	(10,081	)	$	28,296		$	8,047		$	(36,421	)	$	(10,159	)

GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Cash Flows
Six months ended June 30, 2003
(Unaudited)
(In thousands)


							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(10,081	)	$	28,296		$	8,125		$	(36,421	)	$	(10,081	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		—			21,749			1,678			—			23,427
Deferred income taxes		(5,300	)		(7,784	)		11,056			—			(2,028	)
Gain on sale of assets		—			(700	)		—			—			(700	)
Write-off of deferred financing costs		5,548			—			—			—			5,548
Amortization of deferred financing costs and debt discount		1,263			—			—			—			1,263
Minority interest		—			—			(483	)		—			(483	)
Equity in net loss of subsidiaries		(28,296	)		(8,125	)		—			36,421			—
Changes in operating assets and liabilities, net		43,486			(17,487	)		(16,309	)		—			9,690

Net cash provided by operating activities		6,620			15,949			4,067			—			26,636

Cash flows for investing activities:
Purchases of property and equipment		(75	)		(13,838	)		(1,535	)		—			(15,448	)
Proceeds from sale of assets		—			600			—			—			600

Net cash used for investing activities		(75	)		(13,238	)		(1,535	)		—			(14,848	)

Cash flows from financing activities:
Net contributions from General Electric Company and affiliates		—			8,693			—			—			8,693
Advance to from subsidiaries		8,693			(8,693	)		—			—			—
Repayment of long-term debt		(174,562	)		—			—			—			(174,562	)
Proceeds from long-term debt issuances		169,750			—			—			—			169,750
Payment of financing costs		(10,426	)		—			—			—			(10,426	)

Net cash used in financing activities		(6,545	)		—			—			—			(6,545	)

Effect of exchange rate changes on cash		—			—			1,971			—			1,971

Increase in cash and cash equivalents		—			2,711			4,503			—			7,214
Cash and cash equivalents, beginning of year		—			21,940			15,393			—			37,333

Cash and cash equivalents, end of period	$	—		$	24,651		$	19,896		$	—		$	44,547

GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Cash Flows
Six months ended June 30, 2004
(Unaudited)
(In thousands)


							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(60,301	)	$	(29,574	)	$	2,333		$	27,241		$	(60,301	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			27,841			1,489			—			29,330
Deferred income taxes		—			100			1,560			—			1,660
Amortization of deferred financing costs and debt discount		2,345			—			—			—			2,345
Minority interest		—			—			(314	)		—			(314	)
Equity in net loss of subsidiaries		29,574			(2,333	)		—			(27,241	)		—
Changes in operating assets and liabilities, net		22,823			20,197			(16,831	)		—			26,189

Net cash provided by (used in) operating activities		(5,559	)		16,231			(11,763	)		—			(1,091	)

Cash flows for investing activities:
Purchases of property and equipment		(7	)		(14,023	)		(293	)		—			(14,323	)
Purchase of HAHT, net of $4,526 cash acquired		—			(9,724	)		—			—			(9,724	)

Net cash used in investing activities		(7	)		(23,747	)		(293	)		—			(24,047	)

Cash flows from financing activities:
Net contributions from General Electric Company and affiliates		5,695			—			—			—			5,695
Payment of financing costs		(129	)		—			—			—			(129	)

Net cash provided by financing activities		5,566			—			—			—			5,566

Effect of exchange rate changes on cash		—			—			122			—			122

Increase (decrease) in cash and cash equivalents		—			(7,516	)		(11,934	)		—			(19,450	)
Cash and cash equivalents, beginning of year		—			19,389			27,341			—			46,730

Cash and cash equivalents, end of period	$	—		$	11,873		$	15,407		$	—		$	27,280

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 implementation and use of our products.

For most transactions, we charge a transaction-processing fee to both the sending and the receiving party. Because the transactions we process, such as the exchange of invoices and purchase orders, are routine and essential to the day-to-day operations of our customers, the revenues generated from these fees tend to be highly recurring in nature. While many of our larger customers are committed to multi-year contracts, our typical contract for EDI services automatically renews every month. However, we are moving towards longer term contracts for both new and existing customers. Transaction processing revenues are recognized on a per transaction basis in the period the related transaction is processed. Revenues on contracts with monthly or quarterly minimum transaction levels are recognized based on the greater of actual transactions processed or the specified contract minimums.

We also license our software either for perpetual use or for a fixed term. Licensing revenues are generally recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred and collection is probable. In connection with the licensing of our software products, we provide software maintenance services that also generate recurring revenues. We typically charge between 15% and 20% of the initial license fee on an annual basis for these maintenance services. We recognize software maintenance revenues over the life of the related maintenance contracts, which is typically one year. We provide professional services in connection with our entire range of products and services. These services are typically provided under time and material contracts and revenue is recognized as the related services are provided. Most of our costs are relatively fixed and primarily consist of salary compensation and related benefits, as well as expenses for infrastructure equipment, such as hardware and software, and costs associated with the procurement of our telecommunications network.

Over the past several years, general economic conditions and the proliferation of the Internet and other technological advances in computing and telecommunications have and continue to transform the transaction management industry. Our business has been impacted in several ways including a decline in revenue in each of our three categories of products and services. In addition, competitive pricing dynamics across the industry have adversely

impacted our core EDI Services revenues. We responded to these market conditions and corresponding effect on demand for our products and services, by:

• reducing our cost structure through the removal of excess capacity in our sales force, our professional services organization and our computing and network infrastructure;

• consolidating facility space;

• offering selected customers lower pricing in exchange for longer contract terms;

• canceling and consolidating various marketing and development programs related to products and services that were not generating sufficient revenues to support the continued investment; and

• reducing back-office personnel and moving work to lower cost countries.

On June 8, 2004, we announced a restructuring program which includes consolidating development and operations functions, streamlining business processes, making technology investments to lower our worldwide service delivery costs and vacating additional facilities. As a result, we incurred approximately $17.0 million in restructuring costs, the majority of which we expect to disburse during the balance of 2004. We expect to reduce our global employee workforce by approximately 300 positions, or approximately 20 percent, by the end of calendar year 2004. We expect to incur additional restructuring charges of approximately $11.0 million to $15.0 million during the balance of 2004. The majority of the severance costs will be paid out in 2004 and the balance of these costs primarily relating to facilities will be paid in somewhat equal amounts through 2014.

We expect competitive pricing dynamics will continue to put pressure on the revenue from our EDI Services. We continue to focus on maintaining a cost structure that is appropriate for our existing revenue base and revenue expectations. In addition, we expect to continue to both develop and acquire products and services which add value for our customers. Historically our EDI Services revenues have been transaction based. We expect the revenues will become more driven by subscriptions and payment for value added services which utilize information about the transactions and information contained within the transaction to give our customers more insight into their supply chain performance and a greater ability to optimize processes between trading partners.

Pursuant to the terms of the recapitalization agreement dated June 21, 2002, General Electric is required to maintain its affiliates’ respective business arrangements with us on terms and conditions substantially similar to those in effect at the time of the completion of our recapitalization and to continue to purchase products and services from us totaling $30.6 million in each of the four calendar quarters ending September 2003 and September 2004. We are currently in negotiations with General Electric to determine the amount of products and services that General Electric will purchase after September 2004. While we expect General Electric to continue to be a very important and significant customer, we do expect that the revenue in future periods will decline from the previously contracted annual amount of $30.6 million.

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 are able to offer customers an end-to-end data synchronization solution, including software to integrate data from back-end systems, management tools to publish product information, transaction delivery services to move the information and a means to electronically connect multiple trading partners in a retail supply chain.

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

Results of Operations

A summary of our revenue by line of business follows:


	Three Months Ended June 30										Six Months Ended June 30
	2003					2004					2003					2004
			(in thousands of dollars)										(in thousands of dollars)
	$		%			$		%			$		%			$		%
Revenues:
EDI Services		60,119		66.0	%		56,835		69.0	%		119,668		65.6	%		113,559		68.3	%
Other Business to Business Solutions		14,217		15.6	%		11,880		14.4	%		31,133		17.1	%		24,208		14.6	%
Custom Messaging and Network Solutions		16,755		18.4	%		13,676		16.6	%		31,578		17.3	%		28,383		17.1	%

Total revenues		91,091		100.0	%		82,391		100.0	%		182,379		100.0	%		166,150		100.0	%

Three and Six Months Ended June 30, 2004 Compared to Three and Six Months Ended June 30, 2003

Revenues. Revenues decreased in both the second quarter and the first half of 2004 when compared to the same periods in 2003. Additionally, revenue in the second quarter of 2004 was down $1.4 million when compared to the first quarter of 2004.

EDI Services revenue, our main product and service grouping, declined in both the first half and second quarter of 2004 when compared to the same periods in 2003 as we continued to see both contraction of our customer base and lower realized prices in the United States, offset somewhat by strength in our foreign operations. EDI Services revenue was aided in part by the strength of the Euro and British pound relative to the dollar. However, second quarter 2004 EDI Services revenue was flat with first quarter 2004 revenue as growth in Europe offset lower prices in the United States and the rate of customer cancellations slowed. We have been experiencing reduced realized price levels in the United States for the past several quarters and expect this trend to continue as we see aggressive competition in the marketplace and we pursue a strategy of offering customers more attractively priced packages of services in exchange for longer term commitments.

Other Business to Business Solutions revenue, which includes software sales and related services and online marketplaces, declined in both the first half and second quarter of 2004 when compared to the same periods in 2003. We continue to see customer reluctance to commit to major new systems implementations and have not yet seen the increase in demand for data synchronization solutions that we had expected. In addition, our online marketplaces implemented during the past several years are generating declining monthly revenues. Second quarter 2004 revenues were down slightly from revenue levels in the first quarter ($11.9 million versus $12.3 million), principally attributable to this trend. During the first half of 2004, we have closed several country data pool agreements. Data pools will provide a mechanism for trading partners to share and synchronize product data for greater efficiencies and increased profitability across global supply chains. Revenues from these new arrangements with the Global Data Synchronization Network (GDSN) member organizations are not expected to significantly impact operations until at least 2005 and later years.

Custom Messaging and Network Solutions revenue declined in both the first half and second quarter of 2004 when compared to the same periods in 2003, as well as declining in the second quarter of 2004 when compared to the first quarter of 2004 ($13.7 million versus $14.7 million) as customers continue to migrate away from legacy applications on our network and computer systems to either in-house implementations or alternate solutions. These declines, which are in line with or slightly slower than we had expected, will continue and may accelerate as we reallocate resources towards a consolidated computing infrastructure and focus other resources on our existing service offerings. Year over year declines in these offerings were mitigated somewhat by favorable impact of foreign currency exchange of $1.7 million for the six month period.

Currency effects caused revenues to be approximately $4.0 million and $8.3 million higher, respectively, during the three and six months ended June 30, 2004 compared with the three and six months ended June 30, 2003.

A summary of our costs and operating expenses follows:


	Three Months Ended June 30					Six Months Ended June 30
	2003			2004		2003			2004
				(in thousands of dollars)
Costs and operating expenses:
Cost of revenues	$	53,484		$	52,924	$	105,369		$	108,916
Sales and marketing		16,708			15,750		32,100			33,385
General and administrative		12,429			15,997		25,527			30,260
Gain on sale of assets		(700	)		28		(700	)		28
Restructuring and related charges		586			17,179		3,133			17,055

Total costs and operating expenses	$	82,507		$	101,878	$	165,429		$	189,644

Cost of revenues. Cost of revenues decreased by $0.6 million, or 1.1%, to $52.9 million for the three months ended June 30, 2004 from $53.5 million for the three months ended June 30, 2003. For the six months ended June 30, 2004, cost of revenues increased by $3.5 million, or 3.3%, to $108.9 million from $105.4 million for the six months ended June 30, 2004. The increase in cost of revenues for the six-months period 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 decreased by $0.9 million, or 5.4%, to $15.8 million for the three months ended June 30, 2004 from $16.7 million for the three months ended June 30, 2003. The decrease is primarily due to decreases in compensation and related employee expenses as a result of restructuring actions that took place during the first quarter of 2003 and 2004 and lower commission expense in line with the decrease in revenue.

Sales and marketing expense increased $1.3 million, or 4.0%, to $33.4 million for the six months ended June 30, 2004 from $32.1 million for the six months ended June 30, 2003. This increase is primarily due to increases in advertising and sales promotion activities as we strive to enhance our brand awareness in the marketplace, as well as expenses associated with HAHT Commerce.

General and administrative. General and administrative expenses increased $3.6 million, or 29%, to $16.0 million for the three months ended June 30, 2004 from $12.4 million for the three months ended June 30, 2003. General and administrative expenses increased $4.8 million, or 18.8%, to $30.3 million from $25.5 million for the six months ended June 30, 2003. The increase for the three and six months ended June 30, 2004 was primarily driven by an increase in consulting expenses and professional fees. Consulting expenses and professional fees were unusually high, approximately $2.7 million for the first six months of 2004, this trend is not expected to continue. Consulting expenses and professional fees included fees paid to management consultants engaged in December 2003 to work together with our management team to solidify our business strategy and lay a foundation for our cost transformation actions. These engagements were substantially completed by the end of the second quarter.

The weakening dollar caused cost of revenues, sales and marketing and general and administrative expenses to be approximately $3.6 million and $6.9 million higher, respectively, during the three and six months ended June 30, 2004 compared to the three and six months ended June 30, 2003.

Restructuring and related charges. Restructuring and related charges were $17.1 million for the six months ended June 30, 2004. The charges relate to a restructuring program announced on June 8, 2004 which includes consolidating development and operations functions, streamlining business processes and making technology investments to lower our worldwide service delivery costs. We expect to reduce our global workforce by the end of calendar year 2004 by approximately 300 positions, or approximately 20 percent, from headcount of approximately

1,600 at the end of the first quarter 2004. We also expect to shift some employment to lower cost countries, particularly India and the Philippines. We expect to record total restructuring charges of between $28.0 million and $32.0 million during 2004 associated with these actions and related facility rationalizations.

Restructuring and related charges were $3.1 million for the six months ended June 30, 2003. The 2003 charges related to facility and equipment lease buy-outs, facility exit costs including a restoration obligation, and headcount reductions primarily in our operations, engineering and service organizations. Of these costs, $2.5 million were reimbursed by General Electric as part of the September 2002 recapitalization agreement. The Company expects to incur additional restructuring charges of approximately $11.0 million to $15.0 million during the balance of 2004. The majority of these costs will be paid out in 2005 and the balance of these costs will be paid in somewhat equal amounts through 2014.

Write-off of deferred financing costs. Deferred financing costs of $5.5 million were written-off during the six months ended June 30, 2003. The write-off was related to the refinancing of our previous senior term loan.

Interest expense. Interest expense of $14.5 million and $29.7 million for the three and six months ended June 30, 2004, respectively, and $12.8 million and $23.6 million for the three and six months ended June 30, 2003, respectively, was primarily driven by interest on our long-term debt issued in connection with the recapitalization. The increase over the prior year relates to the increase in interest rate on our $235.0 million senior subordinated reset notes from 12% to 15% and increased interest and higher amortization of deferred financing costs related to the March 2003 issuance of our $105.0 million of senior secured floating rate notes and our new credit facility.

Our senior subordinated reset notes bore interest at 12% per annum before September 27, 2003. After September 27, 2003, the senior subordinated reset notes will bear interest at a reset rate between 8% and 17%. The reset rate will be determined by negotiations between General Electric Capital Corporation, or GECC, and us that began in July 2003 and are continuing. The parties have not reached an agreement on the reset rate and have each engaged investment bankers to determine the reset rate. For the period from September 27, 2003 to June 30, 2004, the Company accrued interest at a rate of 15%, the rate which management believes to be the best estimate of where the negotiations will conclude. A 1% change in the reset rate upon final negotiations will change interest expense by $0.6 million per quarter, or $2.4 million annually.

Other income (expense), net. Other income of $0.2 million for the three months ended June 30, 2004, was primarily driven by minority interest income. Other expense was $1.4 million for the six months ended June 30, 2004 which 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 $0.5 million of minority interest income.

Other expense was $0.2 million for the three months ended June 30, 2003. Other income was $0.6 million for the six months ended June 30, 2003, which included $0.1 million of gains on foreign currency transactions and $0.5 million of minority interest income.

Provision for income taxes. Income tax expense was $3.2 million for the three months ended June 30, 2004 compared to income tax benefit of $0.3 million for the three months ended June 30, 2003. Income tax expense was $5.3 million for the six months ended June 30, 2004 compared to income tax benefit of $1.8 million for the six months ended June 30, 2003. Our tax rate for the six months ended June 30, 2004 differs from the federal statutory rate of 35% principally as a result of foreign taxes paid or accrued in jurisdictions where we are profitable and the effect of losses both foreign and domestic for which no benefit has been recognized. Our tax rate for the six months ended June 30, 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 $33.6 million to a net loss of $37.6 million for the three months ended June 30, 2004 compared to a net loss of $4.0 million for the three months ended June 30, 2003. Net loss increased by $50.2 million to a net loss of $60.3 million for the six months ended June 30, 2004 compared to a net loss of $10.1 million for the six months ended June 30, 2003. The increase in net loss of $33.6 million and $50.2 million for the three and six months ended June 30, 2004, respectively, was a result of the matters discussed above.

Liquidity and Capital Resources

Sources and Uses of Cash

The following table is a summary of our sources and uses of cash during the six months ended June 30, 2003 and 2004:


	Six months ended June 30,
	2003			2004
	(in thousands of dollars)
Cash flows from operating activities	$	26,636		$	(1,091	)
Cash flows from investing activities		(14,848	)		(24,047	)
Cash flows from financing activities		(6,545	)		5,566
Effect of exchange rate changes on cash		1,971			122

Net increase (decrease) in cash and cash equivalents	$	7,214		$	(19,450	)

Cash and cash equivalents, end of period	$	44,547		$	27,280

Net cash used in operating activities was $1.1 million for the six months ended June 30, 2004 compared net cash provided by operating activities of $26.6 million for the six months ended June 30, 2003. The decrease in net cash provided by operating activities was mainly attributable to the $50.2 million increase in net loss offset to some extent by increases in deferred income, accrued expenses and depreciation and amortization.

Accrued expenses and other liabilities include $29.3 million of restructuring charges. The majority of these costs will be paid out by 2005 with the balance being paid in somewhat equal amounts through 2014. In addition, the Company expects to incur additional restructuring charges of approximately $11.0 million to $15.0 million during the balance of 2004. The majority of these costs will paid out by 2005 with the balance being paid in somewhat equal amounts through 2014.

Net cash used in investing activities was $24.0 million for the six months ended June 30, 2004 compared to $14.8 million for the six months ended June 30, 2003. Net cash used in investing activities for the six months ended June 30, 2004 and June 30, 2003 included capital expenditures of $14.3 million and $15.4 million, respectively, for property, software and equipment. Net cash used in investing activities for the six months ended June 30, 2004 also included $15.0 million for the purchase of HAHT Commerce, net of $4.5 million of cash acquired. Capital expenditures for the first six months of 2003 and 2004 include $10.1 million and $8.5 million, respectively, of costs capitalized for the development of software for internal use.

Net cash provided by financing activities was $5.6 million for the six months ended June 30, 2004 compared to net cash used in financing activities of $6.5 million for the six months ended June 30, 2003. Cash provided by financing activities for the six months ended June 30, 2004 consisted primarily of a $5.7 million reimbursement by General Electric pursuant to the recapitalization agreement, as previously discussed in note 1 of the financial statements. Cash usage for the six months ended June 30, 2003 was driven by $10.4 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 $8.7 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 June 30, 2004, we had outstanding debt of approximately $406.0 million, which consisted of $235.0 million of outstanding senior subordinated reset notes, $101.0 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 $4.0 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 June 30, 2004, we had $70.0 million outstanding under the senior term loan facility. Borrowings outstanding under the facility at June 30, 2004 bear interest at 8.25%. In addition, as of the date of this report, we have approximately $8.9 million of letters of credit outstanding under our revolving credit facility. The amount that can be borrowed under the revolving credit facility is limited to a percentage of EDI revenues as defined in the agreement governing the credit facility, and is subject to our compliance with financial covenants and other customary conditions, including that no event of default under the facility have occurred and be continuing. Available borrowings under our revolving credit facility were $21.1 million at June 30, 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 and June 2004, we negotiated amended covenants under our credit facility for 2004 and 2005. The amended EBITDA covenant has a requirement of $62.5 million for 2004, $75.0 million for the twelve-month period ended March 31, 2005 and $85.0 million for the twelve-month periods ending June 30, September 30 and December 31, 2005, a minimum consolidated leverage ratio requirement of 3.30 to 1.0 for 2004, 2.80 to 1.0 for the twelve-month period ended March 31, 2005 and 2.40 to 1.0 for the twelve-month periods ending June 30, September 30 and December 31, 2005. Our ability to comply with each of the EBITDA and consolidated leverage ratio covenants will primarily depend on the performance of our business in future periods and, specifically, our ability to generate revenues and control operating costs. Under our credit facility, EBITDA is calculated each quarter for the latest twelve-month period and is adjusted to exclude specific costs and expenses. 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 June 30, 2004 is equal to $12.4 million and $74.9 million, respectively. For the twelve-month period ended June 30, 2004, our consolidated leverage ratio was equal to 2.50 to 1.0, based on senior debt of $183.9 million and EBITDA of $74.9 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 June 30, 2004 was 12%. The senior secured floating rate notes are secured by second-priority security interests in substantially all of our assets and our domestic subsidiaries’ and 66% of the stock of our material foreign subsidiaries. In addition, the senior secured floating rate notes are guaranteed fully and unconditionally by our domestic subsidiaries. Interest is payable semi-annually in arrears on January 15 and July 15 of each year commencing on July 15, 2003.

The senior secured floating rate notes are redeemable at our option any time after October 1, 2004, in whole or in part, at a redemption price equal to par plus accrued and unpaid interest, plus a redemption premium. The premium is 3% for the twelve months ending October 1, 2005 and 1.5% for the twelve months ending October 1, 2006. After October 1, 2006, the senior secured floating rate notes can be redeemed at par plus accrued and unpaid interest. Upon the occurrence of a change of control, as defined in the indenture governing the senior secured floating rate notes, each holder of the senior secured floating rate notes will have the right to require us to repurchase such holder’s notes at an offer price in cash equal to 101% of the aggregate principle amount thereof plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of purchase.

Our senior subordinated reset notes mature on September 27, 2009 and bore interest at 12% per annum before September 27, 2003. After September 27, 2003, the senior subordinated reset notes will bear interest at a reset rate between 8% and 17%. The reset rate will be determined by negotiations between GECC and us that began in July 2003 and are continuing. The parties have not reached an agreement on the reset rate and have each engaged investment bankers to determine the reset rate. For the period from September 27, 2003 to June 30, 2004, the Company accrued interest at a rate of 15%, the rate which management believes to be the best estimate of where the negotiations will conclude. To the extent the reset rate exceeds 15%, we will have the option to pay cash interest of 15% and add the additional interest to the balance of the reset notes. Interest is payable semi-annually on April 15 and October 15 of each year commencing April 15, 2003. The senior subordinated reset notes are general unsecured obligations and are guaranteed by all of our domestic subsidiaries. The senior subordinated reset notes are redeemable at our option, in whole or in part, at any time on or after September 27, 2006 at a redemption price equal to par plus accrued and unpaid interest, plus a declining redemption premium. In addition, prior to September 27, 2005, we may, on any one or more occasions, redeem up to 35% of the aggregate principal amount of the senior subordinate reset notes with the net cash proceeds of one or more equity offerings at a redemption price of 100% of the principal amount plus a premium equal to the reset rate and accrued and unpaid interest, provided that the redemption occurs within 90 days of the date of the closing of such equity offering and at least 65% of the senior subordinated reset notes issued remain outstanding immediately after the occurrence of such redemption. Upon the occurrence of a change of control, as defined in the Indenture governing the senior subordinated reset notes, each holder of the senior subordinated reset notes will have the right to require us to repurchase such holder’s notes at an offer price in cash equal to 101% of the aggregate principle amount thereof plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of purchase.

Our debt service requirements consist primarily of interest expense on the term loan portion of our credit facility, the senior secured floating notes and the senior subordinated reset notes and on any future borrowings under the revolving credit portion of our credit facility. Our short-term cash requirements are expected to consist mainly of cash to fund our operations, interest payments on our debt and cash payments for various operating leases and capital expenditures.

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.

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 June 30, 2004 and their expected effect on our liquidity and cash flows in future periods.


			Payments due by Calendar Period
			2004		2007
			To		And		After
	Total		2006		2008		2008
Contractual Obligations:
Long-term debt	$	410,000	$	—	$	175,000	$	235,000
Operating leases		97,771		33,687		19,223		44,861
Other commitments		1,387		1,387		—		—

Total contractual cash obligations	$	509,158	$	35,074	$	194,223	$	279,861

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 June 30, 2004 was approximately $0.8 million in the aggregate.

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 June 30, 2004, $171.0 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 June 30, 2004, approximately 44% of our total revenues were derived from customers outside of the United States, with approximately 43% of our total revenues denominated in currencies other than the United States dollar. For the six months ended June 30, 2004, approximately 42% of our total revenues were derived from customers outside of the United States, with approximately 42% denominated in currencies other than the United States dollar. We estimate that revenue and expenses for the three months ended June 30, 2004 were higher by $4.0 million and $3.6 million, respectively, as a result of changes in exchange rates as compared to the three months ended June 30, 2004. For the six months ended June 30, 2004, revenue and expenses were higher by $8.3 and $6.9, respectively, as compared to the six months ended June 30, 2003 as a result of changes in exchange rates. At June 30, 2004, we had $14.5 million of working capital (current assets minus current liabilities) denominated in foreign currencies. At June 30, 2004, we had no outstanding foreign currency forward contracts. The following table shows the approximate split of these foreign currency exposures by principal currency:


				Foreign Currency Exposure
	at June 30, 2004
				UK			Canadian						Total
	Euro			Pound			Dollar			Other			Exposure
Revenues (six months ended)		38	%		36	%		9	%		17	%		100	%
Expenses (six months ended)		47	%		23	%		5	%		25	%		100	%
Working Capital		1	%		34	%		23	%		42	%		100	%

A hypothetical 10% strengthening of the dollar during the first six months of 2004 versus the foreign currencies in which we have exposure would have reduced revenue by approximately $6.9 million and reduced operating expenses by approximately $5.7 million, resulting in operating income of $1.2 million less than actually reported. Working capital at June 30, 2004 would have been approximately $1.4 million lower than actually reported if we had used this hypothetical stronger dollar. These numbers were estimated using the different hypothetical rate for the entire period and applying it evenly to all non United States dollar transactions and balances.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. As of the end of the period covered by this quarterly report, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934). Based on that evaluation, the Company’s management has concluded that its disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or furnishes pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to the management of the Company as appropriate to allow timely decisions regarding required disclosure.

Internal Controls. Since the date of the evaluation described above, there have not been any significant changes in the Company’s internal control over financial reporting that have materially affected, or are reasonable likely to materially affect, the Company’s internal control.

PART II. OTHER INFORMATION

Item 6. Exhibits and Current Reports

A. Exhibits


Exhibit Number		Description
10.32		Third Amendment to Loan and Security Agreement, dated as of June 4, 2004, by and among GXS Corporation, GXS Holdings, Inc., the financial institutions party thereto and Wells Fargo Foothill.

10.33		Separation Agreement, dated as of May 21, 2004, by and among Global eXchange Services, Inc., GXS Holdings Inc., and James Macioce.

10.34		Separation Agreement, dated as of July 15, 2004, by and among Global eXchange Services, Inc., GXS Holdings Inc., and John Soenksen.

10.35		Employment Agreement dated July 7, 2004, by and among Global eXchange Services, Inc., GXS Holdings Inc., and Robert Kamba.

10.36		Amendment to GXS Investment and Savings Plan

10.37		Amendment to Employment Agreement dated as of August 9, 2004, by and among Global eXchange Services, Inc., GXS Holdings Inc., and Ross Curtis.

10.38		Fourth Amendment to Loan and Security Agreement, dated as of August 3, 2004, by and among GXS Corporation, GXS Holdings, Inc., the financial institutions party thereto and Wells Fargo Foothill.

31.1		Form of Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		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 June 8, 2004 announcing restructuring activities.


	Page No.
Part I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Financial Statements of GXS Corporation
Condensed Consolidated Balance Sheets as of December 31, 2003 and June 30, 2004		3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2004		4
Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2003 and 2004		5
Condensed Consolidated Statement of Stockholder’s Equity (Deficit) for the three and six months ended June 30, 2004		6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2004		7
Notes to Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		36
Item 4. Controls and Procedures		38
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K		39
Signatures		40


		GXS CORPORATION

		By:		/s/ John Soenksen

		Name:		John Soenksen
		Title:		Senior Vice President,
				Chief Financial Officer
				and Treasurer
				August 13, 2004

		By:		/s/ John Duvall

		Name:		John Duvall
		Title:		Controller and
				Chief Accounting Officer
				August 13, 2004


								Foreign
			Additional		Retained			currency			Total
	Common		paid-in		earnings/			translation			stockholder’s
	stock		capital		(deficit)			adjustments			deficit
Balance at December 31, 2003	$	—	$	258,386	$	(477,616	)	$	(5,505	)	$	(224,735	)
Net loss		—		—		(60,301	)		—			(60,301	)
Foreign currency translation adjustments		—		—		—			473			473
Capital contribution by GXS Holdings in connection with acquisition of HAHT		—		15,000		—			—			15,000
Contributions from General Electric Company (note 1)		—		5,695		—			—			5,695

Balance at June 30, 2004	$	—	$	279,081	$	(537,917	)	$	(5,032	)	$	(263,868	)

		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.

B.		Reports on Form 8-K

a)		Form 8-K, as filed on June 8, 2004 announcing restructuring activities.