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 September 30, 2004


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

Commission file number 333-106143

GXS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


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


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

(301) 340-4000

(Registrant’s Telephone Number, Including Area Code)

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

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

Yes [ ] No [X]

As of November 12, 2004, the registrant had 100 outstanding shares of common stock, all of which was held by affiliates of the registrant.

GXS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands of dollars, except per share amounts)


	December 31,			September 30,
	2003 (1)			2004
				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	46,730		$	28,365
Receivables:
Trade		53,069			44,107
Other		4,178			3,677
General Electric Company		5,081			3,770
Deferred income taxes		1,729			318
Prepaid expenses and other assets		8,660			9,718

Total current assets		119,447			89,955
Investment in affiliates		2,929			2,267
Property and equipment, net		132,701			108,674
Deferred income taxes		3,034			2,217
Deferred financing costs		15,886			13,213
Other assets		4,342			4,714
Other acquired intangible assets, net		1,168			11,781
Goodwill		11,929			28,004

Total Assets	$	291,436		$	260,825

Liabilities, Minority Interest and Stockholder’s Equity (Deficit)
Current liabilities:
Trade payables	$	12,139		$	14,808
Deferred income		10,368			15,686
Accrued expenses and other liabilities		63,405			80,724

Total current liabilities		85,912			111,218
Long-term debt		405,520			406,243
Other liabilities		23,929			25,400

Total liabilities		515,361			542,861

Minority interest		810			316

Stockholder’s equity (deficit):
Common stock $1.00 par value, 100 shares authorized, issued and outstanding		—			—
Additional paid-in capital		258,386			279,249
Retained earnings (deficit)		(477,616	)		(557,055	)
Foreign currency translation		(5,505	)		(4,546	)

Total stockholder’s equity (deficit)		(224,735	)		(282,352	)

Total Liabilities, Minority Interest and Stockholder’s Equity (Deficit)	$	291,436		$	260,825

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

See accompanying notes to condensed consolidated financial statements

GXS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)


	Three months ended						Nine months ended
	September 30,						September 30,
	2003			2004			2003			2004
Revenues	$	91,716		$	81,409		$	274,095			247,559
Costs and operating expenses:
Cost of revenues		54,621			46,950			159,990			155,866
Sales and marketing		16,538			13,227			48,638			46,612
General and administrative		11,346			10,363			36,873			40,651
Gain on sale of assets		—			—			(700	)		—
Restructuring and related charges		1,331			6,348			4,464			23,403
Asset impairment charges		6,500			6,509			6,500			6,509

Operating income (loss)		1,380			(1,988	)		18,330			(25,482	)
Other income (expense):
Proportionate share of income (losses) in investee companies and investment write-downs		(112	)		130			(872	)		(596	)
Write-off of deferred financing costs		—			—			(5,548	)		—
Interest income		219			58			711			416
Interest expense		(12,856	)		(15,054	)		(36,449	)		(44,768	)
Other income (expense), net		536			(451	)		1,160			(1,866	)

Loss before income taxes		(10,833	)		(17,305	)		(22,668	)		(72,296	)
Provision (benefit) for income taxes		(3,318	)		1,833			(5,072	)		7,143

Net loss	$	(7,515	)	$	(19,138	)	$	(17,596	)		(79,439	)

See accompanying notes to condensed consolidated financial statements

GXS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)


	Nine months ended September 30,
	2003			2004
Cash flows from operating activities:
Net loss	$	(17,596	)	$	(79,439	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		35,556			42,446
Asset impairment charges		6,500			6,509
Deferred income taxes		(990	)		1,948
Gain on sale of assets		(700	)		—
Write-off of deferred financing costs		5,548			—
Amortization of deferred financing costs and debt discount		2,392			3,525
Minority interest		(609	)		(494	)
Proportionate share of losses in investee companies and investment write-downs		872			596
Changes in operating assets and liabilities, net of effect of business acquisition:
Decrease in receivables		11,788			12,914
Decrease in prepaid expense and other assets		772			59
Increase (decrease) in accounts payable		(5,263	)		2,461
Increase in deferred income		447			2,136
Increase in accrued expenses and other liabilities		5,302			15,463
Other		(2,439	)		868

Net cash provided by operating activities		41,580			8,992

Cash flows from investing activities:
Purchases of property and equipment		(22,841	)		(23,314	)
Proceed from sale of assets		600			—
Purchase of HAHT, net of cash acquired of $4,526		—			(9,724	)

Net cash used in investing activities		(22,241	)		(33,038	)

Cash flows from financing activities:
Repayment of long-term debt		(174,562	)		—
Proceeds from long-term debt issuances		169,750			—
Capital contributions from General Electric Company		12,893			5,863
Payment of financing costs		(12,131	)		(129	)

Net cash provided by (used in) financing activities		(4,050	)		5,734

Effect of exchange rate changes on cash		2,606			(53	)

Increase (decrease) in cash and cash equivalents		17,895			(18,365	)
Cash and cash equivalents, beginning of year		37,333			46,730

Cash and cash equivalents, end of period	$	55,228		$	28,365

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

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

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

See accompanying notes to condensed consolidated financial statements

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

(1) Business and Basis of Presentation

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

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

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

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

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

GE agreed to reimburse the Company for certain defined operating and restructuring costs following the Recapitalization. During the nine months ended September 30, 2003 and 2004, GE reimbursed the Company approximately $12,900 and $5,900 of these costs, respectively. These costs include approximately $800 of costs and expenses incurred with closing a data center in Rockville, Maryland, $5,700 of costs incurred in connection with a services agreement with MCI (formerly called WorldCom), $2,200 for notice pay and severance in connection with a reduction in force and facility exit costs, $1,500 for costs and expenses incurred for rebranding products and implementing an internal systems infrastructure, $1,200 representing payments made on behalf of certain employees in the United Kingdom covered under the GE pension plan, $600 interest subsidy payment, $1,600 representing certain employee bonus payments made following the closing of the Recapitalization, $1,400 representing payments

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

made on behalf of certain employees in the Netherlands covered under the GE pension plan, and approximately $3,800 for certain taxes. These reimbursements have been recorded as contributions to additional paid-in capital.

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

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

(2) Summary of Significant Accounting Policies

(a) Consolidation

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

(b) Revenue Recognition

The Company generates revenues from three principal sources:

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

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

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

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

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

(c) Use of Estimates

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

(d) Reclassification of certain costs

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

(3) Revenues and Receivables

The Company provides e-commerce and network services to various GE businesses in the normal course of business. Sales to GE businesses and affiliates amounted to approximately $9,809 and $8,972 for the three-month periods ended September 30, 2003 and 2004, respectively and $23,560 and $23,467 for the nine-month periods ended September 30, 2003 and 2004, respectively. Trade receivables as of December 31, 2003 and September 30, 2004 resulting from normal trade activity with GE were $5,081 and $3,770, respectively. Pursuant to the terms of the Recapitalization Agreement, GE was required for the two-year period ended September 27, 2004, to maintain its affiliates’ respective business arrangements with the Company on terms and conditions substantially similar to those in effect at the time of the completion of the Recapitalization and to purchase products and services from the Company totaling $30,600 in each of the four calendar quarters ending September 2003 and September 2004. For the twelve-month periods ended September 30, 2003 and September 30, 2004, the Company considered GE to have met the obligation.

While the Company expects GE to continue to be a very important and significant customer, based on current estimates, which are subject to revision, the Company does expect that the revenue in 2005 will decline by at least 50% from the previously contracted annual amount of $30,600. However, there can be no assurance that the decline will not be greater.

The allowance for doubtful accounts and sales allowances at December 31, 2003 was $11,345 and at September 30, 2004 was $11,281.

(4) Other Related Party Transactions

Trade payables as of December 31, 2003 and September 30, 2004 resulting from normal activity with GE were $1,177 and $497, respectively.

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

GE has provided a variety of services to the Company. These services include administering certain employee benefit plans and paying related claims, provision of voice telecommunication services, outsourcing of certain functions, centralized financial and administrative activities involved with transaction processing, centralized purchasing of desk top software and other corporate services. Such services have been charged to the Company as utilized by the Company. Billings for these services, which are included in operating expenses, amounted to $3,691 and $1,512 for the three months ended September 30, 2003 and 2004, respectively, and $10,689 and $4,453 for the nine months ended September 30, 2003 and 2004, respectively. As part of the Recapitalization, GE will continue to provide these services on an as needed basis until the end of 2004. The Company has migrated substantially all of these services to alternative providers, or brought some of the services in-house. The remaining services will be migrated to alternative providers or brought in-house by the end of 2004. Management believes that the amounts paid to GE approximate the cost at which these services could be obtained from a third party.

In connection with the Recapitalization, the Company entered into an agreement with Francisco Partners under which the Company has agreed to pay to Francisco Partners a fee of $2,000 annually plus expenses for financial advisory and consulting services. Francisco Partners has informed the Company of its intent to defer receipt of the fee. The expense related to the management fee amounted to $500 and $1,500 for the three and nine-month periods ended September 30, 2003 and 2004, respectively. The Company reimbursed Francisco Partners for additional expenses of $479, which were incurred during the nine months ended September 30, 2004. As of December 31, 2003 and September 30, 2004, the Company owed Francisco Partners $3,071 and $4,254, respectively.

(5) Long-Term Debt

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


Term loan facility	$	70,000
Senior secured floating rate notes, net of debt discount of $3,757		101,243
Senior subordinated reset notes		235,000

Long-term debt	$	406,243

Credit Facility:

The Company entered into a credit facility on September 27, 2002 which consisted of a $175,000 term loan facility (Term Loan Facility) and a $35,000 revolving credit facility. To consummate the Recapitalization, the Company borrowed $175,000 under the Term Loan Facility and $235,000 under the Senior Subordinated Reset Notes (Reset Notes).

The Company entered into a New Credit Facility on March 21, 2003 consisting of a $70,000 term loan (the New Term Loan Facility) and a $30,000 revolving credit facility (the New Revolving Credit Facility). On March 21, 2003, the Company also issued $105,000 of Senior Secured Floating Rate Notes (Floating Notes) for proceeds of $99,750. These proceeds, cash on hand and the borrowings under the New Term Loan Facility were used to repay borrowings outstanding under the Term Loan Facility. In connection with the refinancing, the Company wrote off $5,548 of deferred financing costs that the Company had incurred in establishing the original Credit Facility.

The ability to borrow under the New Credit Facility is subject to a borrowing base, calculated monthly, at an amount equal to 90.0% of EDI Services Revenue for the immediately preceding six consecutive completed months. The New Term Loan Facility bears interest, at the Company’s option, at either a floating base rate plus 4.0% per annum or floating LIBOR plus 6.0% per annum. The New Revolving Credit Facility bears interest, at the Company’s option, at either a floating base rate plus 2.0% per annum or floating LIBOR plus 4.25% per annum. The base rate and LIBOR rate used to calculate the applicable interest rate on the New Term Loan Facility and the New Revolving

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

Credit Facility may not be less than 4.25% and 2.25%, respectively. Outstanding borrowings under the New Term Loan Facility as of September 30, 2004 bear interest at a base rate of 4.25% plus 4.0%. Interest is payable monthly in arrears for base rate loans and on the last day of selected interest periods, but no later than every three months, for LIBOR rate loans. Borrowings outstanding under the New Term Loan Facility and the New Revolving Credit Facility mature on March 21, 2007.

The New Revolving Credit Facility enables the Company to obtain revolving credit loans and to issue letters of credit for working capital, acquisitions and general corporate purposes. At September 30, 2004, the Company had outstanding letters of credit of $8,900 and available borrowings of $21,100 under the New Revolving Credit Facility. The outstanding letters of credit relate to performance obligations of the Company. The Company pays 0.75% per annum on the unused portion of the New Revolving Credit Facility. In October 2004, the Company borrowed $14,100 under the New Revolving Credit Facility for general corporate purposes. The Company has repaid $4,731 of these borrowings under the New Revolving Credit Facility.

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

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

In addition, the New Credit Facility contains various covenants that restrict the Company from taking various actions and require the Company to achieve and maintain certain financial ratios. In March and June 2004, the Company negotiated amended covenants for 2004 and 2005. As of September 30, 2004, the Company was in compliance with these covenants.

Senior Secured Floating Rate Notes:

On March 21, 2003, the Company issued $105,000 of Floating Notes for proceeds of $99,750. The Floating Notes mature on July 15, 2008 and bear interest at a floating rate based on six-month LIBOR plus 9%, but never less than 12%. The interest rate at September 30, 2004 was 12%. The Floating Notes are secured by second-priority security interests in substantially all of the assets and stock of GXS and its domestic subsidiaries and 66% of the stock of the Company’s material first-tier foreign subsidiaries. In addition, the Floating Notes are guaranteed fully and unconditionally by the Company’s domestic subsidiaries. The debt discount of $5,250 is being amortized over the life of the Floating Notes using the interest method. Amortization for the period from issuance through September 30, 2004 was $1,493. Interest is payable semi-annually in arrears on January 15 and July 15 of each year commencing on July 15, 2003.

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

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

In certain situations, the Company must offer to redeem outstanding Floating Notes with Excess Cash Flows as defined in the Floating Notes Indenture.

In addition to the restrictions on incurrence of indebtedness, the Company may not, and may not permit any of its subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or allow to exist or otherwise directly or indirectly become liable, contingently or otherwise, for any indebtedness secured by any of the assets of the Company or any subsidiary of the Company in an aggregate principal amount, at any time, in excess of two times EDI Services Revenues, as defined, for the most recently ended two fiscal quarter period of the Company.

Senior Subordinated Reset Notes:

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

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

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

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

The Company paid interest of $5,692 and $7,972 for the three months ending September 30, 2003 and 2004, respectively and $24,995 and $31,585 for the nine months ending September 30, 2003 and 2004, respectively.

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

(6) Contingencies

The Company has received a decision from the State of Tennessee’s Department of Revenue upholding a sales tax audit assessment totaling approximately $4,600, including interest and penalties, for the period from May 1, 1994 to December 31, 2000. GE, on behalf of the Company, has filed a complaint in the Tennessee Chancery Court challenging the decision. In addition, the Department of Revenue issued an assessment of $1,100, including interest and penalties, to GE for the period December 1, 1992 to April 30, 1994, when the Company was a division of GE. GE, on behalf of the Company, has filed a complaint in the Tennessee Chancery Court challenging this assessment. The Company does not believe that the resolution of these matters will have a material effect on the financial position of the Company. Pursuant to the Tax Matters Agreement that was entered into in connection with the Recapitalization Agreement, GE has agreed to indemnify the Company against losses associated with this and other tax matters relating to the periods prior to the Recapitalization.

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

(7) Restructuring

During the three and nine months ended September 30, 2003, the Company incurred approximately $1,331 and $4,464, respectively, in restructuring costs related to facility and equipment lease buy-outs, facility exit costs including a restoration obligation, and headcount reductions of approximately 17 people primarily in its data center, engineering, and services organizations. Of these costs, $4,455 were reimbursed by General Electric as part of the Recapitalization Agreement.

On June 8, 2004, the Company announced a restructuring program which includes consolidating development and operations functions, streamlining business processes, making technology investments to lower its worldwide service delivery costs and vacating additional facilities. As a result, during the three and nine months ended September 30, 2004, the Company incurred approximately $6,348 and $23,403, respectively, in restructuring costs. The amount recorded is net of amounts the Company expects to receive from subleasing vacated space at its headquarters. The facility charge was determined by discounting the net future cash obligation of the existing lease less anticipated rental receipts to be received from existing and potential subleases. This requires significant judgments about the length of time the space will remain vacant, anticipated cost escalators and operating costs associated with the leases, the market rate at which the space will be subleased, and broker fees or other costs necessary to market the space. These judgments were based upon independent market analysis and assessment from experienced real estate brokers.

The Company expects to reduce its global employee workforce by approximately 300 positions, or approximately 20 percent, by the end of calendar year 2004 from the level that existed as of June 8, 2004; as of September 30, 2004, approximately 150 positions had been impacted. The Company has revised its estimate of restructuring charges downward and expects to incur up to $5,000 of additional charges during the fourth quarter of 2004 relating to the closing of facilities in Europe.

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

A rollforward of the restructuring activities is as follows:


	Restructuring 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		(4,460	)		(1,640	)		(6,100	)

Balance as of June 30, 2004		2,379			15,394			17,773
Restructuring expense		—			1,779			1,779
Payments and other adjustments		(1,433	)		(4,613	)		(6,046	)

Balance as of September 30, 2004	$	946		$	12,560		$	13,506


	Restructuring Activities
	Facilities
	2003			2004		Total
Balance as of December 31, 2003	$	12,184		$	—	$	12,184
Restructuring expense		—			—		—
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
Restructuring expense		(78	)		4,647		4,569
Payments and other adjustments		(621	)		489		(132	)

Balance as of September 30, 2004	$	10,275		$	5,136	$	15,411

The majority of the severance accruals will be paid by the end of 2005. The facility accruals will be paid in various amounts through 2014.

(8) Acquisition of HAHT

On February 13, 2004, the Company acquired all of the capital stock of HAHT Commerce, Inc. (HAHT) for consideration of $15,001 in cash plus common and preferred shares of GXS Holdings valued at approximately $15,000.

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

HAHT was a provider of demand chain management applications that strategically automated, integrated and optimized order management, product information management (PIM), channel management, business intelligence and customer services between manufacturers, their channel partners and business customers.

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


Cash	$	15,001
Estimated fair value of capital stock issued by GXS Holdings, Inc.		15,000

Total purchase price	$	30,001

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		15,866
Other assets		1,478

	$	30,001

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


	Nine months ended September 30,
	2003			2004
Revenue	$	284,714		$	248,823
Net loss	$	(26,865	)	$	(78,189	)

(9) Asset Impairment

During the nine months ended September 30, 2003 and 2004, the Company recorded impairment charges of $6,500 and $6,509, respectively, related to certain internally developed software for which management has estimated that the future cash flows were less than the carrying value of the software.

(10) Supplemental Condensed Consolidated Financial Information

The Reset Notes and the Floating Notes issued by the Company are guaranteed by each of the Company’s U.S. subsidiaries (the Subsidiary Guarantors). The Reset Notes and the Floating Notes are not, however, guaranteed by the Company’s foreign subsidiaries. The guarantees are full, unconditional and joint and several. The Subsidiary Guarantors are each wholly owned by the Company. The ability of the Company’s subsidiaries to make cash distributions and loans to the Company and Subsidiary Guarantors is not expected to be significantly restricted. The

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
September 30, 2004
(Unaudited)
(In thousands)


						Non-
	Parent			Guarantors		Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—		$	7,128	$	21,237	$	—		$	28,365
Receivables		—			27,335		24,219		—			51,554
Other current assets		24			—		11,980		(1,968	)		10,036
Advances to subsidiaries		262			166,788		120,695		(287,745	)		—

Total current assets		286			201,251		178,131		(289,713	)		89,955
Investments in affiliates		—			1,741		526		—			2,267
Investments in subsidiaries		199,946			47,859		—		(247,805	)		—
Property and equipment, net		235			105,107		3,332		—			108,674
Goodwill, net		—			22,916		5,088		—			28,004
Other noncurrent assets		1,484			23,836		5,142		(11,750	)		18,712
Deferred financing costs		13,213			—		—		—			13,213

	$	215,164		$	402,710	$	192,219	$	(549,268	)	$	260,825

Liabilities, Minority Interest, and Stockholder’s Equity (Deficit)
Current liabilities:
Trade payables	$	1,311		$	11,086	$	2,411	$	—		$	14,808
Other current liabilities		23,332			47,770		27,276		(1,968	)		96,410
Advances from affiliates		66,630			117,231		103,884		(287,745	)		—

Total current liabilities		91,273			176,087		133,571		(289,713	)		111,218
Long-term debt		406,243			—		—		—			406,243
Other liabilities		—			26,677		10,473		(11,750	)		25,400

Total liabilities		497,516			202,764		144,044		(301,463	)		542,861
Minority interest		—			—		316		—			316
Stockholder’s equity (deficit)		(282,352	)		199,946		47,859		(247,805	)		(282,352	)

	$	215,164		$	402,710	$	192,219	$	(549,268	)	$	260,825

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


							Non-
	Parent			Guarantors			Guarantors		Eliminations			Consolidated
Revenues	$	—		$	216,711		$	104,872	$	(47,488	)	$	274,095
Costs and operating expenses		192			207,136			85,661		(47,488	)		245,501
Gains on sale of assets		—			(700	)		—		—			(700	)
Restructuring and related charges		—			4,464			—		—			4,464
Asset impairment charges		—			6,500			—		—			6,500

Operating income (loss)		(192	)		(689	)		19,211		—			18,330
Other income (expense), net		(45,995	)		4,285			712		—			(40,998	)

Income (loss) before income taxes		(46,187	)		3,596			19,923		—			(22,668	)
Provision (benefit) for income taxes		—			(12,670	)		7,598		—			(5,072	)

Income (loss) before equity in income of subsidiaries		(46,187	)		16,266			12,325		—			(17,596	)
Equity in income of subsidiaries		28,591			12,325			—		(40,916	)		—

Net income (loss)		(17,596	)		28,591			12,325		(40,916	)		(17,596	)
Foreign currency translation adjustments		—			—			311		—			311

Comprehensive income (loss)	$	(17,596	)	$	28,591		$	12,636	$	(40,916	)	$	(17,285	)

GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Operations and Comprehensive Income (Loss)
Three months ended September 30, 2004
(Unaudited)
(In thousands)


							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	58,596		$	44,696		$	(21,883	)	$	81,409
Costs and operating expenses		—			60,025			32,398			(21,883	)		70,540
Restructuring and related charges		—			4,432			1,916			—			6,348
Asset impairment charges		—			6,509			—			—			6,509

Operating income (loss)		—			(12,370	)		10,382			—			(1,988	)
Other income (expense), net		(14,864	)		245			(698	)		—			(15,317	)

Income (loss) before income taxes		(14,864	)		(12,125	)		9,684			—			(17,305	)
Provision for income taxes		—			314			1,519			—			1,833

Income (loss) before equity in income (loss) of subsidiaries		(14,864	)		(12,439	)		8,165			—			(19,138	)
Equity in income (loss) of subsidiaries		(4,274	)		8,165			—			(3,891	)		—

Net income (loss)		(19,138	)		(4,274	)		8,165			(3,891	)		(19,138	)
Foreign currency translation adjustments		—			—			486			—			486

Comprehensive income (loss)	$	(19,138	)	$	(4,274	)	$	8,651		$	(3,891	)	$	(18,652	)

GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Operations and Comprehensive Income (Loss)
Nine months ended September 30, 2004
(Unaudited)
(In thousands)


							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	198,431		$	120,071		$	(70,943	)	$	247,559
Costs and operating expenses		—			219,278			94,794			(70,943	)		243,129
Restructuring and related charges		—			15,803			7,600			—			23,403
Asset impairment charges		—			6,509			—			—			6,509

Operating income (loss)		—			(43,159	)		17,677			—			(25,482	)
Other expense, net		(45,591	)		(78	)		(1,145	)		—			(46,814	)

Income (loss) before income taxes		(45,591	)		(43,237	)		16,532			—			(72,296	)
Provision for income taxes		—			1,109			6,034			—			7,143

Income (loss) before equity in income (loss) of subsidiaries		(45,591	)		(44,346	)		10,498			—			(79,439	)
Equity in income (loss) of subsidiaries		(33,848	)		10,498			—			23,350			—

Net income (loss)		(79,439	)		(33,848	)		10,498			23,350			(79,439	)
Foreign currency translation adjustments		—			—			959			—			959

Comprehensive income (loss)	$	(79,439	)	$	(33,848	)	$	11,457		$	23,350		$	(78,480	)

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


							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(17,596	)	$	28,591		$	12,325		$	(40,916	)	$	(17,596	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		—			33,200			2,356			—			35,556
Asset impairment charges		—			6,500			—						6,500
Deferred income taxes		—			(12,127	)		11,137			—			(990	)
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		2,392			—			—			—			2,392
Minority interest		—			—			(609	)		—			(609	)
Equity in net income of subsidiaries		(28,591	)		(12,325	)		—			40,916			—
Changes in operating assets and liabilities, net		42,380			(18,010	)		(12,891	)		—			11,479

Net cash provided by operating activities		4,133			25,129			12,318			—			41,580

Cash flows for investing activities:
Purchases of property and equipment		(83	)		(21,569	)		(1,189	)					(22,841	)
Proceeds from sale of assets		—			600			—			—			600

Net cash used for investing activities		(83	)		(20,969	)		(1,189	)		—			(22,241	)

Cash flows from financing activities:
Net contributions from General Electric Company and affiliates		12,893			—			—			—			12,893
Repayment of long-term debt		(174,562	)		—			—			—			(174,562	)
Proceeds from long-term debt issuances		169,750			—			—			—			169,750
Payment of financing costs		(12,131	)		—			—			—			(12,131	)

Net cash used for financing activities		(4,050	)		—			—			—			(4,050	)

Effect of exchange rate changes on cash		—			—			2,606			—			2,606

Increase in cash and cash equivalents		—			4,160			13,735			—			17,895
Cash and cash equivalents, beginning of year		—			21,940			15,393			—			37,333

Cash and cash equivalents, end of period	$	—		$	26,100		$	29,128		$	—		$	55,228

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


							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(79,439	)	$	(33,848	)	$	10,498		$	23,350		$	(79,439	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			40,465			1,981			—			42,446
Asset impairment charges		—			6,509			—			—			6,509
Deferred income taxes		—			100			1,848			—			1,948
Amortization of deferred financing costs and debt discount		3,525			—			—			—			3,525
Minority interest		—			—			(494	)		—			(494	)
Equity in net income (loss) of subsidiaries		33,848			(10,498	)		—			(23,350	)		—
Changes in operating assets and liabilities, net		36,339			17,719			(19,561	)		—			34,497

Net cash provided by (used in) operating activities		(5,727	)		20,447			(5,728	)		—			8,992

Cash flows for investing activities:
Purchases of property and equipment		(7	)		(22,984	)		(323	)		—			(23,314	)
Purchase of HAHT, net of $4,526 cash acquired		—			(9,724	)		—			—			(9,724	)

Net cash used in investing activities		(7	)		(32,708	)		(323	)		—			(33,038	)

Cash flows from financing activities:
Net contributions from General Electric Company and affiliates		5,863			—			—			—			5,863
Payment of financing costs		(129	)		—			—			—			(129	)

Net cash provided by financing activities		5,734			—			—			—			5,734

Effect of exchange rate changes on cash		—			—			(53	)		—			(53	)

Decrease in cash and cash equivalents		—			(12,261	)		(6,104	)		—			(18,365	)
Cash and cash equivalents, beginning of year		—			19,389			27,341			—			46,730

Cash and cash equivalents, end of period	$	—		$	7,128		$	21,237		$	—		$	28,365

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

The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes, which are included elsewhere in this document.

The following discussion and analysis may contain forward-looking statements, which reflect the expectations, beliefs, plans and objectives of management about future financial performance and/or assumptions underlying our judgments concerning matters discussed below. These statements, accordingly, involve estimates, assumptions, judgments and uncertainties. In particular, this pertains to management’s comments on financial resources, capital spending, the outlook for our business and our potential combination with G International, Inc. Actual results or outcomes may differ materially from those in such forward-looking statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That Could Affect Future Results” in our Annual Report on Form 10-K filed on March 30, 2004.

Overview

We provide software-based products and services which enable businesses to electronically exchange business documents and automate related processes. Our offerings are categorized into three lines of business: EDI Services, Other Business to Business Solutions, and Custom Messaging and Network Solutions. EDI Services are our principal offerings; they enable our customers to exchange business documents in an automated and secure environment. With our EDI Services offerings, we typically provide value added services such as non-repudiation, document translation, enhanced security, format conversions and support of various communication protocols. Other Business to Business Solutions includes our hosted applications and integration software; these solutions facilitate integration of internal information and collaboration between trading partners. Custom Messaging and Network Solutions primarily includes legacy offerings such as custom applications for individual customers. In general, we derive our revenue from:

• recurring transaction processing fees;

• software licensing;

• software maintenance; and

• professional services provided in connection with implementation and use of our products.

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

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

On September 28, 2004, we introduced Trading Grid, a integration services platform developed exclusively to enable and streamline cross-enterprise business processes. Trading Grid offers unique capabilities that ensure synchronized product information, optimize inventory levels and demand forecasts, and ultimately provide true end-to-end business process visibility. We designed and developed Trading Grid to combine the reliability and best practices of our Value-Added Networks, or VANs, with the speed and agility of the Internet. While VANs primarily move data, Trading Grid provides capabilities that get more out of the data and manage overall business processes. Some capabilities of Trading Grid are available today; others will be introduced periodically for the foreseeable future.

Over the past several years, general economic conditions and the proliferation of the Internet and other technological advances in computing and telecommunications have and continue to transform the transaction management industry. Our business has been impacted in several ways including a decline in revenue in each of our three categories of products and services. In addition, competitive pricing dynamics across the industry have adversely impacted our core EDI Services revenues. We responded to these market conditions and corresponding effect on demand for our products and services, by:

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

• consolidating facility space;

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

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

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

On June 8, 2004, we announced a restructuring program which includes consolidating development and operations functions, streamlining business processes, making technology investments to lower our worldwide service delivery costs and vacating additional facilities. We expect to reduce our global employee workforce by approximately 300 positions, or approximately 20 percent, by the end of calendar year 2004 from the level existing as of June 8, 2004; as of September 30, 2004, approximately 150 positions has been impacted. As a result, we incurred approximately $23.4 million in restructuring costs, the majority of which we expect to disburse by the end of 2005. The amount recorded is net of amounts we expect to receive from subleasing vacated space at our headquarters. We calculated the facility charge included in the restructuring costs by discounting the net future cash obligation of the existing lease less anticipated rental receipts to be received from existing and potential subleases. This requires significant judgments about the length of time the space will remain vacant, anticipated cost escalators and operating costs associated with the leases, the market rate at which the space will be subleased, and broker fees or other costs necessary to market the space. These judgments were based upon independent market analysis and assessment from experienced real estate brokers.

We have revised our estimate of restructuring charges downward and expect to incur additional charges of up to $5.0 million during the fourth quarter of 2004. These additional charges relate to the closing of facilities in Europe. The majority of the severance costs will be paid out by the end of 2005 and the balance of the restructuring costs primarily relating to facilities will be paid in somewhat equal amounts through 2014.

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

Pursuant to the terms of the Recapitalization Agreement, General Electric Company was required to maintain its affiliates’ respective business arrangements with us on terms and conditions substantially similar to those in effect at the time of the completion of our recapitalization and to continue to purchase products and services from us totaling $30.6 million in each year of the four calendar quarters ended September 2003 and September 2004. While we expect General Electric to continue to be a very important and significant customer, based on current estimates,

which are subject to revision, we do expect that the revenue in 2005 will decline by at least 50% from the previously contracted annual amount of $30.6 million. However, there can be no assurance that the decline will not be greater.

On February 13, 2004, we acquired all of the capital stock of HAHT Commerce, Inc. for consideration of $15.0 million in cash plus common and preferred shares of GXS Holdings, Inc. valued at approximately $15.0 million. HAHT Commerce is a provider of demand chain management applications that automate, integrate and optimize order management, product information management, channel management, business intelligence and customer services between manufacturers, their channel partners and business customers.

By combining HAHT Commerce’s software with our other products, we are able to offer customers an end-to-end data synchronization solution, including software to integrate data from back-end systems, management tools to publish product information, transaction delivery services to move the information and a means to electronically connect multiple trading partners in a retail supply chain.

On October 13, 2004, our indirect parent, Francisco Partners, L.P., through a majority owned acquisition vehicle, signed a definitive agreement to acquire G International Inc., a business established to own and operate International Business Machine Corporation’s Electronic Data Interchange and Business Exchange Services businesses. By virtue of the ownership of Francisco Partners, we will be under common control with G International. Francisco Partners intends, subject to entering into definitive documentation with various parties, to combine G International with us or one of our subsidiaries within the next six months. On November 1, 2004, we entered into an Employee Services Agreement with G International whereby certain of our executive officers will provide management services to G International and other personnel will provide support services to G International.

On November 8, 2004, we announced a strategic partnership with webMethods, Inc. to jointly resell, develop and market end-to-end business integration solutions. The agreement will allow businesses to collaborate more effectively with their global vendors and partners. Central to the strategic relationship will be the use of webMethods Fabric, a leading suite of business integration software, in our Trading Grid.

Critical Accounting Policies

Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States. Some accounting policies require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any differences may be material to the financial statements. A description of all of our significant accounting policies used is described in Note 2 to our audited consolidated financial statements, included in our Annual Report on Form 10-K dated December 31, 2003. Some of our policies involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our financial statements. A summary of our critical accounting policies can be found in our Annual Report on Form 10-K dated December 31, 2003. If different assumptions or conditions were to prevail or if our estimates and assumptions prove to be incorrect, actual results could be materially different from those reported.

Employment

Employment was 1,536 and 1,401 as of December 31, 2003 and September 30, 2004, respectively. The employment decrease is a result of the restructuring activities that have taken place this year offset partially by employees added as result of the HAHT Commerce acquisition.

Results of Operations

A summary of our revenue by line of business follows:


	Three Months Ended September 30										Nine Months Ended September 30
	2003					2004					2003					2004
	(in thousands of dollars)										(in thousands of dollars)
	$		%			$		%			$		%			$		%
Revenues:
EDI Services		60,377		65.9	%		54,452		66.9	%		180,045		65.7	%		168,011		67.9	%
Other Business to Business Solutions		16,081		17.5	%		13,997		17.2	%		47,214		17.2	%		38,205		15.4	%
Custom Messaging and Network Solutions		15,258		16.6	%		12,960		15.9	%		46,836		17.1	%		41,343		16.7	%

Total revenues		91,716		100.0	%		81,409		100.0	%		274,095		100.0	%		247,559		100.0	%

Three and Nine Months Ended September 30, 2004 Compared to Three and Nine Months Ended September 30, 2003

Revenues. Revenues decreased in both the third quarter and the first nine months of 2004 when compared to the same periods in 2003. Additionally, revenue in the third quarter of 2004 was down $1.0 million when compared to the second quarter of 2004.

EDI Services revenue, our main product and service grouping, declined in both the first nine months and third quarter of 2004 when compared to the same periods in 2003 as we continued to see both contraction of our customer base and lower realized prices in the United States, offset somewhat by strength in our foreign operations. EDI Services revenue was aided in part by the strength of the Euro and British pound relative to the dollar. Third quarter 2004 EDI Services revenue was down $2.3 million when compared to the second quarter of 2004. This decrease was primarily due to customer cancellations and lower prices in all of our regions. We have been experiencing reduced realized price levels in the United States for the past several quarters and expect this trend to continue as we see aggressive competition in the marketplace and we pursue a strategy of offering customers more attractively priced packages of services in exchange for longer term commitments. During the first nine months of 2004, we entered agreements to host several Country Data Pools. Data Pools provide a mechanism for trading partners, primarily in the retail supply chain, to share and synchronize product data for greater efficiencies and increased profitability across global supply chains, through participation in a global organization called the Global Data Synchronization Network, or GDSN. Revenues derived from our relationship with these Data Pools is not expected to significantly impact our operations until 2005 and later years.

Other Business to Business Solutions revenue, which includes software sales and related services and online marketplaces, declined in both the first nine months and third quarter of 2004 when compared to the same periods in 2003. We continue to see customer reluctance to commit to major new systems implementations. In addition, our online marketplaces implemented during the past several years are yielding lower monthly revenues as they mature in terms of usage and number of participants. However, third quarter 2004 revenues were up $2.1 million when compared to the second quarter of 2004 principally attributable to increases in data synchronization solutions and software sales.

Custom Messaging and Network Solutions revenue declined in both the first nine months and third quarter of 2004 when compared to the same periods in 2003, as well as in the third quarter of 2004 when compared to the second quarter of 2004 ($13.0 million versus $13.7 million) as customers continue to migrate away from hosted legacy applications and computer systems to either in-house implementations or alternate solutions. These declines, which are in line with or slightly slower than we had expected, will continue and perhaps be accelerated at times as we reallocate resources towards a consolidated computing infrastructure and focus resources on newer service offerings. Year over year declines in these offerings were mitigated somewhat by favorable impact of foreign currency exchange of $1.5 million for the nine-month period.

The relative strength of foreign currencies caused an increase in revenues of approximately $2.4 million and $10.7 million, respectively, during the three and nine months ended September 30, 2004 compared with the three and nine months ended September 30, 2003.

A summary of our costs and operating expenses follows:


	Three Months Ended September 30				Nine Months Ended September 30
	2003		2004		2003			2004
	(in thousands of dollars)
Costs and operating expenses:
Cost of revenues	$	54,621	$	46,950	$	159,990		$	155,866
Sales and marketing		16,538		13,227		48,638			46,612
General and administrative		11,346		10,363		36,873			40,651
Gain on sale of assets		—		—		(700	)		—
Restructuring and related charges		1,331		6,348		4,464			23,403
Asset impairment charges		6,500		6,509		6,500			6,509

Total costs and operating expenses	$	90,336	$	83,397	$	255,765		$	273,041

Cost of revenues. Cost of revenues decreased by $7.6 million, or 13.9%, to $47.0 million for the three months ended September 30, 2004 from $54.6 million for the three months ended September 30, 2003. For the nine months ended September 30, 2004, cost of revenues decreased by $4.1 million, or 2.6%, to $155.9 million from $160.0 million for the nine months ended September 30, 2003. The decreases in cost of revenues for the three and nine-months periods are primarily driven by lower depreciation and amortization expense, decreased royalty payments as a result of lower software sales, and decreases in compensation and related employee expenses as we continue to move forward with our transformation plan.

Sales and marketing. Sales and marketing expense decreased by $3.3 million, or 20.0%, to $13.2 million for the three months ended September 30, 2004 from $16.5 million for the three months ended September 30, 2003. Sales and marketing expense decreased $2.0 million, or 4.1%, to $46.6 million for the nine months ended September 30, 2004 from $48.6 million for the nine months ended September 30, 2003. The decrease is primarily due to decreases in compensation and related employee expenses as a result of restructuring actions that took place during 2003 and 2004 and lower commission expense in line with the decrease in revenue. These decreases are somewhat offset by increases in advertising and sales promotion activities as we strive to enhance our brand awareness in the marketplace, as well as expenses associated with HAHT Commerce.

General and administrative. General and administrative expenses decreased $0.9 million, or 8.0%, to $10.4 million for the three months ended September 30, 2004 from $11.3 million for the three months ended September 30, 2003. General and administrative expenses increased $3.8 million, or 10.3%, to $40.7 million for the nine months ended September 30, 2004 from $36.9 million for the nine months ended September 30, 2003. The increase for the nine months ended September 30, 2004 was primarily driven by an increase in consulting expenses and professional fees during the first six months of 2004. Consulting expenses and professional fees were unusually high, approximately $2.7 million for the first six months of 2004. Consulting expenses and professional fees included fees paid to management consultants engaged in December 2003 to work together with our management team to solidify our business strategy and lay a foundation for our cost transformation actions. These engagements were substantially completed by the end of the second quarter; as a result, general and administrative expenses decreased during the three months ended September 30, 2004.

The weakening dollar caused cost of revenues, sales and marketing and general and administrative expenses to be approximately $1.5 million and $8.4 million higher, respectively, during the three and nine months ended September 30, 2004 compared to the three and nine months ended September 30, 2003.

Restructuring and related charges. Restructuring and related charges were $23.4 million for the nine months ended September 30, 2004. The majority of the charges relate to a restructuring program announced on June 8, 2004 which includes facility exit costs, consolidating development and operations functions, streamlining business processes and making technology investments to lower our worldwide service delivery costs. We expect to reduce our global workforce by the end of calendar year 2004 by approximately 300 positions, or approximately 20 percent, from the level that existed as of June 8, 2004; as of September 30, 2004, approximately 150 positions had been impacted. We also expect to shift some employment to lower cost countries, particularly India and the Philippines.

Restructuring and related charges were $4.5 million for the nine months ended September 30, 2003. The 2003 charges related to facility and equipment lease buy-outs, facility exit costs including a restoration obligation, and headcount reductions primarily in our operations, engineering and service organizations. Substantially all of these costs were reimbursed by General Electric as part of the September 2002 recapitalization agreement.

We have revised our estimate of restructuring charges downward and expect to record additional restructuring charges of up to $5.0 million during the fourth quarter of 2004 associated with the closing of facilities in Europe. The majority of these costs will be paid out by the end of 2005 and the balance of these costs will be paid in somewhat equal amounts through 2014.

Write-off of deferred financing costs. Deferred financing costs of $5.5 million were written-off in March 2003. The write-off was related to the refinancing of our previous senior term loan.

Interest expense. Interest expense of $15.1 million and $44.8 million for the three and nine months ended September 30, 2004, respectively, and $12.9 million and $36.4 million for the three and nine months ended September 30, 2003, respectively, was primarily driven by interest on our long-term debt issued in connection with the recapitalization. The increase over the prior year relates to the increase in the interest rate on our $235.0 million senior subordinated reset notes from 12% to 15% and increased interest and higher amortization of deferred financing costs related to the March 2003 issuance of our $105.0 million of senior secured floating rate notes and our new credit facility.

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

Other income (expense), net. Other expense of $0.5 million for the three months ended September 30, 2004, was primarily driven by realized losses on foreign currency transactions. Other expense was $1.9 million for the nine months ended September 30, 2004 which included $0.8 million in fees relating to interest rate determination for our senior subordinated reset notes and $1.6 million of realized losses on foreign currency transactions, offset partially by $0.5 million of minority interest income.

Other income was $0.5 million for the three months ended September 30, 2003. Other income was $1.2 million for the nine months ended September 30, 2003, which included $0.3 million of realized gains on foreign currency transactions and $0.6 million of minority interest income.

Provision for income taxes. Income tax expense was $1.8 million for the three months ended September 30, 2004 compared to income tax benefit of $3.3 million for the three months ended September 30, 2003. Income tax expense was $7.1 million for the nine months ended September 30, 2004 compared to income tax benefit of $5.1 million for the nine months ended September 30, 2003. Our tax rate for the nine months ended September 30, 2004 differs from the federal statutory rate of 35% principally as a result of foreign taxes paid or accrued in jurisdictions where we are profitable and the effect of losses both foreign and domestic for which no benefit has been recognized. Our tax rate for the nine months ended September 30, 2003 differed from the federal statutory rate of 35%

principally as result of state income taxes and the effect of losses in foreign jurisdictions for which no income tax benefits have been recognized.

Net loss. Net loss increased by $11.6 million to a net loss of $19.1 million for the three months ended September 30, 2004 compared to a net loss of $7.5 million for the three months ended September 30, 2003. Net loss increased by $61.8 million to a net loss of $79.4 million for the nine months ended September 30, 2004 compared to a net loss of $17.6 million for the nine months ended September 30, 2003. The increase in net loss of $11.6 million and $61.8 million for the three and nine months ended September 30, 2004, respectively, was a result of the matters discussed above.

Liquidity and Capital Resources

Sources and Uses of Cash

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


	Nine months ended September 30,
	2003			2004
	(in thousands of dollars)
Cash flows from operating activities	$	41,580		$	8,992
Cash flows from investing activities		(22,241	)		(33,038	)
Cash flows from financing activities		(4,050	)		5,734
Effect of exchange rate changes on cash		2,606			(53	)

Net increase (decrease) in cash and cash equivalents	$	17,895		$	(18,365	)

Cash and cash equivalents, end of period	$	55,228		$	28,365

Net cash provided by operating activities was $9.0 million for the nine months ended September 30, 2004 compared net cash provided by operating activities of $41.6 million for the nine months ended September 30, 2003. The decrease in net cash provided by operating activities was mainly attributable to the $61.8 million increase in net loss offset to some extent by increases in deferred income and accrued expenses.

Accrued expenses and other liabilities include $28.9 million of restructuring charges. The majority of these costs will be paid out by the end of 2005 with the balance being paid in somewhat equal amounts through 2014. In addition, we have revised our estimate of restructuring charges downward and expect to record additional charges of up to $5.0 million during the balance of 2004. The majority of these costs will paid out by the end of 2005 with the balance being paid in somewhat equal amounts through 2014.

Net cash used in investing activities was $33.0 million for the nine months ended September 30, 2004 compared to $22.2 million for the nine months ended September 30, 2003. Net cash used in investing activities for the nine months ended September 30, 2004 and September 30, 2003 included capital expenditures of $23.3 million and $22.8 million, respectively, for property, software and equipment. Net cash used in investing activities for the nine months ended September 30, 2004 also included $15.0 million for the purchase of HAHT Commerce, net of $4.5 million of cash acquired. Capital expenditures for the first nine months of 2003 and 2004 include $15.7 million and $11.9 million, respectively, of costs capitalized for the development of software for internal use.

Net cash provided by financing activities was $5.7 million for the nine months ended September 30, 2004 compared to net cash used in financing activities of $4.1 million for the nine months ended September 30, 2003. Cash provided by financing activities for the nine months ended September 30, 2004 consisted primarily of a $5.9 million

reimbursement by General Electric pursuant to the recapitalization agreement, as discussed in note 1 of our financial statements included herein. Cash usage for the nine months ended September 30, 2003 was driven by $12.1 million of professional and banking fees related to our debt refinancing, and cash of $174.6 million used to retire borrowings under our previous term loan, offset by $169.8 million from the refinancing and a $12.9 million reimbursement by General Electric pursuant to the recapitalization agreement.

Our principal sources of liquidity have been available cash and cash flows from operations. We expect our principal uses of cash to be working capital, capital expenditures and debt service. As of September 30, 2004, we had outstanding debt of approximately $406.2 million, which consisted of $235.0 million of outstanding senior subordinated reset notes, $101.2 million of outstanding senior secured floating rate notes and a $70.0 million senior term loan. The senior secured floating rate notes are net of a debt discount of $3.8 million.

Borrowings under our revolving credit facility bear interest, at our option, at either a floating base rate plus 2.00% per annum or floating LIBOR plus 4.25% per annum. Borrowings under our senior term loans bear interest, at our option, at either the base rate plus 4.00% per annum or LIBOR plus 6.00% per annum. The base rate and LIBOR rate used to calculate the applicable interest rates on revolving credit loans and senior term loans may not be less than 4.25% and 2.25%, respectively. Interest is payable monthly in arrears for base rate loans and on the last day of selected interest periods, but no later than every three months for LIBOR rate loans. The maturity date of the revolving credit facility and the senior term loan are March 21, 2007, at which time all principal is due and payable.

At September 30, 2004, we had $70.0 million outstanding under the senior term loan facility. Borrowings outstanding under the facility at September 30, 2004 bear interest at 8.25%. In addition, as of the date of this report, we have approximately $8.9 million of letters of credit outstanding under our revolving credit facility. The amount that can be borrowed under the revolving credit facility is limited to a percentage of EDI revenues as defined in the agreement governing the credit facility, and is subject to our compliance with financial covenants and other customary conditions, including that no event of default under the facility has occurred and is continuing. Available borrowings under our revolving credit facility were $21.1 million at September 30, 2004. In October 2004, we borrowed $14.1 million under the New Revolving Credit Facility for general corporate purposes. We have repaid $4.7 million of these borrowings under the New Revolving Credit Facility.

Our obligations under our credit facility are guaranteed by all of our existing and future U.S. subsidiaries and are also secured by first-priority liens on substantially all of our and the guarantors’ assets and property, including a pledge of 100% of the capital stock or other equity interests of our existing and future U.S. subsidiaries and 66% of the capital stock or other equity interests of our material first-tier foreign subsidiaries. We are also subject to a negative pledge on all of our assets and the assets of our subsidiaries.

The agreements governing our outstanding debt impose limitations on our ability to, among other things, incur additional indebtedness including capital leases, incur liens, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, issue preferred stock, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. The indentures governing our notes contain similar limitations. In addition, the indenture governing our senior secured floating rate notes limits our ability to maintain secured indebtedness in excess of certain limits related to our EDI services revenue. Our credit facility, as amended, also requires that we meet and maintain certain financial ratios and tests, including an annual capital expenditures limitation, minimum consolidated trailing twelve month EBITDA and a maximum consolidated leverage ratio (total senior debt to EBITDA). Our ability to comply with these covenants and to meet and maintain such financial ratios and tests is material to the success of our business and may be affected by events beyond our control. Our failure to comply with these covenants could create a default under the credit facility, the indenture governing the floating notes, and the indenture governing the reset notes. In March and June 2004, we negotiated amended covenants under our credit facility for 2004 and 2005. The amended EBITDA covenant has a requirement of $62.5 million for 2004, $75.0 million for the twelve-month period ended March 31, 2005 and $85.0 million for the twelve-month periods ending June 30, September 30 and December 31, 2005, a minimum consolidated leverage ratio requirement of 3.30 to 1.0 for 2004, 2.80 to 1.0 for the twelve-month period ended March 31, 2005 and 2.40 to 1.0 for the twelve-month periods ending June 30, September 30 and December 31, 2005. Our ability to comply with each of the EBITDA and consolidated leverage ratio covenants will primarily depend on the performance of our business in future periods and, specifically, our ability to generate revenues and control operating costs. Under our credit facility, EBITDA is calculated each quarter for the latest twelve-month period and is adjusted to exclude specific costs and expenses.

The excluded costs and expenses include fees related to the recapitalization, non-cash charges, restructuring charges, costs reimbursed by General Electric, and other adjustments. As defined under our credit facility, EBITDA for the three and twelve-months periods ended September 30, 2004 is equal to $23.3 million and $75.0 million, respectively. For the twelve-month period ended September 30, 2004, our consolidated leverage ratio was equal to 2.50 to 1.0, based on senior debt of $183.9 million and EBITDA of $75.0 million. EBITDA is not a presentation made in accordance with accounting principles generally accepted in the United States. Accordingly, EBITDA is not intended to be used as an alternative to net income or any other measure of performance in accordance with accounting principles generally accepted in the United States, and EBITDA is not necessarily an indication of whether we will be able to fund our cash requirements. The credit facility also requires that we limit our capital expenditures to $42.5 million during each fiscal year. For the year ended December 31, 2003, our capital expenditures totaled $29.4 million. We expect that we will be able to comply with this covenant in future periods.

The senior secured floating rate notes will mature on July 15, 2008 and bear interest at a floating rate based on six-month LIBOR plus 9%, but never less than 12%. The interest rate at September 30, 2004 was 12%. The senior secured floating rate notes are secured by second-priority security interests in substantially all of our assets and our domestic subsidiaries’ and 66% of the stock of our material foreign subsidiaries. In addition, the senior secured floating rate notes are guaranteed fully and unconditionally by our domestic subsidiaries. Interest is payable semi-annually in arrears on January 15 and July 15 of each year commencing on July 15, 2003.

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

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

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

Although we do not have an extensive history of acquisitions, we intend to continue to pursue acquisition opportunities. We expect to finance any future acquisitions using cash, capital stock, notes and/or assumption of indebtedness. However, the restrictions imposed on us by the agreements governing our debt outstanding at the time may affect this strategy. In addition, to fully implement our growth strategy and meet the resulting capital requirements, we may be required to request increases in amounts available under our revolving credit facility, enter into new credit facilities, issue new debt securities or raise additional capital through equity financing. We may not be able to obtain an increase in the amounts available under our credit facility, if requested, on satisfactory terms and we may not be able to successfully complete any future bank financing or other debt or equity financing on satisfactory terms, if at all. As a result, our ability to make future acquisitions is uncertain. As discussed previously, we have recently completed the acquisitions of Celarix, Inc. and HAHT Commerce.

Based upon our current operations and historical results, we believe that our cash flow from operations, together with available cash and borrowings under our revolving credit facility, will be adequate to meet our anticipated requirements for working capital, capital expenditures, lease payments and scheduled interest payments for the next twelve months. To the extent additional funding is required, we expect to seek additional financing in the public or private debt or equity capital markets. We cannot be certain that we will be successful in obtaining additional financing, if needed, or that, if available, any additional financing will be on terms favorable to us. Neither Francisco Partners nor General Electric is obligated to provide financing to us as General Electric and its affiliates have in the past. If we are unable to obtain the capital we require to implement our business strategy, or to obtain the capital we will require on acceptable terms or in a timely manner, we would attempt to take appropriate responsive actions to tailor our activities to our available financing, including revising our business strategy and future growth plans to accommodate the amount of financing available to us.

Contractual Obligations and Other Commitments

Our principal contractual obligations and commercial commitments include our existing senior term loan and revolving credit facility, the senior subordinated reset notes, the senior secured floating rate notes, operating leases and other commitments principally relating to multi-year software maintenance agreements. The following tables summarize these obligations at September 30, 2004 and their expected effect on our liquidity and cash flows in future periods.


			Payments due by Calendar Period
			2004		2007
			To		And		After
	Total		2006		2008		2008
Contractual Obligations:
Long-term debt	$	410,000	$	—	$	175,000	$	235,000
Operating leases		94,599		30,367		19,372		44,860
Other commitments		1,950		1,829		121		—

Total contractual cash obligations	$	506,549	$	32,196	$	194,493	$	279,860

Minority shareholders in one of our consolidated subsidiaries have rights, in certain circumstances, to require us to purchase some or all of their interests in this subsidiary at a specified price. Management estimates that this price generally equates to the fair market value of the holders’ interests and that the potential obligation as of September 30, 2004 was approximately $0.6 million in the aggregate.

ITEM 3. Quantitative and Qualitative Disclosures Regarding Market Risk

We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in interest rates and foreign currency exchange rates that could impact our financial condition, results of operations and cash flows. We have managed our exposure to these and other market risks through regular operating and financing activities. We may use derivative financial instruments on a limited basis as additional risk management tools and not for speculative investment purposes.

Interest Rate Risk. We are exposed to interest rate risk as a result of our outstanding debt obligations. We plan to manage this risk through the use of a combination of fixed and variable rate debt. As of September 30, 2004, $171.2 million of our debt bears interest at variable rates. The interest rate on our $235.0 million senior subordinated reset notes was to be reset on September 27, 2003 for the balance of their six-year term. We are currently in discussions with GECC, the holder of the senior subordinated reset notes, concerning the interest rate on the senior subordinated reset notes. The maximum rate to which the interest rate may be reset is 17%, with amounts above 15% payable in kind at our option. Because the interest rate on the senior subordinated reset notes will reset to a market rate, we believe that the carrying value of the senior subordinated reset notes will approximate fair value. A one-point change in the interest rates on our variable-rate long-term debt would affect interest expense by approximately $4.1 million on an annual basis. We believe the interest rates on our variable-rate long-term debt reflect market rates and, therefore, we believe the carrying value of our variable-rate long-term debt approximates fair value.

Foreign Currency Risk. We are exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of our foreign subsidiaries, intercompany loans with foreign subsidiaries and transactions denominated in foreign currencies. Our objective is to minimize our exposure to these risks through our normal operating activities and, where appropriate, through foreign currency forward contracts. For the three months ended September 30, 2004, approximately 44% of our total revenues were derived from customers outside of the United States, with approximately 42% of our total revenues denominated in currencies other than the United States dollar. For the nine months ended September 30, 2004, approximately 42% of our total revenues were derived from customers outside of the United States, with approximately 42% denominated in currencies other than the United States dollar. We estimate that revenue and expenses for the three months ended September 30, 2004 were higher by $2.4 million and $1.5 million, respectively, as a result of changes in exchange rates as compared to the three months ended September 30, 2003. For the nine months ended September 30, 2004, revenue and expenses were higher by $10.7 million and $8.4 million, respectively, as compared to the nine months ended September 30, 2003 as a result of changes in exchange rates. At September 30, 2004, we had $34.5 million of working capital (current assets minus current liabilities) denominated in foreign currencies. At September 30, 2004, we had no outstanding foreign currency forward contracts. The following table shows the approximate split of these foreign currency exposures by principal currency:


	Foreign Currency Exposure
	at September 30, 2004
				UK			Canadian						Total
	Euro			Pound			Dollar			Other			Exposure
Revenues (nine months ended)		37	%		37	%		9	%		17	%		100	%
Expenses (nine months ended)		46	%		24	%		4	%		26	%		100	%
Working Capital		35	%		36	%		13	%		16	%		100	%

A hypothetical 10% strengthening of the dollar during the first nine months of 2004 versus the foreign currencies in which we have exposure would have reduced revenue by approximately $10.3 million and reduced operating expenses by approximately $8.2 million, resulting in operating income of $2.1 million less than actually reported. Working capital at September 30, 2004 would have been approximately $3.5 million lower than actually reported if we had used this hypothetical stronger dollar. These numbers were estimated using the different hypothetical rate for the entire period and applying it evenly to all non United States dollar transactions and balances.

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.


	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 September 30, 2004		3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2004		4
Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2003 and 2004		5
Condensed Consolidated Statement of Stockholder’s Equity (Deficit) for the nine months ended September 30, 2004		6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 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		26
Item 3. Quantitative and Qualitative Disclosures About Market Risk		31
Item 4. Controls and Procedures		39
Part II. Other Information
Item 6. Exhibits		40
Signatures		41


Exhibit Number		Description
10.39		Employment Agreement dated August 26, 2004, by and among Global eXchange Services, Inc., GXS Holdings Inc., and Louis Salamone, Jr.

10.40		Employee Services Agreement, dated as of November 1, 2004, by and between GXS Corporation and G International, Inc.

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

31.2		Form of Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer


		GXS CORPORATION

		By:		/s/ Louis Salamone, Jr.

		Name:		Louis Salamone, Jr.
		Title:		Senior Vice President, Chief Financial Officer and Treasurer
				November 12, 2004

		By:		/s/ John Duvall

		Name:		John Duvall
		Title:		Controller and Chief Accounting Officer
				November 12, 2004


	Three months ended September 30,						Nine months ended September 30,
	2003			2004			2003			2004
Net loss	$	(7,515	)	$	(19,138	)	$	(17,596	)	$	(79,439	)
Foreign currency translation adjustments		389			486			311			959

Comprehensive loss	$	(7,126	)	$	(18,652	)	$	(17,285	)	$	(78,480	)


								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		—		—		(79,439	)		—			(79,439	)
Foreign currency translation adjustments		—		—		—			959			959
Capital contribution by GXS Holdings in connection with acquisition of HAHT		—		15,000		—			—			15,000
Contributions from General Electric Company (note 1)		—		5,863		—			—			5,863

Balance at September 30, 2004	$	—	$	279,249	$	(557,055	)	$	(4,546	)	$	(282,352	)

		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.

	•		recurring transaction processing fees;

	•		software licensing;

	•		software maintenance; and

	•		professional services provided in connection with implementation and use of our products.

	•		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.