10-K 1 w07230e10vk.htm GXS CORPORATION FORM 10-K e10vk
 

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended December 31, 2004
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-106143
GXS CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware
  35-2181508
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
     
100 Edison Park Drive Gaithersburg, MD   20878
(Address of principal executive offices)
  (Zip Code)
Registrant’s Telephone Number, including area code:
(301) 340-4000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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 o          No þ
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K     o
Indicate by a check mark whether the registrant is an accelerated filer (as determined in Exchange Act Rule 12b-2).     Yes o          No þ
As of March 31, 2005, the Registrant had 100 outstanding shares of common stock, significantly all of which was held by affiliates of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
 
 


 

TABLE OF CONTENTS
             
        Page No.
         
FORWARD-LOOKING STATEMENTS
PART I
ITEM 1.
  BUSINESS     1  
    Overview     1  
    Recent Acquisitions     1  
    Our Industry     2  
    Our Business Model     3  
    Our Business Strategy     4  
    Our Product Solutions     4  
      Transact Solutions     5  
      Monitor Solutions     6  
      Synchronize Solutions     7  
      Collaborate Solutions     8  
    Advantage Services     8  
      Professional Services     8  
      Community Link Services     9  
      Business Process Outsourcing     9  
    Legacy Solutions     9  
    Customers     9  
    International Operations     9  
    Marketing and Sales     10  
    Customer Service     10  
    Competition     10  
    Data Processing Infrastructure     11  
    Product Development     11  
    Alliances and Joint Ventures     12  
    Intellectual Property     13  
    Employees     14  
ITEM 2.
  PROPERTIES     14  
ITEM 3.
  LEGAL PROCEEDINGS     14  
ITEM 4.
  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     14  


 

             
        Page No.
         
 
PART II
ITEM 5.
  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES     15  
ITEM 6.
  SELECTED FINANCIAL DATA     15  
ITEM 7.
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     16  
    Overview     16  
    Recent Trends and Cost-Reduction Initiatives     18  
    Impact of Acquisitions     20  
    Critical Accounting Policies     20  
    Results of Operations     23  
    Liquidity and Capital Resources     29  
    Contractual Obligations and Other Commitments     33  
    Off-Balance Sheet Arrangements     33  
    Recent Accounting Pronouncements     33  
    Factors That Could Affect Future Results     34  
ITEM 7A.
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     46  
    Interest Rate Risk     46  
    Foreign Currency Risk     46  
    Inflation     46  
ITEM 8.
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     47  
ITEM 9.
  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     102  
ITEM 9A.
  CONTROLS AND PROCEDURES     102  
ITEM 9B.
  OTHER INFORMATION     102  
 
PART III
ITEM 10.
  DIRECTORS AND EXECUTIVE OFFICERS     103  
ITEM 11.
  EXECUTIVE COMPENSATION     106  
ITEM 12.
  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     112  
ITEM 13.
  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS     114  
ITEM 14.
  PRINCIPAL ACCOUNTING FEES AND SERVICES     118  
 
PART IV
ITEM 15.
  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     119  
    SIGNATURES     124  


 

The following annual report contains information about GXS Corporation. You should read this entire report, including the information set forth in the “Factors That Could Affect Future Results” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 34. In this report, “we,” “our” and “us” refers to GXS Corporation and its subsidiaries, unless the context otherwise requires.
While most of the information provided in this annual report is historical, some of the comments made are forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate, along with management’s beliefs and assumptions. They are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are typically identified by words such as “believe,” “anticipate,” “expect,” “plan,” intend,” “estimate,” “may,” “will” and similar expressions. As you read and consider the information in this report, you should understand that these statements may differ materially from actual outcomes and results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors that Could Affect Future Results — Special Note Regarding Forward-Looking Statements.”
Item 1.     Business
Overview
We are a leading provider of on-demand supply chain management solutions to over 30,000 customers worldwide, including over 50% of the Fortune 500 corporations. We provide mission-critical solutions that connect our customers, large and small, continuously to their supply chain partners around the world. Our solutions perform an extensive range of critical supply chain management functions, including the exchange of information relating to trade orders, invoicing and payment instructions, synchronization of product and price information, optimization of inventory levels and demand forecasting. Our customers use our solutions to automate complex supply chain relationships with their networks of business partners, and to reduce the cost and complexity of supply chain operations. We operate a highly reliable, secure global network services platform that connects trading partners 24 hours a day, 7 days a week in approximately 25 countries around the world. We have been pioneers in on-demand supply chain management solutions for 20 years, and have been a leading provider in the technology industry since the late 1960s.
We were incorporated as a Delaware corporation in 2002 to hold the GXS business in connection with the recapitalization pursuant to which Francisco Partners, L.P. became our majority stockholder.
Recent Acquisitions
G International. On November 1, 2004, our indirect parent, Francisco Partners, through a majority-owned acquisition vehicle, acquired G International Inc., a business established to own and operate International Business Machine Corporation’s Electronic Data Interchange and Business Exchange Services businesses. In January 2005 we entered into a letter agreement to acquire the sole stockholder of G International. The consideration to be paid by us for G International will be adjusted from $135.0 million based on the indebtedness and working capital of G International, as well as the expenses incurred by G International and its affiliates in connection with the transaction. The form of consideration will be mutually agreed upon by the parties.
The acquisition of G International is subject to satisfaction of several conditions, including:
  •  completion of definitive documentation;
 
  •  receipt of financing; and
 
  •  receipt of third-party consents and approvals.
We believe that the acquisition of G International will:
  •  broaden our customer base to include over 75% of the Fortune 500 companies;
 
  •  position us to offer a broad range of our existing solutions to G International’s customers;


 

  •  reduce our costs and the costs to customers of some of our solutions; and
 
  •  strengthen our competitive position in some industries, including financial services and consumer products.
HAHT Commerce. On February 13, 2004, we completed the acquisition of HAHT Commerce, Inc. We acquired all of the capital stock of HAHT Commerce through a merger of an indirect wholly owned subsidiary with HAHT Commerce for consideration of approximately $30.0 million, consisting of $15.0 million in cash plus common and preferred shares of GXS Holdings valued at approximately $15.0 million. HAHT Commerce is a provider of on-demand supply 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.
Celarix. On June 3, 2003, we acquired substantially all of the assets of Celarix, Inc. related to its logistics integration and visibility solutions business for an aggregate value of approximately $2.0 million in preferred and common shares of GXS Holdings, Inc. and assumed liabilities. The solutions acquired from Celarix help organizations to connect to logistics trading partners and retrieve, use and share shipment status information throughout their supply chains.
We intend to continue to selectively pursue acquisitions of companies with complementary products and technologies to enhance our ability to provide comprehensive solutions to our customers and to expand our business.
Our Industry
We operate in the on-demand supply chain management services industry. On-demand supply chain management describes the systems used for communicating information related to the exchange of goods and services among trading partners. Electronic data interchange, or EDI, which originated in the 1980s and permits the electronic exchange of documents across disparate computing platforms, applications and communications protocols, is the cornerstone of this industry. As the industry continues to evolve, it is moving from EDI into new integration services technology.
We believe that the industry landscape is rapidly evolving in a way that provides many opportunities for us. Traditional Value-Added Network, or VAN, providers are leveraging their connected communities by injecting new technology to provide a higher level of process automation. Businesses are seeking intermediaries to help streamline business processes dependant on highly automated trading partner relationships, such as inventory management, invoicing and payment, order collaboration, and price and promotion management.
Integration service providers such as our company are developing technology to help customers reduce the complexity of process automation with trading partners. Reducing complexity drives significant customer savings. Today, integration service providers deliver a broad range of capabilities in addition to traditional EDI, including data exchange and communications, trading partner management, and integration and application services that help businesses automate and optimize the sharing of data and business processes with their business partners. Businesses enlist the assistance of an integration service provider to speed the enablement of global trading partners, offload difficult integration functions, reduce overall costs of business to business operations, and gain faster access to new community solutions. Supply chain system management is complex. We estimate that 20% of all orders are filled imperfectly and up to 60% of all invoices have errors. In addition, setting up these systems requires significant initial capital investment as well as annual maintenance and higher labor costs. By outsourcing these functions through an integration service provider, a customer can achieve scale with limited network and technological investment while reducing errors and improving overall data quality.
The evolution and globalization of supply networks places increasing demand on on-demand supply chain management services vendors. Technology vendors increasingly need to have a global presence and must offer high-availability, near real-time trading networks. To assure security and reliability, vendors need to have a credible track record, scale and experience to compete for customer accounts. Those with large installed

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trading partner bases and infrastructure will have a natural advantage in assisting customers to evolve their supply network technologies.
Within our industry, we believe that there are five main categories of services, including:
  Data Exchange. Data Exchange services provide safe, reliable electronic document and transaction delivery between trading partners and their application systems. Integration service providers are intermediaries that mediate, transform and manage various protocols, such as Internet Protocol (IP) and document formats (such as EDI ANSI X12, EDIFACT or RosettaNet). Ongoing penetration of EDI into small and medium businesses is expected to be the main driver of growth in the volume of EDI transactions.
 
  Trading Partner Management. Integration service providers help businesses identify, contact, register, and manage their business partners around the world. As businesses increasingly source and sell products and components globally, the need for managing relationships with businesses of all sizes in all locations will be increasingly necessary.
 
  Integration Services. Integration services refer to functionality that facilitates interoperability between business partners, such as data transformation, monitoring, intelligent routing, and business process management. With the increasing complexity from new protocols, message formats and standards, the need for hosted integration services will continue to increase.
 
  Data Synchronization. The sharing of product, service, location, price and promotion information is at the core of trading partner collaboration. Keeping data aligned internally and externally is a significant challenge for diverse supply chains. Data synchronization includes infrastructure and services that facilitate synchronization among trading partners’ application systems.
 
  Application Services. Application services include document or industry-specific functionality that leverages data exchange, trading partner management and integration services to provide increased visibility, control and collaboration around specific business processes.
As an industry leader, we believe that we are well-positioned to address each of these areas. Beyond our basic transact services for traditional and Internet-based data exchange, our value-added monitoring, synchronize and collaborate solutions allow customers to effectively optimize and manage critical chain functions, including supply and demand planning, order management, customer service, shipment visibility, electronic invoicing, warranty verification, product management, order collaboration and inventory visibility, in a cost-effective and efficient manner.
Our Business Model
We employ a “hub and spoke” model for our on-demand supply chain management services. This model entails offering on-demand supply chain management solutions to large industry-leading companies, or hubs, and their community of trading partners, or spokes.
Hubs. Companies in this category tend to be global, multi-divisional, decentralized organizations with complex computing environments and sophisticated enterprise applications software. These large companies often recommend or require their trading partners to implement integration services as the primary method of communicating commercial information and business documents. Often these integration service initiatives

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coincide with a variety of extended enterprise and industry-specific initiatives to automate electronic trading of partner communications, including quick response, just-in-time manufacturing, vendor-managed inventory and efficient consumer response. Hub companies, as part of their integration service initiatives, will typically recommend a specific integration service provider and software to their trading partners. Hub companies also typically rely on the integration service provider to implement integration services with the hub’s trading partners, creating an opportunity for the integration service provider to establish customer relationships with the hub companies’ trading partners. An example of a hub company would be a large apparel retailer that utilizes some form of integration service to communicate with hundreds of apparel manufacturers.
Spokes. Companies in this category tend to be small to medium-size organizations that often seek to implement integration services in order to conduct business with one or more large trading partners. Many of these customers do not have a significant investment in technology, with some having as little as a personal computer with a dial-up connection. Spoke companies typically seek to implement integration services quickly with minimal effort and expense. An example of a spoke company would be a small consumer products manufacturer that is required to communicate through some type of integration service by a retailer selling the manufacturer’s products. After implementing integration services at the request of a hub, some spokes become hubs by utilizing integration services to communicate with their community of trading partners.
We believe that our ability to automate the exchange of essential business information between trading partners with dissimilar processes and applications adds value at each step of the supply chain. In a typical implementation, we will:
  •  install the necessary software on the hub’s systems to enable data exchange, and connect the hub to our infrastructure;
 
  •  roll-out data exchange to the hub’s spokes, including providing the necessary software for the spokes’ systems and connecting the spokes to our infrastructure; and
 
  •  act as a trusted intermediary, providing services such as security, authentication and audit tracking, among others, to the installed trading community through our VAN.
Under our business model, a trading partner is a mailbox on our network infrastructure used to facilitate transactions with other mailboxes on our network infrastructure or with mailboxes on another interconnected network infrastructure. One trading partner does not necessarily equal one customer, as a single customer may have multiple mailboxes. Our 20 largest hubs have between 500 and 4,500 trading partners each. A trading community is a collection of trading partners communicating via their respective mailboxes around a hub.
Our Business Strategy
Our goal is to grow profitably by providing transaction management infrastructure products and services with high returns on investment for our customers while remaining at the forefront of our industry. To achieve this objective, we intend to:
  •  expand our market presence;
 
  •  increase our customer penetration;
 
  •  convert our customers to multi-year contracts;
 
  •  pursue strategic cost transformation opportunities; and
 
  •  broaden our suite of innovative solutions.
Our Product Solutions
As business-to-business e-commerce becomes increasingly strategic, the complexity of integrating and collaborating with business partners is growing exponentially. Over the past decade, businesses invested heavily in internally focused business systems. Today, businesses are extending their enterprise investments by strategically sharing processes with partners to gain competitive advantage. Through the automation of an

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entire value chain, companies are streamlining cross-enterprise processes, such as price and promotions, global shipping, and electronic payments, resulting in greater agility, responsiveness and profitability.
The integration of supply chains across diverse businesses can be very complex. The variety of protocols and standards used to communicate continue to increase. Data structures and data transformation are becoming more sophisticated. Globalization is introducing new trading partners from regions around the world that suffer from a lack of experience and slow adoption of e-commerce processes.
To unlock the potential of business-to-business e-commerce and build a successful global extended enterprise, businesses need a partner with innovative adaptive solutions, broad skills and capabilities, and global reach. Our capabilities, solutions and reach allow businesses to effectively build and manage their extended enterprise and automate their entire supply chains. With over 35 years of experience, we are a proven leader of on-demand business-to-business e-commerce solutions that simplify and enhance business process integration and collaboration.
Fewer and fewer companies manage the entire manufacturing process from raw materials to finished product. Instead, the manufacturing process is distributed across the supply chain with different manufacturers owning the raw materials, component, assembly, and finished product aspects of the process. As a result, an increasing number of business processes are becoming cross-enterprise, including product design, development, manufacturing, and post-sales service and support. Even planning functions such as promotions, forecasting, and marketing are becoming increasingly collaborative. Our on-demand services streamline these cross-enterprise business processes by simplifying the ability to market, plan, order, manufacture, transport, settle and service across corporate boundaries. With on-demand services, businesses get maximum flexibility and economies of scale from a high-performance hosted solution.
We provide a comprehensive suite of offerings for customers seeking high-performance, cost-effective on-demand supply chain management solutions. We deliver our solutions globally on our next-generation integration services platform, the GXS Trading Gridsm. Through the Trading Gridsm, we provide an integrated suite of data communications and exchange, trading partner management, integration, data synchronization and application services. Our global solution portfolio for these services consist of our core product solutions, or Transact Solutions, and our value-added Monitor, Synchronize and Collaborate solutions.
Transact Solutions
Our core product solutions, or Transact Solutions, enable businesses to conduct electronic commerce with any supply chain partner in the world by enabling the electronic exchange of a high volume of business documents among our customers’ computer systems and those of their trading partners. Through our Transact Solutions, buyers and suppliers can exchange purchase orders, as well as the associated shipment notices, invoices, and payment instructions. Additionally, sales activity, sales forecasts, and inventory positions can be exchanged electronically. Revenues generated by our Transact Solutions are largely recurring in nature and contribute the majority of our revenues. Revenues from Transact Solutions were 61.0%, 64.0% and 63.6% of our total revenue for the years ended December 31, 2002, 2003 and 2004, respectively.
EDI is the predominant standard by which Transact Solutions are performed. EDI supplements or replaces traditional document transport media, including postal, fax, telephone and email systems. We provide Transact Solutions through our Trading Gridsm in approximately 25 countries around the world. These Transact Solutions allow a trading partner to use the communications protocol of its choice. We add value by providing protocol conversion, security, authentication, audit and other transaction processing services, allowing customers to implement complex and secure electronic trading systems with little infrastructure or technology investment. The Trading Gridsm processes both traditional EDI documents and documents developed using newer technologies such as Extensible Mark-up Language (XML). By using the Trading Gridsm’s messaging services, customers are able to reduce the costs associated with managing business and technology variables associated with the exchange of data among a large number of trading partners that use

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disparate applications and communications protocols. Today, we brand our core Transact Solutions within the Trading Gridsm as follows:
  •  GXS Interchange Services. Our primary global transaction management platform within the Trading Gridsm. Our services provide a high level of security, authentication, audit tracking, data storage, and protocol independence.
 
  •  GXS Intelligent WebForms. A global, Web-based portal. Intelligent WebForms enable suppliers to manually input information into a Web browser for translation into an EDI document or XML message on the Trading Gridsm. This product is designed for suppliers that have low transaction volumes and minimal internal computer systems, but that have access to the Internet.
 
  •  GXS Network-Based Translation. A fully automated, file integration service. Network-Based Translation enables medium-sized suppliers to integrate applications inside the firewall with the Trading Gridsm for higher-volume integration needs.
Revenues derived from our Transact Solutions are primarily generated through recurring transaction processing fees. For most transactions, we charge a transaction processing fee to both the sending and the receiving party. During 2003, we initiated a concerted effort to move customers on month-to-month contracts for Transact Solutions toward multi-year contracts in exchange for pricing incentives. As a result of these efforts, approximately 60% of our top 2,000 customers are now committed to contracts with an average term of 31 months.
Our Transact Solutions also include integration software, which enables enterprises and small businesses to access the core messaging services. Our integration software enables customers to self-manage the exchange of information among disparate business systems and applications within and among enterprises by integrating internal applications, translating data to the required format (such as EDI or XML) and transporting that data through the Trading Gridsm or directly to the receiving trading partner. Our integration software products include:
  •  GXS Enterprise System. A high-performance software solution that is installed by a customer to enable access to business data that resides in its systems. Enterprise System extracts the data, translates the data into a standard format and enables the secure transport of the data through the Trading Gridsm or directly to the receiving trading partner. The product keeps a list of trading partners, the documents to be used with each trading partner and an audit trail of all transaction activity. Application Integrator, which is described below, is typically licensed with Enterprise System.
 
  •  GXS Application Integrator. A high-performance data transformation solution. Application Integrator enables our customers to keep track of the different documents each trading partner uses and the rules for converting internal data formats into and out of the standard data documents that can be transported over the Trading Gridsm.
 
  •  Small-and-Medium Business Enablers. The Trading Gridsm messaging services also offer a variety of options for small businesses to connect to their trading partners. A suite of web forms provides pre-configured templates for common business processes. Midsize businesses can connect to the Trading Gridsm using preferred accounting software packages from vendors such as Intuit, Peachtree, Epicor, and Sage. Other options for small businesses include desktop translators and on-demand file-upload/ download capability and EDI-to-Fax capability.
Monitor Solutions
Once e-commerce transactions are automated, it is critical for businesses to monitor and measure transactions with supply chain partners. Our Monitor Solutions allow for end-to-end visibility of business documents by monitoring supply and demand signals for quick response. Once the day-to-day supply chain process is automated, companies run the risk of not identifying problems with orders or shipments. Our monitor solutions allow businesses to monitor information flows in e-commerce transactions for critical supply (shipment delay) and demand (sales spike) signals. Near real-time monitoring of these events enables supply chain participants to take proactive measures to avoid out-of-stock situations or excess inventory positions.

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Our Monitor Solutions include:
  •  Order Lifecycle Visibility. A web-based order, shipment, and payment tracking application. Order Lifecycle Visibility enables buyers to track responses from their suppliers to purchase orders. Suppliers either confirm the ability to meet the order or request modifications to the order. Order Lifecycle Visibility also enables the supplier to create advance shipping notices. These shipping notices are sent to the buyer informing them of the contents, carrier, and delivery date of a shipment. Finally, suppliers can send electronic invoices then track the payment status with the buyer.
 
  •  Logistics Visibility. A web-based shipment tracking application. Logistics Visibility enables merchandising personnel to track the whereabouts of shipments in their supply chain. Logistics Visibility is particularly useful for US-based corporations sourcing goods from the Asia-Pacific region. Through Logistics Visibility a user can track shipments across multiple modes of transportation – air, marine, rail, and ground. The application can track shipments from origin to receipt including complex export, customs, warehousing and distribution processes.
In late 2005, we anticipate introducing a third Monitor Solution called Inventory Visibility. This product will facilitate web-based inventory tracking for the exchange of point-of-sale and inventory position data.
Synchronize Solutions
Our Synchronize Solutions help customers accomplish product item validation and synchronization via a comprehensive suite of hosted services and application software. Our Synchronize Solutions enable multiple supply chain partners to exchange information about their products. The inability to effectively manage the growing volume of product data is a challenge for many leading retailers. Product data can include descriptions, dimensions, packaging configuration, and country of origin. Inconsistent and inaccurate product data creates significant disruptions and inefficiencies throughout a retailer’s internal systems and supply chain operations, and can lead to errors with orders, out-of-stock conditions and invoice discrepancies. Accurate product data, however, can significantly reduce inefficiencies and enhance the customer experience. The key for retailers in achieving and maintaining accurate and consistent data is to establish one streamlined process to synchronize product catalog information with their suppliers. As a result, data synchronization solutions can accelerate the introduction of new products; minimize impacts of product discontinuations; and optimize sales of existing products.
Data synchronization is quickly gaining acceptance in the consumer products and retail sectors because it allows a company to store, manage and exchange a wide variety of product information. Product information can include marketing descriptions, dimensions, transportation requirements, price or recycling instructions. It can also include other documents such as photographic images of the products or marketing materials. Although our Synchronize Solutions are currently used mainly by the consumer products and retail sectors, these solutions are equally applicable to other industries, including the automotive industry, and we expect the use of data synchronization to become more widespread in the future.
Our current Synchronize Solutions include:
  •  Data Pool Services. A service that allows supply chain partners to exchange their product catalog information electronically. Data Pool Services are used in the retail industry to notify supply chain partners of new products being introduced; changes to existing products such as prices or dimensions; or to discontinue end-of-life products. Data Pool Services work in conjunction with a set of e-commerce standards defined by the Retail Industry — the Global Data Synchronization Network. These standards have been adopted by the grocery, chain drug, do-it-yourself, office, and consumer electronics sectors. Older standards are used by the apparel and department store sector.
 
  •  Product Information Manager, or PIM. A software solution that enables companies to organize and manage their product information. PIM contains a database that can be used to house all product data for a company. Additionally, PIM automates the process of collecting information for new product introductions. PIM can publish information to other systems within a retail environment such as the

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  warehouse, point-of-sale, or Web site. We believe PIM is viewed as a critical pre-requisite for companies seeking to adopt Radio Frequency Identification, or RFID.
 
  •  Data Pool Manager. A service that enables a fully functioning government’s or standards organization’s data pool to be deployed for a specific region, country or purpose. Our Data Pool Manager facilitates the exchange of product catalog information between retailers and their suppliers. Product information can include descriptions, dimensions, packaging configuration, and country of origin. We provide services utilizing our Data Pool Manager software to third parties, typically industry standards organizations, which use our services to provide their own private-label services. Our Data Pool Manager is currently in operation or being deployed for 17 GS1 standards organizations around the globe. Each of these GS1 standards organizations will market and sell their own branded Data Pool Services to retailers and suppliers in their geographic region.

In the near future, we expect our Synchronize Solutions to also permit price and promotion information to be stored, managed and exchanged.
Collaborate Solutions
Our Collaborate Solutions enable supply chain partners to work closely together to improve efficiencies or increase sales through joint forecasting, marketing and product development. Trading partner collaboration can include:
  •  Demand Planning. Developing joint forecast models to optimize merchandising, inventory, logistics and manufacturing processes.
 
  •  Product Development. Jointly analyzing customer behavior and designing new products to go to market before competition.
 
  •  Marketing and Sales. Jointly planning promotional activities to drive product sales in selected market segments.
We primarily provide our Collaborate Solutions through strategic and technology partnerships. Our Collaborate Solutions partnerships currently include Tradebeam and iSupply, through which we offer a web-based solution for automotive original equipment manufacturers and their suppliers, and 7th Online, through which we offer a collaborative application used in the apparel and department store sector to perform seasonal assortment planning.
Advantage Services
Our Advantage Services provide a suite of community, professional, and managed services that help our customers maximize the benefits from on-demand supply chain management. These services complement our product solutions with people-based services to support the automation process, from consulting and design to implementation and integration to technical support. These services include business to business community management and outsourcing services. We maintain expertise and skills in the mapping, translation and technical support for communities of all sizes. Education, implementation, testing and ongoing technical support for our customers’ trading communities ensures that our customers’ trading partners can actively communicate and share information with each other. Advantage Services consist of three families of services: Professional Services, Community Link and Business Process Outsourcing.
Professional Services
We provide up-front consultation for our customers on how to design an effective business-to-business supply chain management program. We also advise on technical architecture design, modeling business processes and demonstrating a return on investment for new initiatives. Once the consulting and design process is complete, our professional services group helps to implement the solution on the customer’s premises. As necessary, we can customize the solution to integrate directly with our customer’s front and back office systems.

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Community Link Services
After implementation at the hub, we then provide services to enable the trading partner community. These services include trading partner education, implementation and testing, as well as on-going technical support for the entire enabled trading community. Together with our distributors, we offer 24-hour, 7-day-a-week technical support in 20 different languages via the Web and telephone.
Business Process Outsourcing
Customers that prefer not to manage the day-to-day operations of their supply chain management programs can outsource those processes to us. Our Business Process Outsourcing services use our global data center footprint to offer outsourcing for customers of the management, execution and operation activities associated with on-demand electronic supply chain management. By outsourcing to us, customers minimize their up-front investment in software, hardware and other resources necessary to automate their information exchange processes. We provide a comprehensive outsourcing solution that includes data center operations, application hosting, mapping and translation, technical support, and our Community Link services.
Legacy Solutions
Our Legacy Solutions principally consist of applications and products developed for specific customers for use on our computing platforms and telecommunications network. For example, we offer a customized application for cash management systems used by banks that runs on our proprietary Mark III® platform. The application was originally written in the 1980s and continues to be used today. In addition to these customized applications and products, our managed network solutions enable customers to outsource the management and operations of network communications. Our managed network solutions include telecommunications management, monitoring and problem resolution, as well as the provision and installation of modems, routers and software that enable us to manage the customer’s infrastructure remotely. We do not consider our Legacy Solutions to be core to our business. Accordingly, we expect revenues from our Legacy Solutions, including our custom messaging and network solutions, or CMNS, to continue to decline as a percentage of our total revenues as we continue to de-emphasize and discontinue such services and emphasize our Transact, Monitor, Synchronize and Collaborate Solutions. We currently have approximately 4,300 customers for our CMNS, many of which also use our other products and services.
Customers
We serve a community with more than 100,000 trading relationships in a broad range of industries, including automotive, consumer products, high-technology, manufacturing and retail. Our customers currently include over 50% of the Fortune 500 companies and, upon completion of the proposed G International acquisition, we expect to count over 75% of the Fortune 500 companies as customers. This broad base ensures that we are not reliant on any individual customer or industry for a significant portion of our revenues. No one customer represented more than 10% of our revenues in 2002, 2003 or 2004. General Electric and its affiliates accounted for approximately 9.0% of our total revenues in both 2003 and 2004.
In 2004, we retained all of our significant hub customers and we had significant customer wins, including Dillard’s, Rite-Aid and Comcast. Additionally, we have been migrating our customers to multi-year contracts to maintain existing recurring revenue streams. We currently have approximately 60% of our top 2,000 customers committed to contracts with an average term of 31 months.
International Operations
We have a strong global presence across the Americas, Europe, Asia and Australia, including operations in approximately 25 countries. We generated 37.1%, 42.5% and 46.0%, respectively, of our revenues for each year in the three-year period ended December 31, 2004 from customers located outside of the United States, and 12.9%, 11.0% and 10.4%, respectively, of our assets as of December 31, 2002, 2003 and 2004 were located outside of the United States. We generated 11.8%, 14.2% and 15.9%, respectively, of our revenues for each

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year in the three-year period ended December 31, 2004 from customers in the United Kingdom. In the future, we may significantly expand our international operations through geographic expansion and acquisitions.
Marketing and Sales
We market our products and services through our global sales force. Our sales efforts are generally aimed at senior purchasing executives, chief information officers and other primary decision makers within a potential customer organization. Our global sales force is organized along three lines: industry, geography and major account coverage. Our direct sales teams concentrate on developing new hub customers within a particular industry, focusing on the retail, consumer products, high-tech and automotive sectors, and region, as well as increasing the utilization and penetration of existing trading communities. Our telephone sales professionals focus primarily on signing up new spoke customers around a particular hub customer. Our sales teams are supported by a team of technical sales and marketing support personnel who assist in the sales process as needed. We have approximately 210 marketing, sales and sales support personnel.
Our direct sales cycle for hub customers typically takes approximately six to nine months from initial contact to contract signing. Approvals by decision makers from various branches of a potential customer’s organization are often required before a purchase can be completed. The sales cycle for telephone sales varies from several days to approximately three months. We believe the ability of our telephone sales team to address a large number of trading partners of our hub customers in a short time period differentiates us in the trading community sales process.
Our marketing activities are designed to enhance our brand name and the market awareness of our products through advertising, press releases and other media. We have product managers dedicated to each of our product lines who, together with our marketing communications group, focus on the development of and increasing awareness of specific products and services that we offer.
Customer Service
We view our relationships with customers as long-term partnerships in which customer satisfaction is crucial. For this reason, we apply an integrated approach to our sales, marketing and customer service functions. Through our customer relationships, we are able to achieve an in-depth understanding of a customer’s evolving transaction management infrastructure requirements and levels of service satisfaction. We believe that we provide superior customer service in terms of timely and accurate responsiveness. Based on these relationships, we are also able to pursue new revenue generating opportunities and provide product and service improvements for both new customers and customers previously overlooked or not adequately addressed.
We maintain a customer service center at our headquarters in Gaithersburg, Maryland and customer service centers and/or customer service representatives in various locations in Europe and Asia to support customers on a regional basis and to provide local technical support as necessary. Our customer service center in Gaithersburg also provides support to our other customer service centers and customer service representatives. Our customer service representatives, in the United States and elsewhere, include both call analysts, who are trained to identify and analyze customer problems, as well as skilled technical support teams trained to resolve complex technical problems.
Competition
We compete with numerous companies both nationally and internationally. Our competitors include large companies with substantially greater resources than us that compete in many market areas and small specialized companies that compete in a particular market niche. We also compete with the internal programming and information technology staffs of some major companies.

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Our ability to compete successfully depends on multiple factors, both within and outside of our control. The principal factors are:
  •  quality of service, including the reliability and quality of the products and services we offer;
 
  •  technical functionality, including delivery of innovative solutions and our speed in developing and bringing to market the next generation of products and services;
 
  •  price; and
 
  •  customer service, including our responsiveness, availability and flexibility.
We believe that our solutions are generally competitive with regard to each of these factors.
Competition for our services ranges from large corporations to integration suites offered by software vendors and smaller technology consulting firms. We compete with paper-based communications, direct leased-line communications, fax-based solutions, public exchanges and other EDI service providers, including Inovis, Sterling Commerce and other, smaller companies. We also compete with providers of products and services based on alternative technologies to EDI such as IBM and Cyclone Commerce.
Our software products also compete with the products offered by Sterling Commerce, Inovis, IBM, SeeBeyond and Vitria.
Data Processing Infrastructure
We operate three data centers, located in Ohio, Hong Kong and The Netherlands. These data centers service customers on a regional basis and house our data processing infrastructure. Our computing infrastructure primarily operates on one of three systems: IBM z Series OS, UNIX or Mark III®. Mark III® is a legacy operating system we developed that runs on mainframe computers manufactured by Bull, S.A. We are in the process of migrating our EDI operations that currently run on Mark III® to other platforms. We are also in the process of evaluating migration of our customers to other, more open systems, such as Linux. We believe that our data processing infrastructure is sufficient to cost-effectively meet demand for the foreseeable future and to increase capacity as needed.
Our telecommunications infrastructure is a high-speed digital network that connects us to our customers and facilitates the transport of multiple protocols via private lines and the Internet. In the United States, our primary provider is AT&T with Equant serving as a backup provider. In Europe, Equant is our primary provider with AT&T serving as a secondary provider. We also engage additional providers in these and other jurisdictions, mainly in Asia. Our network providers provide us with diversity and enable us to further enhance the reliability and quality of our services for our customers.
In operating our data processing facilities, we have developed both capacity-planning and disaster recovery policies and practices. Our capacity planning operation monitors usage and trends and projects the capital resources needed to satisfy future needs. It performs this role for both our data processing and network communications infrastructure. We are party to disaster recovery agreements that provide alternative off-site computer systems for our UNIX, NT and IBM-based processing operations in the event of a disaster. For our Mark III®-based processing operations, we have a separate disaster recovery site as well as contingency plans which provide for the shifting of our processing operations among different segments of our Ohio data center and our data center in The Netherlands, if necessary. We have also taken precautions to protect ourselves and our customers from events that could interrupt delivery of our transaction processing services. These precautions include, among others, backup power generation equipment, fire protection and physical security systems and an early warning detection and fire extinguishing system.
Product Development
Our product development cycle is driven by technological evolution of new standards for the electronic exchange of information and compatibility with third-party software. To remain competitive, we are required to incorporate advances in technology and standards into our products continually. In addition, we must ensure

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that our solutions are able to function with the latest versions of the third-party software that may be used by some of our customers. We schedule development for our products and services on a six to twelve-month cycle from inception to rollout. We have dedicated product development teams for each major product line. However, a common development process, focused on the quality of our products and services, is deployed across all development efforts. Our solutions focus on the reduction of defects, application reliability and on-time delivery. All new solutions are developed on the UNIX platform with development tools using Java and C++ programming languages. A separate, dedicated team of engineers focuses on the study and introduction of new transaction technologies such as XML, and new types of Internet communications protocols, such as SOAP and AS2.
In 2002, 2003 and 2004, we had expenditures of approximately $15.2 million, $9.1 million and $14.4 million, respectively, for research and development activities. In addition, we spent $26.9 million, $19.9 million and $14.7 million during 2002, 2003 and 2004, respectively, on the development of internal use software, which we capitalized. Although most of our products are developed internally, from time to time we have in the past, and may in the future, acquire software from or invest in companies or businesses that offer products or services that are complementary to our offerings.
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 Gridsm.
Alliances and Joint Ventures
Our PartnerGrid Program is designed to extend the value of the solutions we deliver to our global customer base. We partner with the world’s leading technology specialists to help our customers accomplish their business goals more quickly and effectively. Our partners provide software and hardware technology or consulting and implementation services to complement our industry-leading solutions.
We generally enter into partnerships with four types of partners:
  •  Strategic Partners. As a key player in the business to business technology market, we maintain strategic relationships with the most influential software, hardware, consulting and implementation companies in the world. Strategic partners are selected according to their ability to assist us in delivering industry-leading solutions that streamline cross-enterprise business processes. We collaborate with the leading technology, consulting and system integrators to develop strategic alliances that bring increased value to our global customer base. Strategic partnerships are formed with companies that bring unparalleled depth to solutions across multiple industries and multiple technologies.
 
  •  Solution Partners. We form partnerships with leading industry solution providers that train their experts to sell and deliver powerful, repeatable solutions built around our solution set. The Solution Partner program offers referral and reseller partnerships for service and software solutions designed to increase partner profitability and customer satisfaction. Partners receive extensive tools and resources to enhance the delivery of high-value solutions to our global customer base. The goal of the program is to develop the highest-quality distribution channels to serve our global customer base. Our Alliance Managers work with Channel Partners to build sales and marketing programs. The top partners may have access to co-marketing funds to ensure that the alliance delivers renewable customer value.
 
  •  Technology Partners. We partner with experienced software and hardware providers to provide best-of-breed solutions for our customers. These companies complement and enhance the value delivered to customers that use our solution sets. We work with leading technology vendors to complement and increase the value delivered by our solution sets. We join with some of the world’s leading hardware and software technology providers to develop business solutions that deliver sustainable customer value.
 
  •  Standards Organizations. We recognize that leadership in deploying and managing business process networks (or e-commerce solutions) requires leadership in standards organizations. Many of these

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  organizations also offer test and certification programs to demonstrate that clients experience the fastest “time to production” with predictable results.

In addition to our PartnerGrid Program, we have also partnered with various entities to form joint ventures outside of the United States to assist with the marketing and implementation of our products and services in a particular geographic region. For example, we have a joint venture with ABN AMRO Capital Investment Asia Limited to provide our products and local Transact Services in China. These partnerships are in addition to our foreign subsidiaries that provide marketing and implementation services in many countries.
Intellectual Property
To protect our intellectual property rights, we rely primarily on a combination of copyright, patent and trademark laws, trade secret protection and contractual provisions. We also routinely enter into nondisclosure and confidentiality agreements with our employees, contractors, consultants, vendors and customers to protect our proprietary rights. We have various rights to patents, trademarks, copyrights, trade secrets and other intellectual property directly related to and important to our business. We currently hold four United States Patents:
  •  United States Patent No. 5,627,972 entitled “A system for selectively converting a plurality of source data structures without intermediary structure into a plurality of selected target structures.” The invention behind this patent relates to a data interchange system and, more particularly, to a computer application that is adapted to communicate and translate data between various computer systems involving dissimilar data formats or structures. This patented technology is used in our Application Integrator software product.
 
  •  United States Patent No. 6,671,728, entitled “Abstract Initiator.” The invention behind this patent relates to a method for decoupling a transfer protocol from a central file transfer system.
 
  •  United States Patent No. 6,678,682, entitled “Method, System and Software for Enterprise Access Management Controls.” The invention behind this patent provides for a centralized access management service that allows multiple applications to define and register a standard access control schema.
 
  •  United States Patent No. 6,850,900 entitled “Full Service Secure Commercial Electronic Marketplace.” The invention behind this patent relates to an online electronic marketplace that facilitates transactions between suppliers and buyers, transforming supplier data into a generic format and allowing suppliers to update their data.
As part of our recent effort to expand our patent portfolio, we have filed 24 patent applications that improve upon our technology. In addition, as part of our acquisition of HAHT Commerce, in February 2004, we acquired three U.S. patent applications, which are not of material importance to our business and are being allowed to lapse. We hold registrations on trademarks and service marks on 23 separate marks that have been registered in a number of jurisdictions that we owned at the time of the recapitalization. All of these registered marks are related to legacy or discontinued products and services, and are not of material importance to our business. We acquired, as part of our acquisition of HAHT Commerce, 17 separate marks that have been registered in a number of jurisdictions, none of which are of material importance to our business. In addition, we have applied for registration of two additional marks that relate to products we currently market. We also acquired the rights to one additional Canadian and two U.S. registered trademarks as part of our acquisition of the Celarix assets in June 2003, none of which are of material importance to our business. Our policy is to apply for patents with respect to our technology and seek trademark registration of our marks from time to time when management determines that it is competitively advantageous and cost effective to do so. We have also been granted licenses for a number of third-party software products for our own use and for remarketing to our customers. Further, we believe that our unpatented research, development and engineering skills also make an important contribution to our business. We do not believe that any one single patent, patent application or license is material to the success of our business as a whole. However, in the aggregate these patents applications and licenses are material to our business.

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In connection with the recapitalization, General Electric assigned, licensed or sublicensed, as the case may be, to us all intellectual property rights owned by General Electric that were used by us to operate our business. We also entered into a separate agreement under which General Electric granted us a license to use the GE monogram trademark on a non-exclusive, royalty-free basis. We have ceased using this trademark and the license has terminated.
Employees
As of March 1, 2005, we had approximately 1,360 full-time employees worldwide, including approximately 970 technical personnel engaged in maintaining or developing our products or performing related services, approximately 210 marketing, sales and sales support personnel and approximately 180 administrative, finance and management personnel. We also have approximately 90 call analysts and customer service support technicians worldwide. To attract and retain desired personnel, we offer competitive compensation and benefits packages and strive to maintain excellent employee relations. None of our U.S. employees are represented by a labor union. We have not experienced any work stoppages and consider our employee relations to be good.
In connection with our proposed acquisition of G International, all of the employees of G International in the United States will become our employees as of April 1, 2005 and we will enter into an agreement with G International pursuant to which G International will compensate us for the services provided to it by these employees.
Item 2.     Properties
We lease approximately 342,000 square feet of office space for our corporate headquarters located in Gaithersburg, Maryland. This lease expires in April 2014. However, we have the option to renew this lease for an additional 10 years, through April 2024, followed by two five-year renewal options. General Electric has guaranteed all of our obligations under this lease. In connection with the 2002 recapitalization, our indirect parent, Global Acquisition Company, was required to either replace General Electric as the guarantor or to indemnify General Electric for any obligations it may have under its guarantee. In place of such a guarantee or indemnity, we provided a letter of credit for General Electric’s benefit, in the amount of $7.5 million, under our revolving credit facility. As of December 31, 2004, approximately 60% of our office space is vacant and we are actively seeking to sublease some or all of this space.
Our main data center is a 104,000 square-foot facility located in Cleveland, Ohio. We also operate a 54,000 square-foot data center in Amsterdam, The Netherlands, and a 12,000 square-foot data center in Hong Kong, China. Other than our Ohio data center, which we own, our data centers are leased. These leases expire at various times between 2007 and 2013.
In addition, as of December 31, 2004, we had six sales offices in the United States and 14 sales offices in 11 foreign countries. We also maintain a customer service center at our headquarters in Gaithersburg, Maryland to support our customers in the Americas, and customer service centers and/or customer service representatives in various locations in Europe and Asia to support customers on a regional basis. We currently have sufficient space to meet our needs.
Item 3.     Legal and Other Proceedings
We are and may from time to time in the future become subject to legal proceedings and claims which arise in the normal course of our business. These routine litigation matters are usually settled or defended, depending on the circumstances of each claim. While any legal proceeding has elements of uncertainty, we do not believe, based on historical experience, that the amount of any liability incurred in connection with these types of claims would have a material effect on our financial condition or on the results of our operations.
Item 4.     Submission of Matters to a Vote of Security Holders
Not applicable.

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase Of Equity Securities
Not applicable.
Item 6.     Selected Financial Data
The following table presents our selected historical consolidated financial information. The historical consolidated financial information as of December 31, 2003 and 2004 and for each of the fiscal years ended December 31, 2002, 2003 and 2004 has been derived from, and should be read together with, our audited consolidated financial statements and the accompanying notes included elsewhere in this annual report. The selected financial data as of December 31, 2000, 2001 and 2002 and for the years ended December 31, 2000, 2001 and 2002 have been derived from our audited consolidated financial statements, not included in this annual report.
The financial data set forth below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
                                             
    Year ended December 31,
     
    2000   2001   2002   2003   2004
                     
    (in thousands of dollars)
Operating Data:
                                       
Revenues
  $ 565,655     $ 464,179     $ 409,454     $ 363,469     $ 328,597  
Costs and operating expenses:
                                       
 
Cost of revenues
    341,492       291,295       244,207       207,056       198,187  
 
Sales and marketing
    122,314       113,578       67,316       65,161       63,274  
 
General and administrative
    60,537       52,524       48,291       47,272       47,403  
 
Restructuring and related charges
          9,421       18,406       26,671       26,438  
 
Asset impairment charges
          4,287       5,425       6,500       6,509  
 
Corporate charge from General Electric
    11,249       12,940       7,331              
                               
   
Operating income (loss)
    30,063       (19,866 )     18,478       10,809       (13,214 )
Other income (expense):
                                       
 
Proportionate share of losses in investee companies and investment write-downs
    (18,759 )     (23,417 )     (4,668 )     (679 )     (1,192 )
 
Gain (loss) on disposal of assets
    50,745       8,576             700       (2,901 )
 
Gains on sales of investments
    36,612       144,638                    
 
Fees related to the recapitalization
                (30,085 )            
 
Write-off of deferred financing costs
                      (5,548 )      
 
Interest income
    10,726       6,570       1,285       750       572  
 
Interest expense
    (12,007 )     (5,334 )     (14,526 )     (50,967 )     (59,079 )
 
Other income (expense), net
    13,232       6,705       (83 )     1,248       1,330  
 
Management fees from G International
                            300  
                               
Income (loss) before income taxes
    110,612       117,872       (29,599 )     (43,687 )     (74,184 )
Provision for income taxes
    42,793       49,278       9,858       259,590       10,696  
                               
Net income (loss)
  $ 67,819     $ 68,594     $ (39,457 )   $ (303,277 )   $ (84,880 )
                               

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    Year ended December 31,
     
    2000   2001   2002   2003   2004
                     
Other Financial Data
                                       
Depreciation and amortization
  $ 33,451     $ 41,943     $ 47,768     $ 47,346     $ 51,705  
Capital expenditures
    83,037       73,159       37,815       29,395       27,899  
Balance Sheet Data (at end of period):
                                       
Total assets
  $ 531,952     $ 327,309     $ 572,677     $ 291,436     $ 255,685  
Total debt
    6,474       43,922       409,562       405,520       406,489  
Stockholder’s equity (deficit)
    316,103       127,494       57,996       (224,735 )     (288,460 )
Item 7. 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 audited consolidated financial statements and the accompanying notes, which are included as an integral part of this report.
The following discussion and analysis may contain forward-looking statements, which reflect the expectations, beliefs, plans and objectives of management about future financial performance and/or assumptions underlying our judgments concerning matters discussed below. These statements, accordingly, involve estimates, assumptions, judgments and uncertainties. In particular, this pertains to management’s comments on financial resources, capital spending and the outlook for our business. Actual results or outcomes may differ materially from those in such forward-looking statements. See “— Factors That Could Affect Future Results — Special Note Regarding Forward-Looking Statements.”
Overview
We are a leading provider of on-demand supply chain management solutions to over 30,000 customers worldwide, including over 50% of the Fortune 500 corporations. We provide mission-critical solutions that connect our customers, large and small, continuously to their supply chain partners around the world. Our solutions perform an extensive range of critical supply chain management functions, including the exchange of information relating to trade orders, invoicing and payment instructions, synchronization of product and price information, optimization of inventory levels and demand forecasting. Our customers use our solutions to establish complex supply chain relationships with their networks of business partners, and to reduce the cost and complexity of supply chain operations. We operate a highly reliable, secure global network services platform that connects trading partners 24 hours a day, 7 days a week in approximately 25 countries around the world. We have been pioneers in on-demand supply chain management solutions for 20 years, and have been a leading provider in the technology industry since the late 1960s.
In general, we derive our revenue from:
  •  recurring transaction processing and software maintenance fees;
 
  •  software licensing; and
 
  •  providing professional services in connection with our products.
In 2002, 2003 and 2004, we derived approximately 62.3%, 67.0% and 70.6% of our revenues from recurring transaction processing and related fees, as well as software maintenance fees, generated by our core Transact Solutions, as well as our value-added Monitor, Synchronize and Collaborate Solutions. 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. We have increasingly focused since late 2003 on negotiating multi-year contracts with customers. Approximately 60% of our largest 2,000 customers are now committed to contracts for transaction processing solutions with an average term of 31 months. Those larger customers who are not committed to multi-year contracts and most of our smaller customers generally are under contracts for transaction processing solutions that

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automatically renew every month. Transaction processing revenues are recognized on a per transaction basis in the period the related transaction is processed. Revenues on contracts with monthly, quarterly or annual minimum transaction levels are recognized based on the greater of actual transactions processed or the specified contract minimums. Revenues from software maintenance fees are recognized as described in the next paragraph.
We also license our software either for perpetual use or for a fixed term. Licensing revenues are generated by both our Transact Solutions, as well as our value-added Monitor, Synchronize and Collaborate Solutions. 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 currently have more than 5,700 software maintenance contracts. In 2002, 2003 and 2004, we derived approximately $12.9 million, $12.6 million and $15.7 million in revenues from fees relating to these contracts.
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. Additionally, a portion of our professional services are performed in implementing our product solutions associated with multi-year contracts and revenues derived from those services are recognized over the life of the contract.
We also derive a portion of our revenues from transaction processing and software maintenance fees, software licensing and providing professional services relating to our Legacy Solutions (22.4% of our total revenues in 2004). However, we do not consider our Legacy Solutions to be core to our business. Accordingly, we expect revenues from our Legacy Solutions, which include our Custom Messaging and Network Solutions, or CMNS, and other product offerings that we are in the process of phasing out, to continue to decline as a percentage of our total revenues as we continue to de-emphasize and discontinue such services and emphasize our core Transact Solutions and our value-added Monitor, Synchronize and Collaborate Solutions.
In Item 1 — Business, we categorize and discuss our products and services, and lines of business, in a different way than we have previously. The new presentation better reflects how management views and operates our business and better explains the products and services that we offer. The following table reconciles revenues reported by business line for the years ended December 31, 2002, 2003 and 2004 to the new revenue source-based categories:
                                 
    Year ended December 31, 2002
     
    EDI   Other B2B    
    Services   Solutions   CMNS   Total
                 
    (in thousands of dollars)
Transaction Processing and Maintenance
  $ 244,245     $ 11,153     $     $ 255,398  
Software Licensing
    412       11,319             11,731  
Professional Services
    11,451       7,299             18,750  
Legacy
          58,766       64,809       123,575  
                         
Total
  $ 256,108     $ 88,537     $ 64,809     $ 409,454  
                         

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    Year ended December 31, 2003
     
    EDI   Other B2B    
    Services   Solutions   CMNS   Total
                 
    (in thousands of dollars)
Transaction Processing and Maintenance
  $ 232,309     $ 11,258     $     $ 243,567  
Software Licensing
    407       8,940             9,347  
Professional Services
    5,950       8,379             14,329  
Legacy
          33,626       62,600       96,226  
                         
Total
  $ 238,666     $ 62,203     $ 62,600     $ 363,469  
                         
                                   
    Year Ended December 31, 2004
     
    EDI   Other B2B    
    Services   Solutions   CMNS   Total
                 
    (in thousands of dollars)
Transaction Processing and Maintenance
  $ 216,737     $ 15,080     $     $ 231,817  
Software Licensing
    371       8,613             8,984  
Professional Services
    7,267       6,857             14,124  
Legacy
          21,363       52,309       73,672  
                         
 
Total revenues
  $ 224,375     $ 51,913     $ 52,309     $ 328,597  
                         
Recent Trends and Cost-Reduction Initiatives
A number of trends over the past several years have caused us to re-evaluate our strategic focus, our mix of products and services and our corporate cost structure. For most of the 1990’s, we focused on providing customized information technology solutions to our customers, while also providing standard EDI services and a variety of other transaction-based business to business solutions. In 2000, 50.8% of our revenues were generated by our Legacy Solutions, as currently defined, while 49.2% were generated by our Transact and Value-added Solutions. In 2004, 22.4% of our revenues were generated by our Legacy Solutions, as currently defined, while 77.6% were generated by our Transact and Value-added Solutions.
Along with general economic conditions, the proliferation of the Internet and other technological advances in computing and telecommunications continues to transform the transaction management industry. Our business has been impacted in several ways, including a decline in revenue in each of our four product categories. Our Legacy Solutions declined rapidly as customers moved to less customized, open systems based solutions. This decline was exacerbated by the loss of a key customer and migration by some of our customers to more standardized year 2000 compliant systems during this time period. From 2000 to 2004, revenues from our custom messaging and network solutions, the largest part of our Legacy Solutions declined from $183.7 million to $52.3 million. These trends not only affected revenues in dollar terms, but also our mix of revenues.
In addition, competitive pricing dynamics across the industry adversely impacted our core EDI services revenues. These revenues were also negatively impacted by our strategy, beginning in late 2003, to offer many of our largest 2,000 customers lower pricing in exchange for their commitment to multi-year contracts for our core Transact Solutions. From 2000 to 2002, revenues generated by our Transaction Processing and Maintenance grew from $224.8 million to $255.4 million as more companies implemented our systems to enhance their productivity. By 2004, revenue from Transaction Processing and Maintenance had declined to $231.8 million. Revenue generated by our Software Licensing, which are largely driven by discretionary corporate information technology spending, peaked in 2000, at $21.5 million, or 3.8% of our total revenues and declined to $9.0 million, approximately 2.7% of our total revenues, in 2004.

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Beginning in 2001, to respond to these market conditions, and beginning in late 2003, to compensate for the pricing concessions we were making on our core EDI services, we implemented a number of cost-savings measures, including:
  •  reducing our cost structure through the removal of excess capacity in our sales force, our professional services organization and our computing and network infrastructure;
 
  •  investing in new technologies to lower our per unit costs;
 
  •  consolidating facility space;
 
  •  de-emphasizing Legacy Solutions and reducing the number of customers to whom such services are provided;
 
  •  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.
Beginning in 2004, we also began to package the pricing incentives offered on our core EDI services not only with multi-year contracts but also with contracts for our value-added Monitor, Synchronize and Collaborate Solutions.
During 2004, we also entered into new agreements to provide Synchronize Solutions, including Data Pool services, to the member organizations in several countries in Europe and Asia that participate in an organization called the Global Data Synchronization Network, or GDSN. 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. However, revenues derived from our relationship with these Data Pools is not expected to significantly impact our revenues or results of operations until 2006 and later years, as each country data pool increases its member participation.
During the fourth quarter of 2003, we entered into a restructuring plan to terminate approximately 80 employees and ceased to use approximately 30% of our Gaithersburg facility and we are actively seeking to sublease this space. During the second quarter of 2004, we announced our Business Transformation plan, a restructuring program which includes not only cost-cutting measures such as consolidating development and operations functions, streamlining business processes, and vacating additional facilities, but also measures such as making technology investments to lower our worldwide service delivery costs and the development of our new value-added solutions. We reduced our global employee workforce by approximately 200 positions, by the end of calendar year 2004 from the level existing as of June 8, 2004. As a result, we incurred approximately $26.4 million in restructuring costs, the majority of which we expect to disburse by the end of 2005 with the balance being disbursed in somewhat equal amounts through 2014. The amount recorded is net of amounts we expect to receive from subleasing vacated space at our headquarters and other facilities locations. As of December 31, 2004, these measures resulted in reduced costs of approximately $48.0 million annually, as well as the introduction of several new products. We continue to focus on maintaining a cost structure that is appropriate for our existing revenue base and revenue expectations.
General Electric, together with its affiliates, historically has been among our largest five customers and is currently our largest customer. For the year ended December 31, 2004, General Electric and its affiliates generated approximately 9.0% of our total revenues. For the two years following our 2002 recapitalization, General Electric was required to maintain its and its affiliates’ respective business arrangements with us on terms and conditions substantially similar to those in effect at the time of the recapitalization and to purchase products and services from us at a specified level. General Electric’s obligation to purchase such product and services ended in September 2004. We expect revenue from General Electric and its affiliates to decrease by more than 50% in 2005 compared to 2004 levels. While we expect General Electric to continue to be a very important and significant customer, General Electric and its affiliates may not continue their customer relationships with us at the expected levels or at all.

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Impact of Acquisitions
G International. On November 1, 2004, our indirect parent, Francisco Partners, through a majority-owned acquisition vehicle, acquired 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 are under common control with G International. In January 2005, we entered into a letter agreement to acquire the sole stockholder of G International. The consideration to be paid by us for G International will be adjusted from $135.0 million based on the indebtedness and working capital of G International, as well as the expenses incurred by G International and its affiliates in connection with the transaction. The form of consideration will be mutually agreed upon by the parties.
The acquisition of G International is subject to satisfaction of several conditions, including:
  •  completion of definitive documentation;
 
  •  receipt of financing; and
 
  •  receipt of third-party consents and approvals.
We believe that the acquisition of G International will:
  •  broaden our customer base to include over 75% of the Fortune 500 companies;
 
  •  position us to offer a broad range of our existing solutions to G International’s customers;
 
  •  reduce our costs and the cost to customers of some of our solutions; and
 
  •  strengthen our competitive position in some industries, including financial services and consumer products.
In connection with our proposed acquisition of G International, all of the employees of G International in the United States will become our employees as of April 1, 2005 and we will enter into an agreement with G International pursuant to which G International will compensate us for the services provided to it by these employees.
Other Acquisitions. On June 3, 2003, we acquired substantially all of the assets of Celarix related to its logistics integration and visibility solutions business for an aggregate value of approximately $2.0 million in preferred and common stock and assumed liabilities. On February 13, 2004, we acquired all of the capital stock of HAHT Commerce through a merger of a wholly owned subsidiary with HAHT Commerce for consideration of approximately $30.0 million, consisting 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. Our results of operations for 2003 and 2004 were accordingly impacted by these acquisitions. We intend to continue to selectively pursue acquisitions of companies with complementary products and technologies to enhance our ability to provide comprehensive solutions to our customers and to expand our business. Any such acquisition can affect our results of operations for the period in which the acquisition is completed and future periods and, depending on the size of the acquisition, can affect the comparability of period to period results.
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 consolidated 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,

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and any differences may be material to our consolidated financial statements. A description of all of our significant accounting policies used is described in Note 2 to our audited consolidated financial statements, included herein. Some of these policies involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our financial statements. These critical accounting policies, in management’s judgment, are those described below. If different assumptions or conditions were to prevail or if our estimates and assumptions prove to be incorrect, actual results could be materially different from those reported.
Revenue Recognition. Most of our revenue is recognized in the month service is performed, but in many cases, our recognition of revenue from the licensing of our software products requires judgment. When our software requires significant customization and modification, we estimate the total cost of the contract and recognize revenue based on actual costs incurred in relation to the total estimated cost. If we made different judgments or utilized different estimates of the total amount of work we expect to be required to customize or modify the software, the timing of our revenue recognition and our margins from period to period may have differed materially from that reported. In situations where we host software, we estimate the feasibility of the customer either running the software on its own systems or contracting with another party to host the software. If neither is feasible, license revenue is recognized over the term of the hosting contract. If either is feasible, license revenue is recognized when the software is delivered, and hosting revenue is recognized over the life of the hosting contract. If our assessment of this feasibility, including any penalties under the customer contracts, were different, the timing of our revenue recognition could differ materially.
In many cases, we deliver multiple products and services to the same customer. In these cases, we allocate revenue to each component of the arrangement using the residual value method. This means that we defer revenue from the total fees associated with the arrangement in an amount equal to the fair value of the elements of the arrangements that have not been delivered. The fair value of any undelivered element is established by using historical evidence specific to us. If we were to allocate the respective fair values of the elements differently, the timing of our revenue recognition could differ materially.
Valuation of Accounts Receivable. We must make estimates of potential sales returns, allowances and bad debts in valuing our accounts receivable. We analyze historical returns, current economic trends and changes in customer demand and acceptance of our products and services when evaluating the adequacy of the provision for sales returns and allowances. We analyze historical bad debts, customer concentrations, customer credit-worthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. However, if the financial condition of our customers were to deteriorate, their ability to make required payments may become impaired, and increases in these allowances may be required. As of December 31, 2003 and 2004, we had allowances for doubtful accounts and sales allowances of $11.3 million and $10.7 million, respectively.
Capitalization of Software. We capitalize software development costs in accordance with AICPA Statement Of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. We begin to capitalize costs for software to be used internally when we enter the application development stage. This occurs when we have completed the preliminary project stage, our management authorizes and commits to funding the project and we believe it is feasible that the project will be completed and the software will perform the intended function. We stop capitalizing costs related to a software project when we believe we have entered the post implementation and operation stage. We capitalized approximately $26.9 million in software development costs during 2002, $19.9 million during 2003 and $14.7 million during 2004. If we were to make different determinations with respect to the state of development that a software project had achieved, then the amount we capitalize and the amount we charge to expense for that project could differ materially.
The costs we capitalize during the application development stage consists of payroll and related costs for our employees who are directly associated with and who devote time directly to a project to develop software for internal use. We also capitalize the direct costs of materials and services, which generally includes outside contractors. We do not capitalize any general and administrative or overhead costs or costs incurred during the application development stage related to training or data conversion costs. We capitalize costs related to upgrades and enhancements to internal-use software if those upgrades and enhancements result in additional

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functionality. If upgrades and enhancements do not result in additional functionality we expense those costs as incurred. If we were to make different determinations with respect to whether upgrades or enhancements to software projects would result in additional functionality, then the amount we capitalize and the amount we charge to expense for that project could differ materially.
We begin to amortize capitalized costs with respect to development projects for software for internal use when the software is ready for use. We generally amortize the capitalized software development costs using the straight-line method over a five-year period. In determining and reassessing the estimated useful life over which the cost incurred for the software should be amortized, we consider the effects of obsolescence, technology, competition and other economic factors. Amortization expense related to software for internal use was $18.4 million during 2002, $23.7 million during 2003 and $26.1 million during 2004. If we were to make different determinations with respect to the estimated useful lives of the software, then the amount of amortization we charge in a particular period could differ materially.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, we expense as incurred costs associated with software developed for license to customers because we apply the working model method and, as such, the costs incurred from the date of working model to commercial release to customers have not been material.
Valuation of Long-lived Assets. Long-lived assets, which consist primarily of property and equipment, including capitalized costs for software developed for internal use, and acquired intangible assets totaled $133.9 million as of December 31, 2003 and $113.1 million as of December 31, 2004. We periodically evaluate the estimated useful life of property and equipment and, when appropriate, adjust the useful life thereby increasing or decreasing the depreciation expense recorded in the current and in future reporting periods. We also assess the impairment of long-lived assets on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:
  •  significant underperformance relative to historical or projected future operating results;
 
  •  significant changes in technology or in the manner of our use of the assets or the strategy for our overall business; and
 
  •  significant negative industry or economic trends.
When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our business. This process is inherently subjective, as it requires management to make estimates and assumptions about future cash flows. We recorded impairment charges of $6.5 million during each of the years ended December 31, 2003 and 2004, related to certain internally developed software for which management has estimated that future cash flows will be less than the carrying value of the software.
Restructuring. 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 subleases, 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. If we were to make different determinations with respect to these factors the amounts of our restructuring charges could differ materially.
Deferred Tax Assets. As of December 31, 2003 and 2004, we had net deferred tax assets of approximately $4.8 million and $1.1 million, respectively. Such amounts are net of valuation allowances of $272.0 million and $313.4 million, respectively. We consider the scheduled reversal of deferred tax liabilities, projected future income and tax planning strategies in assessing the realizability of deferred tax assets. Management believes

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we will achieve profitable operations in future years that will enable us to recover the benefit of our deferred tax asset. However, in accordance with applicable accounting literature, we presently do not have sufficient objective evidence that it is more likely than not that we will realize the benefits from the deferred tax assets and, accordingly, have established a full valuation allowance for our U.S. and selected foreign net deferred tax assets as required by generally accepted accounting principles.
Contingencies. We periodically record the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. These events are called contingencies and our accounting for these events is prescribed by SFAS No. 5, Accounting for Contingencies. SFAS No. 5 defines a contingency as “an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.” Contingent losses must be accrued if:
  •  information is available that indicates it is probable that the loss has been incurred, given the likelihood of the uncertain future events; and
 
  •  that the amount of the loss can be reasonably estimated.
The accrual of a contingency involves considerable judgment on the part of management. Legal proceedings have elements of uncertainty, and in order to determine the amount of reserves required, if any, we assess the likelihood of any adverse judgments or outcomes to pending and threatened legal matters, as well as potential ranges of probable losses. We use internal expertise and outside experts, as necessary, to help estimate the probability that a loss has been incurred and the amount or range of the loss. A determination of the amount of reserves required for these contingencies is made after analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy. In the event that we incur a loss in the future with respect to a contingency for which General Electric has indemnified us, as part of the recapitalization, the resulting loss will be recorded in our net income for that period along with a corresponding capital contribution from General Electric.
Results of Operations
A summary of our revenue for 2002, 2003 and 2004 by category follows:
                                                     
    Year Ended December 31,
     
    2002   2003   2004
             
    $   %   $   %   $   %
                         
    (in thousands of dollars)
Revenues:
                                               
 
Transaction Processing and Maintenance
    255,398       62.3 %     243,567       67.0 %     231,817       70.6 %
 
Software Licensing
    11,731       2.9 %     9,347       2.6 %     8,984       2.7 %
 
Professional Services
    18,750       4.6 %     14,329       3.9 %     14,124       4.3 %
 
Legacy
    123,575       30.2 %     96,226       26.5 %     73,672       22.4 %
                                     
   
Total revenues
    409,454       100.0 %     363,469       100.0 %     328,597       100.0 %
                                     

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A summary of our costs and operating expenses for 2002, 2003 and 2004 follows:
                           
    Year Ended December 31
     
    2002   2003   2004
             
        (in thousands of dollars)
Costs and operating expenses:
                       
Cost of revenues
  $ 244,207     $ 207,056     $ 198,187  
Sales and marketing
    67,316       65,161       63,274  
General and administrative
    48,291       47,272       47,403  
Restructuring and related charges
    18,406       26,671       26,438  
Asset impairment charges
    5,425       6,500       6,509  
Corporate charges from General Electric Company
    7,331              
                   
 
Total costs and operating expenses
  $ 390,976     $ 352,660     $ 341,811  
                   
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenues. Revenues decreased by $34.9 million, or 9.6%, to $328.6 million for the year ended December 31, 2004 from $363.5 million for the year ended December 31, 2003, principally as a result of market conditions, pricing concessions on our EDI services and the continued de-emphasis of our legacy solutions that we are phasing out. The negative impact on revenues of these factors was partially offset by the addition of approximately $8.9 million of revenues from the acquisition of HAHT Commerce and the relative strength of foreign currencies, which increased by approximately $13.6 million, for 2004 compared to 2003.
Transaction Processing and Maintenance revenue, our main grouping comprised of recurring revenues, decreased by $11.8 million, or 4.8%, to $231.8 million for the year ended December 31, 2004 from $243.6 million for the year ended December 31, 2003. We have continued to pursue our strategy of offering customers more attractively priced packages of services in exchange for multi-year commitments. While we expect this to result in increased customer loyalty and revenue stability over the longer term, we are experiencing reduced realized price levels and revenues, predominantly in the United States, as we implement this strategy as well as experience aggressive reactive competition in the marketplace. We have also experienced a contraction in our overall customer base as smaller customers cancel their service. The declines have been partially offset by growth in our European operations and by the strength of the Euro and British pound relative to the U.S. dollar.
Software Licensing revenue declined by $0.3 million, or 3.2%, to $9.0 million for the year ended December 31, 2004 from $9.3 million for the year ended December 31, 2003. We continue to experience longer customer decision cycles to commit to major new systems implementations. However, revenues during the last six months of 2004 revenues were $2.5 million higher as compared to the first six months of 2004 principally attributable to increases in data synchronization software sales primarily as a result of the HAHT Commerce acquisition.
Professional Services revenue declined by $0.2 million, or 1.4%, to $14.1 million for the year ended December 31, 2004 from $14.3 million for the year ended December 31, 2003. The decline in professional services revenues is consistent with the reduction in new software licensing sales on which professional services are highly dependent.
Legacy Solutions revenue declined by $22.5 million, or 23.4%, to $73.7 million for the year ended December 31, 2004 from $96.2 million for the year ended December 31, 2003, 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 our expectations, will continue and perhaps begin to accelerate as we reallocate resources towards a consolidated computing infrastructure and focus resources on newer service offerings. 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. Year-over-year

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declines in these offerings were mitigated somewhat by favorable impact of foreign currency exchange of $3.2 million.
Cost of revenues. Cost of revenues decreased by $8.9 million, or 4.3%, to $198.2 million for the year ended December 31, 2004 from $207.1 million for the year ended December 31, 2003. The year-over-year decrease in cost of revenues is primarily driven by declines in compensation and related employee expenses as we continue to move forward with our transformation plan (including utilizing employees in lower cost locations), and by lower royalty payments to software licensors as a result of lower software sales. Also contributing to the decrease is a decline in professional services expense as we have started to utilize contractors in lower cost locations.
Sales and marketing. Sales and marketing expense decreased by $1.9 million, or 2.9%, to $63.3 million for the year ended December 31, 2004 from $65.2 million for the year ended December 31, 2003. The year-over-year decrease is primarily due to lower compensation and related employee expenses as a result of restructuring actions that took place during 2003 and 2004, the most significant of which are described above under “— Recent Trends and Cost-Reduction Initiatives,” and lower commission expense in line with decreased revenues. 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 operating the acquired HAHT Commerce business.
General and administrative. General and administrative expenses increased by $0.1 million, or 0.2%, to $47.4 million for the year ended December 31, 2004 from $47.3 million for the year ended December 31, 2003. The year-over-year increase is primarily driven by an increase in consulting expenses and professional fees during the first six months of 2004. Consulting expenses and professional fees included $2.7 million of 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 of 2004 and, as a result, general and administrative expenses decreased during the second half of 2004.
The weakening dollar caused cost of revenues, sales and marketing and general and administrative expenses to be approximately $11.5 million higher in 2004 compared to 2003.
Restructuring and related charges. Restructuring and related charges were $26.4 million for the year ended December 31, 2004 and included severance of $20.3 million and facility charges of $6.1 million. The majority of the 2004 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 reduced our global workforce by approximately 200 positions from the level that existed as of June 8, 2004. We also expect to shift additional employment to lower cost countries, particularly India and the Philippines. We paid $23.6 million of severance costs in 2004. The balance of the cash expenditures of these severance costs will be paid by the end of 2005 and the balance of these costs related to facilities will be paid in somewhat equal amounts through 2014.
Restructuring and related charges were $26.7 million for the year ended December 31, 2003. The 2003 charges related to facility and equipment lease buy-outs, facility exit costs, and severance for approximately 80 employees primarily in our factory, engineering, and services organizations.
Asset impairment charges. For the years ended December 31, 2004 and 2003, we recorded impairment charges of $6.5 million and $6.5 million, respectively. The impairment charges in both years related to internally developed software providing specific customer functionality. Future cash flows were estimated by management to be less than the current net book value of the software and, as a result, an impairment charges were recorded.
Proportionate share of losses in investee companies and investment write-downs. During the year ended December 31, 2004, we recorded our proportionate share of the losses of our equity method investments of $1.2 million. During the year ended December 31, 2003, we recorded our proportionate share of the losses of our equity method investments of $0.7 million. As of December 31, 2003 and 2004, we held four cost method

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investments and one equity method investment where the carrying value of the investment had not been completely written-off.
Write-off of deferred financing costs. Deferred financing costs of $5.5 million were written off during the year ended December 31, 2003. The write-off was related to the refinancing of a senior term loan entered into in late 2002 and refinancing during the first half of 2003.
Interest expense. Interest expense of $59.1 million for the year ended December 31, 2004, and $51.0 million for the year ended December 31, 2003, was primarily driven by interest on our long-term debt. The increase over the prior year relates to an increase in the interest rate being accrued on our $235.0 million senior subordinated reset notes from 12% to 15% as described in the following paragraph, 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 accrued interest at 12% per annum before September 27, 2003. After September 27, 2003, the senior subordinated reset notes accrue interest at a reset rate between 8% and 17%. The reset rate is to be determined by negotiations between General Electric Capital Corporation, or GECC, and us. These negotiations 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 December 31, 2004, the Company accrued interest at a rate of 15%, the rate which management believes to be the best estimate of where the negotiations will conclude. To the extent the reset rate exceeds 15%, we will have the option to pay cash interest of 15% and add the additional interest to the balance of the reset notes. A 1% change in the reset rate upon final negotiations will change interest expense by $2.4 million annually.
Other income (expense), net. Other income of $1.3 million for the year ended December 31, 2004, was primarily driven by net gains on foreign currency transactions of $1.5 million. Other income also included $0.5 million of minority interest income, offset by $0.8 million in fees relating to interest rate determination for our senior subordinated reset notes.
Other income was $1.2 million for the year ended December 31, 2003 and consisted primarily of net gains on foreign currency transactions of $0.5 million and minority interest income of $0.5 million.
Management fee from G International. On November 1, 2004, we entered into an employee services agreement with G International. The agreement provides that prior to completion of our acquisition of G International, certain of our executive officers will provide management services and other personnel will provide support services with respect to the business and operations of G International. Fees earned for these services were $0.3 million for the last two months of 2004.
Provision for income taxes. Income tax expense was $10.7 million for the year ended December 31, 2004 compared to $259.6 million for the year ended December 31, 2003. The income tax provision for 2003 includes the impact of a $259.8 million increase in the valuation allowance against our net deferred tax assets. Our tax rates for both periods differed from the federal statutory rate of 35% principally as result of state income taxes and the effect of losses in the U.S. and foreign jurisdictions for which no income tax benefits have been recognized. Our income tax expense for the year ended December 31, 2004 relates primarily to taxes for foreign jurisdictions in which we have income.
Net income (loss). Net loss decreased by $218.4 million to a net loss of $84.9 million for the year ended December 31, 2004 compared to a net loss of $303.3 million for the year ended December 31, 2003. The decrease of $218.4 million was primarily driven by the decreases in income tax expense of $248.9 million. We increased the valuation allowance recorded against our net deferred tax assets during the quarter ended December 31, 2003 by $259.8 million.

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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues decreased by $46.0 million, or 11.2%, to $363.5 million for the year ended December 31, 2003 from $409.5 million for the year ended December 31, 2002. The relative strength of foreign currencies caused an increase in revenues of approximately $15.0 million for 2003 compared to 2002.
Transaction Processing and Maintenance revenue decreased by $11.8 million, or 4.6%, to $243.6 million for the year ended December 31, 2003 from $255.4 for the year ended December 31, 2002. The decrease in Transaction Processing and Maintenance revenue was comprised of a $25.0 million revenue decline in the Americas resulting from lower EDI*Express volume and pricing offset by increases in revenue resulting from the favorable impact of foreign currency exchange of $9.4 million, Celarix revenue of $1.5 million, customer surcharges of $3.0 million and core revenue growth in Europe of $3.4 million. The impact on revenues of customer cancellations during the year ended December 31, 2003 was somewhat offset by price increases implemented in the fourth quarter of 2002.
Key factors contributing to the lower EDI*Express volume include cyclical economic pressure on our clients, volume impact of two clients, Kmart Corporation, who filed for bankruptcy during the first quarter of 2002, and Fleming Cos. Inc., who filed for bankruptcy during the second quarter of 2003 and a significant client whose volumes with us were negatively impacted by the consolidation of ordering activity from individual stores to regional distribution centers.
Software Licensing revenue decreased by $2.4 million, or 20.5%, to $9.3 million for the year ended December 31, 2003 from $11.7 million for the year ended December 31, 2002. The $2.4 million revenue decrease is primarily the result of fewer license sales of our traditional software offerings offset by a favorable impact of foreign currency exchange of $0.3 million.
Professional Services revenue decreased by $4.5 million, or 23.9%, to $14.3 million for the year ended December 31, 2003 from $18.8 million for the year ended December 31, 2002. The decline in professional services revenues is consistent with the reduction in new software licensing sales as well as the conclusion of a significant project in 2002.
Legacy Solutions revenue decreased $27.4 million, or 22.2%, to $96.2 million for the year ended December 31, 2003 from $123.6 million for the year ended December 31, 2002. The decrease in revenue is in line with expectations as customers continue to migrate away from legacy applications to open systems based solutions. Decreased business volume was offset by a favorable impact of foreign currency exchange of $3.7 million.
Cost of revenues. Cost of revenues decreased by $37.1 million, or 15.2%, to $207.1 million for the year ended December 31, 2003 from $244.2 million for the year ended December 31, 2002. The decrease in cost of revenues is driven by the impact of restructuring actions taken during 2002 as well as actions taken in 2003 to align our cost structure with our revenue. As demand for our products and services declined, we curtailed a number of product development programs. The impact of the actions contributed to a decline of $23.9 million in network equipment expense and a $21.8 million decline in compensation, contractors and related expenses for the year ended December 31, 2003.
Sales and marketing. Sales and marketing expense decreased by $2.1 million, or 3.1%, to $65.2 million for the year ended December 31, 2003 from $67.3 million for the year ended December 31, 2002. The year-over-year decrease is primarily attributable to the consolidation of marketing and development programs and our efforts to reduce our cost structure by reorganizing our sales force more broadly across all product lines and closing various sales offices. This decrease is offset by an increase in expenses related to the upgrade of our sales force. These actions resulted in an increase of $3.6 million in compensation, contractors and related costs, and a decrease of $3.1 million related to the closing and consolidation of various facilities.
General and administrative. General and administrative expenses decreased by $1.0 million, or 2.1%, to $47.3 million for the year ended December 31, 2003 from $48.3 million for the year ended December 31, 2002. The decrease for the year ended December 31, 2003 was primarily driven by a decrease in compensation and benefits as a result of actions taken to align our cost structure with our revenue.

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The weakening dollar caused cost of revenues, sales and marketing and general and administrative expenses to be approximately $10.0 million higher in 2003 compared to 2002.
Restructuring and related charges. Restructuring and related charges increased by $8.3 million, or 45.1%, to $26.7 million for the year ended December 31, 2003 from $18.4 million for the year ended December 31, 2002. The 2003 charges related to facility and equipment lease buy-outs, facility exit costs including a restoration obligation, and severance for approximately 80 employees primarily in our factory, engineering, and services organizations. The 2002 activities resulted in the termination of approximately 300 people resulting in a restructuring and related charge of $18.4 million, principally related to severance and related termination costs, costs associated with the closings of sales, services and engineering facilities and buy-out of certain equipment operating leases. A portion of these costs were reimbursed by General Electric as part of the September 2002 recapitalization agreement. The reimbursements are reflected as contributions to additional paid-in capital.
Asset impairment charges. For the year ended December 31, 2003, we recorded an impairment charge of $6.5 million related to internally developed software providing specific customer functionality. Future cash flows were estimated by management to be less than the current net book value of the software and, as a result, an impairment charge was recorded. For the year ended December 31, 2002, we recorded an impairment charge of $5.4 million primarily related to certain software under development for which the plans to deploy were curtailed.
Corporate charges from General Electric. The corporate charges from General Electric were $7.3 million for the year ended December 31, 2002. Each year, General Electric charged us a fixed percentage of our budgeted total costs for that year as a corporate charge, which covered various centralized services that General Electric provided to us as needed, such as compensation and benefit plan design, tax planning, marketing support, treasury, auditing, public company reporting and various other corporate expenses. Following the recapitalization, we no longer pay a corporate charge to General Electric. As a stand-alone entity, the replacement costs of these General Electric services are now recognized in the respective functions where incurred.
Proportionate share of losses in investee companies and investment write-downs. During year ended December 31, 2003, we recorded our proportionate share of the losses of our equity method investments of $0.7 million. During the year ended December 31, 2002, we recognized losses on our various cost and equity method investments of $4.7 million. Of this amount $1.3 million related to our proportionate share of losses of one equity method investment and $3.4 million related to write-down of several cost method investments where we determined the decline in value was other than temporary.
Write-off of deferred financing costs. Deferred financing costs of $5.5 million were written off during the year ended December 31, 2003. The write-off was related to the refinancing of our original senior term loan.
Interest expense. Interest expense of $51.0 million for the year ended December 31, 2003, and $14.5 million for the year ended December 31, 2002, was primarily driven by interest on our long-term debt issued in connection with the recapitalization.
Provision for income taxes. Income tax expense was $259.6 million for the year ended December 31, 2003 compared to $9.9 million for the year ended December 31, 2002. The income tax provision for 2003 includes the impact of a $259.8 million increase in the valuation allowance against our net deferred tax assets during the quarter ended December 31, 2003. Our income tax provision for 2002 includes $8.3 million of income taxes we incurred upon the repatriation of foreign earnings, which previously had not been taxable in the United States, and a $0.9 million charge to reflect changes in our net deferred tax assets resulting from the change in control effected by the recapitalization. Our tax rates for both periods 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 income (loss). Net loss increased by $263.8 million to a net loss of $303.3 million for the year ended December 31, 2003 compared to a net loss of $39.5 million for the year ended December 31, 2002. The increase of $263.8 million was primarily driven by the increase in the valuation allowance recorded against our net deferred tax assets.

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Liquidity and Capital Resources
Sources and Uses of Cash
The following table is a summary of our sources and uses of cash during 2002, 2003 and 2004:
                         
    Year ended December 31,
     
    2002   2003   2004
             
    (in thousands of dollars)
Cash flows from operating activities
  $ 9,168     $ 38,762     $ 8,036  
Cash flows from investing activities
    (43,815 )     (28,795 )     (37,623 )
Cash flows from financing activities
    56,534       (4,933 )     6,048  
Effect of exchange rate changes on cash
    813       4,363       1,297  
                   
Net increase (decrease) in cash and cash equivalents
  $ 22,700     $ 9,397     $ (22,242 )
                   
Cash and cash equivalents, end of year
  $ 37,333     $ 46,730     $ 24,488  
                   
2004 Compared to 2003
Net cash provided by operating activities was $8.0 million in 2004 compared to $38.8 million in 2003. The decrease in net cash provided by operating activities from 2003 to 2004 of $30.8 million was mainly attributable to lower operating income before depreciation and amortization of $19.6 million together with higher cash interest payments, which increased by $6.8 million, higher income tax payments, which increased by $3.3 million, and increases in deferred income and accrued expenses.
Net cash used in investing activities was $37.6 million in 2004 compared to $28.8 million in 2003. Net cash used in investing activities in 2004 included $15.0 million for the acquisition of HAHT Commerce, net of $4.5 million of cash acquired. Net cash used in investing activities for 2004 also included capital expenditures of $27.9 million for property, software and equipment. Net cash used in investing activities in 2003 included capital expenditures of $29.4 million for property, software and equipment, offset by proceeds of $0.6 million from the sale of software and assets related to our I400 software product. Capital expenditures for 2003 and 2004 include $19.9 million and $14.7 million, respectively, of costs capitalized for the development of software for internal use. The lower capital expenditures in 2004 resulted from decreasing our investment in products and services with lower revenue expectations, while directing investments in new products and services and those with greater growth expectations based upon then-existing market conditions and outlook.
Net cash provided by financing activities was $6.0 million in 2004 compared to net cash used in financing activities of $4.9 million for 2003. Cash provided by financing activities for 2004 consisted primarily of a $6.2 million reimbursement by General Electric pursuant to the agreements entered into in connection with our recapitalization in 2002, as discussed in note 1 of our consolidated financial statements included herein. Cash used in financing activities in 2003 was driven by $12.6 million of professional and underwriting fees related to our debt refinancing, and cash of $174.0 million used to retire borrowings under our previous term loan, offset by $169.8 million from the refinancing and a $12.5 million reimbursement by General Electric pursuant to the recapitalization agreement.
2003 Compared to 2002
Net cash provided by operating activities was $38.8 million in 2003 compared to $9.2 million in 2002. The increase in net cash provided by operating activities from 2002 to 2003 of $29.6 million was mainly attributable to changes in operating assets and liabilities including $26.7 million in restructuring charges relating to severance and related termination costs and costs associated with the closing of facility space, which will be funded in future years.
Net cash used in investing activities was $28.8 million in 2003 compared to $43.8 million in 2002. Net cash used in investing activities in 2003 included capital expenditures of $29.4 million for property, software and equipment, offset by proceeds of $0.6 million from the sale of software and assets related to our I400 software

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product. Net cash used in investing activities in 2002 consisted primarily of capital expenditures for property, software and equipment of approximately $37.8 million and acquisitions of minority interests in affiliates of approximately $6.0 million. Capital expenditures for 2002 and 2003 include $26.9 million and $19.9 million, respectively, of costs capitalized for the development of software for internal use. The lower capital expenditures in 2003 resulted from our efforts to invest in line with lower revenue expectations for certain products and services.
Net cash used for financing activities was $4.9 million in 2003 compared to net cash provided by financing activities of $56.5 million for 2002. Cash used in financing activities in 2003 was driven by $12.6 million of professional and underwriting 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 $12.5 million reimbursement by General Electric pursuant to the recapitalization agreement. Cash provided by financing activities for 2002 consisted primarily of repayments by our foreign subsidiaries of borrowings under third-party lines of credit, partially offset by repayments of loans we had made to General Electric and its affiliates in connection with tax planning and cash management. Cash provided by financing activities during 2002 also reflects the impact of the recapitalization which resulted in the borrowing of $410.0 million, the payment of financing costs of $11.6 million and the cash distribution to General Electric of $350.0 million. In connection with the recapitalization, all intercompany balances that existed between us and General Electric and its affiliates, including any remaining balances on intercompany loans, were eliminated.
Liquidity
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 December 31, 2004, we had outstanding debt of approximately $406.5 million, which consisted of $235.0 million of outstanding senior subordinated reset notes, $101.5 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 $3.5 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 December 31, 2004, we had $70.0 million outstanding under the senior term loan facility. Borrowings outstanding under the facility at December 31, 2004 bear interest at 8.25%. In addition, as of the date of this report, we have approximately $8.9 million of letters of credit outstanding under our revolving credit facility. The amount that can be borrowed under the revolving credit facility is limited to a percentage of EDI revenues as defined in the agreement governing the credit facility, and is subject to our compliance with financial 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 December 31, 2004. In January 2005, we borrowed $5.0 million under our revolving credit facility for general corporate purposes, all of which has been repaid.
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,

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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 outstanding reset and floating rate notes contain similar limitations. In addition, the indenture governing our outstanding 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 Earnings before Interest, Taxes, Depreciation and Amortization, (EBITDA), as defined in our credit facility, 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 senior secured floating rate notes, and the indenture governing the senior subordinated 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. We expect that we will be able to comply with these covenants in future periods. However, if the compliance is not achieved, we may need to seek waivers or additional covenant amendments from the lender or additional sources of funding. There can be no assurance that such waivers, covenant amendments or funding will be available, if required.
The excluded costs and expenses include fees related to the 2002 recapitalization, non-cash charges, restructuring charges, costs reimbursed by General Electric, and other adjustments. As defined under our credit facility, EBITDA for the twelve-months period ended December 31, 2004 is equal to $73.5 million. For the twelve-month period ended December 31, 2004, our consolidated leverage ratio was equal to 2.5 to 1.0, based on senior debt of $183.9 million and EBITDA of $73.5 million. While EBITDA as defined in our credit facility is a measure used therein, EBITDA is not a financial measure calculated 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 $49.5 million during each fiscal year. For the year ended December 31, 2004, our capital expenditures totaled $27.9 million.
The senior secured floating rate notes are scheduled to mature on July 15, 2008 and accrue interest at a floating rate based on six-month LIBOR plus 9%, but never less than 12%. The interest rate at December 31, 2004 was 12%. The senior secured floating rate notes are secured by second-priority security interests in substantially all of our assets and our domestic subsidiaries’ and 66% of the stock of our material foreign subsidiaries. In addition, the senior secured floating rate notes are guaranteed fully and unconditionally by our domestic subsidiaries. Interest is payable semi-annually in arrears on January 15 and July 15 of each year commencing on July 15, 2003.
The senior secured floating rate notes are redeemable at our option any time, 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.

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Our senior subordinated reset notes are scheduled to mature on September 27, 2009 and accrued interest at 12% per annum before September 27, 2003. After September 27, 2003, the senior subordinated reset notes accrue interest at a reset rate between 8% and 17%. The reset rate is to be determined by negotiations between GECC and us. These negotiations began in July 2003 and are continuing. The parties have not reached a definitive agreement on the reset rate and have each engaged investment bankers to determine the reset rate. For the period from September 27, 2003 to December 31, 2004, the Company accrued interest at a rate of 15%, the rate which management believes to be the best estimate of where the negotiations will conclude. To the extent the reset rate exceeds 15%, we will have the option to pay cash interest of 15% and add the additional interest to the balance of the reset notes. Interest is payable semi-annually on April 15 and October 15 of each year commencing April 15, 2003. The senior subordinated reset notes are general unsecured obligations and are guaranteed by all of our domestic subsidiaries. The senior subordinated reset notes are redeemable at our option, in whole or in part, at any time on or after 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 subordinated 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 selective acquisition opportunities. We expect to finance any future acquisitions using cash, capital stock, notes and/or assumption of indebtedness. However, the restrictions imposed on us by the agreements governing our debt outstanding at the time may affect this strategy. In addition, to fully implement our growth strategy and meet the resulting capital requirements, we may be required to request increases in amounts available under our revolving credit facility, enter into new credit facilities, issue new debt securities or raise additional capital through equity financing. We may not be able to obtain an increase in the amounts available under our credit facility, if requested, on satisfactory terms and we may not be able to successfully complete any future bank financing or other debt or equity financing on satisfactory terms, if at all. As a result, our ability to make future acquisitions is uncertain. As discussed previously, we have recently completed the acquisitions of Celarix and HAHT Commerce and have announced our intention to acquire G International.
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.

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Contractual Obligations and Other Commitments
Our principal contractual obligations and commercial commitments include our existing senior term loan and revolving credit facility, the senior subordinated reset notes, the senior secured floating rate notes, operating leases and other commitments principally relating to multi-year software maintenance agreements. The following tables summarize these obligations at December 31, 2004 and their expected effect on our liquidity and cash flows in future periods.
                                         
    Payments due by period
     
        Less than   1-3   3-5   More than
    Total   1 year   years   years   5 years
                     
Contractual Obligations:
                                       
Long-term debt
  $ 410,000     $     $ 70,000     $ 340,000     $  
Operating leases
    89,896       15,340       22,887       16,430       35,239  
Other commitments
    1,399       1,097       302              
                               
Total contractual cash obligations
  $ 501,295     $ 16,437     $ 93,189     $ 356,430     $ 35,239  
                               
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 December 31, 2004 was approximately $0.5 million in the aggregate.
Off-Balance Sheet Arrangements
We did not enter into any off-balance sheet arrangements during 2003 or 2004, nor did we have any off-balance sheet arrangements outstanding at December 31, 2003 or 2004.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based Payment, which replaces SFAS No. 123 and supercedes APB No. 25. This statement requires compensation costs relating to share-based payment transactions to be recognized in financial statements based upon the fair value of the award. SFAS No. 123R eliminates the option to account for the cost of stock-based compensation using the intrinsic value method as allowed under APB 25 and the minimum value method allowed under SFAS No. 123 for equity investments not traded on public markets. SFAS No. 123R is effective for nonpublic entities for fiscal years beginning after December 15, 2005. Therefore, we expect to adopt SFAS No. 123R as of the beginning of our fiscal year ending December 31, 2006. We are currently evaluating the impact the adoption of SFAS No. 123R will have on our consolidated financial statements.

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Factors That Could Affect Future Results
We depend on General Electric and its affiliates as customers.
General Electric, together with its affiliates, historically has been among our largest five customers and is currently our largest customer. For the year ended December 31, 2004, General Electric and its affiliates generated approximately 9.0% of our total revenues. In addition, General Electric and its affiliates have also acted as trial customers for some of our new products and services. As a result of the recapitalization in 2002, General Electric retained only 10.0% of the common stock of our parent, GXS Holdings, Inc., and an equivalent interest in GXS Holdings’ preferred stock. Because we are no longer a wholly owned subsidiary of General Electric, we may not be able to benefit from our relationship with them as we have in the past. For example, for the two years following our 2002 recapitalization, General Electric was required to maintain its and its affiliates’ respective business arrangements with us on terms and conditions substantially similar to those in effect at the time of the recapitalization and to purchase products and services from us at a specified level. General Electric’s obligation to purchase such product and services ended in September 2004. We cannot provide any assurances that General Electric and its affiliates will continue their customer relationships with us, and expect purchases from General Electric and its affiliates to decrease by more than 50% in 2005 over 2004 levels. In addition, our profitability could be adversely affected if General Electric and its affiliates were to purchase lower margin products and services than they have historically purchased. If General Electric or any of its affiliates were to terminate or materially alter their customer relationships with us, our business, financial position and results of operations could be adversely affected.
Because much of our operations are conducted, and most of our assets are held, by our subsidiaries, we will depend on our subsidiaries for cash and to service our debt.
Substantially all of our operations are conducted through subsidiaries. Consequently, our cash flow and ability to service our debt obligations are dependent upon the earnings of our operating subsidiaries and the distribution of those earnings to us, or upon loans, advances or other payments made by our subsidiaries to us. The ability of our subsidiaries to pay dividends or make other payments or advances to us will depend upon their operating results and will be subject to applicable laws and contractual restrictions contained in the instruments governing their debt, including our credit facility and the indentures governing our senior secured floating rate notes and our senior subordinated reset notes. Although the agreements governing our outstanding debt limit the ability of these subsidiaries to enter into consensual restrictions on their ability to pay dividends and make other payments to us, these limitations are subject to a number of significant qualifications. We cannot assure that the earnings of our operating subsidiaries will be adequate for us to service our debt obligations or meet our other obligations as they become due.
We engage in significant transactions with our affiliates.
Historically, we have engaged in a variety of transactions with our affiliates, including significant business with General Electric and its affiliates. In addition, in connection with the 2002 recapitalization, we entered into a number of agreements with General Electric, its affiliates and Francisco Partners. We have also entered into an agreement with Francisco Partners with respect to our proposed acquisition of G International from Francisco Partners. Although we believe that our agreements with General Electric, its affiliates and Francisco Partners are and will be fair to us in all material respects, the terms of the agreements are not necessarily the same terms that we would have received in arms’ length transactions with third parties. We expect that, in the future, we will continue to enter into a variety of transactions with our affiliates, some of which may be significant. Although the agreements governing our outstanding debt require that these types of transactions be on terms no less favorable to us or the applicable subsidiary than those which could be obtained on an arms’ length basis from third parties, this limitation is subject to a number of important qualifications and exceptions and we cannot be certain that these types of transactions will not adversely affect our business, financial condition or results of operations.
In addition, conflicts of interest may arise with General Electric or Francisco Partners in a number of areas relating to our past and ongoing relationships, including potential competitive business activities, tax and

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employee benefit matters, and indemnity arrangements related to the 2002 recapitalization and our proposed acquisition of G International.
Francisco Partners indirectly controls approximately 90% of our capital stock, and there may be situations in which the interests of Francisco Partners and the interests of holders of our outstanding debt will not be aligned.
Francisco Partners indirectly controls approximately 90% of our capital stock. As a result, Francisco Partners is able to:
  •  elect all of our directors and, as a result, control matters requiring board approval;
 
  •  control matters submitted to a stockholder vote, including mergers, acquisitions and consolidations with third parties and the sale of all or substantially all of our assets; and
 
  •  otherwise control or influence our business direction and policies.
As a result, circumstances may occur in which the interests of Francisco Partners could be in conflict with the interests of the holders of our outstanding debt. In addition, Francisco Partners may have interests in pursuing acquisitions, divestitures or other transactions that, in their judgment could enhance their equity investment, even though the transactions might involve risks to the holders of our outstanding debt.
A significant portion of our services is delivered using a proprietary operating system and loss or disruption of this operating system could adversely affect our ability to service customers.
We utilize a proprietary operating system, known as Mark III®, on mainframe computers manufactured by Bull, S.A. to deliver approximately 41% of our Transaction Processing and Maintenance and almost all of our Custom Messaging and Network Solutions for the year ended December 31, 2004. Revenues derived from products and services using this operating system represented approximately 35% of our total revenues for the year ended December 31, 2004. Currently, we have approximately eight full-time equivalent engineers who are qualified to maintain this operating system. We believe this number of engineers is adequate to maintain the Mark III® systems we currently use. We are, however, in the process of migrating all EDI services currently provided using this operating system to processors utilizing newer technologies. We expect this migration to take several years. While we are completing the migration, there is a risk that the unavailability of these engineering personnel could disrupt the delivery to our customers of services utilizing the Mark III® operating system.
Our inability to adapt to rapid technological change could impair our ability to remain competitive.
The industry in which we compete is characterized by rapid technological change, frequent new product and service introductions and evolving industry standards. Our future success will depend in significant part on our ability to anticipate industry standards and to continue to enhance existing products and services and introduce and acquire new products and services on a timely basis to keep pace with technological developments. We expect that we will continue to incur significant expenses in the design, development and marketing of new products and services. Our competitors may implement new technologies before we are able to implement them, allowing our competitors to provide more effective products and services at lower prices.
We cannot assure that we will be successful in developing, acquiring or marketing new or enhanced products or services that respond to technological change or evolving industry standards, that we will not experience difficulties that could delay or prevent the successful development, acquisition or marketing of such products or services or that our new or enhanced products and services will adequately meet the requirements of the marketplace and achieve market acceptance. Any delay or failure in the introduction of new or enhanced products or services, or the failure of such products or services to achieve market acceptance, could have a material adverse effect on our business, results of operations and financial condition.

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Short product life cycles make it difficult to recover the cost of development and force us to continually qualify new products with our customers.
Over the last several years, the rate at which new technological developments have been introduced into the market has grown at a much more rapid pace than it had previously. Continually updated standards for the electronic exchange of information, such as those issued by the American National Standards Institute have required us to produce successive generations of our Transact Solutions and some of value-added solutions and related software with additional functionality. Because we are required to implement these frequently issued standards, the life cycles of our products have shortened. We typically release new versions of our products every six to twelve months. Short product cycles make it more difficult for us to recover the costs associated with product development because those costs must be recovered over increasingly shorter periods of time. We expect this trend to continue, and it may even accelerate. As a result, we may not be able to recover all of our product development costs, which could affect our profitability. For our products to be competitive, we must be among the first to market with next-generation products. Any failure or delay in the product development or quality assurance process can result in our losing sales until we are able to introduce the new product.
We may experience product failures or other problems with existing or new products, all of which could adversely impact our business.
Software products as complex as those we offer may contain undetected errors or failures when first introduced or when new versions are released. If software errors are discovered after introduction, we could experience delays or lost revenues during the period required to correct the errors. We cannot be certain that errors will not be found in new products or services after commencement of commercial operations, resulting in loss of, or delay in, market acceptance, which could have a material adverse effect on our business, results of operations and financial condition.
Our operations are dependent on our ability to protect our data centers against damage.
Our operations are dependent upon our ability to protect our computer equipment and the information stored in our data centers against damage that may be caused by fire, power loss, telecommunications failures, unauthorized intrusion, computer viruses and disabling devices, natural disasters and other similar events. We cannot assure that a fire or other natural disaster, including national, regional or local telecommunications disruptions, would not result in a prolonged disruption of our network services or permanently impair some of our operations. A prolonged service disruption or other impairment of operations could damage our reputation with customers, expose us to liability, cause us to lose existing customers or increase our difficulty in attracting new ones. We may also incur significant costs for using alternative off-site equipment or taking other actions in preparation for, or in reaction to events that damage our data centers.
We maintain business interruption insurance. However, even if we recovered under such an insurance policy, the lost revenues or increased costs that we experience during the disruption of our network services business, and longer term revenue losses, which may not be recoverable under the policy, could result from possible losses of customers. If this were to occur, our business, results of operations and financial condition could be materially adversely affected.
Security breaches could harm our business.
A significant component of electronic data interchange and marketplaces is the secure transmission of confidential information over telecommunications networks. In facilitating data exchange between our customers and their trading partners, we rely on encryption and authentication technology licensed from third parties and intrusion detection technologies to protect the confidentiality of our customers’ information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. Our security measures may not prevent security breaches. Our failure to

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prevent security breaches could harm our business, damage our reputation and expose us to a risk of loss or litigation and possible liability.
Risks associated with the Internet, changing standards, alternate technologies and competition may adversely impact our business.
The use of the Internet as a vehicle for electronic data interchange and marketplaces raises numerous issues, including reliability, data security, data integrity and rapidly evolving standards. We cannot be certain that any products and services that we introduce will adequately meet the requirements of the marketplace or achieve market acceptance. Moreover, new competitors, which may include media, software vendors and telecommunications companies, offer services that utilize the Internet in competition with our products and services. Although we believe that the Internet will provide opportunities to expand the use of our products and services, we cannot ensure that our efforts to exploit these opportunities will be successful or that increased usage of the Internet for transaction management infrastructure products and services or increased competition will not adversely affect our business, results of operations and financial condition.
A failure to attract or retain qualified personnel or highly skilled employees could adversely affect our business.
Given the complex nature of the technology on which our business is based and the speed with which such technology advances, our future success is dependent, in large part, upon our ability to attract and retain highly qualified managerial, technical and sales personnel. Competition for talented personnel is intense, and we cannot be certain that we can retain our managerial, technical and sales personnel or that we can attract, assimilate or retain such personnel in the future. Our inability to attract and retain such personnel could have a material adverse effect on our business, results of operations and financial condition.
We rely on intellectual property and proprietary rights to maintain our competitive position and, therefore, our failure to protect adequately our intellectual property and proprietary rights could adversely affect our business.
We believe that proprietary products and technology are essential to establishing and maintaining our technology leadership position. We seek to protect our intellectual property through patents, trademarks, service marks, domain names, trade secrets, copyrights, confidentiality, non-compete and nondisclosure agreements and other measures, some of which afford only limited protection. We currently have four United States patents; however, as a part of our recent effort to expand our patent portfolio, we have filed 24 patent applications that improve upon our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary through reverse engineering or otherwise. We cannot assure that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar or superior technology or design around our intellectual property. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States. Our failure to protect adequately our intellectual property and proprietary rights could have a material adverse effect on our business, financial condition, and results of operations. Intellectual property protections may also be unavailable, limited or difficult to enforce in some countries, which could make it easier for competitors to capture market share.
We use, and intend to use in the future, new technology in our products and services. While we do not believe that any of our products or services infringe the valid proprietary rights of third parties in any material respect, we cannot be certain that our products do not and will not be alleged to infringe upon issued patents or other intellectual property rights of others. Any claims from third parties, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available, if at all, on terms acceptable to us and will likely be an increase in our product costs in the way of additional royalty payments or other fees, which could have a material adverse effect on our business, results of operations and financial condition. In addition, to the extent that we indemnify our customers for infringement claims brought as a

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result of their use of our products, we could incur significant expenses in defending such claims and for any resulting judgments.
We may make investments in entities that we do not control.
We currently have established joint ventures with several entities to provide increased customer service and enhance our marketing presence in non-U.S. markets. These joint ventures have been entered into to distribute our products and services in the local country, to provide domestic Transact Solutions in the country using software licensed by us to the joint venture, or to develop new products or services. These existing investments are not individually or collectively material to our business.
We anticipate continuing these strategic relationships and entering into future joint ventures with other entities, including third-party software vendors, consulting companies, systems integrators, Internet service providers and other information technology companies. We have in the past made, and may in the future make, investments in joint ventures without controlling their operations. Our current and any future investments in joint ventures may involve risks such as:
  •  difficulties inherent in assessing the value, strengths and weaknesses of investment opportunities;
 
  •  difficulties in integrating and managing newly acquired operations and improving their operating efficiency; or
 
  •  potential disruption of our ongoing business and diversion of our resources and management time.
Our inability to control entities in which we invest may have consequences for our ability to receive distributions from those entities or to implement our business plan. Debt or other agreements, if entered into by an entity not under our control, may restrict or prohibit that entity from paying distributions to us. Applicable state or local law may also limit the amount that a non-controlled entity is permitted to pay as a distribution on its equity interest, and we may not be able to influence the payment of dividends even if the payment was not otherwise restricted. If any of the other investors in a non-controlled entity fail to observe their commitments, that entity may not be able to operate according to its business plan or we may be required to increase our level of commitment.
We may selectively seek acquisitions in the future, which could expose us to significant business risks.
We may expand our operations through future acquisitions of companies with complementary products and technologies. Our ability to consummate and to integrate effectively any future acquisitions on terms that are favorable to us may be limited by the number of attractive acquisition targets, internal demands on our resources and our ability to obtain financing on satisfactory terms, if at all. In addition, acquisitions may expose us to certain risks including:
  •  we may pay more than the acquired company is worth;
 
  •  we may be entering markets in which we have little or no direct prior experience; and
 
  •  our ongoing business may be disrupted and resources and management time diverted.
In addition, future acquisitions could result in the incurrence of additional debt, costs, contingent liabilities and amortization expenses related to intangible assets, all of which could have a material adverse effect on our business, financial condition or results of operations. We may also incur costs and divert management attention for acquisitions which are never consummated. Integration of acquired operations may also take longer, or be more costly or disruptive to our management and business, than originally anticipated. It is also possible that expected synergies from future acquisitions may not materialize. Our ability to implement and realize the benefits of our strategy may also be affected by a number of factors beyond our control, such as operating difficulties, increased operating costs, regulatory developments, general economic conditions, increased competition or the inability to obtain adequate financing for our operations on suitable terms. Our failure to effectively address any of these issues could adversely affect our results of operations, financial condition and ability to service debt.

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Although we anticipate that we would perform a due diligence investigation of each business that we acquire, there may be liabilities of the acquired companies that we fail or are unable to discover during our due diligence investigation and for which we, as a successor owner, may be responsible. In connection with acquisitions, we anticipate that we would seek to minimize the impact of these types of potential liabilities by obtaining indemnities and warranties from the seller, which may in some instances be supported by deferring payment of a portion of the purchase price. However, these indemnities and warranties, if obtained, may not fully cover the liabilities because of their limited scope, amount or duration, the financial resources of the indemnitor or warrantor or other reasons.
Delays and inaccuracies in our billing and information systems may have an adverse effect on our operations.
Sophisticated information and billing systems are vital to our growth and ability to monitor costs, bill customers, provide services to customers and achieve operating efficiencies. As we begin to offer new products and services, we may be required to install new billing systems or upgrade existing ones. Delays or inaccuracies in billing, our inability to implement solutions in a timely manner or our failure to implement and maintain sophisticated information and billing systems may have an adverse effect on our business and results of operations.
The markets in which we compete are highly competitive.
The markets for our products and services are increasingly competitive and global. As a result, we encounter intense competition in all parts of our business. Moreover, we have seen a trend among many of our customers to reduce their ongoing investments in expensive software systems. We expect competition to increase in the future both from existing competitors and new companies that may enter our markets. To remain competitive, we will need to invest continuously in product development, marketing, customer service and support and service delivery infrastructure. However, we cannot assure that new or established competitors will not offer products and services that are superior to or lower in price than ours. We may not have sufficient resources to continue the investments in all areas of product development and marketing needed to maintain our competitive position. In addition, most of our agreements with our customers are short-term.
We may require additional capital in the future, and additional funds may not be available on terms acceptable to us.
It is possible that we may need to raise additional capital to fund our future activities, to maintain spending on new product development in order to stay competitive in our markets or to acquire other businesses, products or technologies. Subject to the restrictions contained in our credit facility and the indentures governing our senior secured floating rate notes and our senior subordinated reset notes, we may be able to raise these funds by selling securities to the public or selected investors or by borrowing money. However, we may not be able to obtain these additional funds on favorable terms, or at all. None of Francisco Partners, its co-investors or General Electric is obligated to provide additional funding. If adequate funds are not available, we may be required to curtail our operations significantly, reduce planned capital expenditures and research and development, make selective dispositions of our assets or obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to technologies or potential markets, or otherwise impair our ability to remain competitive.
We are exposed to general economic conditions, which could have a material adverse impact on our business, operating results and financial condition.
The United States and other world markets appear to be emerging from a severe economic downturn. Many of our markets have been affected by this downturn, resulting in negative impacts on our financial performance. Lagging impacts from this downturn could cause additional adverse impacts on our financial performance. In addition, uncertainty relating to recent events in the Middle East, including the potential for continued armed conflict, could further increase the financial and economic instability we have been facing. While the precise

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effects of such instability on our industry and our business are difficult to determine, they may have an adverse impact on our business, profitability and financial condition.
As a result of unfavorable general economic conditions and reduced capital spending by customers, our revenues have continued to decline in recent quarters. However, if the economic conditions in the United States and the other markets we serve continue or worsen, we may experience a material adverse impact on our business, operating results and financial condition.
We may experience fluctuations in our quarterly operating results because of factors over which we have little or no control.
Our future quarterly operating results may vary, and we may experience reduced levels of earnings or losses in one or more quarters. Fluctuations in our quarterly operating results could be the product of a variety of factors, including:
  •  changes in the level of revenues derived from our products and services;
 
  •  the timing of new product and service announcements by us or our competitors;
 
  •  changes in pricing policies by us or our competitors;
 
  •  market acceptance of new and enhanced versions of our products and services or the products and services of our competitors;
 
  •  the size and timing of significant orders;
 
  •  changes in operating expenses;
 
  •  changes in our strategy;
 
  •  the introduction of alternative technologies;
 
  •  the effect of acquisitions we might make; and
 
  •  industry and general economic factors.
We operate with no material product order backlog because our products and services generally are delivered shortly after orders are received. As a result, licensing revenues in any quarter are substantially dependent on the quantity of such products licensed in that quarter. Our expense levels are based, in part, on our expectations as to future revenues. A large portion of our cost structure, however, is relatively fixed in nature and cannot be adjusted immediately in response to market conditions. If revenue levels are below expectations, our operating results are likely to be adversely affected unless we are willing and able to reduce our expenses proportionally. As a result of the foregoing factors, comparisons of results of operations between particular periods are not necessarily meaningful and historical results of operations are not necessarily indicative of future performance.
We operate internationally, which exposes us to risks that are difficult to quantify.
Historically, sales of our products and services outside the United States have been significant. For the year ended December 31, 2004, we derived approximately 46% of our total revenues from customers outside of the United States. The acquisition of G International would increase our presence abroad and our non-U.S. generated revenues (although on a percentage basis the split between U.S. and non-U.S. revenues is expected to remain comparable). Our ability to operate our business internationally in the future will depend upon, among other things, our ability to attract and retain talented and qualified managerial, technical and sales personnel and network services customers outside of the United States and our ability to continue to manage our international operations.

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International operations are subject to the risks of doing business abroad, including:
  •  unexpected changes in regulatory requirements and tariffs;
 
  •  longer payment cycles;
 
  •  increased difficulties in collecting accounts receivable;
 
  •  potentially adverse tax consequences from operating in multiple jurisdictions;
 
  •  currency exchange rate fluctuations;
 
  •  difficulties in repatriating earnings;
 
  •  political and economic instability;
 
  •  global and regional economic slowdowns;
 
  •  power supply stoppages and shutdowns;
 
  •  difficulties in staffing and managing foreign operations and other labor problems;
 
  •  seasonal reductions in business activity in the summer months in Europe and other regions;
 
  •  the credit risk of local customers and distributors; and
 
  •  potential difficulties in protecting intellectual property.
Increased United States or foreign government regulation of our industry could restrict our business operations, and compliance with this regulation may be costly.
The United States does not generally regulate providers of electronic transaction processing products and services at this time. However, the governments of some foreign countries do regulate electronic commerce in their countries. The instability and restructuring of the telecommunications industry in some foreign countries may result in a complicated international regulatory framework that may require additional licensing or action on our part to remain in compliance with local laws and could materially affect our ability to do business in those countries. Other than these foreign government regulations and certain regulations requiring the protection of certain information about our customers, there are no regulations pertaining to the price determinations, geographic distribution, quality control or service capabilities of our products. We cannot be certain, however, that we will continue to comply as the rapidly changing laws in the Internet and telecommunications fields continue to be shaped in the United States and abroad. New laws or regulations could impose significant restrictions on our business operations, and compliance with these laws and regulations may be costly.
Our earnings will be adversely affected once we change our accounting policies with respect to the expensing of stock options.
We historically have not been required to deduct the expense of employee stock option grants from our income based on the fair value method. Recently, the Financial Accounting Standards Board issued FASB Statement No. 123 (revised 2004), Share-Based Payment, or SFAS 123R, requiring companies to change their accounting policies to record the fair value of stock options issued to employees as an expense. We are required to adopt SFAS 123R from July 1, 2005. As a result, our earnings will be reduced in future periods by an amount equal to the fair value of stock options issued to employees during these periods.
Filing reports with the Securities and Exchange Commission may strain our resources and distract management.
We file reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or the Exchange Act, and are subject to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. Under the Exchange Act, we file annual, quarterly and current reports with respect to our business and financial condition. Under the Sarbanes-Oxley Act, we must maintain effective disclosure controls and procedures and

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internal controls over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, significant resources and management oversight will be required. These requirements may place a strain on our people, systems and resources and may divert management’s attention from other business concerns.
Factors Relating to Our Indebtedness
The significant amount of debt that we have could adversely affect our financial health and prevent us from fulfilling our obligations under our credit facility, our senior secured floating rate notes and our senior subordinated notes.
As of December 31, 2004, we had $406.5 million of indebtedness outstanding and our percentage of total debt to capitalization was 344.4%. Our interest expense for the year ended December 31, 2004 was approximately $59.1 million and our earnings for the year ended December 31, 2004 were insufficient to cover our fixed charges by $73.5 million.
Our level of indebtedness could have important consequences. For example, it could:
  •  make it more difficult for us to satisfy our obligations with respect to our indebtedness;
 
  •  increase our vulnerability to general adverse economic and industry conditions;
 
  •  require us to dedicate a substantial portion of our cash flow from operations to servicing debt, reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes;
 
  •  limit our flexibility in planning for, or reacting to, changes in our business and industry; and
 
  •  limit our ability to borrow additional funds.
We may incur more debt, which could exacerbate the risks described above.
We and our subsidiaries are able to incur additional indebtedness in the future subject to the limitations contained in the agreements governing our outstanding debt. Although these agreements restrict us and our restricted subsidiaries from incurring additional indebtedness, these restrictions are subject to important exceptions and qualifications. If we or our subsidiaries incur additional debt, the risks that we and they now face as a result of our high leverage could intensify.
Restrictions contained in the agreements governing our outstanding debt could limit our operating activities.
Our credit facility and the indentures governing our senior secured floating rate notes and our senior subordinated reset notes contain covenants that restrict our ability, and the ability of our restricted subsidiaries, to:
  •  incur or guarantee additional indebtedness, or maintain secured indebtedness in excess of certain limits related to our EDI services revenues;
 
  •  pay dividends or distributions on, or redeem or repurchase, capital stock;
 
  •  make investments;
 
  •  issue or sell capital stock of restricted subsidiaries;
 
  •  engage in transactions with affiliates;
 
  •  grant or assume liens; and
 
  •  consolidate, merge or transfer all or substantially all of our assets.
Our credit facility also contains other and more restrictive covenants, including financial covenants that require us to achieve certain financial and operating results and maintain compliance with specified financial

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ratios. Our ability to meet these covenants and requirements may be affected by events beyond our control and we may have to curtail some of our operations and growth plans to maintain compliance. Further, because of the restrictions on our ability to grant or assume liens, we may have difficulty securing additional debt financing were we to need additional capital in the future.
Our failure to comply with the covenants contained in the agreements governing our debt, including as a result of events beyond our control, could result in an event of default which could materially and adversely affect our operating results and our financial condition.
If we are not able to comply with the covenants and requirements contained in the agreements governing our debt, an event of default under the relevant debt instrument could occur. If an event of default does occur, it could trigger a default under our other debt instruments, we could be prohibited from accessing additional borrowings and the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be declared to be immediately due and payable. We cannot be certain that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments or that we would be able to refinance or restructure the payments on those debt securities. Even if we were able to secure additional financing, it may not be available on favorable terms.
We may not be able to generate sufficient cash flow to meet our debt service obligations.
Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. If we do not generate sufficient cash flow from operations to satisfy our debt obligations, including interest payments and the payment of principal at maturity , we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional financing would be permitted under the terms of our various debt instruments then in effect. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial condition and results of operations.
Risks Relating to the Proposed G International Acquisition
We may be unable to integrate the operations of Global eXchange Services and G International successfully and may not achieve the cost savings and increased revenues anticipated for the combined company.
Achieving the anticipated benefits of the proposed G International acquisition will depend in part upon our ability to integrate the two companies’ businesses in an efficient and effective manner. Our attempt to integrate the two companies may result in significant challenges, and we may be unable to accomplish the integration smoothly or successfully. In particular, the necessity of coordinating geographically dispersed organizations and addressing possible differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration will require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the businesses of the combined company. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the combined company’s businesses and the loss of key personnel. Employee uncertainty and lack of focus during the integration process may also disrupt the businesses of the combined company. Any inability of management to integrate the operations of Global eXchange Services and G International successfully could have a material adverse effect on the business and financial condition of the combined company.
Our rationale for the G International acquisition is, in part, predicated on our ability to realize cost savings and to increase revenues through the combination of two companies. Achieving these cost savings and revenue increases is dependent upon a number of factors, many of which are beyond our control. We may not be able

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to achieve the anticipated enhancement of our capabilities in other industries, such as automotive, consumer products, financial services and retail, cross-selling opportunities, the development and marketing of more comprehensive product offerings and solutions, cost savings and revenue growth. An inability to realize the full extent of, or any of, the anticipated benefits of the transaction, as well as any delays encountered in the transition process, could have an adverse effect upon the revenues, level of expenses, operating results and financial condition of the combined company.
Our acquisition of G International is subject to a number of conditions which can affect consummation of the acquisition.
Our acquisition of G International is subject to a number of conditions, including:
  •  completion of definitive documentation;
 
  •  receipt of financing; and
 
  •  receipt of third-party consents and approvals.
If these and other conditions are not satisfied or waived, we may not be able to complete the acquisition as currently planned. In addition, the U.K. competition commission is reviewing the acquisition of G International by Francisco Partners for competition concerns in the U.K. market. As a result of that review, we may be forced to divest certain assets of G International’s U.K. business that we intend to acquire. The U.K. business of G International generated less than 5% of G International’s total revenues in 2004, and on a pro forma basis after giving effect to our acquisition of G International, less than 2% of our total pro forma revenues in 2004.
We will incur significant combination-related and restructuring costs in connection with the proposed G International acquisition.
We expect to incur significant costs associated with combining the operations of the two companies. However, it is difficult to predict the specific size of those charges. The combined company may incur additional unanticipated costs as a consequence of difficulties arising from our efforts to integrate the operations of the two companies.
Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, can offset incremental transaction, combination-related and restructuring costs over time, we cannot give any assurance that this net benefit will be achieved in the near future, or at all.
We may lose employees due to uncertainties associated with the proposed G International acquisition.
The success of the combined company after our acquisition of G International will depend in part upon our ability to retain key employees of both companies. Competition for qualified personnel can be very intense. In addition, key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company. Accordingly, no assurance can be given that we will be able to retain key employees to the same extent that we have been able to do so in the past.
Special Note Regarding Forward-Looking Statements
Forward Looking Statements — Our forward looking statements are subject to a variety of factors that could cause actual results to differ materially from current beliefs.
This report contains forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate, as well as management’s beliefs and assumptions. They are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Forward-looking statements include information concerning possible or assumed future results of operations, capital expenditures, the outcome of pending legal proceedings and claims, the terms of our new revolving credit facility, goals and objectives for future

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operations, including descriptions of our business strategies and purchase commitments from customers, among other things. These statements are typically identified by words such as “believe,” “anticipate,” “expect,” “plan,” “intend,” “estimate,” “may,” “will” and similar expressions. We base these statements on particular assumptions that we have made in light of our industry experience, as well as our perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read and consider the information in this report, you should understand that these statements may differ materially from actual outcomes and results.
These forward-looking statements are affected by risks, uncertainties and assumptions that we make and actual results or outcomes may differ materially from those expressed in the forward-looking statements. These risks, uncertainties and assumptions include, among other things, the factors discussed above under the caption “Factors That Can Affect Future Results,” and:
  •  the potential for continued or increased armed conflicts in the Middle East;
 
  •  rapid technological developments and changes and our ability to introduce competitive new products and services on a timely, cost-effective basis;
 
  •  our ability to attract and retain talent in key technological areas;
 
  •  the continued availability of financing in the amounts, at the times and on the terms required to support our future operations and our levels of indebtedness;
 
  •  our ability to implement effectively our growth strategy;
 
  •  future investments;
 
  •  growth rates and general domestic and international economic conditions, including currency exchange rate fluctuations;
 
  •  our mix of products and services;
 
  •  customer demand for our products and services;
 
  •  our ability to market our products and services effectively;
 
  •  the length of life cycles for the products and services we offer;
 
  •  increasing price and product and services competition by U.S. and foreign competitors, including new entrants;
 
  •  our ability to protect our intellectual property rights;
 
  •  our ability to protect against security breaches and to protect our data centers from damage;
 
  •  our ability to negotiate acquisitions and dispositions and to integrate acquired companies successfully;
 
  •  changes in United States and foreign governmental regulations; and
 
  •  the outcome of future litigation.
In addition, new risks and uncertainties could arise from time to time that could cause actual results or outcomes to differ from those expressed in the forward-looking statements, and it is impossible to predict these events or how they may affect us.

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Item 7a.     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. Since the recapitalization, 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. Our interest rate risk profile changed substantially as a result of changes in the nature and amount of our indebtedness incurred in connection with the recapitalization. We plan to manage this risk through the use of a combination of fixed and variable rate debt. As of December 31, 2004, $171.5 million of our debt bears interest at variable rates. The interest rate on our $235.0 million reset notes was to be reset on September 27, 2003 for the balance of their six-year term. We are currently in discussions with General Electric Capital Corporation, 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. 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. Management believes that the carrying value of our outstanding debt approximates its market 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 year ended December 31, 2004, approximately 46% of our total revenues were derived from customers outside of the United States, with approximately 43% of our total revenues denominated in currencies other than the United States dollar. We estimate that revenue and expenses for the year ended December 31, 2004 were higher by $13.6 million and $11.5 million, respectively, as a result of changes in exchange rates as compared to the year ended December 31, 2003. At December 31, 2004 we had $31.5 million of working capital (current assets minus current liabilities) denominated in foreign currencies. At December 31, 2004, we had no outstanding foreign currency forward contracts. The following table shows the approximate split of these foreign currency exposures by principal currency:
                                         
    Foreign Currency Exposure    
    at December 31, 2004    
         
        UK   Canadian       Total
    Euro   Pound   Dollar   Other   Exposure
                     
Revenues (twelve months ended)
    37%       37%       9%       17%       100%  
Expenses (twelve months ended)
    47%       24%       5%       24%       100%  
Working Capital
    47%       26%       8%       19%       100%  
A hypothetical 10% strengthening of the dollar during 2004 versus the foreign currencies in which we have exposure would have reduced revenue by approximately $13.3 million and reduced operating expenses by approximately $11.2 million, resulting in operating income of $2.1 million less than actually reported. Working capital at December 31, 2004 would have been approximately $3.1 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 year and applying it evenly to all non United States dollar transactions.
Inflation. We believe that inflation has not had a material impact on our results of operations for the year ended December 31, 2004. However, we cannot assure you that future inflation would not have an adverse impact on our operating results and financial condition.

46


 

Item 8.     Financial Statements and Supplementary Data
The report of Independent Registered Public Accounting Firm and financial statements are set forth below (see Item 15(a) for list of financial statements and financial statement schedules):

47


 

Report of Independent Registered Public Accounting Firm
The Board of Directors
GXS Corporation:
We have audited the accompanying consolidated balance sheets of GXS Corporation and subsidiaries as of December 31, 2003 and 2004 and the related consolidated statements of operations, comprehensive loss, stockholder’s equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 2004. In connection with our audits of the consolidated financial statements, we have also audited the related financial statement schedule listed under Item 15(a) 2. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GXS Corporation and subsidiaries as of December 31, 2003 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
  /s/     KPMG LLP
Baltimore, Maryland
March 30, 2005

48


 

GXS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2004
                         
    2003   2004
         
    (In thousands of dollars,
    except per share amounts)
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 46,730     $ 24,488  
 
Receivables:
               
   
Trade
    53,069       51,036  
   
Other
    4,178       6,897  
   
General Electric Company
    5,081       948  
 
Deferred income taxes
    1,729       3,263  
 
Prepaid expenses and other assets
    8,660       11,678  
             
     
Total current assets
    119,447       98,310  
Investment
    2,929       1,901  
Property and equipment, net
    132,701       101,656  
Goodwill
    11,929       25,760  
Deferred income taxes
    3,034       775  
Deferred financing costs, net
    15,886       12,279  
Other acquired intangible assets, net
    1,168       11,452  
Other assets
    4,342       3,552  
             
     
Total Assets
  $ 291,436     $ 255,685  
             
 
LIABILITIES, MINORITY INTEREST AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
               
 
Trade payables
  $ 12,139     $ 15,487  
 
Deferred income
    10,368       19,879  
 
Accrued expenses and other liabilities
    63,405       71,835  
             
     
Total current liabilities
    85,912       107,201  
Long-term debt
    405,520       406,489  
Deferred income taxes
          2,909  
Other liabilities
    23,929       27,199  
             
     
Total liabilities
    515,361       543,798  
             
Minority interest
    810       347  
             
Commitments and contingencies
               
Stockholder’s equity (deficit):
               
 
Common stock $1.00 par value, authorized, issued and outstanding 100 shares
           
 
Additional paid-in capital
    258,386       279,634  
 
Accumulated deficit
    (477,616 )     (562,496 )
 
Accumulated other comprehensive loss
    (5,505 )     (5,598 )
             
     
Total stockholder’s equity (deficit)
    (224,735 )     (288,460 )
             
       
Total Liabilities, Minority Interest and Stockholder’s Equity (Deficit)
  $ 291,436     $ 255,685  
             
See accompanying notes to consolidated financial statements

49


 

GXS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2002, 2003 and 2004
                               
    2002   2003   2004
             
    (In thousands)
Revenues
  $ 409,454     $ 363,469     $ 328,597  
Costs and operating expenses
                       
 
Cost of revenues
    244,207       207,056       198,187  
 
Sales and marketing
    67,316       65,161       63,274  
 
General and administrative
    48,291       47,272       47,403  
 
Restructuring and related charges
    18,406       26,671       26,438  
 
Asset impairment charges
    5,425       6,500       6,509  
 
Corporate charges from General Electric Company
    7,331              
                   
     
Operating income (loss)
    18,478       10,809       (13,214 )
Other income (expense):
                       
 
Proportional share of losses in investee companies and investment write-downs
    (4,668 )     (679 )     (1,192 )
 
Gain (loss) on disposal of assets
          700       (2,901 )
 
Professional fees related to recapitalization
    (30,085 )            
 
Write-off of deferred financing costs
          (5,548 )      
 
Interest income
    1,285       750       572  
 
Interest expense
    (14,526 )     (50,967 )     (59,079 )
 
Other income (expense), net
    (83 )     1,248       1,330  
 
Management fee from G International
                300  
                   
   
Loss before income taxes
    (29,599 )     (43,687 )     (74,184 )
Provision for income taxes
    9,858       259,590       10,696  
                   
   
Net loss
  $ (39,457 )   $ (303,277 )   $ (84,880 )
                   
See accompanying notes to consolidated financial statements

50


 

GXS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
Years ended December 31, 2002, 2003 and 2004
                           
    2002   2003   2004
             
    (In thousands)
Net loss
  $ (39,457 )   $ (303,277 )   $ (84,880 )
Unrealized gain on available-for-sale securities
                193  
Foreign currency translation adjustments
    9,671       4,509       (286 )
                   
 
Comprehensive loss
  $ (29,786 )   $ (298,768 )   $ (84,973 )
                   
See accompanying notes to consolidated financial statements

51


 

GXS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholder’s Equity (Deficit)
Years ended December 31, 2002, 2003 and 2004
                                                 
                    Due from    
                Accumulated   General   Total
        Additional   Retained   Other   Electric   Stockholder’s
    Common   Paid-In   Earnings/   Comprehensive   Company   Equity
    Stock   Capital   (Deficit)   Loss   and Affiliates   (Deficit)
                         
    (In thousands)
Balance at December 31, 2001
  $     $     $ 674,333     $ (19,685 )   $ (527,154 )   $ 127,494  
Net loss
                (39,457 )                 (39,457 )
Foreign currency translation adjustments
                      9,671             9,671  
Distribution to General Electric in connection with Recapitalization
                (350,000 )                 (350,000 )
Net deferred tax assets resulting from U.S. tax election in connection with Recapitalization
          239,309                         239,309  
Net transfers from General Electric Company and affiliates
                            67,939       67,939  
Elimination of amounts due from General Electric Company and affiliates
                (459,215 )           459,215        
Contributions from General Electric Company
          3,040                         3,040  
                                     
Balance at December 31, 2002
          242,349       (174,339 )     (10,014 )           57,996  
Net loss
                (303,277 )                 (303,277 )
Foreign currency translation adjustments
                      4,509             4,509  
Capital contribution by GXS Holdings in connection with acquisition of Celarix, Inc. 
          600                         600  
Contributions from General Electric Company
          15,437                         15,437  
                                     
Balance at December 31, 2003
          258,386       (477,616 )     (5,505 )           (224,735 )
Net loss
                (84,880 )                 (84,880 )
Foreign currency translation adjustments
                      (286 )           (286 )
Unrealized gain on available-for-sale securities
                      193             193  
Capital contribution by GXS Holdings in connection with acquisition of HAHT Commerce, Inc. 
          15,000                         15,000  
Other
          71                         71  
Contributions from General Electric Company
          6,177                         6,177  
                                     
Balance at December 31, 2004
  $     $ 279,634     $ (562,496 )   $ (5,598 )   $     $ (288,460 )
                                     
See accompanying notes to consolidated financial statement

52


 

GXS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2003 and 2004
                               
    2002   2003   2004
             
    (In thousands)
Cash flows from operating activities:
                       
 
Net loss
  $ (39,457 )   $ (303,277 )   $ (84,880 )
 
Adjustments to reconcile net loss to net cash provided by operating activities:
                       
   
Depreciation and amortization
    47,768       47,346       51,705  
   
Asset impairment charges
    5,425       6,500       6,509  
   
(Gain) loss on disposal of asset
          (700 )     2,901  
   
Deferred income taxes
    (1,788 )     263,422       3,364  
   
Write-off of deferred financing costs
          5,548        
   
Amortization of deferred financing costs and debt discount
    2,326       3,558       4,705  
   
Minority interest
    (545 )     (507 )     (463 )
   
Proportionate share of losses in investee companies and investment write-downs
    4,668       679       1,192  
   
Changes in operating assets and liabilities, net of effect of business acquisition:
                       
     
Decrease in receivables
    11,947       11,249       5,587  
     
(Increase) decrease in prepaid expense and other assets
    (1,236 )     760       (2,001 )
     
Increase (decrease) in accounts payable
    (10,356 )     (9,868 )     3,140  
     
Increase (decrease) in deferred income
    (2,176 )     (1,608 )     7,180  
     
Increase (decrease) in other liabilities
    (2,804 )     16,084       11,197  
     
Other
    (4,604 )     (424 )     (2,100 )
                   
     
Net cash provided by operating activities
    9,168       38,762       8,036  
                   
Cash flows from investing activities:
                       
 
Purchases of property and equipment
    (37,815 )     (29,395 )     (27,899 )
 
Acquisition of minority interests in affiliates
    (6,000 )            
 
Proceeds from sales of assets
          600        
 
Purchase of HAHT, net of cash acquired of $4,526
                (9,724 )
                   
     
Net cash used in investing activities
    (43,815 )     (28,795 )     (37,623 )
                   
Cash flows from financing activities:
                       
 
Distribution to General Electric Company in connection with the Recapitalization
    (350,000 )            
 
Net transfers from General Electric Company and affiliates
    67,939              
 
Repayment of short-term borrowings, net
    (43,922 )            
 
Payment of capital lease obligation
    (18,464 )            
 
Repayment of long-term debt
    (438 )     (174,562 )      
 
Proceeds from long-term debt issuances
    410,000       169,750        
 
Borrowings under revolving credit facility
                14,100  
 
Repayments under revolving credit facility
                (14,100 )
 
Capital contributions from General Electric Company
    3,040       12,456       6,177  
 
Payment of financing costs
    (11,621 )     (12,577 )     (129 )
                   
     
Net cash provided by (used in) financing activities
    56,534       (4,933 )     6,048  
                   
Effect of exchange rate changes on cash
    813       4,363       1,297  
                   
     
Increase (decrease) in cash and cash equivalents
    22,700       9,397       (22,242 )
Cash and cash equivalents, beginning of year
    14,633       37,333       46,730  
                   
Cash and cash equivalents, end of year
  $ 37,333     $ 46,730     $ 24,488  
                   
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 consolidated financial statements

53


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2003 and 2004
(In thousands, except per share amounts)
(1) Business and Basis of Presentation
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 8). 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 years ended December 31, 2002, 2003 and 2004, GE reimbursed the Company approximately $3,000, $9,600 and $6,100 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 made on behalf of certain employees in The Netherlands covered under the GE pension plan, and approximately $3,700 for certain taxes. In addition, GE paid the Company $2,900 as a post closing adjustment related to the Recapitalization. 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

54


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
reimbursement during the years ended December 31, 2002 and 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 $239,300. 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.
On November 1, 2004, the Company’s indirect parent, Francisco Partners, L.P., through a majority-owned acquisition vehicle, acquired 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, the Company is under common control with G International. The Company intends to acquire G International from Francisco Partners and on January 20, 2005 the Company signed a letter agreement to that effect. On November 1, 2004, the Company also entered into an Employee Services Agreement with G International through which some of the Company’s executive officers will provide management services to G International and other personnel will provide support services to G International.
In January 2005, the Company entered into a letter agreement to acquire the sole stockholder of G International. G International is owned indirectly by Francisco Partners, the Company’s controlling stockholder. The consideration to be paid by the Company for G International will be adjusted from $135,000 based on the indebtedness and working capital of G International, as well as the expenses incurred by G International and its affiliates in connection with the transaction. The form of consideration will be mutually agreed upon by the parties. The acquisition of G International is subject to satisfaction of several conditions, including completion of definitive documentation, receipt of financing and receipt of third-party consents and approvals.
(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) Foreign Currency
The financial statements of subsidiaries located outside of the United States are measured using the local currency as the functional currency. Assets, including goodwill, and liabilities are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of

55


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
exchange. The resulting translation gains and losses are included as a separate component of other comprehensive income included in stockholder’s equity. Gains and losses from transactions in foreign currency are included in the determination of net income (loss).
(c) Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of overnight interest bearing deposits.
(d) Revenue Recognition
The Company generates revenues from three principal sources:
  Transaction Processing — The Company earns recurring transaction processing fees from facilitating the exchange of business documents among its customers’ computer systems and those of their trading partners. Such revenues are based on a per transaction fee and are recognized in the period in which the related transactions are processed. Revenue on contracts with monthly or quarterly minimum transaction levels is recognized based on the greater of actual transactions or the specified contract minimum amounts.
 
  Software Licensing — The Company earns revenue from the licensing of software applications that facilitate and automate the exchange of information among disparate business systems and applications. Such revenues are recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection is considered probable. Revenue from licensing software that requires significant customization and modification or where services are otherwise considered essential to the functionality of the software are recognized using the percentage of completion method, based on the costs incurred in relation to the total estimated costs of the contract. Revenue from hosted software applications are recognized ratably over the hosting period unless the customer has the contractual right to take possession of the software without significant penalty and it is feasible for the customer to use the software with its own hardware or contract with another party unrelated to the Company to host the software.
 
  Professional Services and Software Maintenance — Professional services are generally conducted under time and material contracts and revenue is recognized as the related services are provided. Software maintenance revenue is deferred and recognized on a straight-line basis over the life of the related contract, which is typically one year.
For arrangements with more than one element of revenue, the Company allocates revenue to each component based on vendor specific objective evidence (VSOE), in accordance with the criteria established in AICPA Statement of Position 97-2, Software Revenue Recognition, as amended, or Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, as appropriate. VSOE for software maintenance is based on contractual renewal rates. Professional services are separately priced and are based on standard hourly rates determined by the nature of the service and the experience of the professional performing the service.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation on property and equipment is calculated on accelerated methods over the estimated useful lives of the assets over lives of three to forty years. Software and leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Property and equipment includes costs related to the development of internal use software pursuant to the guidance in AICPA Statement of Position 98-1, Accounting for the Costs of

56


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
Computer Software Developed or Obtained for Internal Use. During the years ended December 31, 2002, 2003 and 2004, the Company capitalized costs related to the development of internal use software of $26,860, $19,923 and $14,722, respectively.
(f) Marketable Securities
Marketable securities at December 31, 2004 consist of corporate equity securities which the Company has classified as available-for-sale and are recorded at fair market value in the consolidated balance sheet. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized.
A decline in the market value of any available-for-sale securities below cost that is deemed other-than-temporary results in a reduction in the carrying amount to fair value.
(g) Goodwill
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. As of December 31, 2004, the Company has unamortized goodwill in the amount of $25,760. During 2004, the Company completed impairment testing and determined that no impairment charge was necessary.
(h) Capitalized Software Costs
Costs incurred in the development of software sold externally are charged to expense until technological feasibility, as defined by SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed has been established. The Company uses the working model method to establish technological feasibility. Accordingly, the Company does not capitalize costs as there is generally a short period of time between the date technological feasibility is achieved and the date when the product is available for general release.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If these assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
(j) Comprehensive Loss
Comprehensive loss consists of net loss plus the changes in the accumulated foreign currency translation adjustments and unrealized gains on available-for-sale securities.
Accumulated other comprehensive loss consists of the following at December 31, 2004:
                 
    2003   2004
         
Foreign currency translation adjustment
  $ (5,505 )   $ (5,791 )
Unrealized gains of available-for-sale securities
          193  
             
    $ (5,505 )   $ (5,598 )
             

57


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(k) Research and Development
Research and development costs are expensed as incurred. Research and development costs amounted to $15,246, $9,058 and $14,447 for the years ended December 31, 2002, 2003 and 2004, respectively.
(l) Employee Benefits
Prior to the Recapitalization, employees and retirees of the Company and its affiliates participated in a number of employee benefit plans maintained by GE and its affiliates. Following the Recapitalization, GE retained all liabilities under these benefit plans. The principal benefit plans are discussed below, other plans are not significant individually or in the aggregate.
  Retirement Benefits — The principal pension plan benefits were provided under the GE Pension Plan, a defined benefit plan, which provided benefits to certain U.S. employees of the Company based on the greater of a formula recognizing career earnings or a formula recognizing length of service and final average earnings. Eligible employees also participated in the GE Savings and Security Program, a defined contribution plan. Under this plan, eligible employees could invest a portion of their earnings (generally up to 7% with GE matching 50% of the first 7% contributed, and an additional 10% without any employer matching) in various program funds.
 
  Health and Life Benefits — The principal health and life plan benefits were covered under the GE Life, Disability and Medical plan, a health and welfare plan, which provided benefits to pay medical expenses, flexible spending accounts for otherwise unreimbursed expenses, short-term disability benefits and life and accidental death and dismemberment insurance benefits. Retirees shared in the cost of healthcare benefits.
The cost of employee benefits billed by GE to the Company was $19,545 for the year ended December 31, 2002.
Following the Recapitalization, the Company and its subsidiaries sponsor a number of employee benefit programs. At December 31, 2004, the Company was the sponsor of defined benefit pension plans in Germany and the Netherlands.
(m) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The results of the Company’s operations in the United States through the date of the Recapitalization were included in GE’s consolidated U.S. Federal tax return and certain combined state income tax returns. Current tax liabilities and receivables relating to the Company’s operations prior to the Recapitalization have been transferred to GE. Non-U.S. operations record income tax assets and liabilities generally on a stand-alone basis. The Company’s results following the Recapitalization are no longer included in GE’s consolidated U.S. Federal tax return.
(n) Derivative Instruments
The Company applies the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Under SFAS No. 133, all derivative instruments (including certain derivative instrument embedded in other contracts) are recognized in the balance sheet at their fair value and changes in

58


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
the fair value are recognized immediately in income, unless the derivatives qualify as hedges of cash flows. For derivatives qualifying as hedges of future cash flows, the effective portion of the changes in the fair value is recorded temporarily in equity, and then recognized in income along with the related effects of the hedged items. Any ineffective portion of hedges is reported in income as it occurs. During the years ended December 31, 2002, 2003 and 2004, the Company did not hold any derivative instruments.
(o) Stock Option Plan
The Company applies the intrinsic-value based method of accounting prescribed by Accounting Principles Board (ABP) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of the grant only if current market price of the underlying stock exceeds the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting. As discussed in note 13, GXS Holdings has issued certain options to employees of the Company. If the Company adopted SFAS No. 123, the Company would have valued options using the minimum value method. Had the Company recorded the cost of options under this method, the Company’s net loss for the years ended December 31, 2002, 2003 and 2004 would not have been materially different.
(p) Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, receivables, trade payables, accrued expenses, other liabilities and long-term debt. Generally, their carrying amounts approximate fair value because of the short-term maturity of these instruments. The fair value of the Company’s long-term debt is discussed further in note 8.
(q) 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. Significant estimates used in preparing the consolidated financial statements include recovery of long-lived assets, valuation of receivables and valuation of deferred tax assets. In addition, estimates are required to recognize revenue for arrangements with multiple deliverables and to assess the stage at which software development costs should be capitalized.
(r) Reclassifications
Certain amounts in the 2002 and 2003 consolidated financial statements have been reclassified to conform to the current year presentation.
(s) Recently Adopted Accounting Standards
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based Payment which replaces SFAS No. 123 and supercedes APB No. 25. This statement requires compensation costs relating to share-based payment transactions to be recognized in financial statements based upon the fair value of the award. SFAS No. 123R eliminates the option to account for the cost of stock-based compensation using the intrinsic value method as allowed under APB 25 and the minimum value method allowed under SFAS No. 123 for equity investments not traded on public markets. SFAS No. 123R is effective for nonpublic entities for fiscal years beginning after December 15, 2005. Therefore, the Company will adopt

59


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
SFAS No. 123R as of the beginning of our fiscal year ending December 31, 2006. The Company is currently evaluating the impact adoption of SFAS No. 123R will have on its consolidated financial statements.
(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 $28,901, $32,612 and $28,263 for years ended December 31, 2002, 2003 and 2004, respectively. Trade receivables as of December 31, 2003 and 2004 resulting from normal trade activity with GE were $5,081 and $948, 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 were $11,345 and $10,741 at December 31, 2003 and 2004, respectively.
No customer represented more than 10% of revenues in 2002, 2003 or 2004.
As of December 31, 2004, the Company had operations in approximately twenty-five foreign countries. Receivables from customers in foreign countries were $24,704 and $28,307 at December 31, 2003 and 2004, respectively. Revenues generated by the Company’s foreign subsidiaries were $151,908, $154,474 and $151,155 for years ended December 31, 2002, 2003 and 2004, respectively. Of such amount, the United Kingdom generated revenues of $48,134, $51,679 and $52,291 for years ended December 31, 2002, 2003 and 2004, respectively. No other country generated more than 10% of the Company’s revenues.
(4) Other Related Party Transactions
Trade payables as of December 31, 2003 and December 31, 2004 resulting from normal activity with GE were $1,177 and $353. The Company participated until the Recapitalization in pooled treasury operations with GE in most countries in which it had activity. As part of this pooled activity, the Company earned interest on balances on deposit with GE and paid interest when local operations borrowed money from the pool. During 2002, the Company earned net interest income from GE of $1,285. Effective with the Recapitalization, the Company conducts its own treasury operations.
GE has provided a variety of services to the Company. These services have included 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 $58,841, $13,044 and $3,101 for the years ended December 31, 2002, 2003 and 2004, respectively. As part of the Recapitalization, GE continued to provide these services on an as needed basis until the end of 2004. The Company migrated these services to alternative providers, or brought some of the services in-house. Management believes that the amounts paid to GE approximated the cost at which these services could be obtained from a third party. In addition, management believes that the methods used by GE to allocate expenses incurred by them on the Company’s behalf, prior to the Recapitalization were reasonable.

60


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
Prior to the Recapitalization, GE also provided certain centralized services, such as compensation and benefit plan design, tax planning, marketing support, treasury, auditing, public company reporting, and various other corporate expenses which the Company paid for with an annually agreed corporate charge. This corporate charge amounted to $7,331 for the nine months ended September 30, 2002. No amounts have been paid to GE for these services subsequent to the Recapitalization.
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, $2,000 and $2,000 for the years ended December 31, 2002, 2003 and 2004, respectively. The Company reimbursed Francisco Partners for additional expenses of $346 and $479, which were incurred during 2003 and 2004, respectively. As of December 31, 2002, 2003 and 2004, the Company owed Francisco Partners $500, $3,071 and $4,754, respectively, which are included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.
(5) Investments
The Company has made a number of investments in distributors, value added resellers and companies engaged in providing transaction management infrastructure and related products and services. Investments consist of the following at December 31:
                   
    2003   2004
         
Equity method investments
  $ 608     $ 341  
Marketable securities
          1,560  
Cost method investments
    2,321        
             
 
Total
  $ 2,929     $ 1,901  
             
Revenues, results of operations and net assets of the investee companies were not significant for the years ended December 31, 2002 and 2003. Revenues earned from sales to these affiliates were $2,176, $551 and $668 for the years ended December 31, 2002, 2003 and 2004, respectively.
The marketable securities are classified as available-for-sale. At December 31, 2004, the Company had a gross unrealized gain of $193, which was classified as a component of accumulated other comprehensive loss in stockholder’s equity (deficit). During 2004, prior to the securities becoming marketable, the Company recorded a $798 impairment loss based upon the initial public market value of the investees securities.
(6) Property and Equipment
Property and equipment consist of the following as of December 31:
                   
    2003   2004
         
Computer equipment and furniture
  $ 253,941     $ 235,905  
Computer software
    167,392       176,341  
Leasehold improvements
    16,641       15,523  
             
      437,974       427,769  
Less accumulated depreciation and amortization
    305,273       326,113  
             
 
Total
  $ 132,701     $ 101,656  
             

61


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
Property and equipment held outside the United States at December 31, 2003 and 2004 was $14,652 and $10,551, respectively.
During 2003, the Company sold certain software and other assets relating to its I400 software product and recognized a gain of $700. These amounts are included in gains on sale of assets in the consolidated statements of operations. During 2004 the Company completed an inventory of certain of its computer equipment and determined that assets with a net carrying value of $2,901 were no longer in service and, accordingly, wrote-off the assets.
(7) Goodwill
The following represents a summary of changes in goodwill for the years ended December 31:
                         
    2002   2003   2004
             
Beginning of the year
  $ 11,096     $ 11,481     $ 11,929  
Additions — HAHT Commerce, Inc. 
                13,292  
Foreign currency translation
    385       448       539  
                   
End of the year
  $ 11,481     $ 11,929     $ 25,760  
                   
On February 13, 2004, the Company acquired HAHT Commerce, Inc. (HAHT) for consideration of $15,001 in cash plus common and preferred shares of GXS Holdings valued at approximately $15,000. 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. The aggregate purchase, including transaction costs, exceeded the estimated fair value of the net tangible assets and identifiable intangible assets acquired by $13,292. This amount was allocated to goodwill.
(8) Long-Term Debt
Long-term debt consists of the following at December 31:
                 
    2003   2004
         
Term loan facility
  $ 70,000     $ 70,000  
Senior secured floating rate notes, net of debt discount of $4,480 and $3,511, respectively
    100,520       101,489  
Senior subordinated reset notes
    235,000       235,000  
             
Long-term debt
  $ 405,520     $ 406,489  
             
Aggregate maturities of long-term debt are $70,000 in 2007, $105,000 in 2008, and $235,000 in 2009.
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 (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

62


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
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 Term Loan and Revolving Credit Facilities.
The ability to borrow under the New Credit Facility is subject to a borrowing base, calculated monthly, at an amount equal to 90.0% of EDI Services Revenue for the immediately preceding six consecutive completed months. The New Term Loan Facility bears interest, at the Company’s option, at either a floating base rate plus 4.0% per annum or floating LIBOR plus 6.0% per annum. The New Revolving Credit Facility bears interest, at the Company’s option, at either a floating base rate plus 2.0% per annum or floating LIBOR plus 4.25% per annum. The base rate and LIBOR rate used to calculate the applicable interest rate on the New Term Loan Facility and the New Revolving Credit Facility may not be less than 4.25% and 2.25%, respectively. Outstanding borrowings under the New Term Loan Facility as of December 31, 2004 bear interest at a base rate of 4.25% plus 4.0%. Interest is payable monthly in arrears for base rate loans and on the last day of selected interest periods, but no later than every three months, for LIBOR rate loans. Borrowings outstanding under the New Term Loan Facility and the New Revolving Credit Facility mature on March 21, 2007.
The New Revolving Credit Facility enables the Company to obtain revolving credit loans and to issue letters of credit for working capital, acquisitions and general corporate purposes. At December 31, 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 all of these borrowings under the New Revolving Credit Facility. In January 2005, the Company borrowed $5,000 under the New Revolving Credit Facility for general corporate purposes.
The obligations of the Company under the New Credit Facility are guaranteed by all of the Company’s existing and future domestic subsidiaries. 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. The most significant covenant in the New Credit Facility requires the Company to achieve certain levels of quarterly earnings before depreciation and amortization, interest expense, income taxes and other items, as defined in the agreement, determined on a trailing twelve-month period basis. Such covenant amounts were amended by the lender in 2004 to amounts management believes are achievable in 2005 and beyond. However, the amount required for each of the quarters ending in 2005 are up to $12,000 higher than the amount achieved by the Company during the twelve-month period ended December 31, 2004. While management believes the Company will comply with the amended covenant in 2005, if compliance is not achieved, the Company may need to seek waivers or additional covenant amendments from the lender or additional sources of funding. There can be no assurance that such waivers, covenant amendments or funding will be available, if required.

63


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
Senior Secured Floating Rate Notes:
On March 21, 2003, the Company issued $105,000 of Senior Secured Floating Notes (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 December 31, 2004 was 12%. The Floating Notes are secured by second-priority security interests in substantially all of the assets of GXS Corporation 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 years ended December 31, 2003 and 2004 was $770 and $969, respectively. 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, 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 Notes will have the right to require the Company to repurchase such holder’s notes at an offer price in cash equal to 101% of the aggregate principle amount thereof plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of purchase. In certain situations, the Company must offer to redeem outstanding Floating Notes with Excess Cash Flows as defined in the 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. For the period from September 27, 2003 to December 31, 2004, the Company accrued interest at a rate of 15%, the rate which management believes to be the best estimate of where the negotiations will conclude. If the interest rate on the Reset Notes is increased to the maximum rate of 17% the Company’s annual interest expense would increase by $2.7 million. 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.
On September 27, 2003, the Company paid GE a 1% fee because the debt was not refinanced by that date. Such amount was recognized as a deferred financing cost at September 27, 2002 and is being amortized over the life of the agreement.
The Reset Notes were redeemable at the option of the Company anytime prior to September 27, 2003 at par plus accrued and unpaid interest. 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 after September 27, 2003 and prior to

64


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
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.
Interest paid for 2002, 2003 and 2004 was $1,909, $40,645 and $47,448, respectively, including $30,550 and $28,200 paid to GE in 2003 and 2004, respectively. The estimate fair value of the Company’s long-term debt at December 31, 2004 approximated its carrying value.
Deferred financing costs are being amortized over the life of the debt using the interest method. Amortization expense for 2002, 2003 and 2004 was $649, $2,849 and $3,736 respectively.
(9) Accrued Expenses and Other Liabilities
Other liabilities consist of the following as of December 31:
                   
    2003   2004
         
Employee compensation and benefits
  $ 16,037     $ 13,685  
Other taxes accrued
    3,183       2,770  
Accrued interest and deferred financing costs
    14,123       21,073  
Other
    30,062       34,307  
             
 
Total
  $ 63,405     $ 71,835  
             
(10) Income Taxes
Prior to the Recapitalization, the results of the Company’s operations in the United States were included in GE’s consolidated U.S. federal tax return and certain combined state income tax returns. Current tax liabilities relating to the Company’s operations prior to the Recapitalization have been transferred to GE. Non-U.S. operations record income tax assets and liabilities generally on a stand-alone basis. Following the Recapitalization, the Company’s results are no longer being included in GE’s consolidated U.S. federal tax return.

65


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
The following represents the components of the provisions for income taxes for the years ended December 31:
                           
    2002   2003   2004
             
Current income taxes:
                       
 
Federal
  $ 4,711     $ (6,463 )   $  
 
State
    (390 )     (988 )     400  
 
Foreign
    7,325       3,619       7,061  
                   
      11,646       (3,832 )     7,461  
                   
Deferred income taxes:
                       
 
Federal
    (6,019 )     205,872        
 
State
    112       45,561        
 
Foreign
    4,119       11,989       3,235  
                   
      (1,788 )     263,422       3,235  
                   
Total
  $ 9,858     $ 259,590     $ 10,696  
                   
Income taxes paid, including amounts paid to GE in 2002, were $25,538, $5,126, and $8,452 for 2002, 2003, and 2004, respectively. A reconciliation of the effective rate of the provision for income taxes to the statutory rate is as follows:
                             
    2002   2003   2004
             
Statutory U.S. Federal income tax (benefit) rate
    (35.0 )%     (35.0 )%     (35.0 )%
 
Increase (reduction) in rate resulting from:
                       
   
State and local tax
    (3.0 )%     (5.7 )%     (2.0 )%
   
Foreign taxes, including results of examinations and carrybacks
    11.1 %     8.7 %     2.6 %
   
U.S. residual tax on branch earnings
            7.9 %     2.7 %
   
Research and expenditure tax credits
    (1.3 )%            
   
Adjustments in deferred income tax as a result of change in control
    3.0 %     20.7 %      
   
U.S. income taxes on foreign earnings not previously taxed
    28.0 %            
   
Changes in valuation allowance
    30.5 %     594.6 %     44.2 %
   
Other
          3.0 %     1.9 %
                   
 
Income tax expense
    33.3 %     594.2 %     14.4 %
                   
Prior to completion of the Recapitalization, GE repatriated earnings from the Company’s foreign subsidiaries, which had previously not been taxed in the U.S. This resulted in additional income taxes of $8,284 in the year ended December 31, 2002. In addition, as a result of the change in control, the Company expects that deferred tax temporary differences will be taxed at different rates than those in effect when the Company was wholly owned by GE. This resulted in additional income taxes of $894 in the year ended December 31, 2002.
Deferred income tax balances reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax bases and are stated at tax rates expected to be in effect when taxes are

66


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
actually paid or recovered. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31 are as follows:
                     
    2003   2004
         
Deferred tax assets:
               
 
Accrued and other liabilities
  $ 20,807     $ 18,803  
 
Domestic net operating loss carryforwards
    23,020       76,533  
 
Foreign net operating loss carryforwards
    9,842       9,141  
 
Tax credit carryforwards
    126       137  
 
Unrealized loss on investment
    3,865       4,320  
 
Intangible assets
    245,208       223,527  
 
Property and equipment
    791       756  
 
Other
    4,937       4,623  
             
   
Gross deferred tax assets
    308,596       337,840  
 
Valuation allowance
    (271,970 )     (313,411 )
             
   
Net deferred tax assets
    36,626       24,429  
             
Deferred tax liabilities:
               
 
Property and equipment
    31,863       18,401  
 
Intangible assets
          4,037  
 
Undistributed earnings of foreign subsidiaries
          862  
             
   
Gross deferred tax liabilities
    31,863       23,300  
             
   
Net deferred tax assets
  $ 4,763     $ 1,129  
             
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in this assessment. Management believes the Company will achieve profitable operations in future years that will enable the Company to recover the benefit of its net deferred tax assets. However, the Company presently does not have sufficient objective evidence to support management’s belief and, accordingly, has established a valuation allowance of $313,411 for its U.S. and certain foreign net deferred tax assets as required by generally accepted accounting principles. During the years ended December 31, 2003 and 2004, the Company increased its valuation allowances by $259,780 and $41,441, respectively. The amount for 2004 includes $8,658 related to net deferred tax assets acquired from HAHT. Recording this valuation in no way affects the Company’s ability to utilize this asset.
As of December 31, 2004, the Company has gross U.S. net operating loss carryforwards of $161,956 for federal tax purposes which will expire between the years of 2022 and 2024. In addition, the Company has gross foreign net operating loss carryforwards of $28,559 with varying expiration dates. The Company also has gross U.S. net operating loss carryforwards of $35,078 acquired in the HAHT acquisition which will expire between the years of 2015 and 2022. Use of these acquired net operating loss carry forwards is subject to the ownership change provisions of the Internal Revenue Code. To the extent the acquired net operating losses result in tax benefits in the future, those tax benefits will be recorded first to reduce any remaining goodwill, and then to reduce other long-term assets acquired from HAHT.

67


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
The Company has recognized a deferred tax liability of approximately $862 for the undistributed earnings of its foreign operations that arose in 2004 and prior years because management expects those unremitted earnings to be repatriated and become taxable to the Company in the foreseeable future.
(11) Lease and Other Commitments
The Company is a lessee under various noncancelable operating lease arrangements for office space and equipment having terms expiring on various dates. Amounts are net of approximately $600 in sublease rents annually through December 2006. Approximately 27% of the aggregate lease commitments relate to space which is vacant and available for sublease at the Company corporate headquarters. As of December 31, 2004, future minimum lease payments are as follows:
         
2005
  $ 15,340  
2006
    12,716  
2007
    10,171  
2008
    8,508  
2009
    7,922  
Thereafter
    35,239  
       
    $ 89,896  
       
Rent expense for operating leases was $35,569, $37,166 and $24,168 for the years ended December 31, 2002, 2003 and 2004, respectively. Rent expense includes $186, $296 and $185 for the years ended December 31, 2002, 2003 and 2004, respectively, billed by GE for office space and equipment.
The Company has entered into several multi-year software maintenance agreements with a third-party vendor. Such agreements provide for payments of $556 in 2005.
Minority shareholders of one of the Company’s consolidated subsidiaries have rights, in certain circumstances, to require the Company to purchase some or all of their ownership holdings at specified amounts. Management estimates that these specified amounts generally equate to the fair market value of the holders’ interest. Management estimates the potential obligation at December 31, 2004 to be approximately $500.
(12) Pension and Other Retirement Benefits
Following the Recapitalization, the Company sponsors a number of defined contribution plans which cover a substantial portion of the Company’s employees in the United States and various countries around the world. Contributions to these plans for the years ended December 31, 2002, 2003 and 2004 were $407, $4,111 and $347, respectively. In addition, the Company sponsors unfunded defined benefit plans which covers employees in the Company’s subsidiary in Germany. As of December 31, 2004, the Plan’s benefit obligation was $13,654. As of December 31, 2003 and 2004 the Company has an accrued liability with respect to the plan of $11,232 and $13,654, respectively, which is included in accrued expenses and other liabilities in the consolidated balance sheet. Pension expense for the years ended December 31, 2002, 2003 and 2004 was $220, $483 and $347, respectively. The Plan’s benefit obligation was determined using a discount rate of 5.75%, and a compensation rate increase of 3.0%.
(13) Stock Option Plan
GXS Holdings sponsors a stock option plan that provides for the grant of stock options and certain other types of stock-based compensation awards to employees, directors and consultants of the Company. The plan provides for the grant of awards to acquire up to 14,636 shares of GXS Holdings common stock (approximately 5% on a fully diluted basis).

68


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
A summary of options granted, terminated and outstanding as of and during the period since the Recapitalization to December 31, 2004 is as follows:
         
Granted during 2002 and outstanding as of December 31, 2002
    10,761  
Granted
    2,564  
Terminated
    (1,043 )
       
Outstanding as of December 31, 2003
    12,282  
Granted
    2,800  
Terminated
    (5,874 )
       
Outstanding as of December 31, 2004
    9,208  
       
The options issued prior to September 1, 2004, vest in various amounts over periods of up to eight years and were granted at $0.50 per share. The options issued on September 1, 2004 and after vest 25% on the first anniversary of the grant date, thereafter, the options vest at a rate of 1/36 per month over the three-year period following the first anniversary of the grant date. The options were granted at $0.50 per share. As of December 31, 2004, 3,023 of the options were vested. The estimated fair value of the options using the minimum value method and the Black-Scholes model was approximately $.07 per option. Such value assumes an option life of seven years and a risk free interest rate of 2.0%. The options are generally not exercisable until an initial public offering or seven years from the date of grant.
Upon exercise of the options, GXS Holdings has the right to repurchase the common stock for the lower of fair market value or the exercise price following termination of employment for cause or for fair market value following termination for other than cause. The repurchase right terminates upon the earlier of an initial public offering, which raises proceeds of at least $75,000, or twelve months from the date of termination of employment. Fair market value is determined by the price of the stock on the last date before determination, if publicly traded, or by a committee of board of directors.
In addition, the Company granted 40 options to purchase preferred stock to one of its employees.
(14) Contingencies
The Company has received a decision from the State of Tennessee’s Department of Revenue upholding a sales tax audit assessment totaling approximately $4,600, including interest and penalties, for the period from May 1, 1994 to December 31, 2000. GE, on behalf of the Company, has filed a complaint in the Tennessee Chancery Court challenging the decision. In addition, the Department of Revenue issued an assessment of $1,100, including interest and penalties, to GE for the period December 1, 1992 to April 30, 1994, when the Company was a division of GE. GE, on behalf of the Company, has filed a complaint in the Tennessee Chancery Court challenging this assessment. The Company does not believe that the resolution of these matters will have a material effect on the financial position or results of operations of the Company. Pursuant to the Tax Matters Agreement that was entered into in connection with the Recapitalization Agreement, GE has agreed to indemnify the Company against losses associated with this and other tax matters relating to the periods prior to the Recapitalization.
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.
(15) Restructuring
During 2002, 2003 and 2004 the Company entered into a series of restructuring activities in response to lower than expected market demand. During 2002 and 2003 the Company took actions to reduce the size of its back

69


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
office activities, professional services and sales organizations and in 2003 actions were taken to darken a portion of the headquarters facility. The 2002 activities included the termination of approximately 300 people resulting in a restructuring and related charge of $18,406, principally related to severance and related termination costs, costs associated with the closings of sales, services and engineering facilities and buy-out of certain equipment operating leases.
The 2003 activities included the termination of approximately 90 people resulting in a restructuring and related charge of approximately $26,671, principally related to severance and related termination costs and costs associated with the closing of facility space.
In 2004, the Company announced a restructuring program which included 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 year ended December 31, 2004, the Company incurred approximately $26,438 in restructuring costs. The Company reduced its global employee workforce by approximately 200 positions by the end of calendar year 2004 from the level that existed as of June 8, 2004.
The amounts recorded in 2003 and 2004 are 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 following is a summary of the Company’s restructuring activities and the related obligations for the years ended December 31, 2002, 2003 and 2004:
                                 
    Restructuring Activities — Severance    
         
    2002   2003   2004    
    and Prior   Plan   Plan   Total
                 
Balance as of January 1, 2002
  $ 28     $     $     $ 28  
Restructuring expense
    10,967                   10,967  
Payments and other adjustments
    (10,661 )                 (10,661 )
                         
Balance as of December 31, 2002
    334                   334  
Restructuring expense
            13,573             13,573  
Payments and other adjustments
    (334 )     (3,981 )           (4,315 )
                         
Balance as of December 31, 2003
          9,592             9,592  
Restructuring expense (adjustment)
            (124 )     20,482       20,358  
Payments and other adjustments
            (9,151 )     (14,468 )     (23,619 )
                         
Balance as of December 31, 2004
  $     $ 317     $ 6,014     $ 6,331  
                         

70


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
                                 
    Restructuring Activities — Facilities    
         
    2002   2003   2004    
    and Prior   Plan   Plan   Total
                 
Balance as of January 1, 2002
  $     $     $     $  
Restructuring expense
    2,824                   2,824  
Payments and other adjustments
    (367 )                 (367 )
                         
Balance as of December 31, 2002
    2,457                   2,457  
Restructuring expense
          12,650             12,650  
Payments and other adjustments
    (2,457 )     (404 )           (2,861 )
                         
Balance as of December 31, 2003
          12,246             12,246  
Restructuring expense
          67       6,013       6,080  
Payments and other adjustments
          (2,273 )     457       (1,816 )
                         
Balance as of December 31, 2004
  $     $ 10,040     $ 6,470     $ 16,510  
                         
                                 
    Restructuring Activities — Other    
         
    2002   2003   2004    
    and Prior   Plan   Plan   Total
                 
Balance as of January 1, 2002
  $     $     $     $  
Restructuring expense
    4,615                   4,615  
Payments and other adjustments
    (4,615 )                 (4,615 )
                         
Balance as of December 31, 2002
                       
Restructuring expense
          448             448  
Payments and other adjustments
          (448 )           (448 )
                         
Balance as of December 31, 2003
  $     $     $     $  
                         
The current portion of the above obligations totaled $14,113 and $11,639 for 2003 and 2004, respectively, and are included in accrued expenses and other liabilities in the balance sheet. The long-term portion of the above obligations totaled $7,725 and $11,202 for 2003 and 2004, respectively, and are included in other liabilities in the balance sheet.
(16) Asset Impairment Charges
During the years ended December 31, 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 future cash flows will be less than the carrying value of the software. During the year ended December 31, 2002, the Company recorded an impairment charge of $5,425 primarily related to certain software under development for which the plans to deploy were curtailed.
(17) Acquisitions
On June 3, 2003, pursuant to a contract with GXS Holdings, Global eXchange Services, Inc. acquired substantially all of the assets of Celarix related to its logistics integration and visibility solutions business. Celarix’s logistics integration and visibility solutions help organizations to connect to logistics trading partners and retrieve, use and share shipment status information through their supply chains. The acquisition was completed to add a product offering to the Company’s existing suite of services. In consideration of the acquired assets, GXS Holdings issued 5,819 shares of preferred stock and 145,464 shares of common stock and the Company assumed liabilities related to existing customer contracts of Celarix. The Company

71


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
estimated the value of the GXS Holdings preferred stock and common stock issued to be approximately $600 and the value of the assumed liabilities to be approximately $1,300. The aggregate purchase price including the fair value of assumed liabilities was assigned to the assets acquired as follows:
         
Current assets
  $ 461  
Non-current assets
    1,439  
       
    $ 1,900  
       
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. 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. 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 was 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
    2,142  
Property and equipment
    155  
Estimated fair value of liabilities assumed
    (3,216 )
Identifiable intangible assets
    12,225  
Goodwill
    13,292  
Other assets
    877  
       
    $ 30,001  
       
The consolidated statements of operations include the results of Celarix and HAHT from the dates of their respective acquisitions.
On a pro forma basis, assuming the acquisitions had been consummated on January 1, 2003, the Company’s unaudited revenue and net loss for the years ended December 31, 2003 and 2004 and would have been as follows:
                 
    2003   2004
         
Revenue
  $ 377,043     $ 329,861  
Net loss
  $ (313,298 )   $ (85,150 )

72


 

GXS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(18) Other Income (Expense), net
Other income (expense), net consisted of the following for the years ended December 31:
                         
    2002   2003   2004
             
Gains (losses) on foreign currency transactions
  $ (1,062 )   $ 533     $ 1,518  
Minority interest
    545       507       463  
Investment banking fees
                (750 )
Other, net
    434       208       99  
                   
    $ (83 )   $ 1,248     $ 1,330  
                   
(19) Supplemental Condensed Consolidated Financial Information
The Senior Subordinated Reset Notes and the Senior Secured Floating Rate Notes issued by the Company are guaranteed by each of the Company’s U.S subsidiaries (the Subsidiary Guarantors). The Senior Subordinated Reset Notes and the Floating Notes are not, however, guaranteed by the Company’s foreign subsidiaries. The guarantees are full, unconditional and joint and several. The Subsidiary Guarantors are each wholly owned by the Company. The ability of the Company’s subsidiaries to make cash distributions and loans to the Company and Subsidiary Guarantors is not expected to be significantly restricted. The following supplemental financial information sets forth, on a consolidating basis, balance sheets, statements of operations and comprehensive income (loss), and statements of cash flows for the Company, Subsidiary Guarantors and the Company’s nonguarantor subsidiaries.

73


 

GXS CORPORATION AND SUBSIDIARIES
Consolidating Balance Sheet
December 31, 2003
                                             
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
    (In thousands)
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  
                               

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GXS CORPORATION AND SUBSIDIARIES
Consolidating Balance Sheet
December 31, 2004
                                             
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
    (In thousands)
ASSETS
Current assets:
                                       
 
Cash and cash equivalents
  $     $ 7,522     $ 16,966     $     $ 24,488  
 
Receivables
          25,281       33,600             58,881  
 
Other current assets
    149       6,466       8,326             14,941  
 
Advances to subsidiaries
    20,410       230,093       139,511       (390,014 )      
                               
   
Total current assets
    20,559       269,362       198,403       (390,014 )     98,310  
Investments in affiliates
          1,560       341             1,901  
Investments in subsidiaries
    105,877       (11,841 )           (94,036 )      
Property and equipment, net
    235       98,098       3,323             101,656  
Goodwill, net
          19,701       6,059             25,760  
Other noncurrent assets
    1,484       20,395       5,650       (11,750 )     15,779  
Deferred financing costs
    12,279                         12,279  
                               
    $ 140,434     $ 397,275     $ 213,776     $ (495,800 )   $ 255,685  
                               
 
LIABILITIES, MINORITY INTEREST, AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
                                       
 
Trade payables
  $ 1,311     $ 11,081     $ 3,095     $     $ 15,487  
 
Other current liabilities
    21,094       39,167       31,453             91,714  
 
Advances from affiliates
          212,090       177,924       (390,014 )      
                               
   
Total current liabilities
    22,405       262,338       212,472       (390,014 )     107,201  
Long-term debt
    406,489                         406,489  
Other liabilities
          29,060       12,798       (11,750 )     30,108  
                               
   
Total liabilities
    428,894       291,398       225,270       (401,764 )     543,798  
Minority interest
                347             347  
Stockholder’s equity (deficit)
    (288,460 )     105,877       (11,841 )     (94,036 )     (288,460 )
                               
    $ 140,434     $ 397,275     $ 213,776     $ (495,800 )   $ 255,685  
                               

75


 

GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Operations and Comprehensive Income (Loss)
Year ended December 31, 2002
                                           
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
    (In thousands)
Revenues
  $     $ 349,903     $ 133,857     $ (74,306 )   $ 409,454  
Costs and operating expenses
    1,109       318,827       114,184       (74,306 )     359,814  
Restructuring and related charges
          10,965       7,441             18,406  
Asset impairment charges
          5,425                   5,425  
Corporate charge from General Electric Company
          7,331                   7,331  
                               
 
Operating income (loss)
    (1,109 )     7,355       12,232             18,478  
Other income (expense), net
    (28,123 )     (23,430 )     3,476             (48,077 )
                               
 
Income (loss) before income taxes
    (29,232 )     (16,075 )     15,708             (29,599 )
Provision (benefit) for income taxes
    (11,547 )     10,157       11,248             9,858  
                               
 
Income (loss) before equity in income (loss) of subsidiaries
    (17,685 )     (26,232 )     4,460             (39,457 )
Equity in income (loss) of subsidiaries
    (21,772 )     4,460             17,312        
                               
 
Net income (loss)
    (39,457 )     (21,772 )     4,460       17,312       (39,457 )
Foreign currency translation adjustments
                9,671             9,671  
                               
 
Comprehensive income (loss)
  $ (39,457 )   $ (21,772 )   $ 14,131     $ 17,312     $ (29,786 )
                               

76


 

GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Operations and Comprehensive Income (Loss)
Year ended December 31, 2003
                                           
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
    (In thousands)
Revenues
  $     $ 314,439     $ 140,352     $ (91,322 )   $ 363,469  
Costs and operating expenses
    192       290,364       120,255       (91,322 )     319,489  
Restructuring and related charges
          25,987       684             26,671  
Asset impairment charges
          6,500                   6,500  
                               
 
Operating income (loss)
    (192 )     (8,412 )     19,413             10,809  
Other income (expense), net
    (57,647 )     4,939       (1,788 )           (54,496 )
                               
 
Income (loss) before income taxes
    (57,839 )     (3,473 )     17,625             (43,687 )
Provision (benefit) for income taxes
    (1,485 )     251,988       9,087             259,590  
                               
 
Income (loss) before equity in income (loss) of subsidiaries
    (56,354 )     (255,461 )     8,538             (303,277 )
Equity in income (loss) of subsidiaries
    (246,923 )     8,538             238,385        
                               
 
Net income (loss)
    (303,277 )     (246,923 )     8,538       238,385       (303,277 )
Foreign currency translation adjustments
                4,509             4,509  
                               
 
Comprehensive income (loss)
  $ (303,277 )   $ (246,923 )   $ 13,047     $ 238,385     $ (298,768 )
                               

77


 

GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Operations and Comprehensive Income (Loss)
Year ended December 31, 2004
                                           
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
    (In thousands)
Revenues
  $     $ 263,715     $ 162,452     $ (97,570 )   $ 328,597  
Costs and operating expenses
          283,570       122,864       (97,570 )     308,864  
Restructuring and related charges
          13,197       13,241             26,438  
Asset impairment charges
          6,509                   6,509  
                               
 
Operating income (loss)
          (39,561 )     26,347             (13,214 )
Other income (expense), net
    42,569       (100,911 )     (2,628 )           (60,970 )
                               
 
Income (loss) before income taxes
    42,569       (140,472 )     23,719             (74,184 )
Provision for income taxes
          6,638       4,058             10,696  
                               
 
Income (loss) before equity in income (loss) of subsidiaries
    42,569       (147,110 )     19,661             (84,880 )
Equity in income (loss) of subsidiaries
    (127,449 )     19,661             107,788        
                               
 
Net income (loss)
    (84,880 )     (127,449 )     19,661       107,788       (84,880 )
Unrealized gain on marketable equity securities
          193                   193  
Foreign currency translation adjustments
                (286 )           (286 )
                               
 
Comprehensive income (loss)
  $ (84,880 )   $ (127,256 )   $ 19,375     $ 107,788     $ (84,973 )
                               

78


 

GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Cash Flows
Year ended December 31, 2002
                                               
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
    (In thousands)
Cash flows from operating activities:
                                       
 
Net income (loss)
  $ (39,457 )   $ (21,772 )   $ 4,460     $ 17,312     $ (39,457 )
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                                       
   
Depreciation and amortization
          46,354       1,414             47,768  
   
Asset impairment charge
          5,425                   5,425  
   
Deferred income taxes
          18,417       (20,205 )           (1,788 )
   
Minority interest
                (545 )           (545 )
   
Equity in net (income) loss of subsidiaries
    21,772       (4,460 )           (17,312 )      
   
Changes in operating assets and liabilities, net
    (11,212 )     (20,348 )     29,325             (2,235 )
                               
     
Net cash provided by (used in) operating activities
    (28,897 )     23,616       14,449             9,168  
                               
Cash flows for investing activities:
                                       
 
Purchases of property and equipment
          (36,786 )     (1,029 )           (37,815 )
 
Acquisition of minority interests in affiliates
          (6,000 )                 (6,000 )
                               
     
Net cash used in investing activities
          (42,786 )     (1,029 )           (43,815 )
                               
Cash flows from financing activities:
                                       
 
Distribution to General Electric Company in connection with recapitalization
    (350,000 )                       (350,000 )
 
Net contributions from General Electric Company and affiliates
          41,006       26,933             67,939  
 
Advance (to) from subsidiaries
    (19,044 )     10,435       8,609              
 
Repayment of short-term borrowings, net
                (43,922 )           (43,922 )
 
Proceeds from issuance of long-term debt
    410,000                         410,000  
 
Payment of long-term debt
    (438 )                       (438 )
 
Payment of capital lease obligation
          (18,464 )                 (18,464 )
 
Payment of financing costs
    (11,621 )                       (11,621 )
 
Capital contribution from General Electric Company
          3,040                   3,040  
                               
     
Net cash provided by (used in) financing activities
    28,897       36,017       (8,380 )           56,534  
                               
Effect of exchange rate changes on cash
                813             813  
                               
     
Increase in cash and cash equivalents
          16,847       5,853             22,700  
Cash and cash equivalents, beginning of year
          5,093       9,540             14,633  
                               
Cash and cash equivalents, end of year
  $     $ 21,940     $ 15,393     $     $ 37,333  
                               

79


 

GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Cash Flows
Year ended December 31, 2003
                                               
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
    (In thousands)
Cash flows from operating activities:
                                       
 
Net income (loss)
  $ (303,277 )   $ (246,923 )   $ 8,538     $ 238,385     $ (303,277 )
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                                       
   
Depreciation and amortization
          44,564       2,782             47,346  
   
Asset impairment charges
          6,500                   6,500  
   
Deferred income taxes
    257,938       (4,013 )     9,497             263,422  
   
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
    3,558                         3,558  
   
Minority interest
                (507 )           (507 )
   
Equity in net (income) loss of subsidiaries
    246,923       (8,538 )           (238,385 )      
   
Changes in operating assets and liabilities, net
    (205,666 )     233,203       (10,665 )           16,872  
                               
     
Net cash provided by operating activities
    5,024       24,093       9,645             38,762  
                               
Cash flows for investing activities:
                                       
 
Purchases of property and equipment
    (91 )     (27,244 )     (2,060 )           (29,395 )
 
Proceeds from sale of assets
          600                   600  
                               
     
Net cash used in investing activities
    (91 )     (26,644 )     (2,060 )           (28,795 )
                               
Cash flows from financing activities:
                                       
 
Net contributions from General Electric Company and affiliates
    12,456                         12,456  
 
Repayment of long-term debt
    (174,562 )                       (174,562 )
 
Proceeds from long-term debt issuances
    169,750                         169,750  
 
Payment of financing costs
    (12,577 )                       (12,577 )
                               
     
Net cash used in financing activities
    (4,933 )                       (4,933 )
                               
Effect of exchange rate changes on cash
                4,363             4,363  
                               
     
Increase (decrease) in cash and cash equivalents
          (2,551 )     11,948             9,397  
Cash and cash equivalents, beginning of year
          21,940       15,393             37,333  
                               
Cash and cash equivalents, end of year
  $     $ 19,389     $ 27,341     $     $ 46,730  
                               

80


 

GXS CORPORATION AND SUBSIDIARIES
Consolidating Statement of Cash Flows
Year ended December 31, 2004
                                               
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
    (In thousands)
Cash flows from operating activities:
                                       
 
Net income (loss)
  $ (84,880 )   $ (127,449 )   $ 19,661     $ 107,788     $ (84,880 )
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                                       
   
Depreciation and amortization
          49,370       2,335             51,705  
   
Asset impairment charges
          6,509                   6,509  
   
Deferred income taxes
          100       3,264             3,364  
   
Amortization of deferred financing costs and debt discount
    4,705                         4,705  
   
Minority interest
                (463 )           (463 )
   
Equity in net (income) loss of subsidiaries
    127,449       (19,661 )           (107,788 )      
   
Changes in operating assets and liabilities, net
    (53,322 )     116,219       (35,801 )           27,096  
                               
     
Net cash provided by (used in) operating activities
    (6,048 )     25,088       (11,004 )           8,036  
                               
Cash flows for investing activities:
                                       
 
Purchases of property and equipment
          (27,231 )     (668 )           (27,899 )
 
Purchase of HAHT, net of $4,526 cash acquired
          (9,724 )                 (9,724 )
                               
     
Net cash used in investing activities
          (36,955 )     (668 )           (37,623 )
                               
Cash flows from financing activities:
                                       
 
Net contributions from General Electric Company and affiliates
    6,177                         6,177  
 
Borrowings under revolving credit facility
    14,100                         14,100  
 
Repayments under revolving credit facility
    (14,100 )                       (14,100 )
 
Payment of financing costs
    (129 )                       (129 )
                               
     
Net cash provided by financing activities
    6,048                         6,048  
                               
Effect of exchange rate changes on cash
                1,297             1,297  
                               
     
Decrease in cash and cash equivalents
          (11,867 )     (10,375 )           (22,242 )
Cash and cash equivalents, beginning of year
          19,389       27,341             46,730  
                               
Cash and cash equivalents, end of year
  $     $ 7,522     $ 16,966     $     $ 24,488  
                               

81


 

Independent Auditors’ Report
The Board of Directors and Stockholders
Global eXchange Services Limited:
We have audited the accompanying consolidated balance sheets of Global eXchange Services Limited (“GXS” or “the Company”) as at 31 December 2004 and 2003 and the related profit and loss accounts for each of the years in the three-year period ended 31 December 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GXS as at 31 December 2004 and 2003 and the results of their operations for each of the years in the three-year period ended 31 December 2004, in conformity with generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is summarized in note 24 to the consolidated financial statements.
KPMG Audit Plc
/s/ KPMG Audit Plc
London, United Kingdom
24 February 2005

82


 

Global eXchange Services Limited
(Formerly GE Information Services limited)
31 December 2004
Consolidated profit and loss account
for the year ended 31 December
                                 
        2004        
    Note   £000   2003 £000   2002 £000
                 
Turnover
    3       29,251       32,852       37,475  
Cost of sales
            (6,589 )     (8,816 )     (10,665 )
                         
Gross profit
            22,662       24,036       26,810  
Administrative expenses
            (9,905 )     (15,571 )     (15,011 )
Other operating income
            430       642       691  
                         
Operating profit
            13,187       9,107       12,490  
Exceptional charge
    8             (751 )      
Interest receivable and similar income
    9       2,075       1,430       768  
Interest payable and similar charges
    10                    
                         
Profit on ordinary activities before taxation
    4       15,262       9,786       13,258  
Tax on profit on ordinary activities
    11       (4,649 )     (2,944 )     (4,374 )
                         
Profit on ordinary activities after taxation
            10,613       6,842       8,884  
Dividends paid and proposed on preferred shares (net of capital contribution of £1,212,000 in 2003)
    12       (282 )     (999 )     702  
                         
Retained profit for the financial year
    20       10,331       5,843       9,586  
Retained profit brought forward
            21,518       15,675       6,089  
                         
Retained profit carried forward
    20       31,849       21,518       15,675  
                         
The notes on pages 85 to 101 form part of these consolidated financial statements.
The movement in reserves is shown in note 21 to these consolidated financial statements.
The results in the above profit and loss account relate entirely to continuing operations.
The group has no recognised gains and losses other than those included in the profit and loss account above and therefore no separate statement of total recognised gains and losses has been presented.

83


 

Global eXchange Services Limited
(Formerly GE Information Services limited)
31 December 2004
Consolidated balance sheet
at 31 December
                                           
            2004   2003   2003
    Note   2004 £000   £000   £000   £000
                     
Fixed assets
                                       
Intangible assets
    13               1               355  
Tangible assets
    14               274               703  
                               
                      275               1,058  
Current assets
                                       
Debtors: amounts falling due within one year
    15       13,911               14,643          
Debtors: amounts falling due after more than one year
    15       49,833               34,090          
Cash at bank and in hand
            1,639               3,230          
                               
              65,383               51,963          
Creditors: amounts falling due within one year
    16       (11,694 )             (9,649 )        
                               
Net current assets
                    53,689               42,314  
                               
Total assets less current liabilities
                    53,964               43,372  
Provisions for liabilities and charges
    17               (1,115 )             (854 )
                               
Net assets
                    52,849               42,518  
                               
Capital and reserves
                                       
Called up share capital
    19               21,000               21,000  
Profit and loss account
                    31,849               21,518  
                               
Shareholders’ funds
                                       
 
Equity
                    33,849               23,518  
 
Non-equity
    19               19,000               19,000  
                               
                      52,849               42,518  
                               

84


 

Global eXchange Services Limited
(Formerly GE Information Services limited)
31 December 2004
Notes
(forming part of the financial statements)
1 Accounting policies
The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company’s financial statements except as noted below.
a)     Basis of preparation
The financial statements have been prepared in accordance with applicable accounting standards and under the historical cost accounting rules.
b)     Goodwill
Goodwill arose on the acquisition of International Network Services Limited (“INS”) and was written off over 10 years, the period the directors estimated over which benefits accrued from the acquisition.
c)     Other intangible fixed assets and amortisation
Other intangible assets represents development costs and other internally developed software costs and are being written off over 3 years.
d)     Fixed assets and depreciation
Depreciation is provided to write off the cost less the estimated residual value of tangible fixed assets by equal instalments over their estimated useful economic lives as follows:
i)     Plant and machinery
Plant and other equipment are depreciated at the following rates:
         
Year of acquisition
    7%  
First year
    25%  
Second year
    22%  
Third year
    18%  
Fourth year
    16%  
Fifth year
    12%  
Furniture and motor vehicles are depreciated at 10% and 25% per annum respectively.
ii)     Land and buildings
Leasehold improvements to sites used for the Company’s marketing, financial and administrative operations are amortised over the shorter of ten years or the period of the lease. Leasehold improvements to sites used in the communications network are amortised over the shorter of five years or the period of the lease.
No depreciation is provided on freehold land.
e)     Cash flow statement
Under FRS1 “Cash flow statements’ (revised 1996) the Company is exempt from the requirement to prepare a cash flow statement. Exemption is on the grounds that it is a wholly owned subsidiary undertaking and its

85


 

Global eXchange Services Limited
Notes — (Continued)
cash flows appear in a consolidated cash flow statement in the ultimate parent company’s financial statements which are available to the public.
f)     Transactions with related parties
The Company, as a subsidiary undertaking of Acquisition UK Limited (see note 2, Ultimate parent company), has taken advantage of an exemption contained in FRS 8 “Related Party Disclosures’, in preparing its accounts. This exemption allows the Company not to disclose details of transactions with other group companies or investees of the group qualifying as related parties, as the consolidated accounts of Acquisition UK Limited, in which the Company is included, are available to the public.
g)     Foreign currencies
Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the profit and loss account.
h)     Leases
Assets acquired under finance leases, which transfer to the lessee substantially all the benefits and risks of ownership, are included in fixed assets and depreciated over their estimated useful lives. The interest element of the leasing obligation is charged to the profit and loss account over the period of the lease in proportion to the capital balance outstanding. Lease obligations, net of future finance charges, are shown under creditors.
Operating lease payments are charged to the profit and loss account in the year to which they relate.
i)     Post-retirement benefits
The employees of the Company participated in two GE defined benefit schemes providing benefits based on final pensionable pay. The assets of the schemes were held separately from those of the Company. Contributions to the schemes were charged to the profit and loss account so as to spread the cost of pensions over employees’ working lives within the Company. The employees of the Company became deferred members of the two GE defined benefit schemes in September 2003 (see note 8, Exceptional charge).
The Company now operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the company in an independently administered fund. The amount charged to the profit and loss account represents the contributions payable to the scheme in respect of the accounting period.
j)     Reclassifications
Certain prior year amounts have been reclassified to conform with the current years presentation.
k)     Taxation
The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes.
Deferred tax is recognised without discounting, in respect of all timing differences between the treatment of certain items for taxation and accounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS 19.

86


 

Global eXchange Services Limited
Notes — (Continued)
l)     Turnover
The Company generates revenues from three principal sources:
Transaction Processing — The Company earns transaction processing fees from facilitating the exchange of business documents among the Company’s computer systems and those of their trading partners. These revenues are based on a per transaction fee and are recognized in the period the related transaction is 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. Revenues are recognised when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection is probable. Revenue from licensing software that requires significant customisation and modification or where services are otherwise considered essential to the functionality of the software are recognised 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 rateably 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, then the revenue is immediately recognised.
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 in 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 element based on vendor specific objective evidence (VSOE). 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.
Royalty Income — In previous years the Company earned royalty income of 50% on global sales of Edi*Switch and Enterprise products. In 2004, by Shareholder Agreement, the royalty rate on such sales was reduced to 10%.
m)     US management charges
In 2003 and 2004 the Company has been assessed management charges by its US parent in respect of costs incurred in the US on its behalf.
n)     Basis of consolidation
The consolidated financial statements incorporate the financial statements of the parent company and its subsidiary undertaking, International Network Services Limited, made up to 31 December 2004. The acquisition method of accounting has been adopted.
2 Ultimate parent company and parent undertaking of larger group of which the company is a member
The Company’s immediate parent undertaking and controlling entity for the period until 27 September 2002, was GE Information Services Inc. (a company incorporated in the United States of America). With effect from 27 September 2002, as a result of the recapitalization transaction the Company’s immediate parent undertaking and controlling entity was GXS International Inc. (a company incorporated in the United States of America). On 31 December 2002 GXS International Inc. transferred its beneficial interest in the Company

87


 

Global eXchange Services Limited
Notes — (Continued)
to Acquisition UK Ltd (a company incorporated in the United Kingdom). With effect from 31 December 2002 Acquisition UK Limited is the Company’s immediate parent.
The largest group in which the results of the Company are consolidated is that headed by the Company’s ultimate parent undertaking and controlling entity, Global Acquisition Co. (a company incorporated in the United States of America). The consolidated financial statements of this company are available to the public and may be obtained from 2822, Sand Hill Road, Suite 280 Menlo Park, California 94025, USA.
3 Analysis of turnover on ordinary activities before taxation