Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number: 000-27376

Elcom International, Inc.

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

     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 þ          No o

          Indicate by 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 check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)     Yes o          No þ

          The aggregate market value of the common stock held by non-affiliates of the registrant based on the price at which such stock was last sold on the Over The Counter Bulletin Board (the “OTCBB”) on March 22, 2004, was approximately $5,444,000. For purposes of this disclosure only, the registrant has assumed that its directors, executive officers, and beneficial owners of 10% or more of the registrant’s common stock are affiliates of the registrant.

      The registrant had approximately 30,902,000 shares of Common Stock, $.01 par value, outstanding as of March 22, 2004.

Table of Contents

PART I

Introduction

      Elcom International, Inc. (“Elcom” or the “Company”), a corporation formed under the laws of Delaware in December 1992, is a leading provider of Internet and web-based remotely-hosted, integrated eProcurement and eMarketplace solutions and services (“ePurchasing”). The Company’s PECOS^TM ePurchasing solution is remotely-hosted by Elcom providing rapid deployment and single point responsibility for clients. In total, over 100 organizations are using or accessing Elcom’s solution under these licenses. Elcom became publicly-held and quoted on NASDAQ in 1995 and now trades on the OTCBB:ELCO. Elcom has a seasoned management team in place with substantial experience in eBusiness technologies. The Company operates in the U.S. and U.K. with the majority of current revenues and projected future growth expected to be generated from U.K. clients. Although Elcom’s ePurchasing system is generic and can be used in any industry, Elcom has a growing presence in the utilities and public sector marketplaces.

Overview

      Prior to the divestiture of the IT products business in the U.K. and U.S., the Company had previously marketed over 130,000 IT products to commercial, educational and governmental accounts via several electronic methodologies. During 2001, economic activity in the U.S. began to slow and capital and discretionary spending by the Company’s customer base began to decrease. Demand for IT products was further materially impacted by the terrorist attacks in the U.S. on September 11, 2001 and the subsequent effect on the U.S. economy. Even though the demand for IT products was weak throughout 2001, after one year of planning and implementation with Tech Data Corporation (“Tech Data”), the Company launched a new initiative and demonstrated significant success in acquiring incremental customers beginning in August of 2001. This initiative offered an eMarketplace version of PECOS to new customers at no charge in return for a portion of their IT products being ordered through the PECOS system. These orders were fulfilled and executed by Tech Data, the second largest distributor of IT products in the world, who assumed responsibility for all operational functions. Each order placed through the PECOS system generated transaction-oriented fees of approximately 6% (six percent) to the Company as a sales agent of Tech Data. However, subsequent to the September 11, 2001 terrorist attacks, the material decline in demand from the Company’s (then) existing IT products customers (who were not using PECOS) and the uncertainty surrounding the overall economy, caused the Company to carefully review its business operations. In order to reduce operational and financial risks and properly align the Company’s operations with the slowing economic environment, the Company decided to divest its IT products and services businesses to reduce costs and allow the Company to focus exclusively on its core Internet-based, ePurchasing technology.

      On December 31, 2001, the Company divested itself of its U.K. IT products business and on March 29, 2002, the Company divested itself of its U.S. IT products and services business. As a result of these divestitures, commencing in the second quarter of 2002, the Company no longer recorded any revenues arising from the sale of IT products and associated services. Commencing during the second quarter of 2002, the Company’s sole source of revenue has been the implementation of ePurchasing solutions and associated professional services and monthly license and maintenance fees. As provided by applicable accounting conventions, the U.S. IT products and services business and the U.K. IT products business have been presented as discontinued operations for all applicable periods presented.

      During 2003, the economic environment in the U.S. was very weak. In the U.K., the Company’s contract with Cap Gemini Ernst & Young (“CGEY”) associated with the Scottish Executive (Executive Department of the Government of Scotland), began to see an increase in business activity towards the end of the third quarter. This increase in activity, which accelerated during the fourth quarter, was due, in part, to the National Health Service of Scotland (“NHSS”) agreeing during 2003 to join the eProcurement Scotland program (which uses Elcom’s PECOS ePurchasing system), with this group of NHSS hospital trusts to begin implementation in the first quarter of 2004. The NHSS has approximately 17 hospital trusts within its

1

Table of Contents

      The Company’s customer base has remained stable. The Company lost one client during 2003, ostensibly due to its weak balance sheet. This customer generated less than $34,000 in annual revenues to the Company.

      The Company intends to agree to issue and sell common shares to investors in the U.K. in early April 2004, subject to the AIM Listing. The new Elcom shares of common stock would be issued in reliance on the exemption from registration under Regulation S under the Securities Act of 1933 for offshore private or public placements. Under Regulation S, the new shares would not be able to be resold to U.S. persons or to other persons located in the U.S., but may otherwise be traded in the U.K. and offshore without other restrictions. Further, the Company intends to subsequently list those shares on the Alternative Investment Market (“AIM”) of the London Stock Exchange (the “AIM Listing”). The AIM Listing would occur approximately ten (10) business days (U.K.) after the Company’s nominated advisor in the U.K. submits a Schedule 1 document to the AIM exchange. The Schedule 1 is expected to be filed one or two days after the filing of this Form 10-K. The funds to be derived from such proposed sale of common shares would be used to support the Company’s working capital requirements until the Company achieves positive cash flow, which management expects to occur in 2005. The Company is seeking to raise approximately £1.6 to £2.0 (approximately $2.9 million to $3.6 million) via this issuance and sale of common shares. See “Intention to Issue and Sell Common Shares under Regulation S in the U.K. and List Those Shares on the London Alternative Investment Market” and “Risk Factors Relating to Liquidity”.

Product Overview

      The Company’s ePurchasing solution combines robust integrated eProcurement and eMarketplace capabilities and is remotely-hosted via the Company’s data center. Management believes that the combination of eProcurement and eMarketplace functionality capabilities in a single code base gives Elcom a strong low-cost offering and importantly, can be offered to potential clients from either functional viewpoint.

      Since its inception in 1992, the Company has developed its PECOS^TM (Professional Electronic Commerce Online System) system, which automates many supply chain and financial settlement functions associated with procurement. The Company intends to augment its core ePurchasing solutions with other supply chain and supplier-oriented systems to enable the conduct of interactive procurement, supplier relationship management, and financial settlement. The Company has licensed a dynamic trading system platform to provide auction, reverse auction, and other electronic negotiation (or eNegotiation) functions and has also marketed an asset management system, both from third parties, which modules are offered as optional functionality to clients. The Company’s PECOS^TM solution can support large numbers of end-user clients, products, suppliers and transactions and its transaction server middleware provides a scalable foundation for robust system performance and high transaction capacity.

2

Table of Contents

Procurement and Sourcing Overview

      AMR Research estimates that the procurement and sourcing market will grow from $1.7 billion in 2002 to $2.8 billion in 2007. AMR also estimated the professional services market for procurement and sourcing consulting services was approximately $3 billion in 2002. Due to cost containment policies, the Company has not paid any “affiliate fees’ to any industry research companies and, to management’s knowledge, has not been mentioned and/or discussed in any significant industry research reports during most of 2002 and all of 2003.

Products and Pricing

      Products. The Company develops and licenses its PECOS^TM remotely-hosted, self-service, Internet and web-based automated purchasing and marketplace systems, as described above. The Company also offers a dynamic trading system and has offered an asset management system, each from third party companies.

      Pricing. The Company believes that PECOS^TM, including its remotely-hosted automated eProcurement and eMarketplace system(s), is competitively priced compared to costs charged by other eProcurement software providers.

Professional Services

      The Company’s professional service offerings include various consulting and supplier services to its clients. These services range from implementation of PECOS and initial training and consulting, to interfacing data from PECOS into any back-end computer systems, including Enterprise Resource Planning (“ERP”) systems such as Oracle, SAP, PeopleSoft, Lawson, etc. Suppliers are also offered services associated with catalog content and categorization, loading procedures and automated data update methodologies.

Management Information Systems

      In the U.S., the Company licenses and utilizes software from Oracle Corporation and other software firms for its Management Information System (“MIS”) to allow management to monitor and manage the Company. The Company’s MIS incorporates modules supporting general ledger, accounts payable, purchasing, accounts receivable, inventory and order entry. The Company receives data from its chartered accountants in the U.K., to manage and monitor the Company’s U.K. operations.

      The Company’s operations are dependent in part upon its ability to protect its MIS network infrastructure in its Norwood, MA facility against damage from physical break-ins, natural disasters, operational disruptions and other events. To protect the Company’s data and provide service if the Company’s data center were to become inoperative, the Company has a disaster-recovery system in place.

Sales and Marketing

      As of December 31, 2003, the Company’s sales and marketing and support personnel in the U.S. and U.K. were comprised of three marketing and/or relationship management personnel, and 8 customer support personnel, including two (2) of the Company’s software developers. The Company markets and sells its ePurchasing solutions primarily through its channel partners.

Customer Service and Support

      The Company believes that customer satisfaction is essential for its long-term success and offers comprehensive customer assistance programs. The Company’s technical support provides response to and resolution of customer technical inquiries and is available to clients by telephone, over the web or by electronic mail. The Company uses a customer service automation system to track each customer inquiry until it is resolved.

3

Table of Contents

Competition

      The market for ePurchasing solutions is relatively new and evolving rapidly. The Company expects competition in this market to intensify in the future. Among other factors, before investing in an eBusiness system, the Company believes potential clients consider the cost of the system compared to the level of features and functions available in electronic commerce (“eCommerce”) applications and the cost to acquire, implement and maintain the system, as well as the length of time to implement a system and, as applicable, integrate it with a company’s existing computer system. The Company competes with vendors of prepackaged eCommerce software, vendors of software tools for developing eCommerce applications and systems integrators. The Company’s competitors include Ariba, Inc., Perfect Commerce, which acquired eScout (based on the Commerce One platform), Ketera (based on Ariba, hosted) and Epsilon (Ariba). The Company anticipates future competition from other emerging and established companies, including Oracle, PeopleSoft, and SAP, all of which have announced products or alliances to offer Internet-based eCommerce, including eProcurement modules which function as part of their ERP system(s). The Company does not typically engage potential clients which have a major ERP system in place. The Company’s potential competitors also include systems integrators such as Electronic Data Systems (EDS) and a number of EDI solution vendors.

      Certain of these and other competitors have longer operating histories and most have significantly greater financial, technical, marketing and other resources than the Company and thus may have more extensive sales or distribution networks and may be able to develop their solution(s) or respond more quickly to new or changing opportunities, technologies and client requirements. Also, many current and potential competitors have greater name recognition and more extensive client bases that could be leveraged, thereby gaining market share to the Company’s detriment. Such competitors may be able to undertake more extensive promotional activities, adopt more aggressive pricing policies and offer more attractive terms to purchasers than the Company and to bundle their products in a manner that may discourage users from purchasing products offered by the Company. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to enhance their products. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. There can be no assurance that the Company will be able to compete effectively with competitors or that the competitive pressures faced by the Company will not have an adverse effect on the Company’s business, results of operations and/or financial condition.

Intellectual Property

      The Company’s success and ability to compete are dependent, in part, upon its proprietary technology. While the Company relies to a certain extent on trademark, trade secret, patent and copyright law to protect its technology, the Company believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product availability and distribution are of equal importance for establishing and maintaining a competitive position. Although the Company has received a patent on certain, specific aspects of its PECOS^TM technology, there can be no assurance that other entities will not develop, or have not developed, technologies that are similar or superior to the Company’s technology. The source code for the Company’s proprietary software also is protected both as a trade secret and as an unregistered copyrighted work. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use some portions of the Company’s products or technology without authorization, or to develop similar technology independently. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries.

Government Regulation

      The Company is not currently subject to direct regulation by any government agency, other than regulations applicable to businesses generally, and there are currently few laws or regulations directly applicable to commerce on the Internet. However, due to the increasing popularity and use of the Internet, it is possible that additional laws and regulations may be adopted with respect thereto, covering issues such as user privacy, pricing and characteristics, taxation of Internet sales and quality of products and services. The

4

Table of Contents

Environmental Matters

      Based on the Company’s experience to date, the cost of compliance with environmental matters has been immaterial and the Company believes that it is in material compliance with applicable environmental laws and regulations.

Personnel

      As of December 31, 2003, the Company had a total of 22 full time and 7 part time personnel in the U.S. and 6 full time personnel in the U.K. The Company’s personnel are not represented by any labor union and the Company believes that its personnel relations are good. The Company’s future success depends, in significant part, upon the continued service of its key technical and senior management personnel and its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for highly qualified personnel is intense and there can be no assurance that the Company can retain its key managerial and technical personnel or that it will be able to attract or retain additional highly qualified technical and managerial personnel in the future. The Company has relied heavily on incentive and other stock options to motivate and incentivize its personnel. As of March 22, 2004, the Company employed 22 full time and 7 part time personnel in the U.S. and 6 full time personnel in the U.K.

Company Trade Names and Trademarks

      Elcom and PECOS are tradenames and/or trademarks of the Company. The Company has referred to a variety of other entities and products in this Form 10-K, certain of which are tradenames or trademarks. Such tradenames or trademarks are the property of the respective companies owning such tradenames and trademarks.

      As of December 31, 2003, the Company leased the property set forth below. The facility lease expires in July 2006. See Note (7) to the consolidated financial statements, included elsewhere in this Form 10-K.

      The Company’s U.K. personnel work either at customer sites or from home offices which are equipped with the necessary office infrastructure to conduct business, including high-speed Internet access.

      The Company is a party to various claims, disputes and other proceedings relating to former employees and other matters arising in the normal course of its business. In the opinion of management, the outcome of these matters will not have a material adverse effect on the consolidated financial condition or results of operations of the Company.

      No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.

5

Table of Contents

PART II

Price Range of Common Stock

      From August 11, 2002 to January 15, 2003, the Company’s Common Stock was listed on the Nasdaq SmallCap Market. Since January 16, 2003, the Company’s Common Stock commenced trading on the Over The Counter Bulletin Board, (“OTCBB”) under the symbol ELCO. As of December 31, 2003, there were approximately 392 stockholders of record of the Company’s Common Stock. This number does not reflect persons or entities who hold their stock in nominee or “street name” through various brokerage firms which persons or entities are estimated by the Company to be in excess of 11,500 as of December 31, 2003. The high and low closing sales prices reported by the Nasdaq SmallCap Market or OTCBB (bid quotations beginning January 16, 2003) for each of the quarters in the two year period ended December 31, 2003 are set forth in the table below. For the period from January 1, 2004 to March 22, 2004, such high and low bid quotations were $0.25 and $0.175, respectively. The over-the-counter market bid quotations reflect inter-dealer prices, without retail mark-up, mark-downs, or commissions and may not represent actual transactions.

      The Company has never declared or paid cash dividends on its Common Stock. The Company currently does not anticipate paying any dividends in the foreseeable future. Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company’s earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other factors that the Company’s Board of Directors deems relevant.

Recent Sales of Unregistered Securities — Convertible Debentures

      On April 25, 2003, the Company held a first closing (the “First Closing”) on a private placement to accredited investors (the “Private Placement”) of ten-year 10% Senior Convertible Debentures (the “Debentures”), generating gross proceeds of $949,000 and net cash to the Company of $702,000. Robert J. Crowell, the Chairman and CEO invested $300,000, John E. Halnen, the President and COO invested $60,000, William W. Smith, the Company’s Vice Chairman and Director invested $300,000, Andres Escallon, the Chief Technology Officer invested $50,000 (collectively, the “Inside Investors”). The Company paid Robert J. Crowell $187,000 and John E. Halnen $60,000 in repayment of a portion of their salaries which they had voluntarily suspended during 2002 in order to assist the Company in its efforts to retain cash. Robert J. Crowell and John E. Halnen immediately reinvested these proceeds into their purchase of the Debentures. In addition, Smith and Williamson LLC (U.K.) and other Elcom stockholders in the U.K. invested $239,000. Inside Investors are considered related parties and invested a total of $710,00 in the Company via purchases of Debentures in the First Closing.

      On October 16, 2003, the Company closed a second round of the private placement of its Debentures (the “Second Closing”), generating cash proceeds of $315,000. Robert J. Crowell, the Chairman and CEO invested $150,000, William W. Smith, the Vice Chairman and Director invested $50,000 (both, the “Inside Investors”) and Smith & Williamson LLC (U.K.) and another Elcom stockholder invested $115,000. Inside Investors are considered related parties and invested a total of $200,000 in the Company via purchases of Debentures in the Second Closing.

      As of December 31, 2003, Inside Investors have invested an aggregate of $910,000 of the $1,264,000 invested in the Company via the purchases of Debentures.

6

Table of Contents

      The Debentures carry a 10% interest rate, which is payable in cash or payment in-kind. Interest is due annually, in arrears, commencing April 25, 2004 and October 16, 2004. The principal amount is due at maturity on April 25, 2013. The Company has accrued $72,000 in interest expense for these Debentures as of December 31, 2003.

      The Debentures are collateralized by a security interest in substantially all of the Company’s assets for a two-year period ending April 25, 2005. They are convertible by the owner (“Holder”) into common stock of the Company at a conversion price of $0.1246 per share, subject to anti-dilution clauses. The Debentures are convertible at the election of the Holder at any time commencing on April 25, 2005 through April 25, 2013. However, if the Company has two sequential quarters of profitability with respect to continuing operations, the Holder may convert the Debentures at his option. The Holders also have certain registration rights upon conversion. The Company has the right to convert the Debentures upon the occurrence of a change of control, as defined in the agreement, or at the Company’s option as of April 23, 2007 or subsequent thereto upon written notice to the investor. The Company recorded a discount on the issuance of the Debentures (the “Debenture discount”) of $1,069,000 in conjunction with the issuance of these Debentures. This Debenture discount is being amortized as interest expense over the ten-year term of the Debentures. At December 31, 2003, the Company has amortized $59,000 of this Debenture discount. At December 31, 2003, the Debentures are convertible into 10,144,462 shares of common stock.

      The Debentures are not registered under the Securities Act of 1933, as amended, or applicable state securities laws and may not be offered or sold in the United States absent registration under the Securities Act of 1933, and applicable state securities laws or available exemptions from the appropriate registration requirements. This Private Placement has been extended to May 17, 2004 and will terminate on that date unless otherwise extended or earlier terminated by the Company. Exemption from registration with respect to the sale of Debentures is claimed pursuant to Section 4(a) of the Securities Act of 1933, as amended.

Intention to Issue and Sell Common Shares under Regulation S in the U.K. and List Those Shares on the London Alternative Investment Market

      The Company intends to agree to issue and sell common shares to investors in the U.K. during early April 2004, subject to the AIM Listing. The new Elcom shares of common stock would be issued in reliance on the exemption from registration under Regulation S under the Securities Act of 1933 for offshore private or public placements. Under Regulation S, the new shares would not be able to be resold to U.S. persons or to other persons located in the U.S., but may otherwise be traded in the United Kingdom and offshore without other restrictions. Further, the Company intends to subsequently list those shares on the Alternative Investment Market (“AIM”) of the London Stock Exchange (the “AIM Listing”). This listing would occur approximately ten (10) days after the Company’s nominated advisor in the U.K. submits a Schedule 1 document to the AIM exchange. The Schedule 1 is expected to be filed within one or two days after the filing of this Form 10-K. The shares proposed to be traded on the AIM exchange will not commingle with the Company’s stock traded on the OTCBB until and unless the Company registers the shares listed on the AIM in the U.K., via an S-1 Registration Statement with the SEC. The funds to be derived from such proposed sale of common shares would be used to support the Company’s working capital requirements until the Company achieves positive cash flow, which management expects to occur in 2005. The Company is seeking to raise approximately £1.6 million to £2.0 million (approximately $2.9 million to $3.6 million) via this issuance and sale of common shares in the U.K. As of this date, the Company’s nominated advisor in the U.K. has received written indications of interest for the sale of its common shares in the U.K. of over £1.7 million (approximately $3.1 million), which is above the minimum range desired by the Company, at a price equal to the conversion rate of the Company’s recent placement(s) of Convertible Debentures of $0.1246 per share. See “Recent Sales of Unregistered Securities — Convertible Debentures”. The agreement to purchase and pricing of this sale of common shares occurs several days prior to the AIM Listing and the pricing thereof is not necessarily indicative of the price at which the shares will trade on the AIM. There can be no assurance that the sale of any common shares in the U.K. or the AIM Listing associated therewith, will be consummated. In the event common shares are not sold and/or the AIM Listing is not consummated, the Company would be forced to seek other alternative financing. There can no assurance that any such financing

7

Table of Contents

	THE ABOVE REFERENCED SHARES OF COMMON STOCK OF ELCOM HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES (OR TO A U.S. PERSON) ABSENT REGISTRATION OR AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS.

8

Table of Contents

      The following table sets forth selected consolidated financial data for the Company for each of the years ended December 31, 1999 through December 31, 2003 and at the end of each of those years. The historical financial data for the years ended 1999 through 2002 is derived from the Consolidated Financial Statements of the Company that were audited by KPMG LLP. The 2003 financial data is derived from Consolidated Financial Statements audited by Vitale, Caturano & Company, PC. This information should be read in conjunction with the Company’s Consolidated Financial Statements and related Notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which are included elsewhere in this Form 10-K. As discussed more fully herein, for appropriate periods presented, the results of operations of the U.K. IT products business, which was divested in December 2001 and the U.S. IT products and services business, which was divested in March 2002, have been accounted for as discontinued operations. The results of operations from the U.K. IT products business sold in July 1999 are included in continuing operations for all applicable periods presented.

9

Table of Contents

Introduction

      This introduction is intended to provide context and better understanding of the Management’s Discussion and Analysis of Financial Conditions and Results of Operations (“MD&A”) which follows. Under the Interpretive Release promulgated in December 23, 2003 by the SEC, Elcom intends to endeavor, as much as possible, to explain to its shareholders its comparative financial data contained in the MD&A section in such a way as to make the information more understandable to the reader. The Company intends to emphasize important historical and current events or other information that it believes are appropriate or necessary to an understanding of the Company’s financial comparisons.

Historical Overview

      As discussed elsewhere herein, after the September 11, 2001 terrorist attacks and because of the immediate and subsequent material decline in demand for IT products, on December 31, 2001 the Company divested itself of its U.K. IT products business and on March 29, 2002, the Company divested itself of its U.S. IT products and services business. The Company then transitioned to a pure software solutions company with its PECOS eProcurement and eMarketplace system as its primary platform. The Company received far less than anticipated for the U.S. business, which caused Elcom’s auditors to issue a “going concern” audit opinion in March 2002.

      As a result of these divestitures, commencing in the second quarter of 2002, the Company did not record any revenues arising from the sale of IT products and associated services. From the second quarter of 2002, the Company’s sole source of revenue has been the implementation of ePurchasing solutions, associated professional services and monthly license, hosting and maintenance fees. As provided by applicable accounting conventions, the U.S. IT products and services business and the U.K. IT products business have been presented as discontinued operations for all applicable periods presented.

      After the divestitures of the Company’s IT products businesses in the U.S. and U.K. subsequent to the September 11, 2001 terrorist attacks, the overall economy slowed substantially in the U.S. and the Company’s business became generally static in the U.S. The Company did not consummate any new customer agreements in the U.S. during 2003. Management believes that generating new clients was effectively precluded due to the Company’s weak balance sheet and going concern audit opinion, which was first issued in March 2002. Further, most of the Company’s channel partners were unwilling to expand existing initiatives until the Company was properly funded and the Company’s going concern audit opinion was resolved. The Company has been operating under severe cash limitations for several quarters, including voluntary cash salary suspensions from many employees. During the fourth quarter of 2003, the Company recorded the lowest expenses of any quarter in the last five years. The Company implemented multiple redundancies in its U.K. and U.S. software solutions businesses during 2002 and 2003. In March 2004, the Company began hiring

10

Table of Contents

      Since its inception in 1992, the Company has developed its PECOS^TM system, which automates many supply chain and financial settlement functions associated with procurement. The Company also offers a dynamic trading system licensed from a third party, which includes request for proposal, reverse auctioning and other features. In addition, the Company has offered an asset management system and is in discussions with several other software firms to offer their software solutions as augmentations to the PECOS system.

      Sales to CGEY associated with the Scottish Executive Executive Department of the Government of Scotland (the “Scottish Executive”), comprised 46%, and 73%, of net sales for the years ended December 31, 2003 and 2002 respectively. A one-time sale of proprietary software to AJJP Limited, the acquiror of the Company’s UK IT products business, was 69% of net sales for the year ended December 31, 2001.

      The Company intends to raise working capital via the issuance and sale of common shares in the U.K. under Regulation S of the Securities Act of 1933. See “Intention to Issue and Sell Common Shares under Regulation S in the U.K. and List Those Shares on the London Alternative Investment Market”. Failure to consummate the AIM Listing or other near-term financing would likely force the Company to seek protection under bankruptcy laws.

Results of Operations

      The following table sets forth various items of net sales for each of the years in the three-year period ended December 31, 2003 (in thousands):