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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10 - KSB/A
AMENDMENT NO. 1
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1994
-----------------------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17419
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PC Etcetera, Inc.
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(Name of small business issuer in its charter)
Delaware 13-3260705
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
462 Seventh Avenue, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (212) 736-5870
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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none
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 x No .
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ( )
State issuer's revenues for its most recent fiscal year: $10,456,704
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $1,223,867 as of March 21, 1995
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No .
--- ---
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 9,637,308 shares outstanding
as of March 1, 1995
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) BUSINESS DEVELOPMENT.
GENERAL
PC ETCETERA, Inc. (the "Company") develops and offers instructor-led
and computer-based personal computer training programs, and provides consulting
services, primarily to large business and public sector organizations. The
Company's instructor-led training ("ILT") programs include a wide range of
introductory and advanced classes in operating systems, including MS/DOS,
Microsoft Windows, OS/2 and Apple Macintosh ("Macintosh") System 7.0, word
processing, spreadsheets, databases, communications, executive overviews,
integrated software packages, computer graphics and desktop publishing. The
Company's computer-based training ("CBT") programs include offerings on Lotus
Notes, CC Mail, Microsoft Office, and Lotus Smartsuite.
The Company's ILT programs, which are primarily marketed to those
business concerns and public sector organizations which devote substantial
resources to personal computer technology, are conducted solely for the benefit
of such employees. Such programs generally are devised for use in connection
with IBM and IBM-compatible software and, to a lesser degree, Macintosh and
Macintosh-compatible software. The Company has been authorized as a training
center by many software and hardware manufacturers, including Aldus, Alpha
Software, Apple, Borland, Claris, Corel, Dataease, Lotus, Micrografx,
Microsoft, and Software Publishing. The Company does not sell or distribute
any computer hardware, software or related products (other than CBT programs as
discussed below).
The Company develops and offers CBT programs to augment its live
training classes. Whereas live classroom training is delivered in a classroom
setting by one of the Company's qualified instructors to students sitting in
front of personal computers, CBTs utilize a different training methodology.
Computer-based training is supplied to students on either floppy disks or over a
communication line which is tied directly to their desk-top personal computer.
This approach eliminates the need for either classrooms or instructors. The
Company believes that certain software packages and other computer related
topics lend themselves to being taught in this manner. CBT programs, for
example, are a more cost effective way of delivering training on new features
available in software upgrades, as well as in delivering training in
geographically remote locations. In addition, the Company's proprietary
authoring tool, ACE, allows CBT designers to develop custom CBT for a client's
in-house computer applications (see "Recent Developments" below.)
The Company established a Consulting Services Division ("CSD") during
1993. This division is responsible for identifying and providing independent
computer personnel, on a temporary basis, to the Company's client base for
special projects. At the present time, the Company is furnishing its full time
employees, as well as independent contractors, to satisfy its clients'
requirements.
The Company presently operates nine training facilities - four in New
York City, one in Northern California, three in Ontario, Canada and one in
Metropark, New Jersey.
The Company was incorporated in New York in March 1985 as PC Executive
Center, Inc. It changed its corporate domicile to Delaware in December 1987, at
which time it also assumed its present name. The Company's executive offices are
located at 462 Seventh Avenue, New York, New York 10018 (telephone number (212)
736-5870).
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RECENT DEVELOPMENTS
ACQUISITION OF ACE AND ADAR
On August 12, 1994, the Company and its wholly-owned Israeli
subsidiary, PC Etcetera Israel Ltd. ("PC Israel"), entered into an Asset
Purchase Agreement (the "Elron Agreement") with Elron Electronic Industries
("Elron"), Adar International, Inc., ("Adar"), an indirect wholly-owned
subsidiary of Elron and Elron Technologies Inc., ("Technologies") a wholly-owned
subsidiary of Elron pursuant to which (a) Elron sold to PC Israel substantially
all of the assets of its ACE Division ("ACE"), subject to certain disclosed
liabilities, and (b) Adar sold to the Company substantially all of the assets of
Adar, subject to certain disclosed liabilities.
ACE was in the business of designing, developing, producing and
marketing CBT courseware. Adar was ACE's United States marketing arm. The
technology acquired from Elron reduces the development time and costly revision
time of user documentation and training manuals.
Pursuant to the Elron Agreement, the Company issued, as consideration
for the assets acquired, (I) 3,300,000 shares of Common Stock of the Company,
3,000,000 of which were issued to Elron and Technologies and 300,000 of which
were issued to key former employees of Elron at the direction of Elron,
Technologies and Adar (ii) 488,000 shares of Series A Preferred Stock of the
Company; and (iii) a five-year warrant for the purchase of an aggregate of
712,000 shares of Common Stock of the Company at an exercise price of $1.00 per
share (the "Elron Warrant"). In September 1994, as permitted by the Elron
Warrant, the Company required Elron to exercise its Warrant to the extent of
$512,000. Pursuant to the terms of the Elron Warrant, in lieu of shares of
Common Stock, Elron was issued 512,000 shares of Series A Preferred Stock.
The Series A Preferred Stock of the Company carries a liquidation
preference of $1.00 per share and may be converted into shares of Common Stock
of the Company on a one-for-one basis (an effective conversion price of $1.00
per share). The holders of the Series A Preferred Stock shall be entitled to
receive such dividends as may be declared by the Board of Directors of the
Company on an equal basis with the holders of the Company's Common Stock and
shall carry no voting rights except as required by law. Such holders shall be
entitled to require redemption by the Company at a price of $1.00 per share (the
"Redemption Price") in the event of a change of control of the Company, under
certain circumstances, subject to the legal availability of funds. The Company
may elect, at its option, to redeem all or any part of the outstanding Series A
Preferred Stock at the Redemption Price. See Items 11 and 12 hereof.
SERIES B PREFERRED STOCK FINANCING
Reference is made to Items 6 and 12 hereof for a discussion of a
certain $1,500,000 Series B Preferred Stock financing consummated by the Company
in March 1995.
(b) BUSINESS OF COMPANY.
INTRODUCTION
There is an increasing awareness among employers that the use of
personal computers is a means of saving time and increasing employee efficiency.
The Company believes that, as a general matter, due to the large number of
personal computers in use in the United States, computer literacy is
increasingly being considered by employers as a factor in both hiring and
advancement decisions.
As a result of the increasing presence of personal computers in the
workplace and the continuing development of new software products relating to
personal computers, employers are increasingly aware of the necessity of
standardized, high-quality computer training programs for employees.
Accordingly, many employers, particularly large national and international
companies, commit substantial resources to the
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personal computer training of employees. Additionally, due to the recent trend
in corporate downsizing, companies are increasingly looking to outsourcing
relationships in order to satisfy their training and support needs.
The Company seeks to fulfill the need for such personal computer
training and support services through the offering of live hands-on training
classes which utilize standardized curriculum and are conducted at the Company's
facilities or the employers' premises, and CBT programs, which can be accessed
directly by the student at his/her desk. In addition, the Company provides
clients with state-of-the-art training center management services including
student registration, pre- and post-testing, internal marketing and course
customization.
The Company also provides independent personal computer consultants to
assist its clients in the implementation of personal computer software programs
and systems, for desk to desk support, and for hotline and help desk
implementation.
TRAINING PROGRAMS
METHODOLOGY
A variety of personal computer training programs have been developed
utilizing different methods. One such method utilizes ILT traditional classes,
varying in length from several hours to several days. In addition, there are
training methods utilizing the computer as teacher and interactive video
employing video tapes of instruction. Certain employers request a combination of
these various training methods. The Company currently provides both live
instructor-led traditional classes and computer-based training software
products, since it believes that these are currently the best methods for
teaching personal computer skills. However, as the market for multi-media
software expands, the Company plans to explore alternative training methods
which will effectively address the needs of its client base. See "Presentation;
Training Personnel."
The Company's ILT programs offer a wide range of introductory and
advanced classes in operating systems, including MS/DOS, Microsoft Windows, OS/2
and Macintosh System 7.0, word processing, spreadsheets, databases,
communications, executive overviews, integrated software packages, computer
graphics and desktop publishing. Such programs generally are devised for use in
connection with IBM and IBM-compatible software (with substantial resources
being devoted to Microsoft Windows) and, to a lesser degree, Macintosh and
Macintosh-compatible software.
The Company has developed a standardized curriculum designed to
promote uniformity and consistency of its training programs in both the
traditional classroom environment and across its CBT product line. Such
uniformity is generally desired by the Company's customers in order that all of
the customer's employees participating in such training programs receive similar
information and instruction regarding particular software packages. In
addition, the standard curriculum, for both ILT and CBT, can be customized to
meet the exact specifications of individual clients. Each of the Company's live
classroom training programs is divided into modules consisting of introductory
lectures, personal computer exercises with the assistance of a trainer and
independent exercises without a trainer. Each of the Company's CBT products is
divided into tasks and sub-tasks. This format allows the product to be used as
either a training tool, where the entire CBT is followed from beginning to end,
or as a reference tool, where an end-user directly accesses the task or sub-task
that needs to be studied.
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PRESENTATION; TRAINING PERSONNEL
The Company offers several different ILT programs to satisfy customer
needs, including public seminars, private seminars and special tutorial
services.
Public seminars are usually one-day classes scheduled on a regular
basis at the Company's own training facilities. The Company offers a wide
variety of public seminars which are designed to accommodate varied levels of
expertise, background and objectives. Although most classes are one day in
duration, some of the Company's programs are offered on a half-day or multiple
day basis. The Company distributes its public seminar schedule to existing and
potential customers on a quarterly basis.
Private seminars are classes which are designed specifically for
groups of employees from one business concern on a specific topic. Private
seminars generally are held either at the Company's training facilities or at
the customer's own premises. The curriculum for such private seminars is
generally identical to the standardized curriculum provided at public seminar
classes; however, such curriculum may be adapted to accommodate customer
specifications.
The Company also provides special tutorial services to address
particular needs of customers requiring individual attention for their
employees. Consulting services, which are conducted either in the Company's own
facilities or those of its customers, typically provide for a trainer to meet
with one to three employees and may involve a customized curriculum. The Company
also develops customized applications for certain software programs utilized by
its customers.
The Company has found that, although its largest classrooms may
accommodate up to 16 persons, smaller classes emphasizing individual attention
are more effective and that the most effective ratio of students to trainer is
ten to one. Accordingly, public seminars are generally limited to ten students.
For private seminars, a maximum of ten students is also recommended; however,
larger classes may be scheduled at the customer's request. An additional trainer
is generally provided for classes of ten or more students.
In furtherance of the Company's belief that hands-on application is
very essential to computer training, a personal computer is furnished to each
student for his or her exclusive use during ILT programs. Classes that are
conducted on a customer's premises utilize either the customer's own personal
computers or portable computers furnished by the Company. The Company either
owns or leases the computers utilized for its training programs, with such lease
terms generally being three years or less due to the rapid obsolescence of
technology.
The Company also provides, without charge, a post-class telephone
support line during normal business hours to answer questions from any enrollee
or former enrollee in the Company's training programs.
In providing ILT services, the Company utilizes professional trainers
who have both a teaching ability and a technical command of the subject matter.
The Company presently employs approximately 55 trainers on a full-time basis.
The Company's trainers are employed regionally in Northern California, New York
and Toronto and are managed by operations managers in each region, who have
primary responsibility for hiring, training, ongoing skills development and
supervising their regional training staff.
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COURSEWARE AND CBT PRODUCT DEVELOPMENT
The Company's classroom curriculum is developed by a Courseware
Development Department, managed by the Vice President. Over the last year,
there has been a general consolidation in the software market with the result
that most of the Company's corporate clients have standardized on either
Microsoft Office, Lotus Smartsuite, or Novell's desktop application products.
This consolidation has allowed the Company to concentrate its development
efforts and eliminate one full-time courseware developer. The two remaining
full-time developers in the department create most course materials utilized in
connection with the Company's ILT programs, including student manuals,
instructor materials and class handouts. There are also trainers in each region
who occasionally develop special courseware, for local clients.
The Company's CBT products are currently being developed by a staff
of 12 full-time designers, five of which are located in North America and seven
in Israel. The Company's training staff provides the product and educational
design expertise, while its designers supply the authoring tool expertise.
During the fiscal year ended December 31, 1994, the Company spent
$541,439 on research and development activities relating to CBT programs. No
money was expended by the Company on research and development activities during
the fiscal year ended December 31, 1993.
Unlike certain of its competitors, the Company provides only training
and consulting services and does not sell any computer hardware, software or
related products (other than CBT programs as discussed above). This enables the
Company to focus on the development of its training programs, without preference
to any specific computer-related products except as merited by performance.
SOFTWARE MANUFACTURERS' AUTHORIZED TRAINING CENTERS
The Company has been authorized as a training center by many software
manufacturers, including Lotus and Microsoft. Presently, approximately 22% and
44% of the Company's training programs utilize Lotus and Microsoft software
programs, respectively. The Company was a former recipient of the Lotus
Authorized Training Center Award for training the most students in Lotus'
Windows application software. The Toronto Office was awarded the "Lunch at
Lotus" Award for training the most students in Ami Pro at a training facility.
The Company also received a Top Performing Microsoft Authorized Training Center
Award for training the most students in Microsoft products . The Company has
recently been authorized by Lotus Development Corporation as a Lotus Authorized
Education Center for its "Notes" product. The Company expects that training
with regard to "Notes" specifically, and workgroup computing generally, will
be an increasing percentage of its revenues.
Other software and hardware manufacturers for which the Company has
been authorized as a training center include Aldus, Alpha Software, Apple,
Borland, Claris, Corel, Dataease, Micrografx, and Software Publishing.
The Company expends substantial efforts in seeking authorization as a
training center by software manufacturers, including recently established and
start-up software vendors. Management believes that such authorization has
several distinct advantages, including referrals from software manufacturers and
free listings in the advertising literature published or distributed by such
manufacturers. As an authorized training
center, the Company also receives pre-release copies of new software products
enabling the development department to develop instruction programs prior to the
public distribution of such products. The Company also engages in joint
promotions with software manufacturers relating to specific products.
To secure designation as an authorized training center, the Company is
required to pay certain software manufacturers an annual fee of between $300 to
$1,500 per facility and is obligated to furnish such manufacturers with periodic
reports as to the number of trainees and similar statistical information.
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PROGRAM COST
The Company usually charges its customers from $75 per enrollee (for
introductory classes) to $1,200 per enrollee (for advanced three day courses) to
conduct ILT programs. Pricing considerations include the length and complexity
of the program, the number of enrollees, whether the course is a private one or
offered on an open enrollment basis and the physical location of the training.
The Company's refund policy provides that dissatisfied trainees may either
attend the same program without charge or the trainee's employer may request a
full refund.
The Company's CBT products are currently being marketed under various
site license agreements at prices of between $1,000 and $10,000 per hour of CBT
training . The Company also offers custom CBTs to its customers at prices
ranging from $8,000 and $15,000 per hour of CBT training. The Company may
offer, in the future, different pricing strategies depending upon market
considerations.
PROPRIETARY PROTECTION
The protection of proprietary information developed by the Company and
used in its training programs will be limited to such protection as the Company
may be able to secure under copyright and patent laws and confidentiality
agreements. However, there can be no assurance that the scope of any such
protection that the Company is able to secure will be adequate to protect its
proprietary information, or that the Company will have the financial resources
to engage in litigation against parties who may infringe such copyrights. In
addition, there can be no assurance that others will not develop similar
training programs independently of the Company.
CONSULTING SERVICES
The Company's Consulting Services Division identifies and provides
independent computer personnel, on a temporary basis, to the Company's client
base for special projects. Such projects may include the development of
computer programs in accordance with the client's specifications and
requirements, the linking of the client's computers to allow them to share
information, files and devices, the provision of expertise with regard to the
client's software programs and the provision of troubleshooting services wish
regard to the client's day-to-day software problems. The Company generally
charges its clients for such services on an hourly or daily basis.
The Company currently furnishes it full-time employees, as well as
independent contractors, to satisfy its clients' requirements.
MARKETING
The Company directs its ILT, CBT and CSD marketing efforts to those
Elron and public sector organizations which devote substantial resources to
personal computer technology for employees. In particular, the Company's
marketing activities are aimed primarily at companies with operations that are
national or international in scope, since these companies also have a greater
awareness of the advantages relative to uniform and consistent training programs
for their employees and often have a need for computer consulting services. In
addition, these companies have generally established centralized decision-making
authority regarding employee computer training programs, facilitating ongoing
training relationships and scheduling of training programs.
Marketing efforts consist primarily of direct solicitation of
potential customers through direct mailing of brochures and seminar schedules
followed by telephone contact. Such direct mailing is generally done on a
quarterly basis. The Company also conducts exhibits at personal computer trade
shows throughout the United States and Canada. The Company, in conjunction with
software vendors, has established informational
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seminars regarding new software products in order to inform potential customers
as to the Company's training programs and consulting services.
In addition, the Company's account managers act as liaison with
customers in order to ensure that such customers select appropriate training
programs for their employees. These account managers are knowledgeable as to the
customer's specific industry needs relative to personal computer training
programs. The Company's Marketing Department is also generally responsible for
market research and advising the Product Development Department of the product
needs of the Company's customers.
Since the Company markets and sells its personal computer training
programs to business enterprises and public sector organizations for the benefit
of their employees, and costs of training, in most instances, are borne by such
employers rather than the individual trainees, the Company is of the belief that
it is not a school and, consequently, is not subject to educational licensing
requirements under applicable state laws and regulations. No assurances can be
given, however, as to the validity of such belief or the Company's ability to
comply with any such laws or regulations, if applicable.
CUSTOMERS
The Company's present customer base includes companies from a wide
range of industries including banking, finance, manufacturing, insurance and
government. No one customer accounted for more than ten percent of the Company's
revenues during the year ended December 31, 1994.
COMPETITION
The Company faces competition from a number of firms which presently
provide computer training services, consulting services, or CBT products,
similar to those furnished by the Company. The Company also encounters
competition from educational institutions providing personal computer training
programs, including universities, colleges and adult education centers, and
customers' in-house training staffs. The Company believes that it is an
effective competitor based upon the skill and full-time employment of its
training personnel, its training center management services, and the continuous
liaison between the Company's account managers and its customers.
EMPLOYEES
As of March 1, 1995, the Company employed approximately 167 persons,
including 162 full-time employees.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company occupies approximately 16,000 square feet of space at 462
Seventh Avenue, New York, New York where the Company's executive offices and ten
classrooms are located. These premises are occupied under a lease agreement
expiring on January 14, 2004 at a current base annual rental of $233,000, with
rental increases to $288,000 per annum effective January 14, 1996 and $320,000
per annum effective January 14, 1999.
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ADDITIONAL CLASSROOM FACILITIES UNDER LEASE ARE AS FOLLOWS:
LOCATION SQUARE FEET EXPIRATION DATE ANNUAL BASE RENT
Midtown Manhattan 16,000 December 31, 2003 $233,085
East Side Manhattan 3,500 May 1, 1996 96,876
Seaport - Manhattan 3,000 October 1, 1996 38,400
San Fransico, California 6,500 Month to Month 79,776
Islin, New Jersey 3,500 August 30, 1997 66,804
North York, Ontario 13,850 November 1, 2000 97,470
Toronto, Ontario 3,600 December 31, 1997 84,324
Mississagua, Ontario 3,200 January 31, 2000 38,364
The Company believes that its facilities are adequate for its present
needs and anticipates no inordinate difficulty or cost in securing additional
training facilities.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
Revenues for the fiscal year ended December 31, 1994 of $10,456,704
represented an increase of 15% over revenues of $9,154,564 for the year ended
December 31, 1993.
During the year ended December 31, 1993, the Company broadened and
augmented its personal computer support alternatives by introducing two new
service/product lines designed to enhance its established ILT business. The
first, contract consulting, is responsible for providing personal computer
personnel, on a temporary basis, to the Company's client base. Consulting
revenues were approximately $1,400,000 for the year ended December 31, 1994 as
compared to approximately $616,000 for the year ended December 31, 1993, an
increase of 128%. In addition, the Company develops and offers CBT programs to
augment and supplement its live training classes. CBT programs were first
introduced to clients during the fourth quarter of 1993 and revenues from such
programs grew from approximately $64,000 for the year ended December 31, 1993 to
approximately $346,000 (exclusive of CBT revenues generated by PC Israel) for
the year ended December 31, 1994. As discussed in Item 1 hereof, the Company
purchased substantially all of the assets of the ACE Division ("ACE") of Elron
Electronic Industries, Ltd. effective July 1, 1994 and formed PC Israel. The new
Israeli operations generated revenues of approximately $355,000.
During 1994, the Company experienced generally flat ILT revenues.
On a regional basis, revenues (exclusive of those from the new product lines)
from New York/East Coast operations decreased by 6%, Canadian operations
increased by 26% and San Francisco, California operations decreased by 22%.
Management attributes the flat ILT revenue to the fact that software vendors did
not release many new versions of existing software or any new operating systems
during the year ended December 31, 1994. A new operating system entitled
Windows 95 was originally scheduled for release during the first quarter of
1995. The release date has been continually deferred and is currently scheduled
for the third quarter of 1995. Many of the Company's clients have delayed any
software conversions and training projects, awaiting the release of Windows 95.
The decreased revenues in the United States were offset by the large increases
in Canadian revenues. These were due primarily to several software application
upgrade or conversion projects within existing clients. Increased competition
in both New York and San Francisco was also a factor in the decreased revenues
for such regions.
The Company's cost of revenues for the year ended December 31, 1994
was 47% of revenues as compared to 42% of revenues for the year ended December
31, 1993. The Company's new service/product lines do not follow the same trends
in cost of revenues as the ILT business. For example, cost of revenues for
contract consulting was 70% of revenues. Such higher percentage reflects the
greater compensation paid to consultants based upon their higher skill level;
however, all other variable costs associated with classroom training do not
pertain to consulting.
Selling, general and administrative expenses for the year ended
December 31, 1994 of $6,144,899 were approximately 32% higher than the selling,
general and administrative expenses of $ 4,683,002 experienced for the year
ended December 31, 1993. Included in the 1994 amount are $293,459 pertaining to
PC Israel's operations and approximately $271,000 in expenses incurred in
connection with the new CBT product line (including those relating to the
formation of a marketing department of three full time employees). Excluding
the new CBT product line, selling, general and administrative expenses increased
by $897,538 or 20%, substantially all of which related to increased depreciation
and amortization of additional computer equipment, leasehold improvements,
goodwill, patented software. The amortization expense of the Company's
intangible assets (i.e., goodwill, and patented software) which represented
approximately 53% of the Company's assets and 98% of the Company's stockholders'
equity as of December 31, 1994 will adversely affect the Company's results of
operations. The Company is amortizing the patented software acquired over a 15
year period since such software is a development language which is utilized in
the authoring of CBT applications.As such, it is expected to have a considerably
longer useful life than application software. The Company also experienced
increased travel and related expenses and professional fees during 1994 in
connection with the ACE acquisition.
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As discussed in Item 1 hereof, effective July 1, 1994, the Company
purchased substantially all of the assets of ACE which was engaged in the
design, development and production of CBT courseware and interactive multimedia
training. Such functions are currently being performed by PC Israel. The
research and development expenses of $571,439 for the fiscal year ended December
31, 1994 reflect the costs associated with the maintenance, design and
enhancements of the CBT design technology.
The Company had a net loss of $1,198,782 for the year ended
December 31, 1994 as compared to a net income of $557,275 for the year ended
December 31, 1993. Such result is attributable primarily to the Company's CBT
research and development, the increased selling, general and administrative
expenses and the flat ILT revenues. Management believes that decreasing ILT
revenues will continue throughout the remainder of 1995 until training in
Windows 95 commences to any material degree. In addition, continued research
and development expenses are expected to have a material impact on results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficiency increased to $828,562 at
December 31, 1994 as compared to $201,945 at December 31, 1993. The increase
was due primarily to the operating losses experienced during the year ended
December 31, 1994, offset by the receipt of $512,000 from the exercise of a
warrant by Elron and the obtaining of long-term bank financing.
The Company is a party to a financing agreement pursuant to which it
finances its trade receivables. The agreement is scheduled to expire on April
30, 1995. The balance outstanding under the agreement, which is limited to 80%
of eligible receivables, is reported as a current liability under "Loans
Payable-Others."
The Company used $326,431 in operating activities during 1994,
primarily due to its net loss of $1,198,782 during such year. Such loss was
offset by decreased accounts receivable of $228,932 and increased accounts
payable of $255,266 during such year as well as depreciation and amortization
expenses of $390,702. During 1994, the Company's financing activities provided
cash in the amount of $768,468 primarily through the sale of Preferred Stock
($512,000) and increased loans payable - bank ($269,251) and others ($199,250).
During 1994, the Company made a substantial investment in state-of-
the-art computer equipment. These purchases in the amount of $394,738 were
funded through operating profits for the previous year, equipment leases
provided by the equipment manufacturer and bank loans. The bank loans are
repayable over three years and are secured by all assets of the Company. In
addition, in January 1994, the Company built a new training facility at its
Midtown location. While most of the renovation costs were borne by the
landlords, the Company did expend approximately $100,000 for leasehold
improvements.
Effective March 15, 1995, the Company entered into a Stock Purchase
Agreement (the "Series B Preferred Stock Agreement") with certain investors (the
"Series B Purchasers") pursuant to which, among other things, the Company issued
an aggregate of 1,000,000 shares of Series B Preferred Stock for an aggregate
purchase price of $1,500,000. The Company has agreed to use the proceeds for
research and development, CBT promotion and working capital purposes.
The Series B Preferred Stock is mandatorily convertible into an
aggregate of 5,000,000 shares of Common Stock of the Company upon the filing of
a Certificate of Amendment of the Certificate of Incorporation of the Company
pursuant to which a sufficient number of shares of Common Stock are available
for issuance. The Company has undertaken to submit to its stockholders a
proposed one-for-five reverse split of its shares of Common Stock, following
effectiveness of which there will be a sufficient number of shares available for
conversion of the Series B Preferred Stock (since the number of authorized
shares of Common Stock of the Company will not be reduced as a result thereof).
The Series B Preferred Stock is subject to redemption at the option of the
holders in the event a conversion into Common Stock does not occur by April 30,
11
<PAGE>
1995. Simultaneously with the issuance of the Series B Preferred Stock, the
Series B Purchasers were issued four-year Warrants for the purchase of an
aggregate of 2,500,000 shares of Common Stock exercisable at a price of $.55 per
share, subject to antidilution adjustments (the "Purchaser Warrants"). In the
event the one-for-five reverse split is approved, based upon the antidilution
adjustment provisions of the Series B Preferred Stock and the Purchaser
Warrants, the Series B Purchasers will receive an aggregate of 1,000,000 shares
of Common Stock of the Company and will be entitled to purchase an aggregate of
500,000 shares of Common Stock at a price of $2.75 per share.
The Series B Preferred Stock carries a preferential cumulative
dividend right at the rate of 10% per annum, voting rights equal to the number
of shares of Common Stock into which the Series B Preferred Stock is
convertible, a redemption right by the holders as discussed above, mandatory
conversion into Common Stock under the circumstances discussed above and a
liquidation preference, on a PARI PASSU basis with the holders of the Series A
Preferred Stock, to the extent of $1.50 per share. See Item 12 hereof.
The Company is presently exploring all possible opportunities in order
to fund the working capital deficiency including expanding its marketing
efforts, implementing an aggressive cost reduction plan and negotiating with
vendors. Management believes that decreasing ILT revenues will continue
throughout the remainder of 1995 until training in Windows 95 commences to any
material degree. In addition, continued research and development expenses are
expected to have a material impact on liquidity.
In the event the Company requires additional financing, it intends to
seek such from the Series B Purchasers or others pursuant to a debt and/or
equity financing. No assurances can be given that any such required financing
will be available.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements required by this Item 7 are included herein
following Item 13 hereof.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The executive officers and Directors of the Company are as follows:
DIRECTOR
NAME AGE POSITION WITH COMPANY SINCE
---- --- --------------------- --------
Gilbert H. Steinberg 63 Chairman and Director 1985
Terry I. Steinberg 40 President, Treasurer and Director 1985
Joseph Sabrin 52 Executive Vice President- 1991
Sales and Marketing,
Secretary and Director
John Towsley 35 Vice President and Director 1994
Stephen E. Dorman 45 Vice President- -
Information Systems
Lloyd L. Rosler 33 Vice President -
Contract Labor Services -
Avshalom Aderet 45 President, PC Etcetera Israel Ltd. 1994
and Director
Dr. Abraham Peled 49 Director 1994
Abraham Peri 50 Director 1994
Gilbert H. Steinberg has served as Chairman of the Board and a
Director of the Company since its inception. For more than the past five years,
Mr. Steinberg has been Vice President, Treasurer, a Director and a principal
stockholder of Astrosystems, Inc., a publicly-held company engaged in the
manufacture and sale of proprietary electronic and electromechanical products,
whose stock is traded in the over-the-counter market.
Terry I. Steinberg has served as President and a Director of the
Company since its inception and as Treasurer since August 1991. For more than
five years prior to the Company's inception, he was the Director of Decision
Support for Paramount Pictures Corporation, with responsibility for all end-user
computing. Mr. Steinberg was primarily responsible for the introduction of
personal computer utilization at Paramount in October 1981. At the time he left
Paramount in May 1985, Mr. Steinberg was responsible for the support of more
than 200 personal computers and the training of all personnel in personal
computer technology and utilization. Mr. Steinberg holds a Bachelors Degree in
Applied Mathematics and Computer Science and a Masters in Business
Administration, both from McGill University.
Joseph Sabrin has been affiliated with the Company since inception.
During such time, Mr. Sabrin's responsibilities have been in the areas of sales
and marketing. Mr. Sabrin was elected Executive Vice President of the Company in
March 1991, a Director in August 1991 and Secretary in September 1991.
John Towsley has been with the Company since its Canadian facilities
were opened in 1987. In October 1992, Mr. Towsley was elected Vice President of
the Company. In 1989, he was elected Vice President of PC Etcetera, Inc., a
Canadian company which is a wholly-owned subsidiary of the Company. Prior
thereto, Mr. Towsley was Manager of the End User Computing Department of Nabisco
Brands, Ltd. Mr. Towsley holds a Bachelors Degree in Business Administration
from the University of Western Ontario.
13
<PAGE>
Stephen E. Dorman was elected Vice President - Information Systems of
the Company in March 1991. Mr. Dorman has been affiliated with the Company
since May 1989. Prior thereto and from May 1985, Mr. Dorman served as Vice
President of Security Pacific Computer Solutions, Inc., and its successor
Computer Solutions International, Inc. Mr. Dorman holds a Bachelors Degree in
Electrical Engineering and a Masters in Electrical Engineering and Computer
Science from North Carolina State University.
Lloyd L. Rosler has served as Vice President - Contract Labor
Services, and has managed the of Consulting Services Division of the Company,
since December 1993. Prior thereto and from March, 1992, Mr. Rosler served as
President of Computer Professionals Network, Inc., a marketing and referral
service for independent computer programmers and trainers. Previous to that, he
was responsible for marketing and managing training and consulting services for
Ashton-Tate. Mr. Rosler holds a Bachelor of Science Degree in Marketing from
New York University College of Business.
Avshalom Aderet has served as President of PC Israel since August
1994. Prior thereto and from 1993, Mr. Aderet served as President of Adar, an
indirect wholly-owned subsidiary of Elron that marketed CBT products. From 1988
until 1992, he served as Division President of ACE.
Dr. Abraham Peled joined Elron in September 1993 as Senior Vice
President for Business Development. Dr. Peled obtained his B.Sc. and M. Sc.
degrees in Electrical Engineering from the Technion, and his M.A. and PhD.
degrees from Princeton University. In 1974, Dr. Peled joined IBM at the Thomas
J. Watson Research Center to work on advanced digital signal processing
technologies. Between 1976 and 1978, he worked in the IBM Israel Science Center
on the application of digital signal processing techniques to ultrasonic medical
imaging. In 1978, he returned to the Watson Research Center where he was named
Manager of Signal Processing. In 1980, Dr. Peled moved to IBM San Jose Research
Laboratory (now Almaden) where he was promoted to Functional Manager of the
Computer Science area. In 1983, he returned to the Thomas J. Watson Research
Center where he was promoted to IBM Research Division Director of Technical
Planning and Controls with staff responsibility for the integration of the
technical and financial plan of the division. In 1985, Dr. Peled was named IBM
Research Division Vice President, Systems and Software with functional
responsibility for all research and advanced development in these areas across
IBM Research's laboratories worldwide (Almaden, Zurich, Tokyo and Haifa). He
also had line management responsibility for the systems, software and
application areas at the Watson Research Center, with over 800 professionals.
In this capacity he made major contributions to getting new technologies into
the marketplace, among them RS/6000 and APPN.
Abraham Peri joined Elron in 1991 as Vice President - Technologies.
From 1987 to 1991, Mr. Peri was Vice President of Ready Systems Corp. and
Managing Director of Ready Systems (Israel) Ltd. and from 1984 to 1987, Mr. Peri
was Managing Director of Clal Systems Ltd. (a subsidiary of Clal Israel Ltd.).
In 1984, Mr. Peri left the Israeli Defense Forces ("IDF") after 19 years of
service. His last position in the IDF was Commander of MAMRAM computer center,
the IDF computer center, headquarters for computers and the computer science
school. Prior to that, he served in the Israeli Air Force in various management
and technical positions, mostly in the area of realtime and computerized
systems. Mr. Peri obtained his Bachelors Degree in Mathematics and Physics from
the Hebrew University in Jerusalem, and has undertaken advanced computer science
studies at the Weizmann Institute and management studies in the Israeli Defense
Forces Schools.
Terry I. Steinberg, Joseph Sabrin, John Towsley, Stephen E. Dorman,
Lloyd L. Rosler and Avshalom Aderet are full-time employees of the Company or
its subsidiaries. Gilbert H. Steinberg devotes only such portion of his time to
the Company as may be required of him to fulfill his duties as its Chairman.
Directors of the Company hold their offices until the next annual
meeting of the Company's stockholders and until their successors have been duly
elected and qualified or until their earlier resignation, removal from office or
death. Reference is made to Item 12 hereof for a discussion of certain
agreements with regard to the election of Directors of the Company.
Executive officers of the Company serve at the pleasure of the Board
of Directors and until the first meeting of the Board of Directors following the
next annual meeting of the Company's stockholders and until their successors
have been chosen and qualified.
Gilbert H. Steinberg and Terry I. Steinberg are father and son. There
are no other family relationships among the Company's executive officers and
Directors.
14
<PAGE>
To the Company's knowledge, based solely on a review of the copies of
the Forms 3 and 4 furnished to the Company and written representations that no
other reports were required, during the fiscal year ended December 31, 1994, all
Section 16(a) filing requirements applicable to the Company's officers,
Directors and 10% stockholders were complied with, except that Dr. Peled filed
his Form 3 with the Securities and Exchange Commission eight days late.
15
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
COMMON STOCK
The following table sets forth, to the knowledge of the Company,
certain information regarding shares of the Company's outstanding Common Stock
beneficially owned as of March 15, 1995 (i) by each person who is known by the
Company to beneficially own or exercise voting or dispositive control over more
than 5% of the Company's Common Stock, (ii) by each of the Company's Directors
and (iii) by all executive officers and Directors as a group. Except as set
forth below, each beneficial owner has the sole power to vote and dispose of the
shares reflected.
<TABLE>
<CAPTION>
Name and Number of Shares and Nature of
Address of Beneficial Owner Beneficial Ownership(1) Approximate Percentage of Outstanding Shares (2)
--------------------------- ------------------------------ ------------------------------------------------
Prior to Certificate of Following Certificate of
Amendment (3) Amendment (4)
------------- -------------
<S> <C> <C> <C>
Terry I. Steinberg
462 Seventh Avenue
New York, New York 4,241,718 (5) (6) 43.3% 28.7%
Elron Electronic Industries Ltd.
Advanced Technology Center
Haifa, Israel 4,200,000 (7) 38.8% 26.6%
Gilbert H. Steinberg
Six Nevada Drive
Lake Success, New York 4,103,718 (5) 42.6% 28.0%
Austin W. Marxe (8) 2,500,004 (9) - 16.2%
AWM Investment Company, Inc (8) 2,500,004 (9) - 16.2%
Joshua Ruch
Rho Management Company, Inc
767 Fifth Avenue
New York, New York 2,500,000 (10) - 16.2%
Jan Philipp F. Reemtsma
Mera GmbH
Grosse Bleichen 8, D-2000
Hamburg, Germany 2,300,000 (10) - 14.9%
Special Situations Fund III, L.P. (9) 1,875,000 (9) - 12.3%
MGP Advisers Limited Partnership (9) 1,875,000 (9) - 12.3%
Joseph Sabrin
462 Seventh Avenue
New York, New York 1,577,292 (6) (11) 16.1% 10.7%
16
<PAGE>
<CAPTION>
Name and Number of Shares and Nature of
Address of Beneficial Owner Beneficial Ownership(1) Approximate Percentage of Outstanding Shares (2)
--------------------------- ------------------------------ ------------------------------------------------
Prior to Certificate of Following Certificate of
Amendment (3) Amendment (4)
------------- -------------
<S> <C> <C> <C>
SVE STAR Ventures
Enterprises No. III GbR
c/o SVM STAR Ventures
Management GmbH
28A Leopoldstrasse
80208 Munich, Germany 858,840 (12) - 5.8%
Justy Ltd.
c/o Star Management of
Investments (1993)
Limited Partnership
28 Lechi Street
Bnei Brak, Israel 750,000 (13) - 5.0%
John Towsley
5160 Yonge Street
North York, Ontario, Canada 252,500 (14) 2.6% 1.7%
Avshalom Aderet
28 Hacharoshet Street
Or-Yehuda, Israel 180,000 (15) 1.9% 1.2%
Dr. Abraham Peled
Advanced Technology Center
Haifa, Israel - (16) - -
Abraham Peri
Advanced Technology Center
Haifa, Israel - (16) - -
All executive officers and Directors
as a group (9 persons) 4,981,218 (5) (6) (14) 48.2% 32.5%
(15) (17)
</TABLE>
- ---------------
(1) As discussed in Item 6 hereof, effective March 15, 1995, the Company issued
an aggregate of 1,000,000 shares of Series B Preferred Stock which are
mandatorily convertible into an aggregate of 5,000,000 shares of Common
Stock upon the filing of a Certificate of Amendment of the Certificate of
Incorporation of the Company ("Certificate of Amendment") pursuant to which
a sufficient number of shares of Common Stock are available for issuance.
Contemporaneously, the Company issued to the Series B Purchasers warrants
for the purchase of an aggregate of 2,500,000 shares of Common Stock, which
warrants are exercisable upon the filing of a Certificate of Amendment
pursuant to which a sufficient number of shares of Common Stock are
available for issuance. Since the Company has undertaken to obtain
stockholder approval of a Certificate of Amendment resulting in such
conversion and permitting such exercise, and the principal stockholders of
the Company who control the required votes for approval have committed to
the Series B Purchasers to vote in favor of such proposal, the number of
shares of Common Stock issuable upon such conversion and exercise are
included as shares beneficially owned by the Series B Purchasers. The
number of shares owned by each person has not been adjusted, however, to
give effect to the one-for-five reverse split contemplated to be
effectuated to permit such conversion and exercise. See Item 6 hereof.
(2) Calculated pursuant to Rule 13d-3 promulgated under the Securities Exchange
Act of 1934. Accordingly, with respect to each particular beneficial
owner, the percentage gives effect to the deemed exercise of such owner's
17
<PAGE>
options and warrants (which are currently exercisable or exercisable within
60 days) and the deemed conversion of such owner's convertible shares of
Preferred Stock (which are currently convertible or convertible within 60
days); the percentage, however, does not give effect to any exercise or
conversion of other holders' outstanding options, warrants and convertible
Preferred Stock (except as described in footnote (4)).
(3) The percentages in this column do not give effect to the convertibility of
the Series B Preferred Stock into, or the exercisability of the Purchaser
Warrants for the purchase of, shares of Common Stock.
(4) The percentages in this column give effect to the filing of the Certificate
of Amendment discussed in footnote (1), the conversion of the Series B
Preferred Stock into shares of Common Stock and the exercisability of the
Purchaser Warrants.
(5) Includes shares beneficially owned by Terry I. Steinberg (1,427,292),
Joseph Sabrin (1,427,292) and Gilbert H. Steinberg (1,237,134). Such shares
are held subject to a Voting Trust Agreement among such persons, expiring
in 1997, wherein the Messrs. Steinberg exercise joint voting control as co-
trustees. Each of the Messrs. Steinberg and Mr. Sabrin retain dispositive
control over their respective shares.
(6) Includes 150,000 shares issuable upon exercise of currently exercisable
options held by each of Messrs. T. Steinberg and Sabrin.
(7) Pursuant to Schedule 13D filed with the Securities and Exchange Commission
(the "SEC"), includes (i) 300,000 shares registered in the name of
Technologies, a wholly-owned subsidiary of Elron (ii) 1,000,000 shares
issuable upon conversion of Series A Preferred Stock; and (iii) 200,000
shares issuable upon exercise of currently exercisable warrants. Pursuant
to Schedule 13D, Elron may be deemed to have shared power to vote and
dispose of the 300,000 shares owned by Technologies by reason of
Technologies being a wholly-owned subsidiary of Elron. Elron disclaims
beneficial ownership of such shares. See Items 1 and 12 hereof.
(8) Address is 153 East 53rd Street, New York, New York.
(9) The Company has been advised that (i) AWM Investment Company, Inc. ("AWM")
is (a) the general partner of and investment adviser to Special Situations
Cayman Fund, L.P. ("Cayman Fund"), the holder of 83,334 shares of Series B
Preferred Stock and 208,334 Purchaser Warrants and (b) the sole general
partner of MGP Advisers Limited Partnership ("MGP"); (ii) Austin W. Marxe
is President, Chief Executive Officer and primary owner of AWM and
principal limited partner of MGP; and (iii) MGP is the general partner of
Special Situations Fund III, L.P. ("III Fund"), the holder of 250,000
shares of Series B Preferred Stock and 625,000 Purchaser Warrants. The
Company has been advised further that (i) Mr. Marxe has the sole power to
vote the shares beneficially owned by the Cayman Fund, shared power to vote
the shares beneficially owned by the III Fund and the sole power to dispose
of the shares beneficially owned by the Cayman Fund and the III Fund; (ii)
AWM has the sole power to vote the shares beneficially owned by the Cayman
Fund and the sole power to dispose of the shares beneficially owned by the
Cayman Fund and the III Fund; and (iii) MGP has the sole power to dispose
of the shares beneficially owned by the III Fund.
(10) Pursuant to Schedule 13D filed with the SEC, Messrs. Ruch and Reemtsma are
two of the grantors of Gibraltar Trust which is the record owner of
333,333 shares of Series B Preferred Stock (mandatorily convertible into
1,666,665 shares of Common Stock under the circumstances described in Item
6 hereof) and 833,333 Purchaser Warrants. Pursuant to the Schedule 13D,
(i) Mr. Reemtsma beneficially owns approximately 2,300,000 shares of Common
Stock (including 766,666 shares issuable upon exercise of Purchaser
Warrants) and (ii) Mr. Ruch beneficially owns approximately 200,000 shares
of Common Stock (including 66,667 shares issuable upon exercise of
Purchaser Warrants) and exercises sole voting and dispositive control over
such shares. The Schedule 13D indicates further that Mr. Ruch's
beneficial ownership includes 125,000 shares held by Rho Management
Company, Inc. ("Rho"), an entity over the assets of which Mr. Ruch
exercises sole investment and voting control. As stated in the Schedule
13D, through his position with Rho, which acts as investment advisor to Mr.
Reemtsma, Mr. Ruch has investment authority over Mr. Reemtsma's shares and,
therefore, shares voting and dispositive power with Mr. Reemtsma over such
shares.
(11) Shares (excluding shares subject to outstanding options) are held subject
to a Voting Trust Agreement as described in footnote (5).
(12) Represents 572,560 and 286,280 shares of Common Stock issuable upon
conversion of Series B Preferred Stock and exercise of Purchaser Warrants,
respectively, held by SVE STAR Ventures Enterprises No. III GbR ("SVE
III"). Does not include 213,370 and 106,685 shares of Common Stock
issuable upon conversion of Series B Preferred Stock and exercise of
Purchaser Warrants, respectively, held by SVE STAR Ventures Enterprises No.
II GbR ("SVE II") or 47,405 and 23,703 shares of Common Stock issuable upon
conversion of Series B Preferred Stock and upon conversion of Purchaser
Warrants, respectively, held by SVE STAR Ventures Enterprises No. IIIA GbR
("SVE IIIA"). Also does not include any shares beneficially owned by Justy
Ltd. or Yozma Venture Capital Ltd. ("Yozma") as discussed in footnote (13)
hereof. Pursuant to the Series B Stock Purchase Agreement (as hereinafter
defined), Star Management of Investments (1993) Limited Partnership has
been named the
18
<PAGE>
representative of SVE III, SVEII, SVE IIIA, Justy and Yozma for certain
purposes. The Company is unaware of the relationship, if any, among SVE
III, SVE II, SVE IIIA, Justy and Yozma and whether there are any other
beneficial owners of the securities held by such entities.
(13) Represents 500,000 and 250,000 shares of Common Stock issuable upon
conversion of Series B Preferred Stock and exercise of Purchaser Warrants,
respectively. Does not include 333,330 and 166,665 shares of Common Stock
issuable upon conversion of Series B Preferred Stock and exercise of
Purchaser Warrants, respectively, held by Yozma, whose address set forth in
the Series B Stock Purchase Agreement is the same as that of Justy. Also
see footnote (12) hereof.
(14) Represents shares issuable upon exercise of currently exercisable options.
(15) Shares are held in trust for the benefit of Mr. Aderet.
(16) Does not include shares beneficially owned by Elron for which Dr. Peled and
Mr. Peri serve as officers.
(17) Includes 145,000 shares issuable upon exercise of currently exercisable
options held by executive officers of the Company.
19
<PAGE>
SERIES B PREFERRED STOCK
The following table sets forth, to the knowledge of the Company,
certain information regarding shares of the Company's outstanding Series B
Preferred Stock beneficially owned as of March 15, 1995 by each person who is
known by the Company to beneficially own or exercise voting or dispositive
control over more than 5% of the Company's Series B Preferred Stock. To the
knowledge of the Company, no executive officer or Director of the Company
beneficially owned any Series B Preferred Stock as of March 15, 1995. Except as
set forth below, each beneficial owner has the sole power to vote and dispose of
the shares reflected.
<TABLE>
<CAPTION>
Name and Number of Shares and Nature of Approximate Percentage of
Address Of Beneficial Owner Beneficial Ownership (1) (2) Outstanding Shares
--------------------------- ---------------------------- ------------------
<S> <C> <C>
Austin W. Marxe (3) 333,334 (4) 33.3%
AWM Investment Company, Inc (3) 333,334 (4) 33.3%
Joshua Ruch
Rho Management Company, Inc.
767 Fifth Avenue
New York, New York 333,333 (5) 33.3%
Jan Philipp F. Reemtsma
Mera GmbH
Grosse Bleichen 8, D-2000
Hamburg, Germany 306,666 (5) 30.7%
Special Situations Fund III, L.P. (3) 250,000 (4) 25.0%
MGP Advisers Limited Partnership (3 ) 250,000 (4) 25.0%
SVE STAR Ventures
Enterprises No. III GbR
c/o SVM STAR Ventures
Management GmbH
28A Leopoldstrasse
80208 Munich, Germany 114,512 (7) 11.5%
Justy Ltd. (6) 100,000 (7) 10.0%
Special Situations Cayman Fund, L.P. 83,334 8.3%
Yozma Venture Capital Ltd. (6) 66,666 (7) 6.7%
</TABLE>
- ---------------
(1) Holders of shares of Series B Preferred Stock are entitled to five votes
for each share of Series B Preferred Stock held.
(2) The shares of Series B Preferred Stock will be automatically converted into
shares of Common Stock of the Company under certain circumstances. See
Item 6 hereof.
(3) Address is 153 East 53rd Street, New York, New York.
(4) The Company has been advised that (i) Mr. Marxe, as President, Chief
Executive Officer and primary owner of AWM, has the sole power to vote the
shares beneficially owned by the
20
<PAGE>
Cayman Fund, shared power to vote the shares beneficially owned by the III
Fund and the sole power to dispose of the shares beneficially owned by the
Cayman Fund and the III Fund; (ii) AWM has the sole power to vote the
shares beneficially owned by the Cayman Fund and the sole power to dispose
of the shares beneficially owned by the Cayman Fund and the III Fund; and
(iii) MGP has the sole power to dispose of the shares beneficially owned by
the III Fund.
(5) Pursuant to Schedule 13D filed with the SEC, Messrs. Ruch and Reemtsma are
two of the grantors of Gibraltar Trust which is the record owner of 333,333
shares of Series B Preferred Stock. Pursuant to the Schedule 13D, (i) Mr.
Reemtsma beneficially owns 306,666 shares of Series B Preferred Stock and
(ii) Mr. Ruch beneficially owns 26,667 shares of Series B Preferred Stock
and exercises sole voting and dispositive control over such shares. The
Company has been advised further that, as indicated in the Schedule 13D,
Mr. Ruch's beneficial ownership includes 16,667 shares held by Rho, an
entity over the assets of which Mr. Ruch exercises sole voting and
dispositive control. As stated in the Schedule 13D, through his position
with Rho, which acts as investment advisor to Mr. Reemtsma, Mr. Ruch has
investment authority over Mr. Reemtsma's shares and, therefore, shares
voting and dispositive power with Mr. Reemtsma over such shares.
(6) Address is c/o Star Management of Investments (1993) Limited Partnership,
28 Lechi Street, Bnei Brak, Israel.
(7) See footnote (12) to the Common Stock table with regard to the
relationship, if any, among SVE III, Justy, Yozma, SVE II and SVE III A.
21
<PAGE>
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
3 (a) Certificates of Designation with regard to Series A
Preferred Stock and Series B Preferred Stock
(b) Certificate of Incorporation, as amended.(1)
(c) By-laws.(2)
(d) Agreement of Merger dated December 29, 1987 between the
Company and PC Executive Center, Inc.(2)
9 Voting Trust Agreement dated December 29, 1987 between
Gilbert Steinberg, Terry I. Steinberg and Joseph
Sabrin, individually, and Gilbert Steinberg and Terry
I. Steinberg as co-Trustees.(2)
10(a) Lease for premises situated at 462 Seventh Avenue, 4th
Floor New York, New York.(3)
(b) Lease for premises situated at 462 Seventh Avenue, 18th
Floor, New York, New York(4)
(c) Lease for premises situated at 19 Fulton Street,
New York, New York.(2)
(d) Lease for premises situated at 120 Wood Avenue South,
Iselin, New Jersey.(2)
(e) Lease for premises situated at 80 Bloor Street,
Toronto, Canada.(2)
(f) Amended and Restated 1987 Stock Option Plan.(5)
(g) Lease for premises situated at 341 Madison Avenue, New
York, New York.
(h) Agreement dated as of May 30, 1989 among Terry I.
Steinberg, Joseph Sabrin and the Company, as amended.(4)
(i) Lease for premises situated at City Centre Tower, North
York, Ontario, Canada.(6)
(j) Lease for premises situated at 690 Market Street, San
Francisco, California.(6)
(k) Financing Agreement - Receivables dated November 20,
1990 between the Company and Rosenthal & Rosenthal,
Inc.(6)
(l) Asset Purchase Agreement dated as of August 12, 1994
among the Company, PC Etcetera Israel Ltd., Elron
Electronic Industries Ltd., Adar International, Inc.
and Elron Technologies Inc.(7)
(m) Stockholders' Agreement dated as of August 12, 1994
among the Company, Elron Electronic Industries Ltd.,
Adar International, Inc, Elron Technologies Inc., Terry
I. Steinberg, Joseph Sabrin and Gilbert H. Steinberg.(7)
(n) Stock Purchase Agreement dated as of March 15, 1995
among the Company, Special Situations Fund III, L.P.,
Special Situations Cayman Fund, L.P., Gibraltar Trust,
Justy Ltd., Yozma Venture Capital Ltd., SVE STAR
Ventures Enterprises No. II GbR, SVE STAR Ventures
Enterprises No. III GbR and SVE STAR Ventures
Enterprises No. IIIA GbR (collectively, the "Series B
Purchasers").
(o) Form of Warrant dated March 15, 1995 issued to the
Series B Purchasers for the purchase of an aggregate of
2,500,000 shares of Common Stock of the Company.
21 Subsidiaries.
23(a) Consent of Norman Stumacher.
(b) Consent of Luboshitz, Kasierer & Co.
22
<PAGE>
(b) REPORTS ON FORM 8-K
One report on Form 8-K was filed by the Company during the three month
period ended December 31, 1994 as follows:
Date of Event: December 16, 1994
Item Reported: 7
- ---------------
(1) Denotes document filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991 (File No. 0-17419) and
incorporated herein by reference.
(2) Denotes document filed as an exhibit to the Company's Registration
Statement on Form S-18 (File No. 33-19521) and incorporated herein by
reference.
(3) Denotes document filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1989 (File No. 0-17419) and
incorporated herein by reference, as amended by document filed as an
exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1993 (File No. 0-17419) and incorporated herein by
reference.
(4) Denotes document filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1993 (File No. 0-17419) and
incorporated herein by reference.
(5) Denotes document filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1992 (File No. 0-17419) and
incorporated herein by reference.
(6) Denotes document filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1990 (File No. 0-17419) and
incorporated herein by reference.
(7) Denotes document filed as an exhibit to the Company's Current Report on
Form 8-K for an event dated August 12, 1994 (File No. 0-17419) and
incorporated herein by reference.
23
<PAGE>
NORMAN STUMACHER
CERTIFIED PUBLIC ACCOUNTANT
585 Stewart Avenue, Suite 760
Garden City, New York 11530
Board of Directors
P.C. Etcetera, Inc.
462 Seventh Avenue
New York, NY 10123
INDEPENDENT AUDITOR'S REPORT
I have audited the consolidated balance sheet of P.C. Etcetera, Inc. and
subsidiaries as of December 31, 1994, and the related consolidated statements of
income and retained earnings and cash flows for the years ended December 31,
1994 and 1993. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audit. I did not audit the financial
statements of P.C. Etcetera Israel Ltd., a wholly-owned subsidiary, which
statements reflect total assets and revenues constituting 8 percent and 4
percent, respectively, of the related consolidated totals. These statements
were audited by other auditors whose report has been furnished to me, and my
opinion, insofar as it relates to the amounts included for P.C. Etcetera Israel
Ltd., is based solely on the report of the other auditors.
I conducted the audit in accordance with generally accepted auditing standards.
Those standards require that I 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. I believe that my audit and the report of the other auditors
provides a reasonable basis for my opinion.
In my opinion, based on my audit and the report of the other auditors, the
consolidated financial position of P.C. Etcetera, Inc. as of December 31, 1994,
and the results of its operations and its cash flows for the years ended
December 31, 1994 and 1993 in conformity with generally accepted accounting
principles.
/s/ Norman Stumacher
Garden City, NY
March 17, 1995
24
<PAGE>
LUBOSHITZ, KASIERER & CO
64642940
INDEPENDENT AUDITORS' REPORT
(EXTENDED FORM TO COMPLY WITH U.S. STANDARDS)
We have audited the balance sheet of PC ETCETERA ISRAEL LTD. (the "Company") as
of December 31, 1994, and the statements of income, changes in shareholders'
deficiency and cash flows for the period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the U.S. and in Israel, including those prescribed by the Auditors' (Mode of
Performance) Regulations (Israel), 1973. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1994, and the results of its operations, changes in shareholders' deficiency and
cash flows for the period then ended in conformity with accounting principles
generally accepted in Israel and in the United States (as applicable to the
financial statements of the Company, such accounting principles are practically
identical).
/s/ Luboshitz, Kasierer & Co
Certified Public Accountants (Israel)
Tel-Aviv, Israel
February 28, 1995
25
<PAGE>
PC ETCETERA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 77,777
ACCOUNTS RECEIVABLE (NOTE 1) 1,430,910
PREPAID EXPENSES 51,300
----------
TOTAL CURRENT ASSETS 1,559,987
----------
PROPERTY AND EQUIPMENT: (NOTE 2)
PROPERTY AND EQUIPMENT 1,476,811
LEASEHOLD IMPROVEMENTS 216,245
----------
1,693,056
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION (623,979)
----------
TOTAL PROPERTY AND EQUIPMENT 1,069,077
----------
OTHER ASSETS:
SECURITY DEPOSITS 94,150
OTHER ASSETS (NET) (NOTE 3) 32,000
GOODWILL(NET) (NOTE 8) 344,167
PATENTED SOFTWARE (NET OF AMORTIZATION OF $46,140)(NOTE 12) 2,724,666
----------
TOTAL OTHER ASSETS 3,194,983
----------
TOTAL ASSETS $5,824,047
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $1,323,334
PAYROLL TAXES PAYABLE 88,192
LOANS PAYABLE - OTHERS (NOTE 4) 600,175
LOANS PAYABLE - AFFILIATE (NOTE 4) 36,666
LOANS PAYABLE - BANK (NOTE 4) 107,794
CAPITAL EQUIPMENT OBLIGATIONS 129,660
DEFERRED REVENUE (NOTE 7) 102,728
----------
TOTAL CURRENT LIABILITIES 2,388,549
----------
OTHER LIABILITIES:
LOANS PAYABLE - BANK (NOTE 4) 123,292
CAPITAL EQUIPMENT OBLIGATIONS 177,551
----------
TOTAL LIABILITIES 2,689,392
----------
STOCKHOLDERS' EQUITY:
COMMON STOCK,
$.01 PAR VALUE, 15,000,000
SHARES AUTHORIZED,
9,637,308 ISSUED AND
OUTSTANDING (NOTE 5) 96,374
PREFERRED STOCK,
$.001 PAR VALUE, 5,000,000
SHARES AUTHORIZED, 1,000,000 SERIES A
ISSUED AND OUTSTANDING 1,000
STOCK WARRANTS 50,000
ADDITIONAL PAID IN CAPITAL - COMMON STOCK 3,981,209
ADDITIONAL PAID IN CAPITAL - PREFERRED STOCK 1,127,000
ACCUMULATED DEFICIT (2,120,928)
----------
TOTAL STOCKHOLDERS' EQUITY 3,134,655
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,824,047
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS
26
<PAGE>
PC ETCETERA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1993
---- -----
<S> <C> <C>
REVENUES $10,456,704 $9,154,564
COST OF REVENUES 4,847,301 3,803,622
----------- ----------
GROSS PROFIT 5,609,403 5,350,942
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,144,899 4,683,002
RESEARCH AND DEVELOPMENT (NOTE 11) 541,439 0
----------- ----------
OPERATING INCOME (LOSS) (1,076,935) 667,940
INTEREST EXPENSE, NET OF INTEREST INCOME (121,847) (110,665)
----------- ----------
NET INCOME (LOSS) ($1,198,782) $557,275
----------- ----------
----------- ----------
EARNINGS PER SHARE:
NET INCOME (LOSS) ($0.15) $0.09
----------- ----------
----------- ----------
WEIGHTED AVERAGE NUMBER
OF SHARES: 7,767,308 6,245,641
----------- ----------
----------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS
27
<PAGE>
PC ETCETERA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMMON
COMMON STOCK PREFERRED STOCK STOCK
STOCK AMOUNT STOCK AMOUNT SUBJECT TO
------ ------ ----- ------ WARRANTS
----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,1992 6,237,308 $62,374 0 $ 0 0
INCOME FOR THE YEAR ENDED
DECEMBER 31, 1993
ISSUANCE OF STOCK 100,000 1,000
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31,1993 6,337,308 63,374 0 0 0
LOSS FOR THE YEAR ENDED
DECEMBER 31 1994
ISSUANCE OF STOCK AND
WARRANTS 3,300,000 33,000 488,000 488 712,000
EXERCISE OF WARRANTS 512,000 512 (512,000)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31,1994 9,637,308 $96,374 1,000,000 $1,000 200,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
ADDITIONAL ADDITIONAL
WARRANTS PAID IN PAID IN
AMOUNT CAPITAL CAPITAL DEFICIT TOTAL
------ ------- ------- ------- -----
COMMON PREFERRED
------ ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,1992 $0 $1,352,709 $ 0 ($1,479,421) ($64,338)
INCOME FOR THE YEAR ENDED
DECEMBER 31, 1993 557,275 557,275
ISSUANCE OF STOCK 21,500 22,500
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1993 0 1,374,209 0 (922,146) 515,437
LOSS FOR THE YEAR ENDED
DECEMBER 31 1994 (1,198,782) (1,198,782)
ISSUANCE OF STOCK AND
WARRANTS 178,000 2,607,000 487,512 3,306,000
EXERCISE OF WARRANTS (128,000) 639,488 512,000
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31,1994 $ 50,000 $3,981,209 $1,127,000 ($2,120,928) $3,134,655
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
28
<PAGE>
PC ETCETERA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $(1,198,782) $557,275
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 390,702 221,239
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE 228,932 (550,498)
DECREASE IN PREPAID EXPENSES 19,222 22,157
(INCREASE) DECREASE IN SECURITY DEPOSITS 4,583 (26,270)
(INCREASE) IN OTHER ASSETS 0 (48,000)
INCREASE IN ACCOUNTS PAYABLE 255,266 121,575
INCREASE (DECREASE) IN PAYROLL TAXES PAYABLE 26,086 (52,668)
INCREASE (DECREASE) IN DEFERRED REVENUE (52,440) 37,117
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (326,431) 281,927
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF FIXED ASSETS (394,738) (190,289)
--------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES (394,738) (190,289)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
INCREASE IN LOANS PAYABLE - BANK 269,251 0
PRINCIPAL REPAYMENT LOANS PAYABLE - BANK (38,165) 0
INCREASE IN LOANS PAYABLE - OTHER 199,250 41,265
REPAYMENT OF CAPITAL EQUIPMENT OBLIGATIONS (173,868) (171,280)
ISSUANCE OF STOCK 512,000 22,500
--------- ---------
NET CASH PROVIDED BY(USED IN) FINANCING ACTIVITIES 768,468 (107,515)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 47,299 (15,877)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 30,478 46,355
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $77,777 $30,478
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for
Interest (net of amount capitalized) $123,499 $111,409
Income taxes $25,790 $18,568
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $213, 214 and $439,145, respectively, were incurred
when the Company entered into new leases for new equipment during the years
ended December 31, 1994 and 1993, respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
29
<PAGE>
PC ETCETERA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1 - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
PC ETCETERA, Inc. (the "Company") was incorporated under the laws of New
York State on March 1, 1985. It changed its corporate domicile to Delaware in
December 1987 at which time it assumed its present name.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
As of this date, the Company has ten facilities operating. Four are located
in New York City, one in Metropark, New Jersey, three in Canada, and two in
Northern California.
A summary of the Significant Accounting Policies consistently applied in
the preparation of the accompanying financial statements follows:
REVENUE RECOGNITION
Revenues are recognized when training courses are attended, computer-based
training ("CBT") programs are delivered, and consulting work is performed. The
Company's refund policy provides that dissatisfied trainees may either attend
the same course without charge or the trainee's employer may request a full
refund. It is Company policy to reserve for potential refunds; however, an
allowance for refunds has not been established because historically refunds have
been negligible. Retakes are provided on a seat availability basis and as such
the Company incurs no financial exposure related to these retakes.
ACCOUNTS RECEIVABLE
Invoices are issued to customers upon completion of training or consulting
period or delivery of CBT program, or at month end with prior arrangement with
client. It is Company policy to reserve for uncollectible accounts; however, an
allowance for doubtful accounts has not been established because historically
bad debts have been negligible. The Company's customers are mainly large firms
and no one customer accounts for more than ten percent of total gross revenue.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the useful lives of the assets. Amortization of
leasehold improvements is computed on a straight-line basis over the period of
the lease.
INCOME TAXES
The Company has historically had significant net operating loss
carryforwards. The Company recognizes deferred tax valuation allowances in an
amount sufficient to eliminate deferred tax assets as the Company has been in a
cumulative loss position. The net operating losses of $1,890,712 will be
carried forward - $691,930 will expire in 1997 and the balance of $1,198,782
will expire in 1998.
CASH AND CASH EQUIVALENTS
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid instruments with a maturity of three months or less to be cash
equivalents
30
<PAGE>
FOREIGN CURRENCY
The Company has operations in Canada and Israel. The financial records of
the Israeli subsidiary are maintained in U.S. dollars because the currency of
the primary economic environment in which the operations of the subsidiary are
conducted (the functional currency) is the U.S. dollar. Transactions and
balances in the Canadian subsidiary are remeasured into U.S. dollars in
accordance with the principles set forth in Statement Number 52 of the Financial
Accounting Standards Board. Exchange gains and losses arising from such
remeasurement are reflected in income or expenses, as applicable, and are
immaterial.
NOTE 2 - PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective lives
are summarized below:
December 31, 1994 Depreciable lives:
----------------- ------------------
Furniture and Fixtures $281,788 5-8 years
Office Equipment 49,864 3-5 years
Computer Equipment 1,045,974 3-5 years
Leasehold Improvements 216,245 Term of lease
Automobiles 99,185 3 years
------
1,693,056
Accumulated Depreciation (623,979)
Net Property and ---------
Equipment $1,069,077
----------
----------
During the year ended December 31, 1994, $209,554 of computer equipment and
$13,301 of leasehold improvements were fully depreciated and taken off the
books.
As of December 31, 1994 the Company had capital lease obligations in the amount
of $605,858, which amount is included in Computer Equipment above. The future
minimum lease obligations for these leases are $270,056 and $90,019,
respectively, for the years ended December 31, 1995 and December 31, 1996,
respectively.
NOTE 3 - OTHER ASSETS
On December 6, 1993, the Company entered into an agreement to purchase
certain assets of Computer Professionals' Network (CPN), Inc ("CPN"). This
included a restrictive covenant. Also included was a customer list, contractor
list and trade names. The assets will be amortized over a three year period.
At December 31, 1994, the above assets totaled $32,000 net of amortization.
Revenues and results of operations of CPN, prior to the acquisition, were
immaterial.
31
<PAGE>
NOTE 4 - LOANS PAYABLE
OTHERS
In 1990, the Company entered into a financing arrangement to finance its
trade receivables (excluding those from the Company's Canadian subsidiary). The
arrangement expires on April 30, 1995. The balance outstanding under the
agreement is limited to 80% of eligible receivables and bears interest at the
rate of 4% above prime per annum . In addition, the Company pays a facility fee
of $7,500 per contract year or 2% of the average monthly daily cash balances of
the loan, whichever is less. Borrowings under the arrangement are secured by the
Company's accounts receivable. At December 31, 1994, the loan balance was
$473,262.
The Company has also entered into agreements with a number of vendors
whereby trade accounts payable were converted into notes. These notes are one
year notes with expiration dates throughout 1995. Interest rates range from 12%
to 16%. At December 31, 1994, the loans payable balance to such vendors was
$22,927.
AFFILIATE
In 1991, the Company obtained a loan from an unrelated party in the amount
of $100,000 with a 10% interest rate. During the year ended December 31, 1993,
the note was assigned to a member of the Company's Board of Directors. The loan
is payable on demand and is currently unsecured . The security agreement
whereby the loan was secured by all personal property, other than that property
secured pursuant to the financing agreement described above, was subsequently
released. At December 31, 1994, the loan balance, including interest, was
$36,666.
BANK
In 1994, the Company obtained a bank loan for the purchase of state-of-the-
art computer equipment and other fixed assets. The bank loans are repayable in
three years and carry an interest rate of 9% per annum. The bank loans (net of
current portion of $107,794) at December 31, 1994 were $123,292.
NOTE 5 - STOCKHOLDERS' EQUITY
On March 1, 1985, the Company was incorporated with an initial
capitalization of $10,000 for 100 shares of common stock.
In December 1987, the Company was reincorporated in the state of Delaware
with an authorized capitalization of 15,000,000 shares of $.01 par value common
stock. The Company issued 4,188,750 shares to then present stockholders. This
implemented a 41,887.5 for one split of its shares of common stock.
In July 1988, 636,486 shares of common stock were issued for a price of
$51,365. Then present stockholders purchased 136,486 additional shares while the
remaining 500,000 shares were purchased by two unaffiliated parties.
In January 1989, the Company consummated a public offering of 205,262 units
at a price of $6.00 per unit. Each unit consisted of six shares of common stock
and three redeemable common stock warrants (an aggregate of 1,231,572 shares and
615,786 warrants). The Company received net proceeds of approximately $900,000
from such offering. On March 12, 1991, the public warrants for the purchase of
615,786 shares of common stock, as well as that portion of the underwriter's
warrants for the purchase of 60,000 shares of common stock, expired.
32
<PAGE>
In May 1989, the Company issued 180,500 shares of common stock in
connection with the acquisition of PC Etcetera, California (formerly The
Computer Experience Inc.), a wholly-owned subsidiary, which is no longer an
operating entity.
In December 1993, the Company issued 100,000 shares of common stock in
connection with an asset purchase agreement with CPN.
In August 1994, the Company issued 3,300,000 shares of common stock in
connection with the acquisition of ACE Division of Elron Electronic Elron Ltd
("Elron") and Adar International, Inc. In addition, the Company issued
488,000 shares of Series A preferred stock. Elron was also granted warrants to
acquire an additional 712,000 shares of common stock at a price of $1 per share.
Pursuant to the terms of the warrants, in September 1994, at the request of the
Company, Elron exercised the warrants to the extent of $512,000. Since the
exercise was based on the Company's request, in lieu of shares of common stock,
Elron was issued 512,000 shares of Series A preferred stock.
NOTE 6 - LEASES
The Company leases office and classroom premises at 9 locations pursuant to
leases which expire through the year 2004 and require minimum aggregate annual
rental as follows:
1995 $689,288
1996 639,457
1997 573,524
1998 420,664
1999 463,424
Thereafter 1,358,414
---------
$4,144,771
----------
----------
Rent expense charged to operations amounted to $979,218 and $755,117 for
1994 and 1993, respectively.
The Company has also entered into various operating leases for equipment.
The minimum obligations under non-cancelable operating leases are as follows:
1995 $313,245
1996 238,256
1997 142,995
1998 98,643
1999 77,391
--------
$870,530
--------
--------
NOTE 7 - DEFERRED REVENUE
The Company enters into agreements with certain clients whereby blocks of
training coupons are purchased in advance at discount prices. The purchases are
recorded as a liability to provide such training. Revenues are recognized as
classes are attended. At December 31, 1994, deferred revenue was $102,728. The
entire liability is considered current as classes are normally attended in the
quarter subsequent to the purchase.
33
<PAGE>
NOTE 8 - ACQUISITION
Effective July 1, 1994, the Company purchased substantially all of the
assets of the Ace Division of Elron. The acquisition was accounted for under the
purchase method of accounting. The division was engaged in the design,
development and production of CBT courseware and interactive multimedia
training. All of the functions are currently being performed by the Company's
wholly-owned subsidiary, PC Etcetera Israel Ltd. ("PC Israel"). In connection
with the purchase, the Company issued 3,300,000 shares of common stock valued at
the fair market value of $0.80 per share, 488,000 shares of preferred stock
valued at the fair market value of $1 per share and 712,000 warrants valued at
the fair market value of $.25 each. The fair values of PC Israel's assets as
of July 1, 1994 were as follows:
Computer Equipment $60,000
Automobiles 15,000
Accounts Receivable 414,039
Goodwill 350,000
Patented Software 2,770,806
The Goodwill and the Patented Software are being amortized over 15 years, since
such software is a development language which is utilized in the authoring of
CBT applications. As such, it is expected to have a considerably longer useful
life than applications software. (See Note 12)
The results of operations of the acquired company are included in the Statement
of Operations for the period July 1, 1994 through December 31, 1994. Pro forma
results of operations, as if the acquisition had occurred at the beginning of
the year are as follows:
1994 1993
REVENUES $10,804,534 9,967,595
(LOSS) BEFORE EXTRAORDINARY ITEMS
($1,634,818) ($450,042)
NET LOSS ($1,634,818) ($450,042)
NET LOSS PER SHARE ($0.16) ($0.05)
NOTE 9 - STOCK OPTIONS AND WARRANTS
The Company has adopted an Amended and Restated 1987 Stock Option Plan
under which 3,000,000 shares of the Company's common stock have been reserved
for issuance to employees and non-employee Directors, among others. At December
31, 1994, options had been issued to employees and consultants to purchase
2,049,000 shares of common stock with prices ranging from $0.188 to $1.25 per
share.
Of the above stock options, 1,276,000 were exercisable during the year
ended December 31, 1994. No options were exercised during the year ended
December 31, 1994. All of the above options were granted at fair market value as
of the date of grant and no compensation expense was recorded.
34
<PAGE>
OUTSTANDING EXERCISABLE PRICE RANGE
Outstanding December 31, 1993 1,289,500 983,000 $0.188 - $1.25
Options Granted 856,500 - $0.463 - $1.00
Options Cancelled (97,000) - $0.375 - $1.25
Options Exercised - - -
Outstanding December 31, 1994 2,049,000 1,276,000 $0.188 - $1.25
The Company has also granted warrants to a consultant. At December 31, 1994,
warrants were outstanding to purchase 180,000 shares at $0.50 per share. In
addition, at such date, warrants were outstanding and held by Elron for the
purchase of 200,000 shares of common stock at a price of $1 per share.
NOTE 10 - DIVIDEND POLICY
The Company has neither declared nor paid any dividends on its shares of
common stock since inception. Any decisions as to the future payment of
dividends will depend on the earnings and financial position of the Company and
such other factors as the Board of Directors deems relevant. The Company
anticipates that it will retain earnings, if any, in order to finance expansion
of its operations. Accordingly, it is not anticipated that cash dividends will
be paid in the foreseeable future.
NOTE 11 - RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to expense when incurred.
Total research and development costs for the years ended December 31, 1994 and
1993 total $541,439 and $0, respectively.
NOTE 12 - PATENTED SOFTWARE
The total amount of patented software costs amortized for the years ended
December 31, 1994 and December 31, 1993 was $46,140 and $0, respectively. It is
the Company's policy to project future gross revenues and costs related to the
patented software costs and to write off any amount in excess of the net
realizable value. Patented software did not require an adjustment to net
realizable value for the year ended December 31, 1994. The Company does not
anticipate that there will be any impact from the adoption of SFAS 121 relating
to the Accounting for the Impairment of Long-Lived Assets.
35
<PAGE>
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company, its President and Executive Vice President are parties to an
agreement which requires the Company, upon the death of either such person, to
purchase from the estate of such person up to $500,000 of the Company's Common
Stock at a price per share equal to the Company's revenues for the last four
completed fiscal quarters immediately preceding the date of death divided by the
number of outstanding shares of Common Stock at the time of death. The
Company's purchase obligation is conditioned upon its receipt of, and is only to
the extent of, life insurance proceeds on such persons.
The Series B Preferred Stock is subject to redemption at the option of the
holders in the event a conversion into Common Stock does not occur by April 30,
1995. Simultaneously with the issuance of the Series B Preferred Stock, the
purchasers thereof were issued four-year warrants for the purchase of an
aggregate of 2,500,000 shares of Common Stock exercisable at a price of $.55 per
share, subject to antidilution adjustments. In the event the one-for-five
reverse split is approved, based upon the antidilution provisions of the Series
B Preferred Stock and the warrants, the Series B Preferred Stock purchasers will
receive an aggregate of 1,000,000 shares of Common Stock of the Company and will
be entitled to purchase an aggregate of 500,000 shares of Common Stock at a
price of $2.75 per share.
Pursuant to the Series B Preferred Stock Agreement described in Note 15,
the Company has also undertaken to file a registration statement with the SEC by
June 30, 1995 covering the resale of the 7,500,000 shares of Common Stock
(1,500,000) shares post-reverse split) issuable to the Series B purchasers upon
conversion of the Series B Preferred Stock and upon exercise of the Warrants
described therein. Pursuant to the Series B Preferred Stock Agreement, in the
event the reigstration statement is not filed by the Company with the SEC by
June 30, 1995
NOTE 14 - FOREIGN REVENUE
RESULTS OF FOREIGN OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 12/31/94
% % %
US OF TOTAL CANADA OF TOTAL ISRAEL OF TOTAL
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE FROM UNRELATED THIRD PARTIES $7,963,050 76.15% $2,138,998 20.46% $354,656 3.39%
INTERCOMPANY REVENUE 0 0 103,548
------------- ------------- ------------
TOTAL REVENUE $7,963,050 78.03% $2,138,998 20.96% $458,204 1.01%
------------- ------------- ------------
------------- ------------- ------------
NET INCOME (LOSS) ($800,840) 66.80% $5,584 (0.46%) ($403,526) 33.66%
------------- ------------- ------------
------------- ------------- ------------
IDENTIFIABLE ASSETS $5,345,906 $356,116 $122,359
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 12/31/93
% % %
US OF TOTAL CANADA OF TOTAL ISRAEL OF TOTAL
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE FROM UNRELATED THIRD PARTIES $7,451,367 81.40% $1,703,198 18.60% $0 0.00%
INTERCOMPANY REVENUE 0 0 0
TOTAL REVENUE 7,451,367 81.40% 1,703,198 18.60% 0 0.00%
------------- ------------- ------------
NET INCOME $533,299 95.70% $23,976 4.30% $0 0.00%
------------- ------------- ------------
------------- ------------- ------------
IDENTIFIABLE ASSETS $1,861,375 $341,016 $0
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
NOTE 15 - SUBSEQUENT EVENTS
Effective March 15, 1995, the Company entered into a Stock Purchase
Agreement with certain entities, pursuant to which the purchasers acquired an
aggregate of 1,000,000 shares of Series B preferred stock for the purchase price
of $1.50 per share. The agreement provides for (i) cumulative dividends at the
rate of 10% per annum, (ii) voting rights based upon the number of shares of
common stock into which the Series B preferred stock is convertible, (iii) the
right of the holders of the Series B preferred stock to require redemption in
the event such shares shall not have been converted into common stock of the
Company by April 30, 1995, (iv) the mandatory conversion of the Series B
preferred stock into an aggregate of 5,000,000 shares of common stock at a
conversion price of $.30 per share in the event a sufficient number of shares
of common stock shall be available for issuance upon such conversion, and (v) a
liquidation preference, on a PARI PASSU basis with the Series A preferred stock,
equal to $1.50 per share.
In addition, the purchasers were issued by the Company four year warrants
for the purchase of an aggregate of 2,500,000 shares of common stock of the
Company with an exercise price of $.55 per share, subject to antidilution
adjustment.
37
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PC ETCETERA, INC.
October 23 , 1995 By: /s/ Terry I. Steinberg
----------------------
Terry I. Steinberg,
President
38
<PAGE>
Exhibit 23 (b)
LUBOSHITZ,
KASIERER & CO
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL)
We consent to the incorporation by reference in Registration Statement No. 33-
30345 and 33-60574 on Form S-8 of PC Etcetera, Inc. of our report dated February
28, 1995, on the financial statements of PC Etcetera Israel Ltd., included in
the Annual Report on Form 10-KSB of PC Etcetera, Inc. for the year ended
December 31, 1994, as amended.
/s/Luboshitz, Kasierer & Co.
LUBOSHITZ, KASIERER & CO
Certified Public Accountants (Israel)
Tel Aviv, Israel
October 19, 1995
