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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10 - KSB
(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, 1995
( ) 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
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
NONE ----------------
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Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
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(Title of class)
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(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_____. ______
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: $11,148,928
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: $369,174 as of March 22, 1996
(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: 3,127,462 shares outstanding
as of March 21, 1996
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. During
the past year, the Company expanded its marketing efforts with regard to
computer- based training ("CBT") to include the small office-home office
("SOHO") marketplace. 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 CBT software is segmented into two product lines: STAR
for the corporate market and HELP Plus for the SOHO market. The STAR line
includes offering on Lotus Notes, CC Mail, Microsoft Office and Lotus
Smartsuite. The HELP Plus line includes all of the STAR offerings plus training
on software specifically geared to the home user such as Netscape, Quicken, and
America On Line.
The Company's ILT programs are primarily marketed to those business
concerns and public sector organizations which devote substantial resources to
personal computer technology for its 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 for use in connection
with its ILT classes as well as to home users who do not find classroom training
cost effective. 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 for the home/employee user utilize a
different training methodology. Computer-based training is supplied to
consumers/students on either floppy disks, compact disks (CD) or over a
communication line 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").
The Company's Consulting Services Division ("CSD") 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 four training facilities - two in New
York City, one in Northern California, and one in Metropark, New Jersey (See
"Recent Developments").
Reference is made to Items 6 and 12 hereof for a discussion of a
certain $1,500,000 equity financing consummated by the Company in March 1995 and
a certain $500,000 debt financing consummated in December 1995.
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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All references in this Annual Report on Form 10-KSB to numbers of
shares of Common Stock and per share information give retroactive effect to the
Company's one-for-five reverse split of its shares of Common Stock effectuated
on April 1995.
RECENT DEVELOPMENTS
SALE OF CANADIAN SUBSIDIARY
Pursuant to a Stock Purchase Agreement dated as of January 31, 1996
(the "Agreement"), the Company sold all of the outstanding stock of PC Etcetera
Inc., a Quebec corporation ("PC Canada"), to Training Holdings L.L.C. (the
"Purchaser") for a purchase price of $605,000 (inclusive of approximately
$55,000 paid to the Company prior to the closing). Simultaneously with such
sale, the Purchaser paid to the Company the sum of $200,000 as a non-refundable
royalty payment in consideration of the license by the Company to PC Canada of
certain computer software.
Pursuant to the Agreement, the parties agreed to negotiate in good
faith the terms of a three year royalty agreement between the Company and PC
Canada which would provide for the grant of a license by the Company to PC
Canada of certain intellectual property, including the right to use certain
computer software, in consideration of the payment of certain royalty amounts to
the Company. In addition, concurrently with the execution of the Agreement, in
consideration of certain services to be performed by the Company with respect to
certain leases to which PC Canada is a party, the Purchaser agreed to pay to the
Company a fee based upon reductions in rents and other costs required to be paid
by PC Canada pursuant to such leases.
NORTHERN CALIFORNIA OPERATIONS
The Company is currently exploring the terms of a transaction pursuant
to which its Northern California operations would be sold to an affiliate of the
Purchaser. The Northern California operations are not significant to the Company
as a whole with net assets of approximately $42,000 and revenues of
approximately $ 919,000. No assurances can be given that a definitive agreement
between the parties will be entered into or, if entered into, that the
transaction will be consummated.
ISRAELI SUBSIDIARY
Effective March 31, 1996 the Company's wholly-owned subsidiary, PC
Etcetera Israel, Ltd. ("PC Israel") will cease operations, and substantially
eliminate its CBT research and development program.
(b) BUSINESS OF COMPANY.
INTRODUCTION
There is a keen 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 becoming more 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 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.
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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 CBT programs, which the Company develops internally, allow the
Company to reach a completely new client base, that of the SOHO user. The
Company's CBT products are available at Software Retailers such as Computer City
and Comp USA, and at office supply stores, such as Office Max. In addition, the
Company is planning a direct market approach to more thoroughly reach the SOHO
market during 1996.
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.
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
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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 30 trainers on a full-time basis.
The Company's trainers are employed regionally in Northern California and New
York 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
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 or Lotus Smartsuite. This
consolidation has allowed the Company to downsize its courseware development
group and purchase high quality, customizable courseware from numerous third
party vendors. There are trainers in each region who occasionally develop
special courseware for local clients and work at customizing off the shelf
curriculum.
The Company's CBT products are currently being developed by a staff
of five full-time designers, located in North America. 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, 1995 and 1994 the Company
spent $891,686 and $713,167, respectively on research and development activities
relating to CBT programs.
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 26%
and 61% 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 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 work group 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.
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.
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The Company's STAR CBT products are currently being marketed under
various site license agreements at prices of between $1,000 and $10,000 per hour
of STAR CBT training . The Company also offers custom CBTs to its customers at
prices ranging from $8,000 and $15,000 per hour of STAR CBT training. The
Company's HelpPlus CBT is sold through response advertising, telemarketing and
retail stores at approximately $20.00 per title. 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 and/or
patents. 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 with
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
industries 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. The Company, in conjunction with software
vendors, has established informational 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
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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.
The Company is planning a direct marketing approach to more thoroughly
reach the SOHO market for its CBT products.
CUSTOMERS
The Company's present customer base includes companies from a wide
range of industries including banking, finance, manufacturing, insurance and
government, as well as, with regard to retail CBT distribution, software
retailers and office supply stores. No one customer accounted for more than ten
percent of the Company's revenues during the year ended December 31, 1995.
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. Many of such firms have
substantially greater marketing resources than 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 for all of its product lines 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, 1996, the Company employed approximately 147 persons,
including 141 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 $288,000, with a
rental increase to $320,000 per annum effective January 14, 1999.
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Additional classroom facilities under lease are as follows:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET EXPIRATION DATE ANNUAL BASE RENT
<S> <C> <C> <C>
Seaport - Manhattan 3,000 October 1, 1996 38,400
San Francisco, California 6,500 Month to Month 79,776
Iselin, New Jersey 3,500 August 30, 1997 66,804
</TABLE>
The Company believes that its facilities are adequate for its present
needs and anticipates no inordinate difficulty or cost in securing additional
training facilities if required. (See Item 1(a) hereof)
Item 3. LEGAL PROCEEDINGS.
There are no material legal proceedings which are currently pending
against the Company or any of its subsidiaries or of which any of their property
is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the stockholders of the Company
during the quarter ended December 31, 1995.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION.
The Company's shares of Common Stock are traded in the over-the-
counter market on the National Association of Securities Dealers' Bulletin Board
under the symbol "PCEZ. The following table sets forth the range of high and
low bid prices for the Company's Common Stock as reported by the National
Quotation Bureau Inc. The quotations set forth below reflect inter-dealer
prices without retail markup, markdown or commission and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995 CALENDAR YEAR
First Quarter $ 2- 1/8 $ 5/16
Second Quarter 2 -1/4 1
Third Quarter 1 -1/2 1/2
Fourth Quarter 1 1/4
1994 CALENDAR YEAR
First Quarter 1 - 7/8 15/16
Second Quarter 3 - 3/4 15/16
Third Quarter 2 - 15/16 5/8
Fourth Quarter 1 - 7/8 5/8
</TABLE>
(b) HOLDERS.
As of March 27, 1996, there were 53 holders of record of the Company's
shares of Common Stock, $.01 par value.
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(c) DIVIDENDS.
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.
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Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenues for the fiscal year ended December 31, 1995 of $11,148,929
represented an increase of 7% over revenues of $10,456,704 for the year ended
December 31, 1994.
During the year ended December 31,1994, 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 $3,013,000 for the year ended December 31, 1995 as
compared to approximately $1,400,000 for the year ended December 31, 1994, an
increase of 115%. In addition, the Company develops and offers CBT programs to
augment and supplement its live training classes. Revenues from such programs
grew to $606,000 for the year ended December 31, 1995 from approximately
$346,000 (exclusive of CBT revenues generated by PC Israel) for the year ended
December 31, 1994. In September, 1995, the Company began to ship its CBT
products through the retail channel in addition to selling to corporate clients.
The Company has only recognized revenues of $29,000 based on actual sell through
to end users, as all product is returnable if not sold through to end-users, and
the Company has no historical basis of estimating such returns. As discussed in
Item 1 hereof, PC Israel purchased substantially all of the assets of the ACE
Division ("ACE") of Elron Electronic Industries, Ltd. effective July 1,1994. The
Israeli operations generated revenues of approximately $716,000 in 1995 and
$335,000 in 1994.
During 1995, the Company experienced declining ILT revenues in the United
States. Management attributes the declining ILT revenue to the fact that
software vendors did not release many new versions of existing software during
the year ended December 31, 1995, and a new operating system entitled Windows 95
was not released until August 1995. Many of the Company's clients delayed any
software conversions and training projects, awaiting the release of Windows 95,
and many clients are continuing to delay such conversions and projects pending
marketplace experiences with Windows 95. The decreased revenues in the United
States were partially offset by 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 ILT revenues.
The Company's cost of revenues for the year ended December 31, 1995, was
65% of revenues as compared to 52% of revenues for the year ended December 31,
1994. The Company's new service/product lines do not follow the same trends in
cost of revenues as the ILT business. Cost of revenues for contract consulting
was 69% of revenues and costs of revenues for CBT was 78% of revenues for 1995.
Selling, general and administrative expenses for the year ended December
31, 1995 of $5,521,837 showed no significant change as compared to selling,
general and administrative expenses of $5,514,076 for the year ended December
31, 1994. The net reduction reflected an increase in Canada and Consulting due
to volume, offset by a decrease in the Company's United States ILT business due
to reduced volume and a significant cost reduction program.
As discussed above, in 1994 PC Israel purchased substantially all of the
assets of ACE which was engaged in the design, development and production of CBT
courseware and interactive multimedia training. The research and development
expenses of $891,686 for the year ended December 31, 1995 and $713,161 for the
year ended December 31, 1994 reflect the costs associated with the maintenance,
design and enhancements of the CBT design technology, and amortization of
software acquired of $343,457 and $171,728, respectively. The Company was
amortizing the software acquired over a five year period. During the fourth
quarter of 1995, in connection with the decision to close PC Israel (Note 16),
the Company determined there would be no continuing value to the asset. As a
result, it has written off the entire remaining net book value of $1,202,100.
The Company had a net loss of $3,845,975 for the year ended December 31,
1995 as compared to a net loss of $1,318,538 for the year ended December 31,
1994. Such result is attributable primarily to the write off of software
investment of $1,202,100, the Company's CBT research and development expenses,
and the declining ILT revenues. Management believes that the decreasing ILT
revenues will continue throughout 1996. The
11
<PAGE>
Company has decided to cease operations of PC Israel effective March 31, 1996
and substantially eliminate its CBT research and development program; however,
it intends to continue to market CBT software.
As discussed below under "Liquidity and Capital Resources" effective
January 1, 1996, the Company sold all of the outstanding stock of its Canadian
subsidiary ("PC Canada"). The Company is also exploring the terms of a
transaction pursuant to which its San Francisco operations would be sold to an
affiliate of the purchaser of PC Canada. No assurances can be given that such
transaction will be consummated.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficiency increased to $1,234,834 at
December 31,1995 as compared to $828,562 at December 31, 1994. The increase was
due primarily to the operating losses experienced during the year ended December
31, 1995, offset by the sale of Preferred Stock as described below.
The Company is a party to a financing agreement by which it finances its
trade receivables. The agreement is scheduled to expire on April 30, 1996. The
balance outstanding under the agreement, which is limited to 75% of eligible
receivables, is reported as a current liability under "Loans Payable"
The Company used $1,415,277 in operating activities during 1995, primarily
due to its net loss of $3,845,975 during such year. Such loss was offset by
decreased accounts receivable and increased accounts payable during such year as
well as depreciation and amortization expenses of $814,591. During 1995, the
Company's financing activities provided cash in the amount of $1,608,487
primarily through the sale of Preferred Stock ($1,464,495) and increased loans
from related parties of $500,000.
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 1,200,000 shares of Series B Preferred Stock and 500,000
warrants for an aggregate purchase price of $1,500,000. The Company agreed to
use the proceeds for research and development, CBT promotion and working capital
purposes. The Series B Preferred Stock converted into an aggregate of 1,000,000
shares of Common Stock of the Company effective with the Company's one-for-five
reverse split of its shares of Common Stock in April, 1995.
Effective December 5, 1995, the Company borrowed $500,000 from certain of
the Series B Purchasers, Elron and Gilbert H. Steinberg, a principal stockholder
of the Company, for working capital purposes. The notes evidencing the loans
provide for interest at the rate of 10% per annum and the payment of the
principal amount one year from the date of issuance.
Effective January 1, 1996, all of the outstanding stock of PC Canada was
sold to a private company for net proceeds of $731,000, including the license
of certain computer software. Of such amount, $250,000 was used to repay a
portion of the December 1995 loans described above. Pursuant to the terms of
the notes, as a result of the sale of PC Canada, the remaining balance of the
loans is due and payable.
The Company is presently exploring all possible opportunities in order to
reduce the working capital deficiency, including expanding its marketing
efforts, implementing an aggressive cost reduction plan, negotiating with
vendors and seeking additional financing. No assurances can be given that any
such efforts will be successful.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements required by this Item 7 are included herein
following Item 13 hereof.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On August 11, 1995, the Company dismissed Norman Stumacher as its
independent public accountant. Such determination was made by the Company's
Board of Directors.
Norman Stumacher had served as the Company's independent public
accountant from inception (March 1, 1985) through the fiscal year ended December
31, 1994.
Norman Stumacher's reports on the Company's financial statements as of
December 31, 1993 and 1994 and for the years then ended neither contain an
adverse opinion or a disclaimer of opinion nor is qualified or modified as to
audit scope or accounting principles, except that Norman Stumacher did not audit
the financial statements of PC Israel for the fiscal year ended December 31,
1994 and its report, insofar as it relates to the amounts included for PC
Israel, was based solely on the report of other auditors. Norman Stumacher's
reports are not qualified or modified as to uncertainty.
During the fiscal years ended December 31, 1993 and 1994 and the
period from January 1, 1995 to August 10, 1995, there were no disagreements with
Norman Stumacher on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of such firm, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report.
On August 11, 1995, the Board of Directors of the Company approved the
engagement of Arthur Andersen & Co. as its new independent public accountants
with respect to the fiscal year ending December 31, 1995.
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:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION WITH C0MPANY SINCE
---- --- --------------------- -----
<S> <C> <C> <C>
Martin F. Kahn 45 Chairman and Director 1995
Terry I. Steinberg 41 President, Treasurer and Director 1985
Joseph Sabrin 53 Executive Vice President- 1991
sales and Marketing,
Secretary and Director
Lloyd L. Rosler 34 Vice President - Contract Labor Services -
Avshalom Aderet 46 President, PC Etcetera Israel Ltd. 1994
and Director
Jacob Ben-Zvi 46 Director 1995
Abraham Peri 51 Director 1994
</TABLE>
13
<PAGE>
Martin F. Kahn was elected Chairman of the Board and a Director of the
Company in May 1995. Mr. Kahn has served since 1989 as Chairman of Ovid
Technologies, Inc. (formerly CDP Technologies, Inc.), a leading producer of
medical, scientific and technical CD-ROM and network products; since 1993 as
Chairman of OneScource Information Services (formerly Lotus One Source), which
develops and markets a comprehensive set of integrated business information and
software products; since 1991 as Chairman of Vista Information Solutions, Inc.
(formerly DataMap, Inc., a successor through merger to Vista Environmental
Information, Inc. which supplies site-specific risk information about real
estate for the insurance, banking, and environmental engineering markets; since
April 1995 as Chairman of ShopperVision Express, Inc., which offers home grocery
shopping through dial-up and on-line services; and since 1990 as Managing
Director of Cadence Information Associates L.L.C. (and its predecessor), a
consulting and management services firm. Mr. Kahn holds a Bachelors Degree in
Administrative Sciences from Yale College and a Masters degree in Business
Administration from Harvard Business School.
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.
Lloyd L. Rosler has served as Vice President - Contract Labor
Services, and has managed the 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
(see Item 1 hereof). Prior thereto and from 1993, Mr. Aderet served as
President of Adar International, ("Adar") Inc., an indirect wholly-owned
subsidiary of Elron Electronics Industries Ltd. ("Elron") (see Item 11 hereof)
that marketed CBT products. From 1988 until 1992, he served as President of the
ACE Division of Elron.
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 real-time 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.
Dr. Jacov Ben-Zvi, joined Elron in November 1995 as Senior Vice
President - Business Development. From July 1992 to November 1995, he served as
President of Sterling Software ( U.S.A.) Inc., a software products manufacturer.
Prior thereto and from October 1985, Dr. Ben-Zvi was General Manager of Israel
Sterling Teffen Labs, also a software products manufacturer.
Terry I. Steinberg, Joseph Sabrin, Lloyd L. Rosler and Avshalom Aderet
are full-time employees of the Company or its subsidiaries. Martin Kahn devotes
only such portion of his time to the Company as may be required of him to
fulfill his duties as its Chairman.
14
<PAGE>
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 or removal from office.
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.
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, 1995,
all Section 16(a) filing requirements applicable to the Company's officers,
Directors and 10% stockholders were complied with except that (i) no Form 3
was filed by Meir Barel; (ii) the Form 3 for Candence Information Associates,
L.L.C. was filed late; and (iv) Lloyd Rosler filed his Form 5 late, reporting
one transaction (iii) no Form 5 was filed by (a) Elron, Josh Ruch or Jan
Philipp F. Reemtsma who were 10% shockholders of the Company during the fiscal
year, (b) Mr. Kahn, Mr. Peri or Dr. Ben-Zvi who are Directors of the Company
or (c) Abraham Peled, a former Director of the Company, the Company being
unaware in each instance whether a Form 5 was required to be Filed.
15
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the
compensation of Terry I. Steinberg, the Company's President, and all other
executive officers of the Company as of December 31, 1995 who had a total
salary and bonus for such year in excess of $100,000.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL SHARES
COMPENSATION UNDERLYING
------------
NAME AND PRINCIPAL YEAR SALARY OPTIONS
POSITION
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Terry I. Steinberg, 1995 $ 99,360 0
President 1994 $131,750 0
1993 $117,124 25,000
Joseph Sabrin, 1995 $103,680 0
Executive Vice
President- Sales
and Marketing 1994 $110,400 0
1993 $117,293 25000
John Towsley, 1995 $120,000 0
Vice President (1) 1994 $100,072 73,000
1993 $104,087 115,000
</TABLE>
(1) Mr. John Towsley left the Company in connection with the Company's sale of
PC Canada in January 1996 (see Item 1 hereof).
OPTION GRANTS
No stock options were granted to any of Messrs. Steinberg, Sabrin or
Towsley during the fiscal year ended December 31, 1995.
FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning the
value as of December 31, 1995 of unexercised options.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING
UNEXERCISED OPTION AT VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS
DECEMBER 31, 1995 AT DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Terry I. Steinberg 30,000 / -0- -0-/-0-
Joseph Sabrin 30,000 / -0- -0-/-0-
John Towsley 55,367 / 9,733 -0-/-0-
</TABLE>
Reference is made to Item 12 hereof for a discussion of a certain agreement
between the Company and Messrs. Steinberg and Sabrin regarding a purchase of
their shares upon death.
16
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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, 1996 (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
(iii) by each person named in Item 10 hereof and (iv) 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 address of Number of common shares Percent of
Beneficial Owner Beneficially Owned(1) Outstanding
- ------------------- ----------------------- -----------
<S> <C> <C>
Elron Electronic 858,750 (3) 25.4%
Industries Ltd. (2)
Terry I Steinberg (4) 848,343 (5) (6) 26.9%
Gilbert H. Steinberg 839,493 (5) 26.7%
Six Nevada Drive
Lake Success, New York
Gibraltar Trust (7) 620,664 (8) 18.5%
Joshua Ruch (7) 620,664 (8) 18.5%
Jan Philipp F. Reetman 571,011 (8) 17.1%
Mera Gmbh
Grosse Bleichen 8, D-2000
Hamburg, Germany
Meir Barel (9) 620,644 (10) 18.5%
SVM STAR Ventures
Management Gmbh No. 3 (9) 310,332 (10) 9.6%
SVM STAR Ventures Capital
Management Ltd. (II) 310,332 (10) 9.6%
SVE STAR Ventures
Enterprises No. III
Gbr (9) 213,214 (10) (12) 6.7%
Justy Ltd. (II) 186,199 (10) (13) 5.8%
Austin W. Marxe (14) 601,616 (15) (16) 18.1%
AWM Investment 601,916 (15) (16) 18.1%
Company, Inc. (14)
Special Situations 451,436 (15) (17) 13.8%
Fund III L.P. (14)
MGP Advisers 451,436 (15) (17) 13.8%
Limited Partnership (14)
Joseph Sabrin(4) 315,458 (6) (18) 10.0%
17
<PAGE>
<CAPTION>
<S> <C> <C>
Avshalom Aderet 51,000 (19) (18) 1.6%
28 Hacharoshet Street
Or-Yehuda, Israel
Martin F. Kahn 20,000 (21) (22) *
c/o Cadence Information
Associates LLC
767 Fifth Avenue
New York, New York
Abram Peri (2) -0-(23) -
Jacov Ben-Zvi (2) -0-(23) -
All executive officers and 969,343 (5) (6) (19) 29.9%
directors as a group (7 persons) (21) (22) (24)
</TABLE>
_________________________
* Less than 1%
(1) 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 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 deemed exercise or
conversion of other holders' outstanding options, warrants and convertible
Preferred Stock.
(2) Address is Advances Technology Center, Haifa, Israel.
(3) Pursuant to Schedule 13D filed with the SEC, the number of Common Shares
beneficially owned includes (I) 200,000 shares issuable upon conversion of
Series A Preferred Shares; and (ii) 58,750 shares issuable upon exercise of
currently exercisable warrants.
(4) Address is 462 Seventh Avenue, New York, New York.
(5) Includes shares beneficially owned by Terry I. Steinberg (285,458), Joseph
Sabrin (285,458) and Gilbert H. Steinberg (247,427). Such shares are held
subject to a Voting Trust Agreement among such persons, expiring in
December 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 30,000 shares issuable upon exercise of currently exercisable
options held by each of Messrs. T. Steinberg and Sabrin.
(7) Address is c/o Rho Management Co., Inc., 767 Fifth Avenue, New York, New
York.
(8) Pursuant to Schedule 13D filed with the SEC and other information available
to the Company, Messrs. Ruch and Reemtsma are tow of the grantors of
Gibraltar Trust, which is the record owner of 400,000 Common Shares (giving
effect to the issuance described in item 12 hereof) and holds currently
exercisable warrants for the purchase of approximately 220,664 Common
Shares. Based upon the Schedule 13D, (i) Mr. Reetsma beneficially owns
approximately 571,001 shares (including approximately 203,010 shares
issuable upon exercise of currently exercisable warrants) and (ii) Mr.
18
<PAGE>
Ruch beneficially owns approximately 49,653 shares (including
approximately 17,654 shares issuable upon exercise of currently
exercisable warrants) and exercises sole voting and dispositive control
over such shares. The Schedule 13D indicates further that Mr. Ruch's
beneficial ownership includes 25,000 shares held by Rho Management Co.,
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 adviser 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. In addition, an entity affiliated with Messrs. Ruch and Reemtsma
is a limited partner of SVE IIIA (as defined in footnote (10); however,
neither Mr. Ruch nor Mr. Reemtsma has voting or dispositive power over the
shares of the Company beneficially owned by SVE IIIA. The number of Common
Shares beneficially owned by Gibraltar Trust, and the number of Common
Shares beneficially owned by Mr. Ruch, includes 168,581 shares issuable
upon currently exercisable warrants (155,094 for Mr. Reemtsma).
(9) Address is 28A Leopoldstrasse, Munich, Germany.
(10) Pursuant to Schedule 13D filed with the SEC, (i) SVM STAR Ventures
management Gmbh No. 3 ("STAR Germany") manages the investments of SVE STAR
Ventures Enterprises No. II Gbr ("SVE II"), SVE STAR Ventures Enterprises
No. iii ("SVE III") and SVE STAR Ventures Enterprises No. IIIA Gbr
("SVE IIIA"), (ii) SVM STAR Venture Capital Management Ltd. ("STAR Israel")
manages the investments of Justy Ltd. ("Justy") and Yozma Venture Capital
Ltd. Mr. Barel has the sole power to vote or direct the vote, and the sole
power to dispose or direct the disposition of, the shares beneficially
owned by SVE II (79,459 shares), SVE III, SVE IIIA (17,660 shares); (v)
STAR germany has the sole power to vote or direct the vote, and the sole
poser to dispose or direct the disposition of, the shares beneficially
owned by SVE II, SVE III and SVE IIIA; and (vi) STAR Israel has the sole
power to vote or direct the vote, and the sole power to dispose or direct
the disposition of, the shares beneficially owned by Justy and Yozma.
(11) Address is 25 Lechi Street, Bnei Brak, Israel.
(12) The number of Common Shares beneficially owned includes 75,800 shares
issuable upon exercise of currently exercisable warrants.
(13) The number of Common Shares beneficially owned includes 66,199 shares
issuable upon exercise of currently exercisable warrants.
(14) Address is 153 East 53rd Street, New York, New York.
(15) Pursuant to Schedule 13G filed with the SEC, (i) AWM Investment Company,
Inc. ("AWM") serves as (a) the sole general partner of MGP Advisers Limited
Partnership ("MGP") and (b) the investment adviser to, and general partner
of, Special Situations Cayman Fund, L.P. ("Cayman Fund"); (ii) Austin W.
Marxe is President, Chief Executive officer and primary owner of AWM and
principal limited partner of MGP; and (iii) MGP is a general partner of,
and investment adviser to, Special Situations Fund III, L.P. ("III Fund").
Pursuant to the Schedule 13G, (i) Mr. Marxe has the sole power to vote or
direct the vote of the shares beneficially owned by the Cayman Fund
(150,480 shares), shared power to vote or direct the disposition of the
shares beneficially owned by the Cayman Fund and the III Fund; (ii) AWM has
the sole power to vote or direct the vote of the shares beneficially owned
by the Cayman Fund and the sole power to dispose or direct the disposition
of the shares beneficially owned by the Cayman Fund and III Fund; and (iii)
MGP has the sole power to dispose or direct the disposition of the shares
beneficially owned by the III Fund.
(16) Based upon Schedule 13G filed with the SEC and other information available
to the Company, the number of Common Shares beneficially owned includes
201,915 and 33,333 shares, issuable upon exercise of currently exercisable
warrants.
(17) The number of Common Shares beneficially owned by the III Fund includes
151,436 shares issuable upon exercise of currently exercisable warrants.
19
<PAGE>
(18) Shares (excluding shares subject to outstanding options) are held subject
to a Voting Trust Agreement as descried in footnote (5).
(19) Includes 15,000 shares issuable upon exercise of currently exercisable
options.
(20) Shares are held in trust for the benefit of Mr. Aderet.
(21) Represents shares issuable upon exercise of currently exerciseable options.
(22) Options are held in the name of Cadence Information Associates LLC, a
Delaware limited liability Company of which Mr. Kahn is the sole manager
and a member with a 50% membership interest.
(23) Does not include shares beneficially owned by Elron for which Mr. Peri and
Dr. Ben-Zvi serve as officers.
(24) Includes 20,000 shares issuable upon exercise of currently exercisable
options held by an executive officer of the Company.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
REPURCHASE AGREEMENT
The Company, Terry I. Steinberg and Joseph Sabrin 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.
ELRON ELECTRONIC INDUSTRIES LTD.
Pursuant to a Stockholders' Agreement, dated August 12, 1994, among
Elron, Adar, an indirect wholly-owned subsidiary of Elron, Elron Technologies
Inc., a wholly-owned subsidiary of Elron ("Technologies"), Messrs. T.
Steinberg, Sabrin and Gilbert Steinberg and the Company (the "Stockholders'
Agreement"), Messrs. T. Steinberg, Sabrin and G. Steinberg have agreed to vote
all voting securities of the Company owned or controlled by them in favor of two
designees of Elron to the Board of Directors and Elron, Technologies and Adar
have agreed to vote all voting securities of the Company owned or controlled by
them in favor of the four designees of Messrs. T. Steinberg and Sabrin to the
Board of Directors (including, but not necessarily, themselves). Elron's right
to designate two persons to the Board shall continue for as long as it
beneficially owns equity securities of the Company representing, or which are
convertible into, at least 20% of the outstanding shares of Common Stock of the
Company. The right of Messrs. T. Steinberg and Sabrin to designate four persons
to the Board shall continue for as long as they, together with Mr. G. Steinberg,
beneficially own or hold as voting trustees, in the aggregate, equity securities
of the Company representing, or which are convertible into, at least 20% of the
outstanding shares of Common Stock of the Company.
In addition, pursuant to the Stockholders' Agreement, (i) Messrs. T.
Steinberg, Sabrin and G. Steinberg and the Company shall have a right of first
refusal until August 12, 1999 with respect to certain proposed dispositions of
shares by Elron, Technologies or Adar; (ii) Elron shall have a right of first
refusal until August 12, 1999 with regard to certain contemplated private equity
financing by the Company; (iii) Elron, Technologies and Adar have agreed that,
until August 12, 1996, except as provided in (ii) above, they will not,
20
<PAGE>
directly or indirectly, without the prior written consent of the Company, (a)
acquire any equity securities of the Company or any securities which are
exercisable for the purchase of, or convertible into or exchangeable for, equity
securities of the Company; (b) solicit any proxies with respect to any voting
securities of the Company or become a participant in any election contest or
seek to advise or influence any person with respect to the voting of any voting
security of the Company or (c) make a disposition of any of its shares; and (iv)
in the event the Company shall agree to register for resale under the Securities
Act of 1933, as amended (the "Act"), any of the shares of Common Stock owned by
Messrs. T. Steinberg, Sabrin or G. Steinberg, it shall grant to Elron,
Technologies and Adar a similar right to register for resale under the Act a
proportionate number of shares of Common Stock owned by them (a similar right
applying likewise to Messrs. T. Steinberg, Sabrin and G. Steinberg in the event
the Company agrees to register for resale under the Act shares owned by Elron,
Technologies or Adar).
Contemporaneously with the Series B Preferred Stock Agreement, the
Company agreed with Elron to include a certain registration statement to be
filed the resale of the 600,000 shares of Common Stock beneficially owned by
Elron as well as the 240,000 shares of Common Stock issuable to Elron upon
conversion of its Series A Preferred Stock and upon the exercise of an
outstanding warrant.
SERIES B PREFERRED STOCK FINANCING
The Series B Preferred Stock Agreement provides for the issuance of
additional shares of Common Stock to the Series B Purchasers in the event the
Company shall make certain issuances of Common Stock or grant certain options,
warrants or other rights to acquire shares of Common Stock at a price less than
$1.50 per share.
Pursuant to the Series B Preferred Stock Agreement, the Company also
undertook to file a registration statement with the SEC covering the resale of
1,500,000 shares of Common Stock issuable to the Series B Purchasers upon
conversion of the Series B Preferred Stock and upon exercise of their Warrants.
Pursuant to the Series B Preferred Stock Agreement, since the registration
statement was not declared effective by the SEC by December 31, 1995, the
Company became obligated to issue to the Series B Purchasers an aggregate of
200,000 additional shares of Common Stock and additional warrants for the
purchase of an aggregate of 100,000 shares of Common Stock. In the event the
registration statement is not declared effective by the SEC by June 30, 1996
or December 31, 1996, the Company shall be obligated to make like issuances to
the Series B Purchasers on each occasion. The Series B Purchaser to likewise,
under certain circumstances, designate a person to be a member of an expanded
Board of Directors.
DEBT FINANCING
As discussed under Item 6 hereof, effective December 5, 1995, the
Company entered into a Loan and Registration Rights Agreement (the "Loan
Agreement") with Gibraltar Trust, Justy Ltd., Yozma Venture Capital Ltd., SVE
Star Ventures Enterprises No. II Gbr., SVE Star Ventures Enterprises No. 111
Gbr., SVE Star Ventures Enterpriese No. IIIA Gbr., Elron and Gilbert H.
Steinberg (collectively, the "Lenders") See Item 11 hereof) pursuant to which,
among other things, the Company borrowed an aggregate of $500,000 (the "Loans"),
The promissory notes evidencing the Loans provide for interest at the rate of
10% per annum and the payment of the principal amount one year from the date of
issuance. The notes provide further that, in the event the Company shall dispose
of any of its assets for an aggregate purchase price of more that $100,000,
then, to the extent of any net proceeds received, the Company must repay the
notes. The repayment of all amounts due under the notes is to be secured by a
security interest in all the assets of the Company (subject to the terms of a
certain Security Agreement among the parties). As discussed in Item 1(a) hereof,
the Company is obligated to repay the Loans out of the proceeds received in
connection with the sale of PC Canada.
In consideration of the Loans, the Lenders were issued five year
warrants for the purchase of an aggregate of 75,000 Common Shares of the Company
at an exercise price of $1.50 per share. The Loan Agreement provides that, six
months from the date thereof, the Lenders may be entitled to receive additional
warrants for the purchase of up to 37,500 additional Common Shares of the
Company (dependent upon the outstanding principal amount of the notes at such
time). Pursuant to the Loan Agreement, the Lenders have also been given certain
demand and piggyback registration rights with regard to the Common Shares
issuable pursuant to the warrants.
21
<PAGE>
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
2(a) 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.(1)
(b) Stock Purchase Agreement dated as of January 31,
1996 by and between Training Holdings L.L.C. and
PC Etcetera Inc.(2)
3(a) Certificate of Designation with regard to Series
A Preferred Stock (3)
(b) Certificate of Amendment of Certificate of
Incorporation with regard to reverse split (4)
(c) Certificate of Incorporation, as amended.
(d) By-laws. (5)
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.(5)
10(a) Lease for premises situated at 462 Seventh
Avenue, 4th Floor New York, New York. (4)
(b) Lease for premises situated at 462 Seventh
Avenue, 18th Floor, New York, New York (6)
(c) Lease for premises situated at 19 Fulton Street,
New York, New York. (5)
(d) Lease for premises situated at 120 Wood Avenue
South, Iselin, New Jersey. (5)
(e) Lease Amendment for premises situated at 120
Wood Avenue South, Iselin, New Jersey. (4)
(f) Amended and Restated 1987 Stock Option Plan. (7)
(g) Agreement dated as of May 30, 1989 among Terry
I. Steinberg, Joseph Sabrin and the Company, as
amended. (6)
(h) Lease for premises situated at 690 Market
Street, San Francisco, California. (8)
(i) Financing Agreement - Receivables dated November
20, 1990 between the Company and Rosenthal &
Rosenthal, Inc. (4)
(j) 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. (1)
(k) 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"). (3)
(l) Form of Warrant dated March 15, 1995 issued to
the Series B Purchasers for the purchase of an
aggregate of 500,000 shares of Common Stock of
the Company. (3)
22
<PAGE>
(m) Loan and Registration Rights Agreement dated
December 5, 1995 among the Company, Gibraltar,
Justy, Yozma, SVE II, SVE III, SVE IIIA, Elron
and Gilbert H. Steinberg (collectively, the
"Lenders"). (9)
(n) Form of Promissory Note dated December 5, 1995
issued to the Lenders with regard to $500,000
aggregate principal amount of indebtedness. (9)
(o) Form of Warrant dated December 5, 1995 issued to
the Lenders for the purchase of an aggregate of
75,000 Common Shares of the Company. (9)
21 Subsidiaries.
23 Consent of Arthur Andersen, LLP
(b) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Company during the three month
period ended December 31, 1995 as follows:
- -------------------
1Denotes 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.
2Denotes document filed as an exhibit to the Company's Current Report on Form 8-
K for an event dated January 31, 1996 (File No. 0-17419) and incorporated herein
by reference.
3Denotes document filed as an exhibit to the Company's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1994 (File No. 0-17419) and
incorporated herein by reference.
4Denotes 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.
5Denotes document filed as an exhibit to the Company's Registration Statement on
Form S-18 (File No. 33-19521) and incorporated herein by reference.
6 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.
7Denotes 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.
8Denotes 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.
9Denotes document filed as an exhibit to the Company's Registration Statement on
Form S-2 (Registration No. 33-93842) and incorporated herein by reference.
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
PC Etcetera, Inc.:
We have audited the accompanying consolidated balance sheet of PC Etcetera, Inc.
and subsidiaries (a Delaware corporation) as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year 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 generally accepted auditing standards.
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 financial statements referred to above present fairly, in
all material respects, the financial position of PC Etcetera, Inc. and
subsidiaries as of December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, certain factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
ARTHUR ANDERSEN LLP
March 8, 1996
New York, New York
24
<PAGE>
NORMAN STUMACHER
CERTIFIED PUBLIC ACCOUNTANT
585 Stewart Avenue, Suite 760
Garden City, New York, 11530
Board of Directors
PC Etcetera, Inc.
462 Seventh Avenue
New York, NY 10123
INDEPENDENT AUDITOR'S REPORT
I have audited the consolidated balance sheet of PC Etcetera, Inc. and
subsidiaries as of December 31, 1994 and the related consolidated statements of
income and retained earnings and cash flows for the year ended December 31,1994.
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 PC Etcetera Israel
Ltd., a wholly- owned subsidiary for the period July 1, 1994 (inception) through
December 31,1994, which statements reflect total assets and revenues
constituting 8 percent and 4 percent, respectively, of the related consolidated
totals as of December 31, 1994 and for the year then ended, respectively. 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 PC 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. 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 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 statements referred to above present fairly, in all
material respects, the financial of PC Etcetera, Inc. as of December 31, 1994,
and the results of its operations and its cash flows for the year ended December
31, 1994 in conformity with generally accepted accounting principles.
/s/ Norman Stumacher
Garden City, NY
March 17, 1995
25
<PAGE>
PC ETCETERA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS:
- -------
<S> <C>
CURRENT ASSETS:
- ---------------
Cash and Cash Equivalents $151,462
Accounts Receivable,
net of allowance for doubtful accounts of $32,435 730,883
Inventories 32,467
Prepaid Expenses and Other Current Assets 32,192
Assets Held for Sale (Note 16) 1,006,897
--------------
Total Current Assets $1,953,901
PROPERTY AND EQUIPMENT: (NOTE 3)
- ----------------------
Net of accumulated depreciation and amortization
of $724,166 539,769
OTHER ASSETS:
- ------------ 72,997
--------------
TOTAL ASSETS $2,566,667
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
<S> <C>
CURRENT LIABILITIES:
- --------------------
Accounts Payable and Accrued Expenses $1,313,665
Loans Payable - Current Portion (Note 4) 330,889
Loans Payable - Related Party (Note 12) 535,707
Capital Equipment Obligations Current Portion (Note 6) 70,365
Deferred Revenue (Note 7) 30,382
Liabilities in Connection with Assets Held for Sale
(Note 16) 807,727
-------------
Total Current Liabilities $3,188,735
-------------
LONG TERM LIABILITIES:
- ----------------------
Loans Payable (Note 4) 23,113
Capital Equipment Obligations (Note 6) 124,920
-------------
TOTAL LIABILITIES 3,333,768
-------------
</TABLE>
<TABLE>
<CAPTION>
COMMITMENTS AND CONTINGENCIES (NOTE 13)
<S> <C>
STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 5):
- ----------------------------------------
Common Stock,
$.01 Par Value, 15,000,000
Shares Authorized,
3,127,462 Issued and
Outstanding 31,275
Preferred Stock,
$.001 Par Value, 5,000,000
Shares Authorized, 1,000,000 Series A
Issued and Outstanding 1,000
Additional Paid In Capital 5,284,283
Accumulated Deficit (6,086,659)
--------------
Total Stockholders' Equity(Deficit) (770,101)
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
$2,566,667
--------------
--------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED STATEMENTS
26
<PAGE>
PC ETCETERA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net Sales $11,148,929 $10,456,704
Cost of Sales 7,231,364 5,426,152
----------- -----------
Gross Profit 3,917,565 5,030,552
Selling, General and
Administrative Expenses 5,521,837 5,514,076
Research and Development 891,686 713,167
Write Down of Software Investment 1,202,100 0
----------- -----------
Operating Loss (3,698,058) (1,196,691)
Interest Expense, Net of Interest Income
of $34,944 and $2,363 (147,917) (121,847)
----------- -----------
Net Loss ($3,845,975) ($1,318,538)
----------- -----------
----------- -----------
Net Loss Per Share ($1.36) ($0.85)
----------- -----------
----------- -----------
Weighted Average Number
of Shares: 2,827,462 1,553,462
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED STATEMENTS
27
<PAGE>
PC ETCETERA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PREFERRED STOCK PAID IN
STOCK AMOUNT STOCK AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 6,337,308 $63,374 0 $0 $1,374,209 ($922,146) $515,437
Net loss (1,318,538) (1,318,538)
Issuance of Stock and
Warrants 3,300,000 33,000 488,000 488 1,868,992 1,902,480
Exercise Of Warrants 512,000 512 511,488 512,000
----------- -------- --------- ------ ---------- ------------ -----------
Balance, December 31, 1994 9,637,308 96,374 1,000,000 1,000 3,754,689 (2,240,684) 1,611,379
One for five reverse stock
split (7,709,846) (77,099) 77,099 -0-
Issuance of
Common Stock 1,200,000 12,000 1,452,495 1,464,495
Net Loss (3,845,975) (3,845,975)
----------- -------- --------- ------ ---------- ------------ -----------
Balance December 31,1995 3,127,462 $31,275 1,000,000 $1,000 $5,284,283 ($6,086,659) ($770,101)
----------- -------- --------- ------ ---------- ------------ -----------
----------- -------- --------- ------ ---------- ------------ -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE CONSOLIDATED STATEMENTS
28
<PAGE>
PC ETCETERA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($3,845,975) ($1,318,538)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH (USED IN) OPERATING ACTIVITIES:
Write Down of Software Investment 1,202,100 0
Depreciation and Amortization 814,591 510,458
Provision for Doubtful Accounts 32,435 0
Gain on Sale of Property and Equipment (6,690) 0
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Decrease in Accounts Receivable 93,584 228,932
(Increase) Decrease in Prepaid Expenses and
Other Current Assets (58,329) 19,222
(Increase) in Inventories (32,467) 0
Decrease in Other Assets 32,116 4,583
Increase in Accounts Payable and Accrued
Expenses 402,946 281,352
(Decrease) in Deferred Revenue (49,588) (52,440)
-------- --------
NET CASH (USED IN) OPERATING ACTIVITIES (1,415,277) (326,431)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment (160,640) (394,738)
Proceeds from Sale of Property and Equipment 72,672 0
------ -
NET CASH (USED IN) INVESTING ACTIVITIES (87,968) (394,738)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Loans Payable 0 269,251
Principal Repayment of Loans Payable (53,774) (38,165)
Proceeds from Loans Payable - Related
Party 500,000 0
Net (Repayment) Proceeds from Short Term
Borrowings (118,693) 199,250
Repayment of Capital Equipment Obligations (183,541) (173,868)
Net Proceeds from Issuance of Common and
Preferred Stock 1,464,495 512,000
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,608,487 768,468
--------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 105,242 47,299
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 77,777 30,478
LESS CASH AND CASH EQUIVALENTS INCLUDED IN NET
ASSETS HELD FOR SALE (31,557) 0
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $151,462 $77,777
--------- -------
--------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for
Interest (net of amount capitalized) $173,758 $123,499
Income taxes $4,217 $25,790
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON -CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $150,026 and $213,214, respectively, were
incurred when the Company entered into lease arrangements for new equipment
during the years ended December 31, 1995 and 1994, respectively.
The Company effectuated a 1 for 5 reverse stock split in April 1995
resulting in a reclassification between common stock and paid in capital of
$77,099. (Note 5)
Concurrent with the reverse stock split, 1,000,000 shares of preferred
stock were converted into 1,000,000 (post reverse split) shares of common stock.
(Note 5)
$149,890 and $222,855 of property and equipment were fully depreciated and
taken off the books during the years ended December 31, 1995 and 1994
respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
29
<PAGE>
PC ETCETERA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
PC ETCETERA, Inc. (the "Company") develops and offers instructor-led and
computer-based personal computer training programs, and provides contract
consulting services, primarily to large business and public sector
organizations. For the year ended December 31, 1995, revenues from instructor
led training comprised 61% of total revenues while consulting services and
computer-based training ("CBT") revenues accounted for 27% and 12% of total
revenues respectively.
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. Certain amounts for the
prior period have been reclassified to conform with the 1995 presentation.
As of December 31, 1995, the Company had eight facilities operating. Two
are located in New York City, one in Metropark, New Jersey, three in Canada, and
one in Northern California. (Note 16)
A summary of the Significant Accounting Policies consistently applied in
the preparation of the accompanying financial statements is as follows:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents.
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. The Company's customers are mainly large firms and no one customer
accounts for more than ten percent of total gross revenue.
INVENTORIES
Inventories consist of computer software and components. Inventories are
carried at the lower of cost or market determined by the first in, first out
method.
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 shorter of
the period of the lease or the useful life of the asset.
30
<PAGE>
REVENUE RECOGNITION
Revenues related to instructor-led training are recognized over the life of
the training course. CBT revenues are recognized upon delivery of the program.
Contract consulting revenue is recognized as the services are 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 no refunds
have been issued. Retakes are provided on a seat availability basis and as such
the Company incurs no financial exposure related to these retakes.
RESEARCH AND DEVELOPMENT
All research and development costs are charged to expenses when incurred.
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are determined based on differences between the
financial reporting and income tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
FOREIGN CURRENCY
As of December 31, 1995, the Company had operations in Canada and Israel.
(Note 14) 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
maintained in Canadian dollars and translated into U.S. dollars in accordance
with the principles set forth in Statement No. 52 of the Financial Accounting
Standards Board. Exchange gains and losses were not material for the year ended
December 31, 1995.
EARNINGS PER SHARE
Earnings per share calculations are based on weighted average number of
shares of common stock outstanding and dilute common stock equivalents
outstanding. All earnings per share amounts have been adjusted to give effect
to the reverse stock split (Note 5).
REVERSE SPLIT
Except as otherwise indicated, all references herein to numbers of shares
of Common Stock and per share amounts give retroactive effect to the Company's
one-for-five reverse split effectuated on April 19, 1995.
NOTE 2 - GOING CONCERN:
As reflected in the consolidated financial statements, the Company has
experienced continuing net losses and negative cash flows from operations and
maintains negative working capital and negative stockholders equity. The
Company's continuing existence is dependent upon its ability to achieve and
maintain profitable operations. The Company is presently exploring opportunities
in order to fund the working capital deficiency including expanding its
marketing efforts, implementing an aggressive cost reduction plan, negotiating
with vendors and seeking additional financing.
31
<PAGE>
NOTE 3 - PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective lives
are summarized below:
<TABLE>
<CAPTION>
December 31, 1995 Depreciable lives:
<S> <C> <C>
Furniture and Fixtures $193,095 5-8 years
Office Equipment -0- 3-5 years
Computer Equipment 862,311 3-5 years
Leasehold Improvements 208,529 Shorter of term of
lease or useful life
---------
1,263,935
Accumulated Depreciation
and Amortization (724,166)
--------
Net Property and Equipment $539,769
--------
--------
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1995 and
1994 were $458,284 and $326,634, respectively. During the year ended December
31, 1995, $40,642 of furniture & fixtures, $44,531 of office equipment and
$64,717 of computer equipment were fully depreciated and taken off the books.
NOTE 4 - LOANS PAYABLE
SHORT TERM FINANCING
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, 1996. The balance outstanding under the
arrangement is limited to 75% 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, 1995, the loan balance was
$354,570.
BANK DEBT
In 1994, the Company obtained a bank loan for the purchase of state-of-the-
art computer equipment and other fixed assets. The bank loan matures in May
1997 and carries an interest rate of 9% per annum. The bank loan (net of
current portion of $ 76,319) at December 31, 1995 was $23,113.
Summary of Loans Payable:
<TABLE>
<CAPTION>
<S> <C>
Short Term Financing $354,570
Bank Debt 99,432
-------
454,002
Less Current Portion 430,889
-------
$ 23,113
</TABLE>
NOTE 5 - STOCKHOLDERS' EQUITY
In August 1994, the Company issued 3,300,000 shares of common stock in
connection with the acquisition of substantially all of the assets of the ACE
Division of Elron Electronic Industries Ltd. ("Elron") and Adar International,
Inc. ("Adar"). PC Etcetera Israel, Ltd., ("PC Israel"), the Company's wholly
owned subsidiary, which operated the acquired businesses, is expected to cease
operations on March 31, 1996. ( Note
32
<PAGE>
16). In connection with the acquisition, the Company issued to Elron 488,000
shares of Series A preferred stock and warrants to acquire an additional 712,000
shares of common stock at a price of $1 per share. These warrants were issued at
an exercise price above market value. 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.
Effective April 19, 1995, the Company effectuated a one-for-five reverse
split of the shares of Common Stock.
In March 1995, the Company issued an aggregate of 1,000,000 shares of
Series B preferred stock and four-year warrants for the purchase of an aggregate
of 2,500,000 shares of common stock at an exercise price of $.55 per share for
an aggregate Purchase price of $1,500,000. Effective with the April 19, 1995
reverse split, the shares of Series B preferred stock were converted into
1,000,000 shares of common stock (post split) and the warrants become
exercisable for the purchase an aggregate of 500,000 shares of common stock at
a price of $2.75 per share (Note 13). These warrants were issued at an
exercise price above market value. In addition, pursuant to the Series B
preferred stock agreement the Company has undertaken to file a registration
statement with the SEC to register the shares issuable upon conversion of the
Series B preferred stock and upon exercise of the warrants. Since this
registration statement was not declared effective by December 31, 1995, the
Company issued 200,000 additional shares of common stock in accordance with the
Series B preferred stock agreement.
NOTE 6 - LEASES
The Company conducts its operations principally from leased facilities.
These facilities consist of office and classroom space at eight locations
pursuant to leases which expire through the year 2003. The Company has also
entered into capital lease arrangements for certain fixed assets. Future minimum
lease payments with respect to leases in effect at December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Capital Operating
------- ---------
1996 $158,131 $ 488,186
1997 51,730 422,862
1998 11,702 310,859
1999 330,794
2000 330,794
Thereafter 960,000
--------- ----------
$221,563 $2,843,495
Less: Amounts representing interest (26,278)
---------
$195,285
</TABLE>
Rental expense for the years ended December 31, 1995 and 1994 were $1,010,138
and $979,218, respectively.
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, 1995, deferred revenue was $30,382. 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 PC Israel purchased substantially all of the
assets of the ACE Division of Elron and the Company acquired substantially all
of the assets of Adar. 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. Adar was ACE's
United States marketing arm. In connection with the purchase, the Company issued
3,300,000 shares of common stock valued at the fair market value at date of
acquisition of $0.42 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 at date of acquisition of $.04 each. The fair values of assets acquired
subject to certain liabilities as of July 1, 1994 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Computer Equipment $ 60,000
Automobiles 15,000
Accounts Receivable 414,039
Software(Note 12) 1,717,286
Liabilities to Employees (151,781)
Accounts Payable (152,064)
----------
$1,902,480
----------
</TABLE>
The results of operations of the acquired company are included in the Statement
of Operations for the period from 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
REVENUES $10,804,534
NET LOSS ($1,770,226)
NET LOSS PER SHARE ($0.85)
NOTE 9 - STOCK OPTIONS AND WARRANTS
The Company has adopted an Amended and Restated 1987 Stock Option Plan
under which 600,000 shares of the Company's common stock have been reserved for
issuance to employees and non-employee Directors, among others. At December 31,
1995, options had been issued to employees and consultants to purchase 415,200
shares of common stock with prices ranging from $0.94 to $5.00 per share.
Of the above stock options, 288,100 were exercisable as of December 31,
1995. No options were exercised during the year ended December 31, 1995.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE PRICE RANGE
<S> <C> <C> <C>
Outstanding December 31, 1994 409,800 255,200 $0 .94 - $5.00
Options Granted 30,000 - $1.70 - $5.00
Options Canceled (24,600) - $1.88 - $5.00
Options Exercised - -
Outstanding December 31, 1995 415,200 288,100 $0.94 - $5.00
</TABLE>
In April 1992, the Company granted a warrant to purchase 36,000 shares of
common stock to a consultant. This warrant is exercisable at $2.50 and expire on
December 31, 1998. In addition, warrants are
34
<PAGE>
outstanding and held by Elron for the purchase of 40,000 shares of common stock
at a price of $5 per share. The Company has also issued four year warrants for
the purchase of 500,000 shares of common stock at a price of $2.75 a share (see
Note 5) as well as warrants issued in connection with a loan obtained (Note 12)
to purchase 75,000 shares at a price of $1.50 per share.
All of the above options and warrants were granted at or above fair market value
as of the date of grant and no compensation expense was recorded.
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 - SOFTWARE
The total amount of software costs amortized for the years ended December
31, 1995 and December 31, 1994 was $343,457 and $171,728, respectively. These
costs are included in research and development. It is the Company's policy to
project future gross revenues and costs related to the software costs and to
write off any amount in excess of the net realizable value. During the fourth
quarter of 1995, in connection with the decision to close PC Israel (Note 16),
the Company determined there would be no continuing value to the asset. As a
result, it has written off the entire remaining net book value of $1,202,100
NOTE 12 - RELATED PARTY TRANSACTIONS
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 then 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, 1995, the loan balance, including interest, was
$35,707.
In 1995 the Company obtained a loan from certain related parties in the
amount of $500,000 with a 10% interest rate. The loan is payable in December,
1996 and is currently unsecured until such time as the Company is able to obtain
waivers from certain lien holders of the Company. Simultaneously, in
consideration of the loans, the lenders were being issued by the Company
warrants for the purchase of an aggregate of 75,000 shares of the Company's
common stock at a price of $1.50 per share. These warrants were issued at a
price in excess of market value. Under certain circumstances, the lenders are
entitled to receive additional identical warrants for the purchase of 37,500
shares of common stock. The terms of the loan provide that, in the event the
Company disposes of any assets for an aggregate price of more than $100,000 then
to the extent of any net proceeds received, the Company must repay the notes.
At December 31, 1995, the loan balance, including interest, was $506,601. Of
such amount, $250,000 was subsequently repaid from the proceeds of the sale of
the Canadian subsidiary. The remaining balance of the notes is due and payable.
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
35
<PAGE>
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.
Pursuant to the Series B Preferred Stock Agreement the Company has filed a
registration statement with the Securities and Exchange Commission covering the
resale of the 1,500,000 shares of Common Stock issued or issuable to the Series
B purchasers. As discussed in Note 5 Pursuant to the Series B Preferred Stock
Agreement, since the registration statement was not declared effective by the
SEC by December 31, 1995, the Company became obligated to issue to the Series B
Purchasers an aggregate of 200,000 additional shares of Common Stock and
additional warrants for the purchase of an aggregate of 100,000 shares of Common
Stock. These warrants were issued in excess of market value. In the event the
registration statement is not declared effective by June 30, 1996 or December
31, 1996, the Company will be obligated to issue a like number of shares and
warrants on each occasion.
NOTE 14 - FOREIGN REVENUE
<TABLE>
<CAPTION>
RESULTS OF FOREIGN OPERATIONS
FOR THE YEAR ENDED 12/31/95
% % %
US OF CANADA OF ISRAEL OF
TOTAL TOTAL TOTAL
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE FROM UNRELATED THIRD PARTIES $7,097,409 64% $3,335,461 30% 716,059 6%
INTERCOMPANY REVENUE 0 0 174,517
------------ ------------ ----------
TOTAL REVENUE $7,097,409 63% $3,333,461 29% $890,576 8%
------------ ------------ ----------
------------ ------------ ----------
NET LOSS ($3,166,529) 82% ($23,106) 1% ($656,340) 17%
------------ ------------ ----------
------------ ------------ ----------
IDENTIFIABLE ASSETS $1,542,623 $644,771 $379,611
------------ ------------ ----------
------------ ------------ ----------
FOR THE YEAR ENDED 12/31/94
% % %
US OF CANADA OF ISRAEL OF
TOTAL TOTAL TOTAL
--------------------------------------------------------------------------------------
REVENUE FROM UNRELATED THIRD PARTIES $7,963,030 76% $2,138,998 21% $354,656 3%
INTERCOMPANY REVENUE 0 0 103,548
------------ ------------ ----------
TOTAL REVENUE $7,963,030 76% $2,138,998 20% $103,548 4%
------------ ------------ ----------
------------ ------------ ----------
NET LOSS ($800,840) 60% ($5,584) -% ($458,204) 40%
------------ ------------ ----------
------------ ------------ ----------
IDENTIFIABLE ASSETS $3,359,700 $466,737 $474,244
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
NOTE 15 - INCOME TAXES
There was no income tax expense or benefit recorded for the years ended December
31, 1995 or 1994.
The Company has a net operating loss ("NOL") carryforward for income tax
purposes which is available to offset future taxable income. This NOL totals
$4,485,215 and expires in the years 2006 through 2010. A valuation
36
<PAGE>
allowance of $4,485,215 has been reserved by the Company for the entire NOL.
The utilization of these carryforwards is subject to yearly limitations as a
result of ownership changes.
NOTE 16 - SUBSEQUENT EVENTS
Effective January 31, 1996, all of the outstanding stock of the Company's
Canadian subsidiary (the "Subsidiary") was sold to a private company for net
proceeds of $731,000. These net proceeds include a non refundable licensing fee
related to certain computer software in connection therewith. Pro forma results
of operations, as if the sale had occurred on January 1, 1994 are as follows:
1995 1994
---- ----
Revenues $7,850,810 $ 8,317,708
Net Loss ($3,965,527) ($1,475,293)
Net Loss Per Share ($1.40) ($0.95)
Proforma revenues were adjusted to reflect revenues from software development
services from the Company to the Subsidiary, which had been eliminated in the
consolidation process, but would have been payable to the Company had the
Company been unaffiliated.
The Company has also decided to cease operations of its wholly-owned Israeli
subsidiary, PC Etcetera Israel Ltd., effective March 31, 1996.
The net assets and liabilities of both of the Company's wholly-owned
subsidiaries which are either being sold or closed are included in the
consolidated balance sheets as net assets held for sale and are as follows;
<TABLE>
<CAPTION>
Canada Israel Total
-------- -------- ---------
<S> <C> <C> <C>
Currents Assets $479,471 $203,531 $ 683,002
Property & Equipment (Net) 142,778 176,080 318,858
Other Assets 5,037 0 5,037
-------- -------- ---------
Total assets held for sale $627,286 $379,611 $1,006,897
-------- -------- ---------
Current Liabilities $242,909 $529,057 $ 771,966
Other Liabilities -0- 35,761 35,761
-------- -------- ---------
Total Liabilities in connection
with assets held for sale $242,909 $564,818 $ 807,727
-------- -------- ---------
-------- -------- ---------
</TABLE>
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.
March 29, 1996 By: /s/ Terry I. Steinberg
----------------------
Terry I. Steinberg,
President
______________________
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/Martin Kahn
- --------------
Martin Kahn Chairman and Director March 29, 1996
/s/ Terry I. Steinberg
- ----------------------
Terry I. Steinberg President, Treasurer and
Director (Principal Executive
and Financial Officer) March 29, 1996
/s/ Joseph Sabrin
- -----------------
Joseph Sabrin Executive Vice President,
Secretary and Director March 29, 1996
/s/ Adrienne Haber
- ------------------
Adrienne Haber Controller (Principal
Accounting Officer) March 29, 1996
/s/ Avshalom Aderet
- -------------------
Avshalom Aderet President of PC Etcetera Israel March 29,1996
Ltd. and Director
_______________
Jacob Ben-Zvi Director
_______________
Abraham Peri Director
38
<PAGE>
CERTIFICATE OF INCORPORATION
OF
PC ETCETERA, INC.
The undersigned, being over the age of 21, in order to form a corporation
pursuant to the provisions of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
ARTICLE I
The name of the corporation (hereinafter referred to as the "Corporation")
is P C ETCETERA, INC.
ARTICLE II
The registered off ice of the Corporation is located in the County of Kent
at 410 South State Street, Dover, Delaware 19901. The name of the
Corporations's registered agent at said address is United Corporate Services,
Inc.
ARTICLE III
The nature of the business of the Corporation, and the objects and purposes
proposed to be transacted, promoted and carried on by it are as follows:
To engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
ARTICLE IV
(a) The aggregate number of shares of stock which the corporation
shall have the authority to issue is 20,000,000, of which 15,000,000 are shares
of Common Stock, with a par value of
<PAGE>
$.01 per share, and 5,000,000 are shares of Preferred Stock, with a par value of
$.001 per share.
(b) The Board of Directors hereby is vested with the authority to provide
for the issuance of the Preferred Stock, at any time and from time to time, in
one or more series, each of such series to have such voting powers,
designations, preferences and relative participating, optional, conversion and
other rights, and such qualifications, limitations or restrictions thereon as
expressly provided in the resolution or resolutions duly adopted by the Board of
Directors providing for the issuance of such shares or series thereof. The
authority which hereby is vested in the Board of Directors shall include, but
not be limited to, the authority to provide for the following matters relating
to each series of the Preferred Stock:
(i) The designation of any series.
(ii) The number of shares initially constituting any such
series.
(iii) The increase, and the decrease, to a number not less than
the number of the outstanding shares of any such series, of the number of shares
constituting such series theretofore fixed.
(iv) The rate or rates and the times at which dividends on the
shares of Preferred Stock or any series thereof shall be paid, and whether or
not such dividends shall be cumula-
2
<PAGE>
tive, and, if such dividends shall be cumulative, the date or dates from and
after which they shall accumulate.
(v) Whether or not the shares of Preferred Stock or series
thereof shall be redeemable, and, if such shares shall be redeemable, the terms
and conditions of such redemption, including but not limited to the date or
dates upon or after which such shares shall be redeemable and the amount per
share which shall be payable upon such redemption, which amount may vary under
different conditions and at different redemption dates.
(vi) The amount payable on the shares of Preferred Stock or
series thereof in the event of the voluntary or involuntary liquidation,
dissolution or winding up of the corporation; provided, however, that the
holders of shares ranking senior to other shares shall be entitled to be paid,
or to have set apart for payment, not less than the liquidation value of such
shares before the holders of shares of the Common Stock or the holders of any
other series of Preferred Stock ranking junior to such shares.
(vii) Whether or not the shares of Preferred Stock or series
thereof shall have voting rights, in addition to the voting rights provided by
law, and, if such shares shall have such voting rights, the terms and conditions
thereof, including but not limited to the right of the holders of such shares to
vote as a separate class either alone or with the holders of shares of one
3
<PAGE>
or more other class or series of Preferred Stock and the right to have more
than one vote per share.
(viii) Whether or not a sinking fund shall be provided for the
redemption of the shares of Preferred Stock or series thereof, and, if such a
sinking fund shall be provided, the terms and conditions thereof.
(ix) Whether or not a purchase fund shall be provided for the
shares of Preferred Stock or series thereof, and, if such a purchase fund shall
be provided, the terms and conditions thereof.
(x) Whether or not the shares of Preferred Stock or series
thereof shall have conversion privileges, and, if such shares shall have
conversion privileges, the terms and conditions of conversion, including but not
limited to any provision for the adjustment of the conversion rate or the
conversion price.
(xi) Any other relative rights, preferences, qualifications,
limitations and restrictions.
(c) Each five (5) shares of the Common Stock, par value $.01 per share, of
the Corporation issued and outstanding or held in treasury as of 5:00 p.m. New
York time on the date on which this Certificate of Amendment is filed by the
Secretary of State of the State of Delaware (the "Effective Time") shall be
reclassified as and changed into one (1) share of Common Stock, par value $.01
per
4
<PAGE>
share, of the Corporation, without any action by the holders thereof. Each
stockholder who, immediately prior to the Effective Time, owns a number of
shares of Common Stock which is not evenly divisible by five (5) shall, with
respect to such fractional interest, be entitled to receive from the
Corporation, in lieu of fractions of shares of Common Stock , (i) one (1) share
of Common Stock, par value $.01 per share, of the Corporation if the stockholder
would otherwise be entitled to receive at lease one-half (1/2) of a share of
Common Stock or (ii) no additional shares of Common Stock if the stockholder
would otherwise be entitled to receive less than one-half (1/2) of a share of
Common Stock;
ARTICLE V
The name and mailing address of the incorporator of the Corporation is:
NAME MAILING ADDRESS
Ira Roxland Certilman Haft Balin Buckley
Kremer & Hyman
805 Third Avenue
New York, New York 10022
ARTICLE VI
Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware
5
<PAGE>
may, on the application in a summary way of the Corporation or of any creditor
or stockholder thereof or on the application of any receiver appointed for the
Corporation under the provisions of Section 291 of Title 8 of the Delaware Code
or on the application of trustees in dissolution or of any receiver or receivers
appointed for the Corporation under the provisions of Section 279 of Title 8 of
the Delaware Code order a meeting of the creditors or class of creditors and/or
of the stockholders or class of stockholders of the Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of the Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
ARTICLE VII
The original By-Laws shall be adopted by the Incorporator of the
Corporation. Thereafter, the Board of Directors or the stockholders may adopt,
amend or repeal the By-Laws in such manner
6
<PAGE>
as may be by law or therein provided, but any By-Laws made by the Board of
Directors is subject to amendment or repeal by the stockholders of the
Corporation.
ARTICLE VIII
No director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the directors duty or loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
ARTICLE IX
(a) Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer, of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis
7
<PAGE>
of such proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than said law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except as provided in paragraph (b)
hereof, the Corporation shall indemnify any such person seeking indemnification
in connection with a proceeding (or part thereof) initiated by such person only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Section shall
be a contract right and shall include the right to be paid by the Corporation
the expenses incurred in defending any such proceeding in advance of its final
8
<PAGE>
disposition; provided, however, that, if the Delaware General Corporation Law
requires, the payment of such expenses incurred by a director or officer in his
or her capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director or officer,
to repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this Section or
otherwise. The Corporation may, by action of its Board of Directors, provide
indemnification to employees and agents of the Corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
(b) If a claim under paragraph (a) of this Section is not paid in full by
the Corporation within thirty days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its
9
<PAGE>
final disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation Law for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard or conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
(c) The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Section shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, provision of the Certificate of
Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
10
<PAGE>
(d) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the Delaware Corporation Law.
11
<PAGE>
Exhibit 21
SUBSIDIARIES
PC Etcetera Israel, Ltd.
39
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-KSB into the Company's
previously filed Registration Statements Nos. 33-30345 and 33-60574.
ARTHUR ANDERSEN LLP
New York, New York
March 29, 1996
40
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 151,462
<SECURITIES> 0
<RECEIVABLES> 730,883
<ALLOWANCES> 32,435
<INVENTORY> 32,467
<CURRENT-ASSETS> 1,953,901
<PP&E> 1,263,935
<DEPRECIATION> 724,166
<TOTAL-ASSETS> 2,566,667
<CURRENT-LIABILITIES> 3,188,735
<BONDS> 0
0
1,000
<COMMON> 31,275
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,566,667
<SALES> 11,148,929
<TOTAL-REVENUES> 11,148,929
<CGS> 7,231,364
<TOTAL-COSTS> 14,846,987
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147,917
<INCOME-PRETAX> 3,845,975
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,845,975)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,845,975)
<EPS-PRIMARY> (1.36)
<EPS-DILUTED> (1.36)
</TABLE>
