<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10 - KSB/A
AMENDMENT NO. 1
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1995
-----------------------------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ------------------
Commission file number 0-17419
---------------------------------
PC Etcetera, Inc.
- -----------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 13-3260705
- -----------------------------------------------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
462 Seventh Avenue, New York, New York 10018
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (212) 736-5870
----------------------------------------
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
none
------------------- -----------
------------------- -----------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
- -----------------------------------------------------------------------------
(Title of class)
- -----------------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No .
----- -----
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
<PAGE>
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
$355,000 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.
2
<PAGE>
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 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.
As reflected in the consolidated financial statements and indicated above,
the Company has experienced continuing net losses and negative cash flows from
operations and has a working capital deficiency and stockholders deficit. The
Company's continuing existence is dependent upon its ability to achieve and
maintain profitable operations. Based on the foregoing, the report of the
Company's independent auditor indicates that the Company's financial statements
have been prepared assuming that the Company will continue as a going concern
and that, as discussed in the notes to the financial statements, certain factors
raise substantial doubts about the ability to so continue.
3
<PAGE>
The Company is currently working under a plan to reduce overhead and
return to profitability. As indicated above, the Company sold its Canadian
subsidiary in January 1996 and shut down the Israeli- based research and
development center in March 1996 in order to raise needed cash and reduce
expenses. In addition, the Company has implemented a substantial cost cutting
program. The Company has currently reduced expenses by approximately $135,000 a
month by eliminating three Vice President positions, reduced the number of CBT
design staff, reduced administrative payroll obligations and sublet office
space. The Company is also experiencing growth in its Consulting Service
Division and has begun to experience reduced losses in its ILT operations.
The Company is also presently exploring all other possible opportunities in
order to reduce the working capital deficiency, including expanding its
marketing efforts, negotiating with vendors and debt holders and seeking
additional financing. No assurances can be given that any such efforts will be
successful. Based upon the cost reduction plans outlined above, the Company
believes that it will be able to generate sufficient cash to support its
operations through the remainder of 1996. Such belief is, however, a forward-
looking statement and, due to the stiff competition faced by the Company from
entities which provide computer training and consulting services, and market CBT
products, as well as the uncertain operating environment currently surrounding
personal computers in general, no assurances can be given that the Company will
be successful in such regard.
4
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements required by this Item 7 are included
herein following Item 13 hereof.
5
<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
6
<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
7
<PAGE>
LUBOSHITZ, KASIERER & CO
INDEPENDENT AUDITORS' REPORT
(extended form to comply with U.S. Standards)
We have audited the balance sheet of PC ETCETERA ISRAEL LTD. (the "Company") as
of December 31, 1994, and the statements of income, changes in shareholders'
deficiency and cash flows for the period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the U.S. and in Israel, including those prescribed by the Auditors' (Mode of
Performance) Regulations (Israel), 1973. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1994, and the results of its operations, changes in shareholders' deficiency and
cash flows for the period then ended in conformity with accounting principles
generally accepted in Israel and in the United States (as applicable to the
financial statements of the Company, such accounting principles are practically
identical).
/s/ Luboshitz, Kasierer & Co
Certified Public Accountants (Israel)
Tel-Aviv, Israel
February 28, 1995
8
<PAGE>
PC ETCETERA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
ASSETS:
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
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $1,313,665
Loans Payable - Current Portion (Note 4) 430,889
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 3,336,768
-------------
COMMITMENTS AND CONTINGENCIES (NOTE 13)
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
-------------
-------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED STATEMENTS
9
<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
10
<PAGE>
PC ETCETERA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCK HOLDERS' 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
(7,709,846) (77,099) 77,099 -0-
split
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
11
<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
12
<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.
13
<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.
LONG-LIVED ASSETS
It is the Company's policy to project future gross revenues from, and costs
related to long-lived assets and to write off any amount in excess of the net
realizable value.
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' deficit. The
Company's continuing existence is dependent upon its ability to achieve and
maintain
14
<PAGE>
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.
The Company is currently working under a plan to reduce overhead, and
return to profitability. The Company sold its Canadian subsidiary in January
1996 and shut down the Israeli- based research and development center in March
1996, in order to raise needed cash and reduce expenses. In addition, the
Company has implemented a substantial cost cutting program. The Company has
currently reduced expenses by approximately $135,000 a month by eliminating
three Vice President positions, reduced the number of CBT design staff, reduced
administrative payroll obligations and sublet office space. The Company is also
experiencing growth in its Consulting Service Division and has begun to
experience reduced losses in its ILT operations.
NOTE 3 - PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective lives
are summarized below:
December 31, 1995 Depreciable lives:
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
--------
--------
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.
15
<PAGE>
Summary of Loans Payable:
Short Term Financing $354,570
Bank Debt 99,432
-------
454,002
Less Current Portion 430,889
-------
$ 23,113
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 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:
CAPITAL OPERATING
16
<PAGE>
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
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.
NOTE 8 - ACQUISITION
Effective July 1, 1994, PC Israel purchased substantially all of the assets
of the ACE Division of Elron and the Company certain 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:
Computer Equipment $ 60,000
Automobiles $ 15,000
Accounts Receivable $ 414,000
Software(Note 12) $1,717,286
Liabilities $ (151,781)
Accounts Payable (152,064)
----------
$1,902,480
----------
17
<PAGE>
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.
OUTSTANDING EXERCISABLE PRICE RANGE
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
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 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
18
<PAGE>
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 Company's capitalized software consists of the authoring tool used to
develop the Company's CBT products. 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 since the software is only used for the development of CBT
products. It is the Company's policy to project future gross revenues from, and
costs related to, the software 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 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.
19
<PAGE>
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% $3,335,461 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 $7,963,050 76% $2,138,998 21% $354,656 3%
INTERCOMPANY REVENUE 0 0 103,548
-------------- -------------- --------------
TOTAL REVENUE $7,963,050 76% $2,138,998 20% $458,204 4%
-------------- -------------- --------------
-------------- -------------- --------------
NET INCOME (LOSS) ($800,840) 60% $5,584 -% ($523,282) 40%
-------------- -------------- --------------
-------------- -------------- --------------
IDENTIFIABLE ASSETS $3,359,790 $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 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.
20
<PAGE>
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 $7,813,469 $ 8,317,708
Net Loss ($4,002,869) ($1,475,293)
Net Loss Per Share ($1.42) ($0.95)
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;
Canada Israel Total
------ ------ -----
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 $379,61 $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
-------- -------- ---------
-------- -------- ---------
21
<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.
June 14, 1996 By: /s/ Terry I. Steinberg
----------------------
Terry I. Steinberg,
President
22
