PC ETCETERA INC, 10KSB, 1997-04-15

PC ETCETERA INC
10KSB, 1997-04-15
EDUCATIONAL SERVICES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549

FORM 10-KSB

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996

Commission File Number: 0-17419

PC ETCETERA, INC.
(Name of small business issuer in its charter)

Delaware 13-3260705
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

462 Seventh Avenue 10018
New York, New York (Zip Code)
(Address of principal executive offices)

Issuer's telephone number: (212) 736-5870

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g)of the Exchange Act:
Common Stock, $.001 par value

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. [ ]

Issuer's revenues for its most recent fiscal year: $7,042,089

The aggregate market value of the voting stock held by non-affiliates computed,
as of April 11, 1997 was: $168,419(using the average of the bid and asked price)

Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 11,267,308 shares outstanding as of April 11,
1997

Transitional Small Business Disclosure Format Yes ___ No X

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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
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, Windows NT, OS/2 and Apple Macintosh ("Macintosh")
System 7.0, word processing, spreadsheets, databases, communications, executive
overviews, integrated software packages, computer graphics, desktop publishing,
and groupware products including Lotus Notes. The Company's CBT software line
includes offerings on Lotus Notes, CC Mail, Microsoft Office and Lotus
Smartsuite, as well as end user titles.

The Company's ILT programs include advanced technical courses to
professionals in addition to end user proficiency courses. The Company offers an
extensive curriculum of Microsoft courses under its Microsoft Advanced Technical
& Education Center authorization, and Lotus Notes courses under the Company's
Lotus Premium Partner and Lotus Authorized Education Center Status. 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's
clients are mostly information technology ("IT") professionals and corporations.

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 who sit in front of
personal computers, CBT products for the home and employee user utilize a
different training methodology. The Company supplies CBT programs on either
floppy disks, compact disks or over a communication line directly to desk-top
personal computers, local area networks, wide area networks, and the Internet,
eliminating 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 made available in software
upgrades, as well as in delivering training in geographically remote locations.
In addition to its CBT titles, which are based on popular end user applications,
the Company develops custom projects for large

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corporations. These custom CBT titles assist corporations in training and
integration of internal applications.

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 provides its clients with its full time employees, as well as
independent contractors, to satisfy its clients' requirements.

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).

Recent Developments

Pursuant to a Stock Purchase Agreement dated February 6, 1997 and effective
February 13, 1997 (the "Stock Purchase Agreement") between the Company and
Mashov Computers Marketing Ltd. ("Mashov"), the Company acquired Sivan Computers
Training Center (1994) Ltd. ("Sivan"), and Mashov Computer Based Training
(C.B.T.) Ltd. ("Mashov CBT"). Both Sivan and Mashov CBT are incorporated under
the laws of the State of Israel. Sivan and Mashov CBT are engaged in
instructor-led personal computer training and the development and sale of
technology-based training products and services. Sivan is Israel's largest
provider of computer training courses, operating over 60 classrooms in 11
different locations. Sivan is the leading ILT delivery company in Israel and
offers over 150 different courses in six teaching departments providing a
comprehensive IT training syllabus. Sivan trained approximately 40,000 students
in 1996. Sivan is certified by numerous software publishers, including Novell,
Microsoft, Borland, SCO, Lotus, MSE and others, and its diplomas are recognized
both by leading Israeli technology companies and the Israeli government's
Ministry of Labour. Sivan offers one year professional acquisition programs,
training participants to become programmers, PC technicians, communication
technicians and system analysts. Sivan implements an original teaching method
which is based on a session model (as opposed to the full day model), and
provides substantial practice, lab and project work for its students. Sivan
believes that this model offers a much better training level and leads to
increased knowledge retention.

Mashov CBT is engaged in developing technology based training products and
content. Mashov CBT currently offers a number of CBT titles in Hebrew directed
at the Microsoft Office training market. The titles are sold by over 200 stores
throughout Israel and to OEM customers in Israel. In addition to its own titles,
Mashov CBT develops custom projects. Mashov CBT has developed custom projects
for leading Israeli banks, insurance firms and other Israeli companies. In
addition to content development, Mashov CBT develops delivery technology for
delivering training via the Internet and other public networks. Its Intertrainer
1.0 product supports delivery of training content on the Internet supporting
full simulation, interactivity, sound and graphics.

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The financial statements of Sivan and Mashov CBT are not included in this
report. They will be included in a Form 8-K to be filed on or about April 24,
1997.

(b) Business of the Company.

Introduction

The pace at which new technologies are introduced and implemented, coupled
with the increasing need for corporations to continuously update their
technological base, is re-defining the training and education paradigm. The old
model of education in which one acquired a profession and skills in the
classical education system simply does not take into account the realities of
the workplace. IT professionals who do not refresh their technical skills may
find themselves obsolete and thus IT professionals must refresh their knowledge
and master new technologies continuously throughout their careers. The Company
offers courses that allow professionals to stay on top of new technologies,
products and platforms while still maintaining their current careers. In
addition to professional education, the Company offers proficiency training in
computers for end users.

The Company provides a wide range of training products, among them ILT and
CBT based programs. Moreover the Company also offers professional consulting
services to corporations. Recruiting external expertise allows a corporation to
quickly acquire and implement new skills and technologies. The Company's
professionals provide two basic functions: implementation of new skills and
knowledge propagation. 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

The Company has developed a variety of computer training programs for the
U.S. market utilizing different methods. One method utilizes traditional ILT
classes, varying in length from several hours to several days. Another training
method utilizes the computer and interactive video instruction tapes to teach
the student. Certain employers request a combination of these training methods.
The Company currently provides both live instructor-led traditional classes and
computer-based training software products, since it believes that these are the
best methods for teaching personal computer skills. However, as the market for
interactive 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 Microsoft Windows, Windows NT
workstation and server, word processing, spreadsheets, databases,
communications, executive overviews, integrated software

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packages, computer graphics, desktop publishing and groupware products including
Lotus Notes. Such programs generally are devised for use in connection with
computing based on networks.

The Company has developed a standardized curriculum designed to promote
uniformity and consistency in 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 such that all of the customer's
employees participating in the training receive similar information and
instruction on particular software packages. In addition, the standard
curriculum, for both ILT and CBT, may be customized to meet the exact
specifications of individual clients. In addition to an original curriculum the
Company uses programs developed by software developers such as Microsoft, Lotus
and others. Each of the Company's live classroom training programs is divided
into modules consisting of introductory lectures, 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 ILT programs to satisfy customer needs,
including public and 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 variety of public
seminars that are designed to accommodate varied levels of expertise, background
and objectives. Although most classes are one day in duration, some of the
Company's programs are offered on a half-day or multiple day basis. The Company
distributes its public seminar schedule to existing and potential customers on a
quarterly basis.

Private seminars are classes which are designed specifically for groups of
employees from one business on a specific topic. Private seminars generally are
held either at the Company's training facilities or at the customer's premises.
The curriculum for such private seminars is generally identical to the
standardized curriculum provided at public seminars; however, the curricula 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 provided either at 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.

In furtherance of the Company's belief that hands-on application is
essential to computer training, a personal computer is furnished to each student
for his or her exclusive use during ILT

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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 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 enrollees or former enrollees in the Company's training
programs. In providing ILT services, the Company utilizes professional trainers
who possess both teaching skills and a technical command of the subject matter.
The Company presently has over 250 trainers available.

Courseware and CBT Product Development

There has been a general consolidation in the software market such 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 to purchase high quality,
customizable courseware from third party vendors. Some trainers occasionally
develop special courseware for clients and work at customizing an off the shelf
curriculum. The Company's CBT products are currently developed by one full-time
designer in North America and 14 designers in Israel. The Company's training
staff provides the product and educational design expertise, while the designer
supplies the authoring tool expertise. During the fiscal year ended December 31,
1996 and 1995 the Company spent $58,214 and $891,686, respectively, on research
and development activities relating to CBT programs. Due to the Company's
financial situation, all research and development related to CBT programs was
discontinued during 1996. The Company's Israeli subsidiary ("PC Israel")
suspended operations in March 1996 until a restructuring plan for PC Israel is
under consideration.

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 is authorized as a training center by many software
manufacturers, including Lotus and Microsoft. Presently, approximately 24% and
52% 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 was recently authorized by Lotus Development
Corporation as a Lotus Authorized Education Center for its "Notes" product and
was recently upgraded to Platinum Business Partner. The Company expects that
training with regard to Notes specifically, and work group computing in general,
will be an increasing percentage of its revenues. Other software and hardware
manufacturers for which the

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Company has been authorized as a training center include Aldus, Alpha Software,
Apple, Borland, and Corel.

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 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 of
instruction programs prior to the public distribution of these 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 $5,000 per facility and is obligated to furnish manufacturers
with periodic reports on the number of trainees and similar statistical
information.

Program Cost

In the U.S., the Company typically charges its customers from $75 per
enrollee (for introductory classes) to $2,125 per enrollee (for advanced five
day certified training courses) to conduct ILT programs. Pricing considerations
vary depending on: the length and complexity of the program, the number of
enrollees, whether the course is a private one or offered on an open enrollment
basis; and the physical location of the training. The Company's refund policy
provides that dissatisfied trainees may either attend the same program without
charge or the trainee's employer may request a full refund.

The Company's STAR CBT products are currently marketed in the U.S. 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.

Proprietary Protection

The protection of proprietary information developed by the Company and used
in its training programs is limited to the protection that the Company is able
to secure under copyright laws and confidentiality agreements. However, there is
no assurance that the scope of the 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 on copyrights. In addition, there is no assurance that competitors
will not develop similar training programs independently of the Company.

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Consulting Services

CSD identifies and provides independent computer personnel, on a temporary
basis, to the Company's client base for special projects. Such projects include:
the development of computer programs in accordance with the client's
specifications and requirements, the linking of client computers to allow the
client's employees to share information, files and devices, providing expertise
for the client's software programs, and providing troubleshooting services for
software problems. The Company charges its clients for such services on an
hourly or daily basis. The Company currently furnishes its 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 that devote substantial resources to
computer technology for employees. In particular, the Company's marketing
activities are aimed at national and international corporations, since these
companies have a greater awareness of the advantages of uniform and consistent
training programs and have a need for consulting services. In addition, these
companies have established centralized decision-making authority regarding
employee computer training programs, facilitating ongoing training relationships
and scheduling of training programs. The Company recently retained an
advertising agency in order to enhance is marketing efforts.

The Company's marketing efforts consist 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 computer trade shows throughout the U.S.
The Company, in conjunction with software vendors, has established informational
seminars on new software products to inform potential customers about the
Company's training programs and consulting services.

In addition, the Company's account managers act as liaisons with customers
to ensure that customers select appropriate training programs. These account
managers are knowledgeable as to the customer's specific industry needs relative
to computer training programs. Since the Company markets its training programs
in the United States to businesses and public sector organizations for the
benefit of their employees, and costs of training, in most instances, are borne
by such employers rather than the individual trainees, the Company believes that
it is not a school and consequently is not subject to educational licensing
requirements under applicable state laws and regulations. No assurances may 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.

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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, regarding 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, 1996.

Competition

The Company competes with a number of firms that provide computer training
services, consulting services and CBT products, similar to those furnished by
the Company. Many of these firms have substantially greater marketing resources
than the Company. The Company also competes with educational institutions that
provide computer training programs, including universities, colleges and adult
education centers, as well as customers' in-house training staffs. The Company
believes that it is an effective competitor for all of its product lines based
upon the skill of its training personnel, its training center management
services, and the relationships between the Company's account managers and its
customers.

Employees

As of March 1, 1997, the Company employed approximately 73 persons,
including 70 full-time employees, in its New York operations. As of March 1,
1997, Sivan employed approximately 146 persons, and Mashov CBT employed 16
persons.

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.

The Company also leases a training facility at the Manhattan Seaport in New
York City. The lease provides for a base rent of $38,400 and expires on April
15, 1997. The Company intends to shut down the facility upon the expiration of
the lease.

As a result of the Stock Purchase Agreement, the Company also leases in
Israel, through its subsidiaries Sivan and Mashov CBT, approximately 51,000
square feet of space in various locations at an annual base rent of
approximately $900,000.

Item 3. Legal Proceedings.

The Company is not party to any material litigation.

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Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market For Common Equity and Related Stockholder Matters.

(a) Market Information.

The Company's shares of common stock (the "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 below reflect inter-dealer prices
without retail markup, markdown or commission and may not necessarily represent
actual transactions.

High Low
---- ---
1996 Calendar Year
First Quarter $ 9/16 $ 9/16
Second Quarter 1/2 1/2
Third Quarter 1/2 1/4
Fourth Quarter 1/4 1/4

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

(b) Holders.

As of April 11, 1997, there were 53 holders of record of Common Stock,
$.001 par value.

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 film earnings, if any, in order to finance

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expansion of its operations. Accordingly, it is not anticipated that cash
dividends will be paid in the foreseeable future.

Item 6. Management's Discussion and Analysis.

This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 which are subject to risks and
uncertainties. Actual results could differ materially from the forward-looking
statements in this report. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Description of
Business," as well as those discussed elsewhere in this report. The following
discussion and analysis should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere in this report. 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 in April
1995.

Year Ended December 31, 1996 Compared with Year Ended December 31, 1995

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 minimal
refunds have been issued. Retakes of a course are provided on a seat
availability basis and as such the Company incurs no financial exposure related
to these retakes.

Revenues for the year ended December 31, 1996 declined to $7,042,089 from
$11,148,929 in 1995. The decline in sales was primarily attributable to the sale
or termination of operation of several of the Company's subsidiaries as part of
the Company's effort to improve operating results.

Effective January 1, 1996 the Company sold the assets of its wholly-owned
Canadian subsidiary ("PC Canada"), which accounted for $3,335,461 of revenues in
the year ended December 31, 1995. In addition, Management temporarily ceased
operations of PC Israel, which accounted for $656,898 of revenues in 1995.
Effective April 1, 1996, the Company sold its San Francisco, California and
Boise, Idaho operations, which accounted for approximately $714,121 of revenues
in 1995. Total revenues for the Company's New York City operations increased by
10% in 1996 as compared to 1995.

In 1994 and 1995 the Company began to broaden and augment its personal
computer support activities, introducing new service and product lines designed
to enhance its established ILT business. In 1996, Management changed the focus
of its CSD operations to place more emphasis on contract consulting. Consulting
revenues grew from $2,230,238 in 1995 to $3,939,720 in 1996, an increase of 77%.
The Company intends to expand this part of its operating activity in 1997.

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During the year ended December 31, 1996, the Company continued to
experience declining end-user ILT revenues. However, the rate of the decrease
has declined. In the New York region, end-user ILT revenues decreased by
approximately 26% in 1996 compared to 1995. Management attributes the declining
end-user ILT revenue to the fact that software vendors did not release many new
versions of existing software in 1996 and those that were released required less
training because of knowledge in prior versions. In addition, Windows NT, a more
advanced network operating system, has caused organizations to re-evaluate
desktop application strategies and back office applications together and thus
has further delayed application or conversion projects. Increased competition
and lower pricing was also a factor in the decreased end-user ILT revenues. The
Company's ILT revenues are expected to increase in 1997 as a result of the
acquisition of Sivan. In 1996, Sivan had revenues of approximately $9,150,000.

The Company is aggressively pursuing a move into the higher end training
market, as many organizations require certification training for Microsoft and
Lotus back office applications and operating systems which historically have had
higher margins. Management believes that this technical training environment has
a better synergy with the Company's growing consulting business. In 1995 the
Company was awarded Lotus Authorized Education Center status and also received
Microsoft Authorized Technical Education Center status in 1996. During 1996, the
Company's Business Partner status with Lotus was upgraded to Premium Business
Partner. The Company recognized technical training revenue of $397,638 in 1996
compared to $204,453 in 1995, an increase of 94%. During 1996, technical
training accounted for approximately 16% of all ILT revenues.

In 1996, the Company developed and offered CBT programs to augment and
supplement its live training classes. However, the CBT programs resulted in
operating losses and the Company temporarily suspended its efforts to develop
new CBT products while it attempted to obtain additional financing. Although the
Company's U.S. based CBT operations were suspended, the Company continues to
sell existing CBT products through its ILT and CSD sales force. CBT revenues for
the year ended December 31, 1996, were approximately $324,803 as compared to
$606,000 in 1995 for corporate sales. In September 1995, the Company began to
ship its CBT products through retail channels in addition to selling to
corporate clients. All products sold to retailers are returnable if not resold
to end-users. Since the Company has no historical basis of estimating such
returns, it recognizes revenues only when such retail sales occur. The Company
does not have any obligations to the end-user once the product is sold. The
Company only recognized revenues of approximately $16,500 during the year ended
December 31, 1996 from such retail sales. Retail sales were lower than expected
and the Company was forced to limit its efforts due to its limited marketing
resources. Management expects that the Company's CBT business will grow in 1997
as a result of its acquisition of Mashov CBT. In 1996, Mashov CBT had revenues
of approximately $242,000 for the nine months since its inception. No assurance
can be given that the Company will be successful in this market in the future.

The Company's cost of revenues in 1996 were 70% of revenues compared to 65%
of revenues in 1995. Cost of revenues for contract consulting were 67% of
revenues in 1996

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compared to 70% in 1995. Cost of revenues for ILT were 68% of revenues in 1996.
With ILT revenues decreasing, cost of revenues increased, because fixed costs
such as classroom rental and equipment depreciation remain constant. Cost of
revenues for CBT were actually greater than revenue because of the poor sales of
the retail product. The Company expects that its cost of revenues as a
percentage of revenue will fluctuate in the future depending on the amount of
its revenues and the mix of CSD, CBT and ILT revenues.

Selling, general and administrative expenses in 1996 declined to
$3,307,242, a significant decrease from $5,521,837 in 1995. Approximately
$1,620,483 of the decline was attributable to the sale of PC Canada and the San
Francisco operations as well as the suspension of the operations of PC Israel.
Management has devoted substantial efforts to implement an aggressive cost
containment plan. This led to the Company reducing selling, general and
administrative expenses for its remaining United States operations by 28% in
1996 compared to 1995. Corporate overhead decreased by 31% in 1996. At year end
1996, the Company further reduced expenses by approximately $150,000 a month by
eliminating three Vice President positions, reducing the number of CBT design
staff, reducing administrative payroll obligations and subletting office space.
Selling, general and administrative expenses are expected to increase in 1997 as
a result of the acquisition of Sivan and Mashov CBT.

Research and development expenses were $58,214 in 1996, compared to
$891,686 in 1995. This decrease was due to a determination by the Company to
scale back significantly its CBT research and development operations until such
time as proper funding can be obtained. The Company expects to increase its
research and development expenses in 1997 as a result of its acquisition of
Mashov CBT and Management's decision to devote additional resources to this
area.

As a result of the foregoing the Company incurred a net loss of $1,213,135
for the year ended December 31, 1996 compared to a net loss of $3,845,975 for
the year ended December 31, 1995. With increased CSD revenues as well as the
implementation of the restructuring and cost containment plans, the Company was
profitable on an operating basis during most of the last two quarters of 1996.
The improved operating results were attributable primarily to Management's
aggressive cost containment plan, increased consulting revenues and the
suspension of the Company's CBT research and development expenses, offset by a
$248,443 gain on the sale of PC Canada and the San Francisco and Boise
operations, including licensing fees.

Recent Developments

Effective February 13, 1997, the Company entered into a Stock Purchase
Agreement with Mashov, whose shares are publicly traded on the Tel-Aviv Stock
Exchange. Mashov is a subsidiary of Mashov Computers Ltd., whose shares also are
publicly traded on the Tel-Aviv Stock Exchange and which controls Magic Software
Enterprises Ltd., a publicly traded company in the U.S. Based on the Stock
Purchase Agreement, Mashov acquired 8,438,924 shares of Common Stock and 658,412
shares of Series C Preferred Stock of the Company, where each share of Series C
Preferred Stock is convertible into 10 shares of Common Stock and has 10 to 1
voting rights in relation to

-13-

<PAGE>

shares of Common Stock. As a result of the transactions provided for in the
Stock Purchase Agreement, Mashov owns 69% of the Company's equity and voting
securities on a fully diluted basis.

In connection with the execution of the Stock Purchase Agreement, the
Company executed a Conversion and Waiver Agreement dated February 6, 1997 and
effective February 13, 1997 (the "Conversion and Waiver Agreement"). The
Conversion and Waiver Agreement provides that the parties who had made loans to
the Company in December 1995 and October 1996 (the "Conversion Parties") receive
Common Stock for the cancellation of the loan debt owed by the Company and the
dilution of options and warrants owned by the Conversion Parties. Specifically:
(i) the 1,000,000 shares of Series A Preferred Stock held by Elron Electronic
Industries Ltd. ("Elron") were converted into 200,000 shares of Common Stock
(see note 4 to the Financial Statements, Item 7); (ii) the loans the Company
received from certain stockholders aggregating $437,500 as of December 31, 1996
were converted into 1,750,000 shares of Common Stock (see note 3 to the
Financial Statements, Item 7); and (iii) the holders of Company warrants (see
note 4 to the Financial Statements, Item 7) agreed to convert a total of
1,432,519 warrants (consisting of 922,508 warrants outstanding as of December
31, 1996 (see note 4 to the Financial Statements, Item 7) which were
subsequently adjusted pursuant to the Conversion and Waiver Agreement under
anti-dilution provisions) into 344,464 shares of Common Stock. After giving
effect to the Conversion and Waiver Agreement, and aggregating their prior
holdings, the Conversion Parties own 4,812,509 shares of Common Stock as of
March 31, 1997.

Liquidity and Capital Resources

The Company's working capital deficiency increased to $1,946,663 as of
December 31, 1996 compared to $1,234,834 as of December 31, 1995. The increase
was due primarily to the operating losses experienced during 1996, offset in
part by the sale of PC Canada and the sale of the San Francisco regional office.

As a result of the execution of the Stock Purchase Agreement with Mashov,
the Company's working capital position has improved. The Stock Purchase
Agreement provided that Sivan and Mashov CBT have net tangible assets of
$2,200,000, where such assets included a cash contribution by Mashov of
$1,500,000 to the Company. It is the intention of Mashov to provide continued
financial support of the company, if necessary, to meet the Company's
obligations for the next twelve months.

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, 1997. The
balance outstanding under the agreement, which is limited to 75% of eligible
receivables, is reported as a current liability under "Loans Payable - Others."
The Company is allowing the receivables agreement to expire and is retiring any
balance outstanding.

-14-

<PAGE>

The Company used $821,291 in operating activities during the year ended
December 31, 1996, primarily due to its net loss of $1,213,135 during such
period. Such loss was offset by increased accounts payable of $760,156 during
such period as well as depreciation and amortization expenses of $236,091.
During 1996, the Company's investing activities provided cash in the amount of
$732,213 as a result of the sale of PC Canada and the San Francisco operations.

During the fourth quarter of 1995, in connection with the decision to
temporarily suspend operations of PC Israel, the Company determined that there
would be no continuing value to PC Israel. As a result, the Company wrote off
the entire remaining net book value of $1,202,100 of the Subsidiary in December
1995. Effective December 5, 1995, the Company borrowed $500,000 from certain
stockholders of the Company for working capital purposes. The notes evidencing
the loans provided for interest at the rate of 10% per annum and the payment of
the principal amount one year from the date of issuance. Effective October 6,
1996 the Company borrowed an additional $187,500 from certain stockholders of
the Company for working capital purposes. The notes evidencing the loans
provided for interest at a rate of 10% per annum. In addition, the parties
agreed to extend the terms of the December 5, 1995 loan. Pursuant to the
Conversion and Waiver Agreement, the loans obtained in December 1995 and October
1996 were converted into Common Stock of the Company effective February 13,
1997.

Effective January 1, 1996, all of the outstanding stock of PC Canada was
sold to a private Company for net proceeds of $704,000, 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. Effective April 1, 1996, the Company
sold the operating assets of its San Francisco, California training office and
Boise, Idaho business location for an aggregate cash purchase price of $42,000.
In addition, the purchaser agreed to assume certain obligations and liabilities
of the Company.

Effective October 15, 1996, the Company entered into a composition
agreement with certain vendors. The agreement provided for specific payment
terms based on the total debt to the vendor. Class A creditors (total
indebtedness in excess of $3,000 each) would be paid in full through a four year
payment plan. The composition agreement pertained to all past due balances
through July 15, 1996. The Company also agreed to keep current on future
invoices.

The Company expects to open one new state of the art training facility this
year in the U.S. The expected cost of opening this new office is estimated to be
approximately $250,000.

-15-

<PAGE>

Item 7. Financial Statements.

Index to Financial Statements

Independent Auditors' Reports........................................F-1

Financial Statements:

Consolidated Balance Sheet .....................................F-3

Consolidated Statements of Operations...........................F-4

Consolidated Statements of Stockholders' Equity (Deficit).......F-5

Consolidated Statements of Cash Flows...........................F-6

Notes to Consolidated Financial Statements......................F-7

-16-

<PAGE>
REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
PC Etcetera, Inc.:

We have audited the accompanying consolidated balance sheet of PC Etcetera, Inc.
as of December 31, 1996, and the related consolidated statements of operations,
stockholders' equity (deficit) 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PC
Etcetera, Inc. as of December 31, 1996, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.

/s/ERNST & YOUNG LLP

New York, New York
March 28, 1997

F-1

<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
PC Etcetera, Inc.:

We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of PC Etcetera, Inc. and
subsidiaries for the year ended December 31, 1995. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the result of operations and cash flows of PC Etcetera,
Inc. and subsidiaries for the year ended December 31, 1995 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 1 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 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

/s/ARTHUR ANDERSEN LLP

New York, New York
March 8, 1996

F-2

<PAGE>

PC ETCETERA, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996

ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 50,445
Accounts Receivable,
net of allowance for doubtful accounts of $20,189 947,327
Prepaid Expenses and Other Current Assets 31,985
------
Total Current Assets 1,029,757
---------

PROPERTY AND EQUIPMENT,
Net of accumulated depreciation and amortization of $446,038 319,730
OTHER ASSETS 37,667
- ------------ ------
TOTAL ASSETS $ 1,387,154
===========

LIABILITIES AND STOCKHOLDERS' DEFICIT:
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 1,685,391
Loans Payable - Current Portion 663,589
Loans Payable - Related Party 470,833
Capital Equipment Obligations - Current Portion 36,299
Deferred Revenue 120,308
---------
Total Current Liabilities 2,976,420
---------

LONG TERM LIABILITIES:
Capital Equipment Obligations 6,834
Accounts Payable - Long Term 324,980
Deferred Revenue 66,656
---------
TOTAL LIABILITIES 3,374,890
---------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT:
Preferred Stock,
$.001 Par Value, 5,000,000
Shares Authorized, 1,000,000 Series A
Issued and Outstanding 1,000
Common Stock,
$.01 Par Value, 15,000,000
Shares Authorized,
3,169,129 Issued and Outstanding 31,691
Additional Paid-In Capital 5,279,367
Accumulated Deficit (7,299,794)
-----------
Total Stockholders' Deficit (1,987,736)
-----------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,387,154
===========

See Accompanying Notes

F-3

<PAGE>

PC ETCETERA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net Sales $7,042,089 $11,148,929
Cost of Sales 4,964,144 7,231,364
---------- -----------
Gross Profit 2,077,945 3,917,565

Selling, General and Administrative Expenses 3,307,242 5,521,837
Research and Development 58,214 891,686
Write Down of Software Investment 0 1,202,100
---------- ----------
Operating Loss (1,287,511) (3,698,058)

Gain on Sales of Subsidiaries 181,771 0
Other Income 66,672 0

Interest Expense, net of interest income of
$3,476 and $34,944 (174,067) (147,917)
---------- ----------
Net Loss ($1,213,135) ($3,845,975)
========== ==========
Net Loss Per Share ($0.39) ($1.36)
===== =====
Weighted Average Number of Shares 3,137,879 2,827,462
========= =========

</TABLE>

See Accompanying Notes

F-4

<PAGE>

<TABLE>
<CAPTION>
ADDITIONAL STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK PAID IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------ ------ ------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,000,000 $1,000 9,637,308 $96,374 $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 1,000,000 1,000 3,127,462 31,275 5,284,283 (6,086,659) (770,101)
Issuance of common stock 41,667 416 (416) 0
Expenses related to 1995 share
registrations (4,500) (4,500)
Net loss (1,213,135) (1,213,135)
--------- ------ --------- ------- ---------- ----------- ----------
Balance December 31, 1996 1,000,000 $1,000 3,169,129 $31,691 $5,279,367 ($7,299,794) ($1,987,736)
========= ====== ========= ======= ========== ============ ============
</TABLE>

See Accompanying Notes

F-5

<PAGE>
PC ETCETERA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($1,213,135) ($3,845,975)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH (USED IN) OPERATING ACTIVITIES:
Write Down of Software Investment 0 1,202,100
Depreciation and Amortization 236,091 814,591
Provision for (recovery of) Doubtful Accounts (12,246) 32,435
Gain on Sale of Property and Equipment 0 (6,690)
Gain on Sale of Subsidiaries (181,771) 0
Amortization of Deferred Revenue (66,672) 0

Changes in Operating Assets and Liabilities: (204,198) 93,584
Prepaid Expenses and Other Current Assets (10,030) (58,329)
Inventories 32,467 (32,467)
Assets held for Sale 379,611 0
Accounts Payable and Accrued Expenses 760,156 402,946
Deferred Revenue 23,254 (49,588)
Liabilities held for Sale (564,818) 0
--------- ----------
NET CASH (USED IN) OPERATING ACTIVITIES (821,293) (1,447,393)
-------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Other Assets 35,330 32,116
Purchase of Property and Equipment (49,306) (160,640)
Proceeds from Sale of Property and Equipment 0 72,672
Proceeds from Sale of License 200,000 0
Proceeds from Sale of Subsidiaries, net 546,191 0
------- --------

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 732,215 (55,852)
------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Repayment of Loans Payable - Related Party (252,374) (53,774)
Proceeds from Loans Payable - Related Party 187,500 500,000
Net Proceeds (Repayment) - Short Term Borrowings 209,587 (118,693)
Repayment of Capital Equipment Obligations (152,152) (183,541)
Net Proceeds(Expenses)from Issuance of Common and Preferred Stock (4,500) 1,464,495
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (11,939) 1,608,487
-------- ---------

NET(DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS (101,017) 105,242
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 151,462 77,777
LESS CASH AND CASH EQUIVALENTS INCLUDED IN NET ASSETS HELD FOR SALE 0 (31,557)
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $50,445 $151,462
======= ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $142,101 $173,758
Income taxes $10,733 $4,217

</TABLE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
---------------------------------------------------------------------------
Capital lease obligations of $150,026 were incurred when the Company entered
into lease arrangements for new equipment during the year ended December 31,
1995.
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.
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.

See Accompanying Notes

F-6

<PAGE>

PC ETCETERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996

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 years ended December 31, 1996 and 1995, revenues from
instructor led training comprised 39% and 61% of total revenues, respectively,
while consulting services and computer-based training ("CBT") revenues accounted
for 56% and 27% and 5% and 12% of total revenues, respectively.

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries until the time they were either sold or
closed. All material intercompany balances and transactions have been eliminated
in consolidation.

As of December 31, 1996, the Company had two facilities operating in New
York City.

As reflected in the Consolidated Financial Statements, the Company has
experienced continuing net losses, negative cash flows from operations, a
negative working capital and a stockholders' deficiency. The Company is
currently working under a plan which has reduced overhead and expenses and
improved profitability Additionally, the Company sold its Canadian subsidiary
and California and Idaho training facilities and suspended operations at its
Israeli subsidiary. Further, as described in Note 13, in February 1997, Mashov
Computers Marketing Ltd. (MCM) acquired 69% of the common stock of the Company.
It is the intent of MCM to provide continued financial support to the Company,
if necessary, to meet its obligations for the next twelve months.

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

F-7

<PAGE>

statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and accounts receivable.
The Company maintains its cash balances on deposit with one financial
institution. Concentrations of credit risk with respect to accounts receivable
are limited because the Company's customers are from a wide range of industries
and no one customer accounts for more than ten percent of total revenue or
accounts receivable as of December 31, 1996.

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.

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 minimal
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.

F-8

<PAGE>

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, 1996, the Company suspended operations in Israel and
sold its Canadian subsidiary. 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 were maintained in Canadian dollars and translated into U.S.
dollars in accordance with the principles set forth in Statement of Financial
Accounting Standards No 52. Exchange gains and losses were not material for the
years ended December 31, 1996 and 1995.

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.

Earnings per Share

Earnings per share calculations are based on the weighted average number of
shares of common stock outstanding and dilutive common stock equivalents
outstanding. All earnings per share amounts have been adjusted to give effect to
the reverse stock split.

F-9

<PAGE>

Long-Lived Assets

It is the Company's policy to estimate future gross revenues from, and
costs related to long-lived assets and to write off any amount in excess of the
net realizable value. No such write off was necessary at December 31, 1996.

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.

NOTE 2 - PROPERTY AND EQUIPMENT

Major classifications of property and equipment and their respective lives
are summarized below:

December 31, 1996 Depreciable lives
----------------- -----------------
Furniture and Fixtures $191,188 5-8 years
Computer Equipment 373,898 3 years
Leasehold Improvements 200,682 Shorter of term of
------- lease or useful life
765,768
-------
Accumulated Depreciation
and Amortization (446,038)
-------

Net Property and Equipment $319,730
========

Depreciation and amortization expense for the years ended December 31, 1996 and
1995 were $236,091 and $458,284, respectively. During the year ended December
31, 1996, $437,415 of property and equipment was fully depreciated and written
off.

At December 31, 1996, property and equipment includes computer equipment under
capital leases with a cost of $200,713 and accumulated amortization of $130,079.

NOTE 3 - 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 subsidiaries). The
arrangement expires on April 30, 1997. The

F-10

<PAGE>

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, 1996, the loan balance was $441,428.

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
at December 31, 1996 was $38,161 (all current).

In 1994, the Company's wholly-owned Israeli subsidiary obtained a working
capital loan from a bank in Israel which was guaranteed by the Company. The loan
balance at December 31, 1996 is $184,000 (all current) and carries an interest
rate of 10% per annum.

Accounts Payable - Long Term

In October 1996, the Company entered into an agreement with certain
vendors. The agreement provided for specific payment terms based on the total
debt to the vendor. Class A creditors (total indebtedness in excess of $3,000
each) will be paid in full through a four-year payment plan.

Loans from Related Parties

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, 1996, the loan balance was $33,333.

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 due on October 25, 1997
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 issued 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. The
loan agreement also provided that additional warrants be issued to the lenders
equal to 11.25% of the outstanding principal amount on June 5, 1996, divided by
$1.50. At June 5, 1996, the principal balance was $250,000 and as such, 18,750
additional warrants

F-11

<PAGE>

were issued. The total warrants issued of 93,750 are subject to certain
anti-dilution provisions which increased the number of warrants outstanding at
December 31, 1996 to 97,656. At December 31,1996, the loan balance was $250,000.

In 1996, the Company obtained an additional loan from certain related
parties in the amount of $187,500 with a 10% interest rate. Simultaneously with
the receipt of the loan, each lender extended the maturity of the loans made by
them pursuant to the above described 1995 loan agreement, to October 25, 1997.
In consideration for making the loans, the Company agreed to issue to the
lenders warrants for the purchase of an aggregate of 150,000 shares of Common
Stock of the Company at a price of $0.25 per share. The warrants are subject to
certain anti-dilution provisions.

Fair Value

The following methods and assumptions were used by the Company in
estimating its fair value disclosure for loans payable:

Short Term Financing: The carrying amount of the Company's borrowings
under its short term financing agreement approximates fair value.

Bank Debt: The carrying amount of the Company's borrowings under its
bank loans approximates fair value.

Accounts Payable - Long Term: The carrying amount of the Company's
long term accounts payable approximate fair value.

Loans from Related Parties: The carrying amount of the Company's loans
from related parties approximate fair value.

NOTE 4 - STOCKHOLDERS' EQUITY

Effective April 19, 1995, the Company effectuated a one-for-five reverse
split of the shares of Common Stock.

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, suspended
operations on March 31, 1996. In connection with the acquisition, the Company
issued, or subsequently issued upon exercise of warrants, which were also issued
in connection with the transaction with Elron, 1,000,000 shares of Series A
preferred stock. After the above transactions there were 40,000 warrants
outstanding.

F-12

<PAGE>

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 (500,000 post split) at an exercise price of
$.55 per share ($2.75 post split) 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 became exercisable. These warrants were issued at an
exercise price above market value. In addition, pursuant to the Series B
preferred stock agreement the Company had 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 had not been declared effective by December 31, 1995, the
Company issued 200,000 additional shares of common stock and 101,103 additional
warrants at an exercise price of $2.75 per share, in accordance with the Series
B preferred stock agreement. The above mentioned common stock and warrants were
issued with anti-dilution provisions if either common stock or warrants are
subsequently issued by the Company below specific amounts. Based on certain 1995
and 1996 transactions described in Note 3, 41,667 shares of common stock and
33,749 warrants to purchase additional shares of common stock were issued.

OPTIONS

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.

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No, 123, "Accounting for Stock-Based Compensation" requires use of
options valuation models that were not developed for use in valuing employee
stock options. The exercise price of the Company's employee stock options was
equal to or above the market price of the underlying stock on the date of grant
and, therefore, no compensation expense was recognized.

Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996: risk free interest rate of 6.6%, volatility
factor of the expected market price of the Company's common stock of .72, and
the weighted-average expected life of the options of 5 years. Dividends are not
expected in the future. Since the fair value for the options was determined to
be de minimus, proforma information is not disclosed.

F-13

<PAGE>

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics of
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

All of the options were granted at or above fair market value as of the
date of grant and no compensation expense was recorded.

Stock option activity is summarized as follows:

WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
------ --------------

Outstanding December 31, 1994 435,800 $3.31

Options Granted 30,000 $3.90
Options Canceled (24,600) $3.79
-------
Outstanding December 31, 1995(288,100 exercisable
at option prices $.94 to $6.25) 441,200 $3.17

Options Granted 20,000 $5.00
Options Canceled (307,200) $2.03
---------
Outstanding December 31, 1996 (154,000 exercisable
at option prices $.94 to $6.25) 154,000 $3.56
========

F-14

<PAGE>

Options outstanding and exercisable at December 31, 1996 are as follows:

WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL
SHARES EXERCISE PRICE LIFE
------ -------------- ----
16,900 $.94 .2
30,000 $1.05 .2
5,100 $2.50 1
10,000 $2.75 1
66,000 $5.00 3
26,000 $6.25 5.75
-------
154,000
=======

At December 31, 1996, 600,000 options are available for grant.

WARRANTS

The following is a summary of warrants outstanding and exercisable at
December 31, 1996

NUMBER OF
EXPIRATION DATE WARRANTS EXERCISE PRICE DESCRIPTION
- --------------- -------- -------------- -----------
August 12, 1999 40,000 $5.00 (1)
March 15, 1999 634,852 $2.60 (2)
December 31, 1998 36,000 $2.50 (3)
December 5, 2000 97,656 $1.44 (4)
October 25, 2001 150,000 $0.25 (5)
-------
Total 958,508
=======

(1) Warrants issued in connection with the Elron acquisition
(2) Warrants issued with the Series B preferred stock agreement, as adjusted
for anti dilution provisions
(3) Warrants granted to a consultant
(4) Warrants issued in connection with the 1995 loan from related parties
(Note 3), as adjusted for anti dilution provisions
(5) Warrants issued in connection with the 1996 loan from related parties
(Note 3)

Subsequent to the balance sheet date 922,508 of the above noted warrants
were converted into shares of common stock (See Note 13)

F-15

<PAGE>

At December 31, 1996, the Company has 958,508 shares of common stock
reserved for issuance to the warrant holders.

NOTE 5 - 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, 1996 are as
follows:

Capital Operating
------- ---------
1997 $44,566 $316,426
1998 8,215 298,794
1999 0 330,794
2000 0 330,794
2001 0 330,794
Thereafter 0 641,799
--------- ---------
$52,781 $2,249,401
==========
Less: Amounts representing interest (9,648)
------
$43,133
=======

Rental expense for the years ended December 31, 1996 and 1995 was $456,083 and
$1,010,138, respectively.

NOTE 6- 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 deferred revenue ($53,636 at December 31, 1996) which is recognized
as revenues as classes are attended.

In connection with the sale of the Canadian Subsidiary (see Note 12), the
Company sold a non refundable license fee for certain computer software for
$200,000. This license fee has been deferred and is being recognized over three
years which is equal to the term of the license. At December 31, 1996, the
deferred revenue amounted to $133,328 of which $66,672 has been included in
current liabilities in the accompanying consolidated balance sheet.

F-16

<PAGE>

NOTE 7 - SOFTWARE

The Company's capitalized software consisted of the authoring tool used to
develop the Company's CBT products. The total amount of software costs amortized
for the year ended December 31, 1995 was $343,457. 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 suspend operations of PC Israel, the Company determined there would
be no continuing value to the asset. As a result, it wrote off the entire
remaining net book value of $1,202,100 in December, 1995.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

The Company, and its former 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.

F-17

<PAGE>

NOTE 9 - FOREIGN OPERATIONS

<TABLE>
<CAPTION>
RESULTS OF FOREIGN OPERATIONS
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------------------------
% % %
US OF CANADA OF ISRAEL OF
TOTAL TOTAL TOTAL
---------------- ----------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE FROM UNRELATED
THIRD PARTIES $6,982,928 99% $0 0% $59,161 1%
INTERCOMPANY REVENUE 0 0 0
--------- -- ------
TOTAL REVENUE $6,982,928 99% $0 0% $59,161 1%
========== === =======
NET LOSS ($889,289) 80% $0 0% ($223,846) 20%
========== === ========
IDENTIFIABLE ASSETS $1,387,154 $0 $0
========== === ===
</TABLE>
<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------------------------
% % %
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 INCOME (LOSS) ($3,166,529) 82% ($23,106) 1% ($656,340) 17%
=========== ========== ========
IDENTIFIABLE ASSETS $1,542,623 $644,771 $379,611
========== ========= ========
</TABLE>

NOTE 10 - RETIREMENT PLAN

The Company sponsors a defined contribution plan under Section 401(k) of
the Internal Revenue Code for its employees. Participants can make elective
contributions subject to certain limitations. The Company can make a
discretionary matching contribution on behalf of all participants. The Company
made a contribution of $15,824 and $11,064 in 1996 and 1995, respectively.

NOTE 11 - INCOME TAXES

There was no income tax expense or benefit recorded for the years ended
December 31, 1996 or 1995.

F-18

<PAGE>

The Company has a net operating loss ("NOL") carryforward for income tax
purposes which is available to offset future taxable income. This NOL totals
$5,485,000 and expires in the years 2006 through 2011. The Company has a capital
loss carryforward for income tax purposes, which totals $1,202,000 and expires
in 2000.

Components of the Company's deferred tax asset and liability at December
31, 1996 is as follows:

Net operating loss carryforwards $2,194,000
Capital loss carryforward 481,000
Deferred revenue (53,000)
---------
2,622,000
Valuation allowance (2,622,000)
----------
Net deferred tax asset --

The change in valuation allowance amounted to $828,000 and $1,559,000
respectively, for the years ended December 31, 1996 and 1995.

The change in stock ownership discussed in Note 13 will result in a
limitation on the annual utilization of net operating loss carryforwards.

NOTE 12 - GAIN ON SALE OF SUBSIDIARY

Effective January 1, 1996, all of the outstanding stock of the Company's
Canadian subsidiary was sold to a private company for net proceeds of $504,000.

Effective April 1, 1996 the Company sold the San Francisco California and
Boise Idaho training operations for net proceeds of $42,000.

NOTE 13 - SUBSEQUENT EVENTS

Effective February 6, 1997, Mashov Computers Marketing Ltd., ("MCM")
acquired a 69% interest in the Company. In consideration of the foregoing, MCM
transferred to the Company all of its interest in Sivan Computers Training
Center ("Sivan") and Mashov Computer Based Training ("Mashov CBT"). MCM received
8,438,924 shares of common stock and 658,412 shares of preferred stock par value
$.001, each share of preferred being convertible into ten shares of common stock
having a ten to one voting right in relation to shares of common stock. This
transaction will be accounted for as a reverse acquisition.

Concurrently with the above purchase transaction, the Company entered into
a conversion and waiver agreement whereby the following took place:

F-19

<PAGE>

The 1,000,000 shares of Series A Preferred Shares held by Elron Electronic
Industries was converted into 200,000 shares of common stock. (See Note 4).

The loans the Company received from certain stockholders aggregating
$437,500 as of December 31, 1996 were converted into 1,750,000 shares of common
stock. (See Note 3).

The holder of warrants (See Note 4) agreed to convert a total of 1,432,519
warrants (consisting of 922,508 warrants outstanding at December 31, 1996 (See
Note 4) which were subsequently adjusted in 1997 under anti dilution provisions)
into 344,464 shares of common stock.

F-20

<PAGE>

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

On February 24, 1997, the Company dismissed the accounting firm of Arthur
Andersen LLP, who was previously engaged as the principal accountant to audit
the Company's financial statements. The principal accountant's report on the
financial statements for either of the Company's two most recent fiscal years
did not contain an adverse opinion or a disclaimer of opinion, or was qualified
or modified as to audit scope, or accounting principles. The principal
accountant's report on the financial statements for the Company's fiscal year
ended December 31, 1995 contained a qualification as to uncertainty regarding
the Company's ability to continue as a going concern.

The decision to change accountants was recommended and approved by the
Board of Directors of the Company. During the Company's two most recent fiscal
years and the interim period through February 24, 1997 there were no
disagreements with the former accountant 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 the former
accountant, would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its report. No "reportable events" as defined
in Item 304 (a)(1)(v) of Regulation S-K occurred during the Company's two most
recent fiscal years or the interim period through February 24, 1997.

On February 25, 1997, the Company engaged Ernst & Young LLP to audit the
Company's financial statements. Kost, Levary & Forer, C.P.A.s, independent
accountants in Israel, a member firm of Ernst & Young LLP, are the auditors of
Sivan, Mashov CBT and PC Israel.

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.

The executive officers and Directors of the Company are as follows:

Director
Name Age Position with the Company Since
- ---- --- ------------------------- -----
Roy Machnes 37 Chairman, President, Chief
Executive Officer and Director 1997
Elan Penn 45 Chief Financial Officer and
Director 1997
Terry I. Steinberg 42 Executive Vice President and
Director 1985
David Assia 45 Director 1997
Jack Dunietz 42 Director 1997
Martin F. Kahn 46 Director 1995

-17-

<PAGE>

In connection with the execution of the Stock Purchase Agreement effective
February 13, 1997, Mr. Avi Peri, Mr. Joe Sabrin, and Mr. Avshalom Aderet
resigned from the Company's Board of Directors. Mr. Terry Steinberg and Mr.
Martin Kahn remained on the Board and were joined by Mr. Roy Machnes, Mr. Elan
Penn, Mr. David Assia and Mr. Jack Dunietz. Mr. Machnes now serves as Chairman
of the Company.

Roy Machnes currently serves as the Company's Chairman and Chief Executive
Officer and a Director. In January 1994, Mr. Machnes became and remains Chairman
and Chief Executive Officer of Mashov. Mr. Machnes is also a Director of Mashov
Computers Ltd., Mashov and Magic Software Enterprises Ltd. From January 1988 and
until January 1994, Mr. Machnes served as Vice President Sales of Mashov
Computers Ltd. and has been a Director of Mashov Computers Ltd. since January
1988. Mr. Machnes holds a B.A. from the University of California at Berkeley.

Elan Penn serves as the Company's Chief Financial Officer and a Director.
Mr. Penn also serves as the Chief Financial Officer of Mashov Computers Ltd. and
Mashov. Mr. Penn joined Mashov Computers Ltd. and Magic Software Enterprises
Ltd. as their Vice President Finance and Administration in June 1992. In
February 1997, Mr. Penn resigned his position at Magic Software to assume the
position of Chief Financial Officer of the Company. From January 1991 until May
1992, Mr. Penn was employed by Solgood Representatives Ltd., an electronics
equipment sales representative firm, where he acted in an executive capacity.
Mr. Penn was Vice President Finance of Mashov Computers Ltd. from March 1987
until December 1990. Mr. Penn holds a B.A. in Economics from the Hebrew
University of Jerusalem and a Ph.D. in Management Science from the University of
London.

Terry I. Steinberg currently serves the Company as Executive Vice President
and a Director. Mr. Steinberg was President of the Company since its inception
and as Treasurer since August 1991 until February 1997. 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.

David Assia serves the Company as a Director. Mr. Assia is a co-founder of
Mashov Computers Ltd. of which he was a Managing Director between 1980 and 1986
and has been its Chairman since 1989. Mr. Assia has been Managing Director of
Magic Software Enterprises Ltd. since its inception in 1983 and has been Chief
Executive Officer and Chairman since 1986. Mr. Assia also serves as a director
of Mashov and Aladdin Knowledge Systems Ltd. Mr. Assia holds a B.A. and an
M.B.A. from the Tel-Aviv University.

-18-

<PAGE>

Jack Dunietz serves the Company as a Director. Mr. Dunietz is a co-founder
of Mashov Computers Ltd. of which he was Managing Director from 1978 until 1987
and has been the Chief Executive Officer since 1987. Mr. Dunietz also serves as
a Director of Mashov, Magic Software Enterprises Ltd., and Paradigm Geophysical
Ltd. & Data Automation Ltd. Mr. Dunietz holds a B.Sc. in Computer Science from
the Technion Israel Institute of Technology.

Martin F. Kahn serves the Company as a Director. Mr. Kahn was Chairman of
the Board of the Company from May 1995 until February 1997. Mr. Kahn has served
as Chairman of Ovid Technologies, Inc. since 1989 (formerly CDP Technologies,
Inc.), a leading producer of medical, scientific and technical CD-ROM and
network products; since 1993 as Chairman of OneSource 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.

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. 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. The Board of Directors intends to nominate
and elect a seventh Director as soon as possible. Reference is made to Item 12
hereof for a discussion of certain agreements with regard to the election of
Directors of the Company.

To the Company's knowledge, based solely on a review of the copies of
filings furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to the Company's officers,
Directors and 10% stockholders were complied with.

-19-

<PAGE>

Item 10. Executive Compensation

The following table sets forth information concerning the total
compensation during the last three fiscal years for the Company's executive
officers whose total salary in fiscal 1996 totaled $100,000 or more:

Summary Compensation Table

Long-Term
Compensation
Annual Securities
Compensation Underlying
Name and Principal Position Year Salary ($) Options (#)
- --------------------------- ---- ---------- -----------
Terry Steinberg 1996 --(2) --
President (1) 1995 --(2) --
1994 131,750 --
Joseph Sabin
Executive Vice President (3) 1996 --(2) --
1995 103,680 --
1994 110,400 --
- --------------
(1) Effective February 13, 1997, Mr. Steinberg was named Executive Vice
President pursuant to an employment contract dated February 6, 1997.
(2) Less than $100,000.
(3) In March 1997 and effective May 1997, Mr. Sabrin resigned from the Company.
Mr. Sabrin was granted severance of three months' salary.

The aggregate value of all other perquisites and other personal benefits
furnished in each of the last three years to each of these executive officers
was less than 10% of each officer's salary for such year. The Company has not
paid any cash remuneration to any of its outside Directors as Directors in the
last three years.

Pursuant to the Stock Purchase Agreement and effective February 13, 1997,
the Company entered into employment contracts with each of Terry Steinberg, Roy
Machnes and Elan Penn, providing for their employment as Executive Vice
President, Chief Executive Officer and Chief Financial Officer, respectively, of
the Company. Messrs. Machnes, Steinberg and Penn have been granted incentive
stock options in connection with their respective employment agreements of
325,000, 240,000 and 200,000 stock options, respectively, where such options
vest over a three-year period. The exercise price of the stock options is $0.584
per share.

The base salaries of Messrs. Machnes and Steinberg are $155,000. Mr.
Machnes' employment agreement provides that the Company will reimburse certain
of Mr. Machnes' relocation and living expenses. Specifically, the Company must
reimburse Mr. Machnes for the

-20-

<PAGE>

following expenses: (1) $20,000 for expenses incurred during the relocation of
Mr. Machnes, his family and their possessions; (2) all expenses associated with
the education of Mr. Machnes' children including private school tuition and
associated expenses; (3) rental payments for an apartment in Manhattan, New
York, including any associated real estate broker's fees, less the amount of any
rental payments received from the sublease of Mr. Machnes' home in Israel, net
of associated expenses; and (4) any expenses incurred by Mr. Machnes in
connection with the repatriation of his family to Israel once each year. All of
the expense reimbursements are to be grossed up to account for the payment of
any taxes due if such reimbursement constitutes taxable income to Mr. Machnes
and are to be adjusted upwards annually in a percentage amount equal to the
Consumer Price Index for all urban consumers in the New York, New Jersey and
Connecticut area as published by the Bureau of Labor Statistics. Should Mr.
Machnes' employment be terminated by any means, Mr. Machnes is to be reimbursed
for relocation expenses of no more than $20,000 in connection with Mr. Machnes's
relocation to Israel.

Mr. Penn's salary is paid at a rate of $10,000 per month, adjusted monthly
in a percentage amount equal to the increase in the Consumer Price Index as
published by the Israeli Bureau of Labor Statistics.

Stock Options

The following table provides information concerning stock options held in
1996 by each of the executive officers named above in the Summary Compensation
Table. There were no options granted to any officers in 1996.

AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
Number of Shares
Underlying Value of Unexercised
Shares Unexercised Options at in the Money Options
Acquired on Value FY-End (#) Exercis- at FY-End ($) Exercis-
Name Exercise (#) Realized ($) able/Unexercisable able/Unexercisable
- ---- ------------ ------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Terry Steinberg -- -- 20,000/-- --
President

Joseph Sabin -- -- 20,000/-- --
Executive Vice
President

</TABLE>

-21-

<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management.

(a) Security Ownership of Certain Beneficial Owners

The following table sets forth certain information as of April 11, 1997
regarding the ownership of the Company's equity securities for each person known
by the Company to be the beneficial owner of more than 5% of the outstanding
shares of a class of the Company's securities:

<TABLE>
<CAPTION>
Percent
Title of Name and Address Amount and Nature of of
Class of Beneficial Owner Beneficial Owner Class(1)
- ----- ------------------- ---------------- --------
<S> <C> <C> <C>
Series C Mashov Computers Marketing 658,412 shares(3)(4) 100%
Preferred Ltd.
Stock (2) 5 HaPlada Street
Or-Yehuda, Israel 60218

Series C Mashov Computers Ltd. 658,412 shares(3)(4) 100%
Preferred 5 HaPlada Street
Stock Or-Yehuda, Israel 60218

Common Mashov Computers Marketing 8,308,924 shares(3)(4) 55.3%
Stock Ltd.

Common Mashov Computers Ltd. 8,308,924 shares(3)(4) 55.3%
Stock

Common Elron Electronic Industries Ltd. 1,490,405(5) 9.9%
Stock Advanced Technology Center
P.O. Box 1573
Haifa, Israel 31015

Common Rho Management Trust I 1,166,671(6) 7.8%
Stock c/o Rho Management Co., Inc.,
767 Fifth Avenue
New York, New York

Common Star Group 871,304(7) 5.8%
Stock Management Ltd.
Herzelia Pitauch, Israel 46733

Common Dr. Meir Barel 871,304(7) 5.8%
Stock SVM STAR Ventures
Management Ltd.
Herzelia Pitauch, Israel 46733

</TABLE>

-22-

<PAGE>

<TABLE>
<CAPTION>
Percent
Title of Name and Address Amount and Nature of of
Class of Beneficial Owner Beneficial Owner Class(1)
- ----- ------------------- ---------------- --------
<S> <C> <C> <C>
Common Gilbert H. Steinberg 1,448,123(8) 9.6%
Stock Six Nevada Drive
Lake Success, New York

Common Terry I. Steinberg 1,448,123(8) 9.6%
Stock 462 Seventh Avenue
New York, New York

</TABLE>

(1) Percentages give effect to the Conversion and Waiver Agreement effective
February 13, 1997.

(2) All of the Company's Series A and B Preferred Stock were converted into
Common Stock pursuant to the Conversion and Waiver Agreement. Each share of
Series C Preferred Stock is convertible into 10 shares of Common Stock and
has 10 to 1 voting rights in relation to shares of Common Stock.

(3) Mashov Computers Marketing Ltd. is a wholly owned subsidiary of Mashov
Computers Ltd. Mashov Computers Ltd. is publicly traded on the Tel-Aviv
Stock Exchange with 17,697,453 million shares outstanding. David Assia and
Jack Dunietz own approximately 20% and 10%, respectively, of the shares of
Mashov Computers Ltd. The remaining shares are owned by the public.

(4) Based on the Stock Purchase Agreement, Mashov acquired 8,438,924 shares of
Common Stock and 658,412 shares of Series C Preferred Stock of the Company,
where each share of Series C Preferred Stock is convertible into 10 shares
of Common Stock and has 10 to 1 voting rights in relation to shares of
Common Stock. As a result of the transactions provided for in the Stock
Purchase Agreement, Mashov (and by virtue of its control of Mashov, Mashov
Computers Ltd.) owns 69% of the Company's equity and voting securities on a
fully diluted basis.

(5) Includes 130,000 shares of Common Stock of the Company transferred to Elron
by Mashov Computers Marketing Ltd. upon the execution of the Stock Purchase
Agreement.

(6) Rho Management Partners L.P. ("Rho") may be deemed the beneficial owner of
shares registered in the name of Rho Management Trust I (formerly known as
Gibraltar Trust), pursuant to an investment advisory agreement that confers
sole voting and investment control over such shares to Rho.

-23-

<PAGE>

(7) Pursuant to information available to the Company, the Star Group includes:
SVE STAR Ventures Enterprises No. II GbR (112,610 shares), SVE STAR
Ventures Enterprises No. III (297,422 shares), SVE STAR Ventures
Enterprises No. IIIA GbR (25,260 shares), Justy Ltd. (261,392 shares) and
Yozma Venture Capital Ltd. (174,260 shares). Dr. Meir 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 the members of the
Star Group.

(8) Includes shares beneficially owned by Terry I. Steinberg (305,458 shares
including 20,000 exercisable options), Joseph Sabrin (335,458 shares
including 20,000 exercisable options) and Gilbert H. Steinberg (807,207
shares) pursuant to a Voting Trust Agreement expiring in December 1997,
wherein the Messrs. Steinberg and Sabrin exercise joint voting control as
co-trustees. Each of the Messrs. Steinberg and Mr. Sabrin retain
dispositive control over their respective shares.

(b) Security Ownership of Management

The following table sets forth certain information as of April 11, 1997
regarding the ownership of the Company's equity securities for each executive
officer and Director, and for the Company's executive officers and Directors as
a group:

<TABLE>
<CAPTION>
Beneficial
Ownership of
Officer, Director or Amount and Nature of
Title of Class Group Beneficial Owner Percent of Class
- -------------- ----- ---------------- ----------------
<S> <C> <C> <C>
Series C Preferred Roy Machnes(1) 658,412(2) 100%
Stock
Common Stock Roy Machnes 8,308,924(2) 55.3%
Series C Preferred Elan Penn(1) 658,412(2) 100%
Stock
Common Stock Elan Penn 8,308,924(2) 55.3%
Series C Preferred David Assia(1) 658,412(2) 100%
Stock
Common Stock David Assia 8,308,924(2) 55.3%
Series C Preferred Jack Dunietz(1) 658,412(2) 100%
Stock
Common Stock Jack Dunietz(1) 8,308,924(2) 55.3%
Common Stock Terry Steinberg(1) 305,458(3) 2.0%

</TABLE>

-24-

<PAGE>

<TABLE>
<CAPTION>
Beneficial
Ownership of
Officer, Director or Amount and Nature of
Title of Class Group Beneficial Owner Percent of Class
- -------------- ----- ---------------- ----------------
<S> <C> <C> <C>
Common Stock Martin Kahn 40,000(4) 0.3%
Series C Preferred All Executive 658,412 100%
Stock Officers and
Directors as a group
(6 persons)

Common Stock All Executive 8,654,382(3)(4) 57.6%
Officers and
Directors as a group
(6 persons)

- -------------------
</TABLE>

(1) Address is c/o PC Etcetera, Inc., 462 Seventh Avenue, New York, New York
10018.
(2) Denotes voting control by virtue of holding positions as Director of Mashov
and Mashov Computers Ltd.
(3) Includes 20,000 shares issuable upon the exercise of currently exercisable
stock options.
(4) Includes 40,000 shares issuable upon the exercise of currently exercisable
stock options.

Item 12. Certain Relationships and Related Transactions.

Transactions Effected In Connection With the Execution of the Stock Purchase
Agreement

Prior to the execution of the Stock Purchase Agreement, Mashov owned
70% of the issued and outstanding ordinary shares of Mashov CBT. Pursuant to a
purchase agreement dated February 6, 1997, between Mashov and Elron, Mashov
purchased from Elron all of the ordinary shares of Mashov CBT held by Elron,
such shares then representing 30% of the issued and outstanding shares of Mashov
CBT. In consideration of the purchase and sale, Mashov transferred to Elron upon
the execution of the Stock Purchase Agreement 130,000 shares of Common Stock of
the Company.

Prior to the execution of the Stock Purchase Agreement, Sivan owned
312,547 shares of Mashov and 234,918 options to purchase shares of Mashov
(collectively, the "Mashov Option Shares"). Pursuant to an agreement dated
February 5, 1997, Sivan granted to Mashov Computers Ltd. the option to purchase
the Mashov Option Shares at the average market value of the Mashov Options
Shares during the five day period immediately following the consummation of the
transactions contemplated by the Stock Purchase Agreement, as quoted on the Tel
Aviv Stock Exchange. The Mashov Option Shares were purchased by Mashov Computers
Ltd. in consideration of approximately $175,000.

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<PAGE>

The Stock Purchase Agreement further provides that Mashov will convert its
Preferred Stock of the Company into the Company's Common Stock as soon as
possible following the closing of the transaction. In the event of a rights
offering by the Company, Mashov may call due and payable $600,000 of debt owing
to Mashov from Sivan for use in the purchase by Mashov of securities of the
Company offered pursuant to such rights offering.

In connection with the execution of the Stock Purchase Agreement, the
Company executed the Conversion and Waiver Agreement, which provides that the
Conversion Parties (Elron, Rho Management Trust I [formerly Gilbralter Trust],
the Star Group [as defined in Item 11(a)], Gilbert H. Steinberg, Special
Situations Fund III, L.P., and Special Situations Cayman Fund, L.P.) receive
Common Stock for the cancellation of debt owed by the Company and the dilution
of options and warrants owned by the Conversion Parties. Specifically: (i) the
1,000,000 shares of Series A Preferred Stock held by Elron were converted into
200,000 shares of Common Stock; (ii) the loans the Company received from certain
stockholders aggregating $437,500 as of December 31, 1996 were converted into
1,750,000 shares of Common; and (iii) the holders of Company warrants agreed to
convert a total of 1,432,519 warrants (consisting of 922,508 warrants
outstanding as of December 31, 1996 which were subsequently adjusted pursuant to
the Conversion and Waiver Agreement under anti-dilution provisions) into 344,464
shares of Common Stock. After giving effect to the Conversion and Waiver
Agreement, and aggregating their prior holdings, the Conversion Parties own
4,812,509 shares of Common Stock of the Company as of March 31, 1997.

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.

Item 13. Exhibits and Reports on Form 8-K.

Exhibit
Number Description of Exhibit
- ------ ----------------------
2.1 Asset Purchase Agreement dated as of August 12, 1994 among the Company, PC
Israel, Elron, Adar International, Inc. and Elron Technologies Inc. (1)

2.2 Stock Purchase Agreement dated as of January 31, 1996 by and between
Training Holdings L.L.C. and the Company.(2)

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<PAGE>

Exhibit
Number Description of Exhibit
- ------ ----------------------
2.3 Stock Purchase Agreement dated February 6, 1997 and effective February 13,
1997 by and between the Company and Mashov.(3)

3.1 Certificate of Designation with regard to Series C Preferred Stock.

3.2 Certificate of Amendment of Certificate of Incorporation with regard to
reverse split.(4)

3.3 Certificate of Incorporation, as amended. (5)

3.4 By-Laws.(6)

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.(6)

10.1 Lease for premises situated at 462 Seventh Avenue, 4th Floor New York, New
York.(4)

10.2 Lease for premises situated at 462 Seventh Avenue, 18th Floor, New York,
New York.(7)

10.3 Amended and Restated 1987 Stock Option Plan.(8)

10.4 Financing Agreement for receivables dated November 20, 1990 between the
Company and Rosenthal & Rosenthal, Inc.(5)

10.5 Stockholders' Agreement dated as of August 12, 1994 among the Company,
Elron, Adar International, Inc., Elron Technologies Inc., Terry I.
Steinberg, Joseph Sabrin and Gilbert H. Steinberg. (1)

10.6 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.(4)

16 Arthur Andersen LLP letter dated March 7, 1997 pursuant to Item 304(a)(3)
of Regulation S-K.(9)

21 Subsidiaries.(10)

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<PAGE>

(1) Filed as an exhibit to the Company's Current Report on Form 8-K for an
event dated August 12, 1994 and hereby incorporated by reference thereto.

(2) Filed as an exhibit to the Company's Current Report on Form 8-K for an
event dated January 31, 1996 and hereby incorporated by reference thereto.

(3) Filed as an exhibit to the Company's Current Report on Form 8-K for an
event dated February 13, 1997 and hereby incorporated by reference thereto.

(4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994 and hereby incorporated by reference
thereto.

(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989 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 and hereby
incorporated by reference thereto.

(6) Filed as an exhibit to the Company's Registration Statement on Form S-18
(File No. 33- 19521) and hereby incorporated by reference thereto.

(7) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1993 and hereby incorporated by reference
thereto.

(8) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1992 and hereby incorporated by reference
thereto.

(9) Reference is made to Item 1(a) of this Form 10-KSB, "Recent Developments."

(10) Filed as an exhibit to the Company's Current Report on Form 8-K/A Amendment
No. 2 for an event dated February 24, 1997 and hereby incorporated by
reference thereto.

(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, 1996. The following forms 8-K were filed since
December 31, 1996:

A Current Report on Form 8-K ("Form 8-K") was filed by the Company with the
Commission on February 27, 1997 with respect to the execution of the Stock
Purchase Agreement and the change of the Company's auditors.

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<PAGE>

An Amendment No. 1 to the Form 8-K was filed by the Company on March 4,
1997 with respect to the change of the Company's auditors.

An Amendment No. 2 to the Form 8-K was filed by the Company on March 13,
1997 with respect to the change of the Company's auditors.

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<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

PC ETCETERA, INC.

April 15, 1997 By: /s/Roy Machnes
--------------
Roy Machnes
President and
Chief Executive Officer

--------------------

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.

/s/ Roy Machnes Chairman, President, and April 15, 1997
- ---------------
Roy Machnes Chief Executive Officer

/s/ Terry Steinberg Executive Vice President, April 15, 199
- ------------------- and Director
Terry Steinberg

/s/ Elan Penn Chief Financial Officer April 15, 1997
- ------------- and Director
Elan Penn

/s/ Adrienne Haber Controller (Principal April 15, 1997
- ------------------ Accounting Officer)
Adrienne Haber

/s/ David Assia Director April 15, 1997
- ---------------
David Assia

/s/ Jack Dunietz Director April 15, 1997
- ----------------
Jack Dunietz

/s/ Martin Kahn Director April 15, 1997
- ---------------
Martin Kahn

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<PAGE>

EXHIBIT INDEX

Exhibit Page

2.1 Asset Purchase Agreement dated as of August 12, 1994 among the Company, PC
Israel, Elron, Adar International, Inc. and Elron Technologies Inc. (1)

2.2 Stock Purchase Agreement dated as of January 31, 1996 by and between
Training Holdings L.L.C. and the Company.(2)

2.3 Stock Purchase Agreement dated February 6, 1997 and effective February 13,
1997 by and between the Company and Mashov.(3)