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, 1998
Commission File Number: 333-64623
MENTORTECH 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,
$.01 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: $19,951,000
The aggregate market value of the voting stock held by non-affiliates computed,
as of March 25,1999 was: 4,066,187(using the average of the bid and ask price)
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 3,578,208 shares outstanding as of March 25,
1999
Transitional Small Business Disclosure Format Yes ___ No X
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PART I
Item 1. Description of Business.
General
Mentortech Inc. (the "Company") develops and offers instructor-led training
("ILT") and technology-based training ("TBT") courses for information technology
professionals and end-users and also provides consulting services in both the
State of Israel and the New York tri-state area, primarily to large business and
public sector organizations. The Company's ILT programs include a wide range of
introductory and advanced classes in operating systems (including Windows 98,
Windows NT, UNIX and Netware), programming languages (including C, C++ and
COBOL), databases (including Oracle and MS SQL Server), communication software,
integrated software packages, computer graphics, desktop publishing, and
groupware products, (including Outlook clients, Exchange Server and Lotus
Notes). In Israel the Company offers an extensive curriculum, including courses
in information technology ("IT") vocational training which provide full change
of career opportunities for individuals seeking to become IT professionals. The
Company's TBT software line includes offerings on Lotus Notes, Microsoft Office,
and other end-user titles. The Company's Consulting Services Division ("CSD")
provides short to medium term technical consulting to large and mid-sized
corporations in the Northeast region of the U.S. No single client accounts for
more than 10% of the Company's revenues.
The Company has been authorized as a training center by a number of
software developers, including Microsoft (US and Israel), Novell (in Israel
only), Autocad (in Israel only), Corel, Apple, Lotus (in the United States only)
and Magic. The Company offers an extensive curriculum of Microsoft courses under
its Microsoft Certified Technical & Education Center Authorization, and Lotus
Notes courses under the Company's Lotus Premium Partner and Lotus Authorized
Education Center ("LAEC") Status. The authorization status allows the Company to
purchase training manuals from the software publishers and offer official vendor
courses.
The Company develops and offers TBT programs for use in conjunction with
some of its ILT classes. The Company supplies TBT programs on floppy disks and
compact disks for stand-alone PC's, as well as LANs, WANs, Intranets, and the
Internet via InterTrainer. The Company develops custom TBT projects for large
corporations. These custom TBT titles assist corporations in the training and
integration of internal applications and other non-IT related training topics.
The Company's CSD is responsible for identifying and providing computer
personnel, on a temporary basis, to the Company's client base for special
projects. The Company provides its clients with its own full-time employees, as
well as with independent contractors. Consultants' projects include (i)
development of computer
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programs in accordance with the client's specifications; (ii) installation of
network operating systems, and networking and communications software tools;
(iii) troubleshooting software problems; and (iv) end-user help desk support.
Demand for training in information technology products is generated by the
rapid pace of technology's product cycles. The pace of emerging technologies has
increased dramatically and this has fueled a demand for IT training and
consulting. The business community continues to adopt the technologies, thus
absorbing the continuing introduction of new products. Publishers of tools,
operating systems and applications produce new versions.
Background
Effective February 13, 1997, the Company's predecessor, PC Etcetera, Inc.
("PCE U.S.") underwent a change in control pursuant to a Stock Purchase
Agreement (the "Stock Purchase Agreement") between it and Mashov Computers
Marketing Ltd. ("Mashov"). Mashov acquired 68.5% of the common stock of PCE U.S.
on a fully diluted basis, in consideration for which PCE U.S. acquired Sivan
Computers Training Center (1994) Ltd. ("Sivan") and Mashov Computer Based
Training (C.B.T.) Ltd. ("Mashov CBT"), both of which corporations are
incorporated under the laws of the State of Israel. The stock purchase
transaction was accounted for as a reverse acquisition such that Sivan and
Mashov CBT were considered the surviving entity, although Mentortech remains the
Registrant for purposes of filing periodic reports with the Securities and
Exchange Commission. Accordingly, for ease of reference in this Report, when the
U.S. historical operations of Mentortech are discussed, the entity will be
referred to as PCE U.S. When the historical operations of Sivan and Mashov CBT
are discussed, the entity will be referred to as "Mentortech." When the current
consolidated operations of Mentortech Inc. and its subsidiaries are discussed,
the entity will be referred to as the "Company." On March 3, 1998, a
one-for-eight reverse split of the Company's Common Stock was effected. All
references to the Company's Common Stock in this report reflect the reverse
split.
In October 1997, the Company acquired the assets of GLTN Computer
Consultants, Inc.("GLTN"), a Long Island, New York, ILT training company in
consideration of $130,000 and the issuance of 15,909 shares of Common Stock.
United States ILT Operations
PCE U.S. was founded in 1985 to serve the growing demand for PC training
following the introduction and proliferation of the IBM PC. PCE U.S. grew
serving the training requirements generated by the propagation of the PC at the
corporate desktop.
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Israeli Operations
ILT
The Company's ILT activities in Israel are conducted by Sivan, a wholly
owned subsidiary of the Company, founded in 1977. At the initiation of its
activities, Sivan principally offered classes in systems analysis and
programming. The operations of Sivan were acquired by Mashov in 1994. Under the
leadership of the Company's current management team, Sivan's sales increased
from approximately $4 million in 1994 to $9.2 million in 1996, $11.2 million in
1997 and $13 million in 1998.
Sivan is a leading Israeli ILT training company, with over seventy
classrooms in twelve cities throughout Israel. Sivan trained approximately
42,000 students in 1997 and over 43,000 students in 1998. Sivan employs 148
full-time people and uses a combination of in-house and free-lance trainers to
fulfill the demand for its services.
One of Sivan's major strengths is its vocational training programs. These
programs accounted for over 40% of Sivan's revenues in 1998. These programs,
developed by Sivan experts, provide full vocational training to individuals who
want to become IT professionals.
Sivan offers its training through six academic departments:
o Professional training: Vocational courses in Programming in C and C++,
real-time Programming, PC technicians, Communication Technicians and
Application Specialists. These courses provide between 400 - 900
classroom hours.
o System Analysts: The course is approved by the System Analysts Guild
in Israel.
o Continuing Professional Update: Courses for IT professionals providing
incremental technology and products updates. Among these courses are:
JAVA for C++ programmers, ActiveX, new SQL database versions, Delphi
for programmers, PowerBuilder, VB, Access and Windows NT and Novell
Networking and Administration courses.
o Full curriculum of Novell, Microsoft as well as UNIX communication
protocols.
o Graphics: Courses offered in all popular graphics packages both for
the print and the multi-media industries. These courses are offered
both for the Macintosh and WINTEL (Intel Architecture based PCs
running Windows operating system) environments.
o End-Users: Courses offered in the popular end-user packages such as
Microsoft Office and web site development using html.
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The model that Sivan employs to deliver most of its ILT courses is based on
a four-hour session model, rather than one-day courses as is the prevalent model
in the U.S. Management believes that teaching a course in four-hour sessions
over a greater length of time with added content, exercises, and homework is a
more effective way of learning technology.
During 1998, Sivan launched new communications training programs in
cooperation with leading networking equipment companies, Internet design and
programming, ActiveX and Java professional training programs. These courses have
been extremely effective and generate continued demand from graduates who
require technical updates during their professional career. Leading Israeli
technology companies and the Israeli Government's Ministry of Labor recognize
Sivan's diplomas for employment classification. Sivan supplements its ILT
end-user training courses with TBT materials, thus reducing end-user training
costs and freeing up instructors to teach technical courses
In order to provide its students and recent graduates with work experience,
the Company has recently established a software development business. This
business activity is conducted by Mentortech Systems (1996) Ltd. ("Mentortech
Systems"), a wholly owned subsidiary of the Company which was previously known
as Mashov CBT.
On March 15, 1999, the Company sold its New York ILT activities to
Knowledge Alliance, Inc. for total consideration of $335,000, including earn-out
provisions of $115,000 if certain revenue targets are achieved in the twelve
months following the date of sale. As a result of the sale, the Company will no
longer provide ILT services in the United States.
TBT
The Company is engaged in the development of technology-based training
products in Israel. The Company's products include TBT titles for end-user
applications, custom projects, Hebrew and English titles for training in
Microsoft Office, Lotus Notes and cc:Mail. The Company provides full service
custom development of training concepts, supporting materials, delivery media
and tools. Custom projects are tailored to corporate needs, such as training for
bank tellers, insurance agents, product scheduling. Mentortech TBT is currently
engaged in the development of TBT products to work in conjunction with Sivan's
ILT offerings
Mentortech TBT products are targeted at corporations who utilize LANs,
WANs, Intranet and Internet. The TBT products are network-compatible and are
easily integrated into clients' systems.
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Consulting Services
CSD identifies and provides independent computer professionals, on a
temporary basis, to the Company's client base for special projects. For example,
the Company currently has six help-desk professionals on assignment at large
pharmaceutical company, three end-user analysts on assignment at a multinational
consumer products company and 8 people on a SMS implementation project for a
large, multinational food and healthcare corporation. 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, daily,
weekly, or monthly basis.
Projects undertaken by the CSD have included:
o The development of computer programs in accordance with the client's
specifications.
o The installation of network operating systems and networking and
communication software tools.
o Troubleshooting software problems and help-desk support.
o Staffing end-user help desks.
The CSD provides various services for its corporate customers including:
o Temporary consulting services provided by the Company's full time
employees.
o Temporary consulting services provided by the Company to its corporate
clients using independent subcontractors.
o Project development services in which the Company provides fixed-bid
software development projects. The Company executes these projects
using either its full time employees or independent subcontractors.
o Recruiting individuals identified by the Company for permanent IT
positions.
The Company is expanding its U.S.-based consulting practice by implementing
an incentive program for consultants and by developing a database of active IT
professionals, in addition to increasing recruiting initiatives, advertising,
and expanding the sales force. Management believes that this strategy will
enable the Company to retain a cadre of qualified, highly-trained IT
professionals for placement into short-term and long-term consulting assignments
or permanent positions.
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Training Programs
Methodology
The Company's training programs incorporate traditional ILT classes,
varying in length from several hours to several months. The Company's ILT
programs offer a wide range of courses in operating systems, including Microsoft
Windows, Windows NT, Novell NetWare, programming in basic languages such as C
and C++ and programming courses in new development tools such as Microsoft, VB,
J++ and other development tools, word processing, spreadsheets, databases,
communications, executive overviews, integrated software 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 currently offers over 160 different courses.
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 TBT products is divided into tasks and sub-tasks. This format
allows the product to be used as either a training tool, where the entire TBT 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.
The Company's training model is based on a training model developed by
Sivan in Israel. Sivan's model differs from the prevalent approach to technical
training of IT professionals in two key respects: (i) duration of courses and
(ii) emphasis on practical applications.
Training Services
The Company offers several ILT programs to satisfy customer needs,
including public and private courses and special tutorial services.
Public seminars are scheduled on a regular basis at the Company's own
training facilities. The Company offers a variety of public courses that are
designed to accommodate varied levels of expertise, background and objectives.
The Company distributes its public seminar schedule to existing and potential
customers on a quarterly basis and publishes its schedule in its Internet sites.
Private seminars are classes which are designed specifically for groups of
employees from one business on a specific topic. Private courses 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.
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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.
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 programs. Classes that are conducted on
a customer's premises utilize either the customer's own personal computers or
computers furnished by the Company. 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.
Software Manufacturers' Authorized Training Centers
The Company is authorized to act as a training center by many software
manufacturers, including Novell, Lotus and Microsoft. The Company is authorized
by Lotus Development Corporation ("Lotus") as a LAEC for its "Notes" product and
was recently upgraded to Premium Business Partner status. As a Premium Business
Partner, the Company is entitled to receive specific referrals for new students
from Lotus.
Courseware and TBT Product Development
The Company's TBT products are currently developed by Mentortech TBT's
group in Israel, which consists of 8 programmers, designers and education
specialists with extensive experience in training and education development. The
Company's training staff provides the product and educational design expertise,
while the designers supply the authoring tool expertise. The team develops
titles for the end-users market, which are sold under the Sivan brand name. The
Company also sells its titles to OEM clients in Israel who bundle the titles
with their computers. In addition, the Company develops general-purpose titles
and provides adaptations to the titles according to the requirements of a client
and develops custom projects for its corporate clients. In such projects the
Company's education designers develop a specific curriculum for the client. The
Company has developed many custom projects in various areas.
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Protection of Proprietary Technology
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.
Marketing
The Company directs its ILT, TBT and CSD marketing efforts to those
industries and public sector organizations that devote substantial resources to
computer technology for employees. The Company has client relations resulting
from its 18 years of operation in Israel and 12 years of operation in the United
States.
Direct mail is the primary media which is used to reach the small office
and home office market segment. The Company believes that word-of-mouth, as
generated by individual and corporate clients, has the largest potential for
gaining new customers.
The Company, in conjunction with software vendors, has established
informational seminars on new software products. These seminars inform potential
customers about the Company's training programs and staffing services. In
addition to these efforts, the Company's account m managers' act as liaisons
with customers to ensure that the customers select appropriate training
programs. These account managers are knowledgeable about the customer's specific
computer training needs, and can therefore recommend and promote newly offered
services.
The Company's marketing efforts include:
o Direct mail solicitation
o Telephone contact
o Radio and print advertisement
o Computer trade show exhibits throughout the U.S. and Israel
World Wide Web site.
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Program Costs
In the U.S., the Company typically charges its customers from $75 (for
introductory classes) to $5,000 per participant to conduct ILT programs. In
Israel, the Company typically charges from $200 to $5,000 per participant to
conduct ILT programs. Pricing considerations vary depending on the length and
complexity of the program, the number of participants, 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 repeat the same program without charge.
Pricing of Courseware and TBT Products
The Company's Mentortrain Technology Series products are currently marketed
in the U.S. under various site license agreements at prices of between $1,000
and $10,000 per title
Customers
No one customer accounted for more than ten percent of the Company's
revenues during the two years ended December 31, 1998.
Competition
The Company's primary competitors are providers of training and consulting
services, including education and training specialists, internal corporate IT
departments, software vendors and Big Four consulting practices. Some of these
competitors offer course titles and programs covering similar topics as those of
the Company. Many competitors have significant financial, technical, sales,
marketing and other resources, as well as widespread name recognition. In
addition, some of the larger instructor-led training organizations have the
capacity to develop technology-based training products that they could then
distribute through their existing distribution channels to their current client
base. Management believes that the Company is not a major competitor in the ILT
or CSD markets in the New York metropolitan area, but believes that Sivan is the
largest ILT provider of IT in Israel.
Employees
As of December 31, 1998, in its US operations, the Company employed
approximately 44 full-time persons. Specifically, the Company employed 11
persons as full-time trainers, 26 persons as consultants, 12 persons in sales,
marketing and sales administration and 8 persons in management, finance and
operations. In addition, the Company occasionally uses subcontractors on an as
needed basis. Sivan employed approximately 124 part-time persons as trainers, 42
persons in sales, marketing and sales administration, 27 persons in management
and finance and 63 in operations. Sivan also contracts with approximately 65
freelance trainers. Mentortech TBT employs 8 persons in
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research and development, 1 person in sales and marketing and 1 person in
administration. Mentortech Systems employs 13 full-time persons.
Item 2. Description of Property.
The Company occupies approximately 8,000 square feet of space at 462
Seventh Avenue, New York, New York where the Company's executive offices and
classrooms are located. These premises are occupied under a lease agreement
expiring on October 31, 2003 at a current base annual rental of $170,000. In
addition, the Company leases approximately 3,915 square feet of classroom space
in Melville, New York at an annual rental of $86,130 under a lease, which
expires on October 31, 2005.
Sivan and Mashov CBT lease space in Israel in accordance with the following
table:
<TABLE>
<CAPTION>
Square Monthly
Location Lease expiration Renewal Option Footage Rent
-------- ---------------- -------------- ------- ----
<S> <C> <C> <C> <C>
Tel-Aviv, Sderot Yehudit May 31, 2003 -- 9,900 $15,000
Tel-Aviv, Beit Hilel December 31, 1999 Two options of 2 8,500 $12,850
years each
Tel-Aviv, Barak August 31, 1999 Two options of 2 and 10,000 $15,000
3 years
Rishon Le' Zion February 28, 2000 -- 2,000 $ 1,250
Rishon Le' Zion December 31, 2003 5 year option 2,760 $ 4,300
Jerusalem March 31, 2004 59 month option 6,300 $ 7,560
Tel-Aviv, Beit Hilel December 31, 1999 18 month option 2,500 $ 4,500
Tel-Aviv, Beit Hilel December 31, 1998 Two options 750 $ 1,125
of 1 year each
</TABLE>
Item 3. Legal Proceedings.
The Company is not party to any material litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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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 "MNTK". 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 the one-for-eight
reverse split effected on March 3, 1998 inter-dealer prices without retail
markup, markdown or commission and may not necessarily represent actual
transactions.
High Low
---- ---
1998
----
First Quarter $ 4-3/4 $ 4
Second Quarter 4-3/4 4-1/2
Third Quarter 4-1/2 3
Fourth Quarter 4-1/4 2-1/2
1997
----
First Quarter 3 2
Second Quarter 2-1/2 2
Third Quarter 1-3/4 1-1/2
Fourth Quarter 4 3/4
(b) Holders.
As of March 25, 1999, there were 91 holders of record of the Company's
Common Stock.
(c) Dividends.
The Company has neither declared nor paid any dividends on its shares of
Common Stock since inception. Any decisions as to the future payment of
dividends will depend on the earnings and financial position of the Company and
such other factors as the Board of Directors deems relevant. The Company
anticipates that it will retain future earnings, if any, in order to finance
expansion of its operations. Accordingly, it is not anticipated that cash
dividends will be paid in the foreseeable future.
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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.
Overview
Effective February 13, 1997, a change of control of PCE U.S. occurred
pursuant to the Stock Purchase Agreement between PCE U.S. and Mashov, whose
shares are publicly traded on the Tel-Aviv Stock Exchange (the "TASE"). Mashov
is a majority-owned subsidiary of Mashov Computers Ltd., whose shares are also
publicly traded on the TASE. Based on the Stock Purchase Agreement, Mashov
acquired 1,054,865 shares of Common Stock and 658,412 shares of Series C
Preferred Stock of PCE U.S. (collectively, the "Sale Stock"), with each share of
Series C Preferred Stock convertible into 1.25 shares of Common Stock. In
consideration for the Sale Stock, PCE U.S. acquired two of Mashov's
subsidiaries, Sivan and Mashov CBT. Pursuant to the Stock Purchase Agreement,
Mashov acquired 69% of the equity and voting securities of PCE U.S. on a fully
diluted basis, subject to an adjustment based upon the fiscal year 1996 audited
balance sheets of PCE U.S., Sivan and Mashov CBT. Such adjustment was made on
August 4, 1997 when Mashov contributed 43,199 shares of Common Stock to the
capital of the Company. In addition, on August 4, 1997, Mashov converted the
658,412 shares of Series C Preferred Stock into 823,015 shares of Common Stock.
The Stock Purchase Agreement required that Sivan and Mashov CBT have net
tangible assets of $2,200,000 including cash of $1,500,000. In connection with
the execution of the Stock Purchase Agreement, PCE U.S. executed the Conversion
Agreement effective February 13, 1997 with certain holders of the Company's
equity securities and debt (the "Conversion Parties"). Pursuant to the
Conversion Agreement, the Conversion Parties received 340,423 shares of Common
Stock in consideration for the cancellation of the debt owed them by PCE U.S.
and as a result of antidilution provisions relating to the securities owned by
the Conversion Parties.
In October 1997, the Company acquired the assets of GLTN Computer
Consultants, Inc., a Long Island, New York, ILT training company in
consideration of $130,000 and the issuance of 15,909 shares of Common Stock.
In 1996, 1997 and 1998 the Company and its predecessor derived
substantially all of their revenues from ILT training and consulting services.
As reflected in the following
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table, revenues in the U.S. from ILT training services improved in 1998,
following a decline in 1997, while steadily increasing in Israel. Revenues from
U.S. consulting services diminished in 1998 following an increase in 1997 over
1996 levels.
Year ended December 31,
-----------------------
1996(1) 1997(2) 1998
------- ------- ----
(Pro forma)
(in thousands)
--------------
U.S. ILT $3,038 $1,972 $2,306
Israel ILT 9,158 11,231 13,162
Consulting services 4,003 4,435 3,717
TBT 242 523 766
(1) Includes the operations of PCE U.S. for the period January 1, 1996 through
December 31, 1996
(2) Includes the operations of PCE U.S. for the period January 1, 1997 through
February 13, 1997, the effective date of the Stock Purchase Agreement.
The Company's revenues are derived from ILT services, contractual consultation
services, and TBT product sales. The Company's ILT revenues are recognized over
the life of the training course. Contract consulting and development revenues
are recognized as the services are performed. TBT revenues are recognized upon
shipment of the software provided that no significant vendor obligations remain
and collection of the related receivable is probable. 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 available basis. Accordingly,
the Company does not incur any financial exposure with respect to such retakes.
Year Ended December 31, 1998 as Compared with the Year Ended December 31, 1997.
The Company's revenues for the year ended December 31, 1998 increased 14%
to $19,951,000 from $17,560,000 in the comparable 1997 period. Sivan's ILT
revenues increased by 17% to $13,162,000 in 1998 from $11,231,000 in 1997. The
increase in Sivan's revenues in 1998 was due primarily to its success in
offering more technical
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courses as well as an increase in the number of application courses offered. TBT
revenues for the year ended December 31, 1998 were $766,000 compared to $523,000
in 1997.
The Company's U.S. operations generated revenues of $6,023,000 (exclusive
of intercompany revenue, which has been eliminated in consolidation) in 1998, an
increase of 4%, compared to revenues of $5,806,000 in 1997. Consulting revenues
for the New York metropolitan area decreased to $3,717,000 in 1998 from
$4,435,000 in 1997, a decrease of 16%. To halt the decline, the Company's U.S.
operation began to place a greater emphasis on the growth of its CSD in the
second half of 1998. To spearhead the effort, the Company recruited a President
of the Consulting Services Division. The new CSD President joined the Company
with a team of four additional employees. Management expects CSD revenues to
increase substantially in 1999.
The decrease in CSD revenues was partially offset by an increase in the ILT
revenues. ILT revenues in 1998 rose to $2,306,000, an increase of 17%, compared
to revenues of $1,972,000 in 1997. Management attributes the increase in ILT
revenues to the acquisition of GLTN and to the adoption of new operating systems
by its clients, which resulted in increased demand for training.
The cost of ILT revenues consists primarily of the expenses of instructors,
classroom space costs as well as depreciation of classroom equipment. Cost of
revenues for consulting services consists primarily of the labor costs of the
consultants performing the work at clients' facilities. Cost of revenues for TBT
revenues include packaging and manufacturing costs of the products as well as
design expenses for custom TBT projects and development costs. Cost of revenues
rose to 63% in 1998 compared to 62% of revenues in 1997. Cost of revenues for
Sivan was 61% of revenues in 1998 compared to 58% in 1997. Cost of revenues for
the U.S. operation was 67% in 1998 compared to 72% in 1997, primarily resulting
from the termination of a lease for classroom space resulting in approximate
savings of $20,000 per month to the Company. In addition, as training revenues
increase, cost of revenues as a percentage of sales has decreased due to the
fixed costs of classroom facilities and depreciation.
Prior to 1998, the Company had included the salaries of the employees
engaged in ongoing research and development of TBT materials and other related
costs as research and development expenses. Research and development expenses
amounted to $450,000 for the year ended December 31, 1997. All of this work is
currently directed to client projects and thus such expenses are included in
TBT's cost of revenues.
Sales and marketing expenses consist primarily of compensation of the CSD
personnel as well as travel and related expenses. Such expenses also include
promotion, advertising, trade shows and exhibitions. Sales and marketing
expenses increased 33% to $3,582,000 during 1998 from $2,698,000 in 1997. The
increased revenues are a result of the increased sales and marketing expenses.
Sales and marketing expenses in the U.S. increased 68% to $1,582,000 in 1998
from $943,000 in 1997. A substantial portion of the increased expenses are a
result of the costs associated with recruiting and supporting the
15
<PAGE>
Company's new CSD President and a team of additional employees. The cost of this
new team is considered a startup cost by management and as such, the team is not
projected to produce revenues in excess of its costs until mid 1999. Sivan's
sales and marketing expenses include advertising expenses which were $543,000 or
28% of total sales and marketing expenses in 1998. Total sales and marketing
expenses of Sivan increased by 9% in 1998 compared to 1997. This increase was
due to management's decision to increase the Company's sales and marketing
budget in an attempt to obtain increased revenues.
General and administrative expenses include compensation costs for
administration, finance and general management personnel and office maintenance
and administrative costs. General and administrative costs for the Company
increased by 3% to $4,306,000 during 1998, from $4,171,000 in 1997. General and
administrative expenses were approximately $1,198,000 for the U.S. operation,
$3,092,000 for Sivan, and $117,000 for TBT in 1998, compared with $1,869,000,
$2,468,000 and $85,000,respectively in 1997. General and administrative expenses
for Sivan increased by 25%, offset by a 36% decrease in administrative expenses
for the US operation. This was due, in part, to the appointment of Elan Penn as
chief Operating Officer of Sivan. Mr. Penn had previously served as Chief
Financial Officer of the Company and compensation expenses had been allocated
between Sivan and the US operation.
Based upon the subsequent sale of the New York ILT assets (see Note 15),
management determined that goodwill had been impaired and recorded a writedown
of $300,000 for the year ended December 31, 1998.
The Company incurred an operating loss of $789,000 in 1998 compared to an
operating loss of $618,000 in 1997. Excluding the effect of the writedown of
goodwill, there would have been a decrease in the Company's operating loss in
1998. This decrease was principally due to Sivan's increased ILT revenues,
partially offset by an increase in sales and marketing expenses.
In 1998, the Company paid $107 in income taxes.
Interest expenses net, consists primarily of bank charges and interest
expenses offset by interest income. Interest expenses decreased 5% to $221,000
in 1998 from $233,000 in 1997.
Sivan's operations generated a net loss of $141,000 in 1998 compared to net
income of $226,000 in 1997. During the year ended December 31, 1998, the
Company's U.S. operation incurred a loss of $370,000 and TBT incurred a loss of
$199,000 compared with losses of $1,165,000 and $48,000, respectively for the
year ended December 31, 1997. As a result of the foregoing, the Company incurred
a net loss of $1,010,000 in 1998 compared to a net loss of $851,000 in 1997.
16
<PAGE>
Liquidity and Capital Resources
At December 31, 1998, the Company had $220,000 in cash and cash equivalents
and a working capital deficiency of $268,000, compared with $1,659,000 in cash
and cash equivalents and a working capital deficiency of $147,000 at December
31, 1997.
In 1998 the Company obtained an oral commitment from its Israeli bank to
provide Sivan up to $1.2 million in working capital loans. As of December 31,
1998, Sivan had borrowed approximately $596,000 from such bank.
The Company's operating activities used $0.9 million of net cash in the
year ended December 31, 1998. Accounts receivable increased by approximately
$2.1 million and other receivables and prepaid expenses increased by $0.6 during
the same period. This increase in receivables was due primarily to the increase
in sales volume. Accounts payable and accrued expenses increased by $0.5 million
during the same period. The Company's investing activities used $1.2 million
mainly for the purchase of fixed assets. On October 28, 1998 Mashov Computers
Marketing Ltd. exercised warrants to purchase 132,045 shares of the Company's
common stock. The Company received $600,000 as a result of this transaction.
Based on its working capital commitment, the Company believes that it has
sufficient working capital to fund its current level of operational and capital
requirements through 1999. The Company does not have any material capital
commitments for 1999. To the extent the Company increases the scope of its
activities significantly, it may be required to obtain additional financing.
Seasonality
While the Company's revenues have not been substantially affected by
seasonal variations, the revenues of the Company's Israeli subsidiary, Sivan,
are affected by the timing of the national holidays, when classes are suspended.
The Year 2000 Issue
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment and is in the process of modifying
and replacing portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
total Year 2000 project cost is
17
<PAGE>
estimated at approximately $90,000. The Company has incurred costs of
approximately $75,000 to date.
We cannot presently assess the likelihood that we will experience
significant problems due to the unresolved year 2000 problems of third parties
with which we do business. Although we have not been put on notice that any
known third-party problem will not be timely resolved, we have limited
information and no assurance can be made concerning the year 2000 readiness of
third parties. If third parties fail to achieve year 2000 compliance, the year
2000 issue may have an adverse effect on our business and results of operations.
Similarly, there can be no assurance that we can timely mitigate our risks
related to a third party's failure to resolve its year 2000 issues. If we fail
to timely mitigate such risks, that failure may have an adverse effect on our
business and results of operations.
18
<PAGE>
Item 7. Financial Statements.
Index to Financial Statements
Report of Independent Auditors F-1
Financial Statements:
Consolidated Balance Sheet F-2
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
19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Mentortech Inc.
We have audited the accompanying consolidated balance sheet of Mentortech Inc.
and Subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the two years in the period ended December 31, 1998. 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 audits.
We conducted our audits 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 audits provide 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
Mentortech Inc. and Subsidiaries as of December 31, 1998 and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/Ernst & Young LLP
New York, New York
January 21, 1999, except for Note 15,
as to which the date is March 15, 1999
F-1
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(In thousands except share and per share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 220
Accounts receivable, net of allowance for doubtful
Accounts of $64 5,132
Prepaid expenses and other current assets 791
Inventory 148
------
Total current assets 6,291
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 4,215
less accumulated depreciation and amortization (1,868)
-------
2,347
OTHER ASSETS:
Goodwill, net of accumulated amortization of $969 4,185
Other assets, net 410
=======
TOTAL ASSETS $13,233
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $3,158
Deferred revenue 2,088
Loan payable - bank 596
Loan payable - related party 33
Due to related parties 684
-------
Total current liabilities 6,559
LONG-TERM LIABILITIES:
Accounts payable - long-term 154
Accrued severance pay 525
Loan payable - long-term 125
-------
Total liabilities 7,363
F-2
<PAGE>
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000
Shares authorized, 3,578,208 issued and
outstanding 36
Preferred Stock, $0.001 par value, 5,000,000 shares
Authorized, none issued
Additional paid-in capital 9,215
Accumulated other comprehensive income (loss) (600)
Accumulated deficit (2,781)
-------
Total stockholders' equity 5,870
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,233
=======
See Accompanying Notes
F-3
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands, except for share data)
1998 1997
-------- -------
Net revenues $19,951 $17,560
Cost of revenues 12,552 10,859
------- -------
Gross profit 7,399 6,701
General and administrative expenses 4,306 4,171
Sales and marketing expenses 3,582 2,698
Write-down of Goodwill 300 -
Research and development - 450
-------- -------
Operating loss (789) (618)
Interest expense, net (221) (233)
-------- -------
Net loss $(1,010) $(851)
======== =======
Basic loss per share $(0.29) $(0.40)
Weighted average number of shares 3,468 2,124
===== =====
See Accompanying Notes
F-4
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED INCOME (LOSS) EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 - $- - $- $150 $(920) $23 $(747)
--------------------------------------------------------------------------------------------
Net loss - - - - - (851) - (851)
Foreign currency translation - - - - - - (168) (168)
--------------------------------------------------------------------------------------------
Comprehensive income (loss) - - - - - - - (1,019)
Acquisition of PC Etcetera, Inc.
and related conversions (Note 9) - - 820 8 (1640) - - (1,632)
Issuance of preferred and common
stock to Mashov 1 1,012 10 6,967 - 6,978
Conversion of Mashov preferred
stock to common stock (Note 9) (658) (1) 823 8 (7) - - -
Acquisition of GLTN (Note 9) - - 16 - 47 - - 47
Private placement offering (Note 9) - - 511 5 2,046 - - 2,051
Mashov loan conversion to
common stock (Note 9) - - 264 3 1,159 - - 1,162
--------------------------------------------------------------------------------------------
Balance as of December 31, 1997 - - 3,446 34 8,722 (1,771) (145) 6,840
--------------------------------------------------------------------------------------------
Net loss - - - - - (1,010) - (1,010)
Foreign currency translation - - - - - - (455) (455)
--------------------------------------------------------------------------------------------
Comprehensive income (loss) - - - - - - - (1,465)
Exercise of Warrants - - 132 2 580 - - 582
Costs associated with Registration
Statement - - - - (87) - - (87)
--------------------------------------------------------------------------------------------
Balance as of December 31, 1998 - $- 3,578 $36 $9,215 $(2,781) $(600) $5,870
============================================================================================
</TABLE>
See Accompanying Notes
F-5
<PAGE>
MENTORTECH INC. AND SUBISIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) for the period $(1,010) $ (851)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 1,100 1,114
Gain on sale of fixed asset - 5
Write-down of goodwill 300 -
Changes in operating assets and liabilities:
Accounts receivable (2,144) (100)
Prepaid expenses and other current assets (634) 42
Inventory (120) 50
Other assets 38 (53)
Accounts payable and accrued expenses 503 (523)
Due to related parties 632 (771)
Deferred revenue 295 454
Accrued severance pay 143 (70)
------- -------
Net cash (used in) operating activities (897) (703)
------- ------
Cash flows from investing activities:
Purchase of property and equipment (1,267) (1,235)
Proceeds from sale of property and equipment 113 71
Purchase of subsidiaries, net of cash acquired - (119)
------- -------
Net cash (used in) investing activities (1,154) (1,283)
------- -------
Cash flows from financing activities:
Proceeds from loan payable - bank 90 601
Proceeds from loan payable - related party - 42
Repayment of capital equipment obligations (5) (68)
Cash received from Mashov transaction,
net of expenses of $140 - 760
Net proceeds from issuance of common stock 495 2,051
------- -------
Net cash provided by financing activities 590 3,386
------- -------
Net (decrease) increase in cash and cash equivalents (1,471) 1,400
Cash and cash equivalents, beginning of the year 1,659 283
Effect of exchange rate changes on cash and
cash equivalents 32 (24)
------- ------
Cash and cash equivalents, end of the year $ 220 $ 1,659
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 160 $ 282
Income Taxes $ 107 $ 53
</TABLE>
See Accompanying Notes
F-6
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 1 - THE COMPANY
Mentortech Inc. (the "Company") develops and offers instructor-led training
and technology-based training courses for information technology professionals
and end-users and also provides consulting services, in both the State of Israel
and the New York tri-state area. The Company's ILT programs include a wide range
of introductory and advanced classes in a multitude of subjects ranging from
full vocational training programs which are geared to training individuals to
become information technology ("IT") professionals to end-user computer
proficiency courses. The Company's Consulting Services Division ("CSD") provides
short to medium term technical consulting to large and mid-sized corporations in
the Northeast region of the U.S. The Company develops and offers TBT programs
for use in conjunction with its ILT classes, as well as for home and corporate
users who use self-study tools for training and reference. The Company's TBT
software line includes offerings on Lotus Notes, cc:Mail, Microsoft Office, and
other end-user titles. In addition, the Company develops TBT products for
corporations in Israel and the United States.
For the years ended December 31, 1998 and 1997, revenues from ILT comprised
78% and 74% of total revenues, respectively, while consulting services and TBT
revenues accounted for 19% and 23% and 3% and 3% of total revenues,
respectively.
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 assumed the name PC Etcetera, Inc. The Company changed its name to
Mentortech Inc. on August 4, 1997.
Effective February 13, 1997, Mashov Computer Marketing Ltd. ("Mashov"), the
parent company of Sivan Computers Training Center (1994) Ltd. ("Sivan") and
Mashov Computer Based Training (C.B.T.) Ltd. ("Mashov CBT"), transferred to PC
Etcetera, Inc. all of its holdings in Sivan and Mashov CBT for 8,438,924 shares
of Common Stock (1,054,866 after giving effect to the stock split-see Note 9)
and 658,412 shares of convertible preferred stock of PC Etcetera, Inc. ("PCE
U.S"). Under generally accepted accounting principles, the stock purchase
transaction has been accounted for as a reverse acquisition such that Sivan and
Mashov CBT are considered the surviving entity, although Mentortech Inc.
(formerly PCE U.S.) remained the Registrant for purposes of filing periodic
reports with the Securities and Exchange Commission.
As reflected in the Consolidated Financial Statements, the Company has
experienced continuing net losses, negative cash flows from operations and
negative working capital. The Company's principal shareholder, Mashov Computers
Ltd.
F-7
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 1 - THE COMPANY (continued)
("Mashov Computers"), intends to provide continued support in the form of
additional capital contributions, extensions if credit facilities or other
necessary action to ensure the continued financial viability of the company
throughout 1999.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Significant Accounting Policies consistently applied in
the preparation of the accompanying consolidated financial statements is as
follows:
Foreign Currency
The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars, in accordance with FASB Statement No. 52, "Foreign
Currency Translation." All balance sheet amounts have been translated using the
exchange rates in effect at the balance sheet date. Statement of operations
amounts have been translated using the average exchange rate for the year. The
gains and losses resulting from the change in exchange rates from year to year
have been reported separately as a component of stockholders' equity (deficit).
Cash equivalents
The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.
Inventory
Inventory, mainly finished products, are presented at the lower of cost or
market value. Cost is determined using the "first-in, first-out" method.
F-8
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Property and equipment
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method, on the basis of the estimated useful lives of the assets,
as follows:
Years
-----
Computers and peripheral equipment 3 - 5
Office furniture and equipment 5 - 10
Automobiles 2 - 7
Leasehold improvements The lesser of the remaining lease
period or useful life
Goodwill
Goodwill, which is attributable to the acquisitions of PCE, Inc., Sivan's
personal computer tutorial services and GLTN, is stated at cost and amortized by
the straight-line method over 15 years.
The carrying value of goodwill is periodically reviewed by management based
on the expected future undiscounted operating cash flows over the remaining
goodwill amortization period. Based upon the subsequent sale of the New York ILT
assets (see Note 15), management determined that goodwill had been impaired and
recorded a writedown of $300,000 for the year ended December 31, 1998.
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.
F-9
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Revenue recognition
Revenues related to ILT are recognized over the life of the training
course. TBT revenues are recognized upon delivery of the program. Revenues from
sales of products are recognized upon shipment of the software provided no
significant vendor obligations remain and collection of the related receivable
is probable. 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 the Company's 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.
Research and development costs
Research and development costs are expensed as incurred. Statement of
Financial Accounting Standard (SFAS) No. 86 "Accounting for the Costs of
Computer Software to be Sold, Licensed or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and general release of the
product have been insignificant.
Concentrations 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 in the U.S. and several major banks in Israel. 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 net revenues or accounts receivable
as of December 31, 1998.
F-10
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Fair value of financial instruments
The financial instruments of the Company consist of non-derivative assets:
cash and cash equivalents, trade receivables and loans payable, which in view of
their nature, the fair value of financial instruments approximates their
carrying value.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Loss per share
The basic loss per share calculation is based on the weighted average
number of shares of common stock outstanding. Diluted earnings per share is not
presented as the effect of including the impact of outstanding stock options and
warrants would be antidilutive.
All references to per share data have been retroactively adjusted to give
effect to a one-for-eight reverse stock split effective March 3, 1998 (see Note
9).
Comprehensive Income
Effective January 1, 1998, the Company adopted FASB Statement No. 130,
"Reporting Comprehensive Income" ("FAS 130"). The new rules establish standards
for the reporting of comprehensive income and its components in financial
statements. Comprehensive income consists of net income and other gains and
losses affecting stockholders' equity that, under generally accepted accounting
principles, are excluded from net income. For the Company, such items consist of
foreign currency translation gains and losses. The adoption of FAS 130 did not
have an effect on the Company's primary financial statements, but did effect the
presentation of the accompanying consolidated statement of stockholders' equity
(deficit).
F-11
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Segment Information
On December 31, 1998, the Company adopted FASB Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The new rules establish revised standards for public companies relating
to the reporting of financial and descriptive information about their operating
segments in financial statements. The adoption of FAS 131 did not have an effect
on the Company's primary financial statements, but did effect the disclosure of
segment information contained elsewhere herein (See Note 12).
NOTE 3 - PROPERTY AND EQUIPMENT
Major classifications of property and equipment at December 31, 1998 are as
follows:
Computers and peripheral equipment and
related systems $ 3,100
Office furniture and equipment 509
Automobiles 164
Leasehold improvements 442
-------
4,215
Accumulated depreciation and amortization (1,868)
-------
$ 2,347
=======
Depreciation and amortization expense, was $797 and $763 for the years
ended December 31, 1998 and 1997, respectively.
F-12
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 4 - ACCRUED SEVERANCE PAY
Under Israeli law, the Company is required to make severance payments to
dismissed employees (including officers) and to employees leaving employment
under certain other circumstances. This liability is calculated based on the
years of employment for each employee, in accordance with the "severance pay
laws." The Company's liabilities for required severance payments are covered by
funding into severance pay funds, insurance policies and by an accrual.
Severance pay expense for the years ended December 31, 1998 and 1997 was $130
and $22, respectively.
NOTE 5 - 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 ($2,088 at December 31, 1998) which is recognized
as revenues as classes are attended.
NOTE 6 - LOANS PAYABLE
Bank Debt
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, 1998 is $125 and carries an interest rate of 10% per
annum and will mature in the year 2000.
In 1998, the Company obtained an oral commitment from its Israeli bank to
provide Sivan up to $1,200 in working capital loans. The loan is not secured by
any assets but the Company has agreed to a negative pledge, which means the
Company can not apply for any other credit of any kind without the bank's
permission. The loan is a demand loan and is included in the current liabilities
section of the consolidated balance sheet. The interest rate was approximately
14.6% at December 31, 1998. The balance outstanding at December 31, 1998 was
$596.
F-13
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 6 - LOANS PAYABLE (continued)
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 owed to the vendor. Class A creditors (total indebtedness in excess of $3
each) will be paid in full through a four-year payment plan. Those payments
which will be paid during periods greater than 12 months (amounting to $154 at
December 31, 1998) have been reflected as long-term.
Loan from Related Party
In 1991, the Company obtained a loan from an unrelated party in the amount
of $100 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. At December 31, 1998, the loan
balance was $33.
NOTE 7 - LEASES
The Company leases its office and classroom space under operating leases
that expire on various dates through the year 2005. 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, 1998 are as follows:
Capital Operating
--------------------------------
1999 $ 2 $ 358
2000 - 354
2001 - 353
2002 - 267
2003 - 268
Thereafter - 189
--------------------------------
$ 2 $ 1,789
================================
Rental expense for the years ended December 31, 1998 and 1997 was $709 and
$945, respectively.
F-14
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company and its Executive Vice President are parties to an agreement
which requires the Company, upon the death of such person, to purchase from the
estate of such person up to $500 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 person.
NOTE 9 - STOCKHOLDERS' EQUITY
Effective March 3, 1998, the Company effectuated a one-for-eight reverse
stock split. The number of shares issued at December 31, 1997 after giving
effect to the split was 3,446,176 (27,569,404 shares before the split). All
share and per share data, including stock options and warrants has been restated
to reflect the split.
Effective February 13, 1997, a change of control of the Company occurred
pursuant to the Stock Purchase Agreement between PCE U.S. and Mashov, whose
shares are publicly traded on the Tel-Aviv Stock Exchange (the "TASE"). Mashov
is a subsidiary of Mashov Computers, whose shares are also publicly traded on
the TASE. Based on the Stock Purchase Agreement, Mashov acquired 1,054,866
shares of Common Stock and 658,412 shares of Series C Preferred Stock of PCE
U.S. (collectively, the "Sale Stock"), where the share of Series C Preferred
Stock was convertible into 823,015 of Common Stock and proportionate has 10 to 1
voting rights in relation to shares of Common Stock. In consideration for the
Sale Stock, PCE U.S. acquired two of Mashov's subsidiaries, Sivan and Mashov
CBT. Pursuant to the Stock Purchase Agreement, Mashov acquired 69% of the equity
and voting securities of PCE U.S. on a fully diluted basis, subject to an
adjustment based upon the fiscal year 1996 audited balance sheets of PCE U.S.,
Sivan and Mashov CBT. Such adjustment was made on August 4, 1997 when Mashov
contributed 43,199 shares of Common Stock to the capital of the Company. In
addition, on August 4, 1997, the 658,412 shares of Series C Preferred Stock were
converted by Mashov into 823,015 shares of Common Stock.
In connection with the execution of the Stock Purchase Agreement, PCE U.S.
executed a conversion agreement (the "Conversion Agreement") effective February
13, 1997 with certain prior holders of the Company's equity securities and debt
(the "Conversion Parties"). Pursuant to the Conversion Agreement, the Conversion
Parties received Common Stock in consideration for the cancellation of the debt
owed by PCE
F-15
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
U.S. (amounting to $437) and as a result of antidilution provisions relating to
the securities owned by the Conversion Parties. These transactions resulted in
the issuance of a total of 340,423 shares of common stock. In addition, 83,566
shares of Common Stock were issued to Helix Capital, LLC, the financial adviser
to PCE U.S. in the transaction. Prior to the acquisition date there was 396,141
of shares of Common Stock outstanding, resulting in a total shares outstanding
of 820,131 after the Conversion Agreement was executed on February 13, 1997.
At the Company's 1997 Annual Meeting held August 4, 1997, the Company's
stockholders voted to (i) amend the Company's Certificate of Incorporation to
change the name of the Company to Mentortech Inc.; (ii) authorize the conversion
of the 658,412 outstanding shares of the Company's Series C Preferred Stock into
823,015 of Common Stock; and (iii) ratify the Company's 1997 Stock Option Plan.
On October 24, 1997, the Company acquired substantially all of the assets
of GLTN Computer Consultants, Inc., ("GLTN") a Long Island, New York-based ILT
Company, for $130 in cash and 15,909 shares of Common Stock.
Effective December 11, 1997, the Company completed a private placement of
255,682 Units, each Unit consisting of two shares of Common Stock and one
two-year Warrant to purchase a share of Common Stock. The price per Unit was
$8.80 and the exercise price of the Warrant contained in each Unit is $4.40 per
share of Common Stock.
In connection with, but separately from the private placement, Mashov
converted $1,162 of debt owed to it by the Company into 132,045 Units (or
264,090 shares of Common Stock) and warrants to purchase 132,045 shares of
Common Stock at $4.40 per share. On November 15, 1998, Mashov exercised its
warrants and purchased 132,045 shares of common stock at $4.40 per share.
OPTIONS
Under the Company's 1997 Stock Option Plan, 625,000 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
F-16
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
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 loss and net loss per share is required
by FASB Statement No. 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 1998 and 1997: risk free interest rate of 4.7% and 5.6%,
respectively, volatility factor of the expected market price of the Company's
Common Stock of .84 and 1.11, respectively, and the weighted-average expected
life of the options of 2 and 3 years, respectively. Dividends are not expected
in the future. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. The
Company's pro forma net loss is $826 and $881 for 1998 and 1997, respectively,
and net loss per share is $.24 and $.41 for 1998 and 1997, respectively.
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
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.
F-17
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
Stock option activity is summarized as follows:
WEIGHTED-
AVERAGE EXERCISE
SHARES PRICE
------ -----
Outstanding December 31, 1996 (19,250
exercisable at option prices $7.52 to $50.00) 19,250 $28.48
Options Granted 98,125 $5.60
Options Canceled (9,700) $19.12
-------
Outstanding December 31, 1997 (43,925
exercisable at option prices $4.67 to $50.00) 107,675 $8.74
Options Granted 173,750 $4.99
Options Canceled (1,300) $24.80
-------
Outstanding December 31, 1998 (106,874
exercisable at option prices $4.67 to $50.00) 280,125 $6.34
=======
Options outstanding and exercisable at December 31, 1998 are as follows:
WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL
SHARES EXERCISE PRICE LIFE
------ -------------- ----
63,750 $4.67 4.09
32,374 $5.25 4.99
7,500 $40.00 1.37
3,250 $50.00 3.75
-----
106,874
At December 31, 1998, 344,875 options are available for grant.
F-18
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
The following is a summary of warrants outstanding and exercisable at
December 31, 1998:
NUMBER OF
EXPIRATION DATE WARRANTS EXERCISE PRICE DESCRIPTION
- --------------- -------- -------------- -----------
December 11, 1999 255,682 $4.40 (1)
(1) Warrants issued in connection with the December 11, 1997 private placement
and Mashov loan conversion
At December 31, 1998, the Company has 255,682 shares of Common Stock
reserved for issuance to the warrant holders.
NOTE 10 - TAXES ON INCOME
There was no income tax expense or benefit recorded for the years ended
December 31, 1998 and 1997.
The Company has net operating loss carryforwards of approximately $7,768
expiring from 2006 to 2013. In addition, the Company has a capital loss
carryforward of approximately $1,202, which expires in 2000. However, pursuant
to Section 382 of the Internal Revenue Code, the future utilization of
approximately $6,708 of the net operating loss carryforwards and the entire
capital loss carryforward is significantly limited due to an ownership change
which occurred in 1997. The full utilization of these losses in the future is
dependent upon the Company's ability to generate taxable income and also is
subject to certain annual limitations due to the change in control; accordingly,
valuation allowances of equal amounts have been established.
Components of the Company's deferred tax asset and liability at December
31, 1998 is as follows:
Net operating loss carryforwards $3,340
Capital loss carryforward 481
------
3,821
Valuation allowance (3,821)
------
Net deferred tax asset -
======
F-19
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 11 - PRO FORMA RESULTS OF OPERATIONS (Unaudited)
The consolidated financial statements for 1997 included in this report
reflect the operations of Sivan and Mashov CBT for the year ended December 31,
1997, and Mentortech Inc. since February 13, 1997, the date of the stock
purchase transaction. Because of the change in control, the stock purchase
transaction between Mashov and Mentortech Inc. was accounted for as a reverse
acquisition. Based on such accounting treatment, Sivan is reported as the
surviving entity.
On a pro forma basis had the acquisition occurred January 1, 1997, the pro
forma results of operations for the year ended December 31, 1997 would have been
as follows:
Revenues $18,161
Net (loss) ($959)
Net (loss) per share ($0.45)
NOTE 12 - SEGMENT INFORMATION
Information as to the Company's operations in different geographical areas
is as follows:
<TABLE>
<CAPTION>
Revenues for the years Identifiable assets as of Net income (loss) for the
ended December 31, years ended
1998 1997 1998 1997 1998 1997
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 6,023 $ 5,806 $10,799 $ 6,025 $ (670) $(1,029)
Israel 13,928 11,754 2,434 7,472 (340) 178
----------------------------------------------------------------------------------
Consolidated
total $19,951 $17,560 $13,233 $13,497 $(1,010) $ (851)
==================================================================================
</TABLE>
F-20
<PAGE>
MENTORTECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
(All amounts are in thousands except for share data)
NOTE 13 - 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 contributions of $13 and $14 in 1998 and 1997, respectively.
NOTE 14 - RELATED PARTY TRANSACTIONS
Year Ended December 31,
1998 1997
-----------------------
Revenues $50 $ -
Expenses
Rent 127 -
Internet site 46 -
General and administrative 3 -
-----------------------
Total Expenses $176 $ -
The above revenue and expense items represent transactions between Sivan and
Mashov.
NOTE 15 - SUBSEQUENT EVENT
On March 15, 1999, the Company sold its New York ILT activities to
Knowledge Alliance, Inc. for total consideration of $335,000, including earn-out
provisions of $115,000 if certain revenue targets are achieved in the twelve
months following the date of sale. As a result of the sale, the Company will no
longer provide ILT services in the United States.
F-21
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
20
<PAGE>
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 38 Chairman, President, Chief Executive 1997
Officer and Director
Elan Penn 45 Chief Financial Officer and Director 1997
Terry I. Steinberg 43 Secretary and Director 1985
David Assia 46 Director 1997
Jack Dunietz 44 Director 1997
Martin F. Kahn 47 Director 1995
Joseph Musacchio 41 President, Consulting Services Division
David Assia. Mr. Assia has served as a director of the Company since
February 1997. He is a co-founder with Mr. Dunietz of Mashov Computers Ltd. and
has been its Chairman since 1989. Mr. Assia has been Managing Director, since
its inception in 1983, of Magic Software Enterprises Ltd. ("Magic"), a developer
and provider of network software products and services for departmental,
client/server and Internet/Intranet applications, and has been Chairman of Magic
since 1986. He 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.
Jack Dunietz. Mr. Dunietz has served as a director of the Company since
February 1997. He is a co-founder with Mr. Assia of Mashov Computers Ltd. of
which he has been the Chief Executive Officer since 1987. Mr. Dunietz also
serves as a director and interim Chief Executive Officer of Magic and a director
of Mashov 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. Mr. Kahn has served as a director of the Company since May
1995 and was Chairman of the Board of the Company from May 1995 until February
1997. He has served since 1989 as Chairman of Ovid Technologies, Inc., a leading
producer of medical, scientific and technical CD-ROM and network products. Since
September 1993 Mr. Kahn has served as Chairman of OneSource Information
Services, which develops and markets a comprehensive set of integrated business
information and
21
<PAGE>
software products. Mr. Kahn has since April 1995, served as Chairman and CEO of
Shoppers Express, Inc., which offers home grocery shopping through dial-up and
on-line services and has since March 1996 served as Managing Director of Cadence
Information Associates L.L.C. (and its predecessor), a consulting and management
services firm. Mr. Kahn also serves as a Director of Vista Information
Solutions, Inc. (formerly DataMap, Inc.), which supplies site-specific risk
information about real estate for the insurance, banking, and environmental
engineering markets. Mr. Kahn holds a Bachelors Degree in Administrative
Sciences from Yale College and an M.B.A. from Harvard Business School.
Roy Machnes. Mr. Machnes has served as the Company's Chairman of the Board,
President and Chief Executive Officer and a director since February 1997. Since
January 1994, he has been Chairman and Chief Executive Officer of Mashov, and
prior thereto, from 1988, he served as Vice President Sales of Mashov Computers
Ltd. Mr. Machnes is also a director of Mashov Computers Ltd. He holds a B.A.
from the University of California at Berkeley.
Joseph Musacchio. Mr. Musacchio joined the company as President of the
Consulting Services Division in August 1998. Previously, he was Senior Vice
President of Volt Services Group for four years, President, Chief Executive
Officer and director of Career Management International for six years, and
Regional Vice President of Butler Services Group for seven years. Mr. Musacchio
holds a B.S. from the State University of NY.
Elan Penn. Mr. Penn served as the Company's Chief Financial Officer and a
director since February 1997. In October, 1998 Mr. Penn became the Chief
Operating Officer of the Company's Israeli operations. Mr. Penn assumed
responsibility of Chief Financial Officer of the Company as of April 1, 1999. He
also serves as the Chief Financial Officer of Mashov Computers Ltd. Mr. Penn
joined Mashov Computers Ltd. and Magic as their Vice President of Finance and
Administration in June 1992. In February 1997, he resigned his position at Magic
to assume the position of Chief Financial Officer of the Company. 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. Mr. Steinberg has served as a director since 1985 and
he currently serves as Secretary. He served as the Company's Executive Vice
President, responsible for North American Sales and Marketing from February 1997
until March 31 1999, and as President and Chief Executive Officer of PCE U.S.
since its inception in 1985 until February 1997. Mr. Steinberg holds a
Bachelor's Degree in Applied Mathematics and Computer Science and an M.B.A.,
both from McGill University.
22
<PAGE>
Item 10. Executive Compensation
The following table sets forth information concerning the compensation
during the last three fiscal years of the Company's executive officers whose
total salary during any of the three prior fiscal years was $100,000 or more.
The Company has a 401(k) savings plan for its executives which is available to
all Company employees. The current value of all perquisites and other personal
benefits furnished in each of such years to each of the executive officers named
below was less than 10% of such officer's salary for such year.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation
Compensation Securities Underlying
Name and Principal Position Year Salary ($) Options (#)
- --------------------------- ---- ---------- -----------
<S> <C> <C> <C>
Roy Machnes 1998 $155,000 40,625
President and Chief Executive 1997 163,789 45,000
Officer
Elan Penn 1998 120,000 25,000
Chief Operating Officer - Israeli 1997 120,000 22,500
operations (1)
Terry Steinberg 1998 155,000 30,000
Executive Vice President (2) 1997 168,500 22,500
1996 (3) --
Joseph Musacchio 1998 115,935 33,000
President CSD
</TABLE>
(1) Mr. Penn served as Chief Financial Officer until October 1998, when he
became Chief Operating Officer of the Company's Israeli operations.
(2) Effective February 13, 1997, Mr. Steinberg, the former President of the
Company, was named Executive Vice President. Mr. Steinberg resigned as
Executive Vice President effective March 31, 1999.
(3) Less than $100,000.
Except as reported elsewhere, the aggregate value of all other perquisites
and other personal benefits furnished in each of the last three years to each of
these executive officers was less than 10% of each officer's salary for such
year. The Company has not paid any cash remuneration to any of its outside
directors as directors in the last three years.
23
<PAGE>
Directors' Compensation
Directors, whether or not they are also employees of the Company, are not
paid any fees or other remuneration for service on the Board. The Company
reimburses all of its directors for their out-of-pocket expenses incurred in the
performance of their duties as directors of the Company.
Stock Options
The following table provides information concerning exercises of stock
options during 1997 by each of the executive officers named above in the Summary
Compensation Table, and the number and value of unexercised options held by each
of them at December 31, 1998.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last
Fiscal Year and Fiscal Year-End Option Values
Number of shares underlying Value of unexercised
unexercised options at FY-end in-the-money options at
Shares acquired (#) exercisable/ FY-end ($)(1) exercisable/
Name on exercise (#) unexercisable unexercisable
- ---- --------------- ------------- -------------
<S> <C> <C> <C>
Roy Machnes -- 42,084/43,541 --
Elan Penn -- 24,166/23,334 --
Terry I. Steinberg -- 27,500/25,000 --
Joseph Musacchio -- --/33,000 --
</TABLE>
(1) None of the outstanding options were in the money at December 31, 1998. The
exercise price of the outstanding options was $4.67 while the average of
the bid and the asked prices of a share of Common Stock on December 31,
1998 was $3.44.
Employment Agreements
Pursuant to the Stock Purchase Agreement and effective February 13, 1997,
the Company entered into employment contracts with each of Roy Machnes, Terry I.
Steinberg and Elan Penn, providing for their employment as Chief Executive
Officer, Executive Vice President and Chief Operating Officer of Sivan,
respectively, of the Company. Pursuant to such contracts, and effective as of
August 4, 1997, Messrs. Machnes, Steinberg and Penn were granted incentive stock
options to purchase 40,625, 30,000 and 25,000 shares of Common Stock,
respectively, which options vest over a three-year period commencing in August
1997. The exercise price of such stock options is $4.672 per share. In 1998,
Messrs. Machnes, Penn and Steinberg were granted
24
<PAGE>
additional incentive stock options to purchase 45,000, 22,500, and 22,500 shares
of common stock respectively.
The base salaries of Messrs. Machnes and Steinberg are each $155,000. 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.
Mr. Machnes' employment agreement provides that, although he may perform
the services contemplated by such agreement in the U.S. or Israel, the Company
will pay for or reimburse certain of Mr. Machnes' relocation and living expenses
should Mr. Machnes choose to live in the U.S. during the period of his
employment. Specifically, the Company must pay (or reimburse Mr. Machnes) if he
incurs such expenses for the following: (1) $20,000 for expenses incurred during
any relocation of Mr. Machnes, his family and their possessions to New York; (2)
all expenses associated with the education of Mr. Machnes' children including
private school tuition and associated expenses (estimated at $20,000 per annum)
in the United States; (3) an apartment in Manhattan, New York, including any
associated real estate broker's fees, less the amount of any rental payments
received from the lease of Mr. Machnes' home in Israel, net of associated
expenses; and (4) any expenses incurred by Mr. Machnes in connection with a
visit by his family to Israel once each year. If any of the above constitute
taxable income to Mr. Machnes, such amounts are to be grossed up to account for
the payment of any taxes due, 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 for any reason,
Mr. Machnes is to be reimbursed for relocation expenses of no more than $20,000
in connection with Mr. Machnes' relocation to Israel.
During the year ended December 31, 1998, the Company pre-paid approximately
$23,682 for tuition for Mr. Machnes' children. The Company also paid
approximately $45,963 for the rental of an apartment in New York which it leased
for the use of its executives. The apartment is being used by Mr. Machnes at the
present time. No expenses have been incurred by the Company for any visits by
Mr. Machnes (or his family) to Israel. Any amounts that are taxable to Mr.
Machnes will be grossed up to compensate Mr. Machnes for any taxes due.
Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law, the Company has
broad powers to indemnify its directors and officers against liabilities that
they may incur in such capacities, including liabilities under the Securities
Act. The Company's by-laws provide that the Company will indemnify its directors
and officers to the fullest extent permitted by law and require the Company to
advance litigation expenses upon receipt by the Company of an undertaking from
the director or officer to repay such advances if it is ultimately determined
that the director or officer is not entitled to indemnification. The
25
<PAGE>
by-laws further provide that rights conferred under the by-laws will not be
deemed to be exclusive of any other right such persons may have or acquire under
any by-law, agreement, vote of stockholders or disinterested directors or
otherwise.
The Company's Certificate of Incorporation provides that, pursuant to
Delaware law, its directors will not be liable for monetary damages for breach
of the directors' fiduciary duty to the Company and its stockholders. This
provision in the Certificate of Incorporation does not eliminate the duty of
care, and, in appropriate circumstances, equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware law.
In addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to the Company or its stockholders, for acts
or omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefits to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
Stock Option Plan
The Company's 1997 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors on June 25, 1997 and ratified by the Company's stockholders
on August 4, 1997. The Option Plan provides for the granting of incentive stock
options ("Incentive Stock Options"), within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, to employees, and for the granting of
nonstatutory stock options ("Nonstatutory Stock Options") to employees,
non-employee directors, consultants and advisors. A total of 625,000 shares of
Common Stock have been reserved for issuance under the Option Plan. As of
December 31, 1998, 268,075 shares were subject to outstanding Incentive Stock
Options under the Option Plan. In addition, 12,050 shares were subject to
outstanding options under the Company's 1987 Stock Option Plan. No further
options may be granted under the 1987 Stock Plan.
The exercise price of all Incentive Stock Options must be at least equal to
the fair market value of the Common Stock on the date of grant and the option
term may not exceed ten years. The exercise price of all Nonstatutory Stock
Options granted under the Option Plan may be less than the fair market value of
the Common Stock on the date of grant and the option term may be greater than
ten years. Incentive Stock Options and Nonstatutory Stock Options ("Options")
may be exercised by delivery to the Company at its principal office of written
notice of the number of shares with respect to which the Option is being
exercised. Such notice must be accompanied by payment of the full option price
of such shares with a check payable to the order of the Company in such amount.
The Option Plan may be amended or terminated by the Board or the Company's
stockholders, but no such action may impair rights under a previously granted
Option. No Options may be granted under the Option Plan after June 25, 2007.
26
<PAGE>
401(k) Plan
Effective as of January 1, 1993, the Company adopted a 401(k) Employee
Savings Plan (the "401(k) Plan"). The 401(k) Plan covers all employees of the
Company who have attained the age of 21 and are employed by the Company six
months after their employment commences, except those employees who work sixteen
or fewer days per month. A participating employee (a "Participant") may elect to
defer, in the form of pre-tax contributions to the 401(k) Plan, an amount up to
15% of his or her compensation for each year. A Participant's before-tax
contributions cannot exceed $9,500 per year, as adjusted for inflation. For each
year, the Company may contribute for each Participant a matching contribution
equal to 25% of so much of the Participant's before-tax contributions for the
year as does not exceed 2% his or her compensation. In addition, for each year,
the Company may make a contribution, in any amount determined by the Company in
its sole discretion, to the 401(k) Plan that will be allocated to Participants
in accordance with a formula set forth in the 401(k) Plan.
Contributions to the 401(k) Plan made on behalf of a Participant are
invested in the manner directed by the Participant. Before-tax contributions and
Company matching contributions are fully vested and nonforfeitable at all times.
Company discretionary contributions vest according to a five-year graded vesting
schedule, based on a Participant's years of service.
27
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 25, 1999
with respect to each person known to the Company to be the beneficial owner of
more than 5% of the outstanding shares of the Company's Common Stock, for each
executive officer named in the Summary Compensation Table, for each of the
Company's directors, and for the Company's officers and directors as a group.
Percentage of
Number of Shares
Shares(1) Outstanding
--------- -----------
Mashov Computers
Ltd.(2)(3) 2,171,079 59.1%
Elron Electronic Industries Ltd.(3)(4) 231,300 6.3%
David Assia (5)(6) 14,785 *
Jack Dunietz (5)(6) 73,258 2.0
Martin F. Kahn (5) --
Roy Machnes (5)(6) 68,105(7) 1.9
Elan Penn (5)(6) 54,020(8) 1.5
Terry I. Steinberg (5) 63,182(9) 1.7%
Joseph Musacchio -- --
All executive officers and directors as a group 273,350(10) 7.4%
- ----------------
* Less than 1%
(1) Calculated pursuant to Rule 13d-3 promulgated under the Exchange Act.
Accordingly, with respect to each particular beneficial owner, the number
of shares of Common Stock gives effect to the deemed exercise of such
owner's options and warrants (which are currently exercisable or
exercisable within 60 days). Except as otherwise disclosed in the footnotes
below, the shares listed in this column for a person named in this table
are directly held by such person, with sole voting and dispositive power.
(2) Address is 5 HaPlada Street, Or-Yehuda, Israel. Mashov Computers is a
software and information technology services company holding interests in
the Company and certain other Israeli technology corporations. Formula
Systems (1985) Ltd. ("Formula Systems"), an Israeli software and
information techology services company whose ADRs are listed on the US
Nasdaq Stock Market, owns approximately 45% of the voting shares of Mashov
Computers, the parent of the Company.
28
<PAGE>
(3) Includes shares of Common Stock issuable upon exercise of currently
exercisable warrants held by: Mashov (132,045 shares) and Elron Electronic
Industries Ltd. (22,500 shares).
(4) Address is Advanced Technology Center, P.O. Box 1573, Haifa, Israel.
(5) Serves as a director of the Company.
(6) Serves as a director of Mashov.
(7) Includes 42,084 shares issuable upon currently exercisable options.
(8) Includes 24,166 shares issuable upon currently exercisable options.
(9) Includes 27,500 shares issuable upon currently exercisable options.
(10) Include 93,750 shares issuable upon currently exercisable options.
Item 12. Certain Relationships and Related Transactions.
Effective February 13, 1997, a change of control of PCE U.S. occurred
pursuant to the Stock Purchase Agreement between PCE U.S. and Mashov, whose
shares are publicly traded on the TASE. Mashov is a subsidiary of Mashov
Computers, whose shares are also publicly traded on the TASE. Based on the Stock
Purchase Agreement, Mashov acquired 1,054,866 shares of common stock and 658,412
shares of Series C Preferred Stock of PCE U.S., where each share of Series C
Preferred Stock is convertible into 1.25 shares of Common Stock. In
consideration for such stock issuances PCE U.S. acquired two of Mashov's
subsidiaries, Sivan, and Mashov CBT. Pursuant to the Stock Purchase Agreement,
Mashov acquired 69% of the equity and voting securities of PCE U.S. on a fully
diluted basis, subject to an adjustment based upon the fiscal year 1996 audited
balance sheets of PCE U.S., Sivan and Mashov CBT. Such adjustment was made on
August 4, 1997 when Mashov contributed 43,199 shares of common stock to the
capital of PCE U.S. In addition, on August 4, 1997, the 658,412 shares of Series
C Preferred Stock was converted by Mashov into 823,015 shares of common stock.
As a result of the adjustment discussed above and such conversion, Mashov
currently owns 60.7% of the common stock.
In 1996 certain departments of PCE Israel (including employees and
equipment) were transferred to Mashov CBT. PCE U.S. originally owned 30% of the
ordinary shares of Mashov CBT. This ownership was subsequently sold to Elron
Electronics Industries Ltd. ("Elron"). Mashov owned 70% of the ordinary shares
of Mashov CBT. Pursuant to a purchase agreement dated February 6, 1997, between
Mashov and Elron, Mashov purchased the remaining 30% of the outstanding shares
of Mashov CBT held by Elron. In consideration of the purchase, Mashov
transferred 130,000 shares of common stock to
29
<PAGE>
Elron upon the execution of the Stock Purchase Agreement. Pursuant to the Stock
Purchase Agreement, 100% of the ownership of Mashov CBT was transferred to PCE
U.S.
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. 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 in
consideration of approximately $175,000.
Mashov granted Sivan a shareholders' loan in October 1994 of approximately
$2.6 million which was converted into equity in the first quarter of 1997 as
part of the Stock Purchase Agreement. The loan was linked to the Israeli
Consumer Price Index and interest was charged at a rate of 6% per annum. Mashov
charged Sivan interest and linkage charges of $434,000 in 1996. In addition, in
1996 Mashov charged Sivan and Mashov CBT management fees of $691,000 and $57,000
respectively. In December 1997, Mashov converted $1,162,000 of debt owed to it
by Sivan into 265,965 shares of Common Stock and 132,045 warrants.
In connection with the execution of the Stock Purchase Agreement, the
Company executed the Conversion Agreement, which provides that the Conversion
Parties (Elron, Rho Management Trust I (formerly Gibraltar Trust), the Star
Group (comprised of Justy Ltd., SVE STAR Ventures Enterprises No. II Gbr, SVE
STAR Ventures Enterprises No. III Gbr, SVE STAR Ventures Enterprises No. IIIA
Gbr, and Yozma Venture Capital Ltd.), 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 warrants
owned by the Conversion Parties. Specifically: (i) the 1,000,000 shares of
Series A Preferred Stock held by Elron were converted into 25,000 shares of
common stock; (ii) the Bridge Loans the Company received from certain
stockholders aggregating $436,000 as of December 31, 1996 were converted into
218,700 shares of common stock; and (iii) the holders of Company warrants agreed
to convert a total of 179,064 warrants (consisting of 115,315 warrants
outstanding as of December 31, 1996 which were subsequently adjusted pursuant to
the Conversion and Waiver Agreement under anti-dilution provisions) into 340,423
shares of common stock.
On December 14, 1998, Mashov distributed to its public shareholders, by way
of a dividend, all of the Company's common stock then held by Mashov. At the
time of the dividend distribution, Mashov Computers owned approximately 81% of
the voting securities of Mashov. In January 1999, Mashov Computers acquired
189,501 shares of Common Stock and 56,818 Warrants in a private transaction.
Mashov Computers also has acquired 28,432 shares of Common Stock in public
transactions. Based on the foregoing, Mashov Computers holds 2,171,079 shares of
Common Stock and 56,818 Warrants, which Common Stock constitutes 60.7% of the
outstanding Common Stock of the Company.
30
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
Exhibit
Number Description of Exhibit
3.1 Certificate of Incorporation, as amended (1)
3.2 Certificate of Amendment of Certificate of Incorporation with regard to the
change of the Company's name and the increase in the Company's authorized
capital stock (2)
3.3 Certificate of Amendment of Certificate of Incorporation with regard to a
reverse stock split (3)
3.4 By-Laws (4)
10.1 Lease for premises situated at 462 Seventh Avenue, 4th Floor, New York, New
York (5)
10.2 1997 Stock Option Plan (6)
10.3 Employment Agreement of Roy Machnes (7)
10.4 Employment Agreement of Elan Penn (7)
21 Subsidiaries
27 Financial Data Schedule
99 Additional Information Regarding Forward Looking Statements
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1989 and hereby incorporated by reference thereto,
as amended by document filed as an exhibit to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1993.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1997 and hereby incorporated by reference
thereto.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997 and hereby incorporated by reference thereto.
(4) Filed as an exhibit to the Company's Form S-18 (File No. 33-19521) and
hereby incorporated by reference thereto.
31
<PAGE>
(5) 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 Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1997 and hereby incorporated by reference
thereto.
(7) Filed as a "Related Agreement" to the Stock Purchase Agreement, which
Related Agreement was 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.
(b) Reports on Form 8-K.
None.
32
<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.
Mentortech Inc.
Dated: April 15, 1999 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
- --------------
Roy Machnes Chairman, President, and April 15, 1999
Chief Executive Officer
/s/Elan Penn
- ------------
Elan Penn Chief Financial and Accounting April 15, 1999
Officer and Director
/s/Terry Steinberg
- ------------------
Terry Steinberg Secretary and Director April 15, 1999
/s/David Assia
- --------------
David Assia Director April 15, 1999
/s/Jack Dunietz
- ---------------
Jack Dunietz Director April 15, 1999
/s/Martin Kahn
- --------------
Martin Kahn Director April 15, 1999
33
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
3.1 Certificate of Incorporation, as amended (1)
3.2 Certificate of Amendment of Certificate of Incorporation with regard to the
change of the Company's name and the increase in the Company's authorized
capital stock (2)
3.3 Certificate of Amendment of Certificate of Incorporation with regard to a
reverse stock split (3)
3.4 By-Laws (4)
10.1 Lease for premises situated at 462 Seventh Avenue, 4th Floor, New York, New
York (5)
10.2 1997 Stock Option Plan (6)
10.3 Employment Agreement of Roy Machnes (7)
10.4 Employment Agreement of Elan Penn (7)
10.5 Employment Agreement of Terry I. Steinberg (7)
27 Financial Data Schedule
_______________
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1989 and hereby incorporated by reference thereto,
as amended by document filed as an exhibit to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1993.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1997 and hereby incorporated by reference
thereto.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997 and hereby incorporated by reference thereto.
(4) Filed as an exhibit to the Company's Form S-18 (File No. 33-19521) and
hereby incorporated by reference thereto.
(5) 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 Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1997 and hereby incorporated by reference
thereto.
(7) Filed as a "Related Agreement" to the Stock Purchase Agreement, which
Related Agreement was 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.
EXHIBIT 21
Subsidiaries of the Registrant
Subsidiary Jurisdiction of Incorporation
- ---------- -----------------------------
Mentortech TBT Ltd. Israel
Mentortech Systems (1996) Ltd. Israel
Sivan Computers Training Center (1994) Ltd. Israel
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 220
<SECURITIES> 0
<RECEIVABLES> 5,196
<ALLOWANCES> 64
<INVENTORY> 148
<CURRENT-ASSETS> 6,291
<PP&E> 4,215
<DEPRECIATION> 1,868
<TOTAL-ASSETS> 13,233
<CURRENT-LIABILITIES> 6,559
<BONDS> 0
0
0
<COMMON> 36
<OTHER-SE> 5,834
<TOTAL-LIABILITY-AND-EQUITY> 13,233
<SALES> 19,951
<TOTAL-REVENUES> 19,951
<CGS> 12,552
<TOTAL-COSTS> 20,961
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 221
<INCOME-PRETAX> (1,010)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,010)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,010)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
EXHIBIT 99
ADDITIONAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS
The Company's Annual Report on Form 10-KSB for the year ended December 31,
1998 (the "Annual Report") contains various forward-looking statements which
reflect the Company's current views with respect to future events and financial
results. Forward-looking statements usually include the verbs "anticipates,"
"believes," "estimates," "expects," "intends," "plans," "projects,"
"understands" and other verbs suggesting uncertainty. The Company reminds
shareholders that forward-looking statements are merely predictions which are
inherently subject to uncertainties and other factors which could cause the
actual results to differ materially from the forward-looking statement. Some of
these uncertainties and other factors are discussed in the Annual Report. See
Item 6 "Management Discussion and Analysis of Financial Condition and Results of
Operations." In this Exhibit 99, the company has attempted to identify
additional uncertainties and other factors which may affect its forward-looking
statements.
Shareholders should understand that the uncertainties and other factors
identified in the Annual Report and this Exhibit 99 do not constitute a
comprehensive list of all the uncertainties and other factors which may affect
forward-looking statements. The Company has merely attempted to identify those
uncertainties and other factors which, in its view at the present time, have the
highest likelihood of significantly affecting its forward-looking statements. In
addition, the Company does not undertake any obligation to update or revise any
forward-looking statements or the list of uncertainties and other factors which
could affect such statements.
Capitalized terms not otherwise defined below have been defined in the
Annual Report.
Business and Market Risks
Operating Results May Fluctuate. The Company has experienced and may in the
future experience significant fluctuations in revenues and operating results
from quarter to quarter due to a combination of factors, many of which are
beyond the Company's control. These factors include: the timing of significant
revenues for the Company's services; new services introductions by the Company
or its competitors; changes in the Company's product or service mix that may
affect revenues, prices, margins or both; further expansion of the Company's
marketing and service operations; disruptions in sources of personnel; changes
in personnel costs; regulatory changes; general economic conditions and other
factors. The Company's operating expenses are based on anticipated revenue
levels, and a high percentage of such expenses are relatively fixed. The Company
believes that its quarterly operating results will continue to be subject to
significant fluctuations.
<PAGE>
History of Unprofitable Operations; Accumulated Deficit; Working Capital
Deficiency. During the fiscal years ended December 31, 1996, 1997 and 1998, the
Company's operations were unprofitable. No assurance can be given that it will
operate on a profitable basis in the future. The ability of the Company to
continue its operations successfully is materially dependent upon the marketing
of its services and products in a profitable manner and the raising of any
additional capital which it may require.
Recent Merger; Failure to Manage Growth Effectively Could Have a Material
Adverse Effect on the Company. The Company has grown significantly in 1997 as a
result of the Stock Purchase Agreement. The Company's ability to manage its
growth will require it to continue to improve its operational, financial and
management information systems, and to motivate and manage its employees
effectively. In addition, the Company's management must manage operations which
are international in scope. If the Company's management is unable to manage the
Company's growth and geographically dispersed operations effectively, the
quality of the Company's services, its ability to retain key personnel and its
business and operating results and financial condition could be materially and
adversely affected.
Market for Company's Services is Highly Competitive. The market for the
Company's services is highly competitive and subject to rapid technological
change. The Company faces competition from a number of entities which presently
provide computer training and consulting services, or market TBT products,
similar to those furnished by the Company. The Company also encounters
competition from educational institutions providing personal computer training
programs, including universities, colleges and adult education centers, and
customers' in-house training staffs. Many of the entities which provide ILT and
consulting services, and market TBT products, have greater financial and
marketing resources than the Company. Increased competition could materially and
adversely effect the Company's results of operations through price reductions
and loss of market share. There can be no assurance that the Company will be
able to continue to compete successfully against its existing competitors or
that it will be able to compete successfully against new competitors.
Cancellation of Software Manufacturers' Authorizations. The Company is
authorized to act as a training center by various software manufacturers.
Management believes that such authorizations have several advantages, including
referrals from the software manufacturers and free listings in the advertising
literature published or distributed by such manufacturers. No assurance can be
given that the Company will continue to maintain its authorizations or that it
will be successful in obtaining new authorizations in the future. The inability
to maintain such authorization or obtain new ones could make the Company's
training courses and consulting services less attractive to its clients and thus
materially adversely effecting its financial results and financial condition.
The Year 2000 Issue May Have a Material Adverse Effect on the Company's
Business. We cannot presently assess the likelihood that we will experience
significant problems due to the unresolved year 2000 problems of third parties
with which we do business. Although we have not been put on notice that any
known third-party problem will not be timely resolved, we have limited
information and no assurance can be made concerning
2
<PAGE>
the year 2000 readiness of third parties. If third parties fail to achieve year
2000 compliance, the year 2000 issue may have an adverse effect on our business
and results of operations. Similarly, there can be no assurance that we can
timely mitigate our risks related to a third party's failure to resolve its year
2000 issues. If we fail to timely mitigate such risks, that failure may have an
adverse effect on our business and results of operations.
The Loss of Key Employees Could Have a Material Adverse Effect on the Company's
Business. The Company's success depends to a significant degree upon its
executive officers. The loss of any of Roy Machnes, Chairman and Chief Executive
Officer, Elan Penn, Chief Financial Officer, or Joseph Musacchio, President,
Consulting Services Division, could have a material adverse effect on the
Company's business. The Company's success also depends upon its ability to
attract and retain highly skilled technical, management and other personnel.
Competition for such personnel is intense, and the inability to attract and
retain additional qualified employees or the loss of current key employees could
materially and adversely affect the Company's business, operating results and
financial condition.
Company's Proprietary Technology Has Limited Protection. The Company possesses
limited patent or registered intellectual property rights with respect to its
TBT technology. The Company depends in part upon its proprietary technology and
know-how to differentiate its products and service from those of its
competitors. The Company relies on a combination of contractual rights and trade
secret laws to protect its proprietary technology. There can be no assurance
that the Company will be able to protect its technology or that third parties
will not be able to develop similar technology independently.
Risks Associated with Allegations of Patent Infringement in the Software
Industry. The software industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. There can be no assurance that third parties will not assert
infringement claims against the Company in connection with its products, that
any such assertion of infringement will not result in litigation, or that the
Company would prevail in such litigation or be able to license any valid and
infringed patents of third parties on commercially reasonable terms.
Furthermore, litigation, regardless of its outcome, could result in substantial
cost to and diversion of effort by the Company. Any infringement claims or
litigation against the Company could materially and adversely affect the
Company's business, results of operations and financial condition.
Company Will Continue to be Controlled by its Principal Stockholder. Mashov
Computers currently owns an aggregate of approximately 60.7% of the Company's
outstanding Common Stock. As a result, Mashov Computers will be able to exert
controlling influence over the outcome of actions requiring stockholder
approval, such as the election of the Company's directors, amendments to the
Company's Certificate of Incorporation and mergers. Messrs. Assia and Dunietz
are directors of Mashov
3
<PAGE>
Computers and are the beneficial owners of approximately 30% of its issued and
outstanding shares.
Illiquidity of Trading Market; Sales of Shares Eligible for Future Sale Could
Adversely Affect Market Prices for the Company's Common Stock. The Company does
not currently meet the initial listing requirements for the Nasdaq SmallCap
Market. Accordingly, trading in the Company's Common Stock is conducted in the
over-the-counter market on the Nasdaq Bulletin Board where there is presently
only a limited trading market for such securities. As a consequence, purchasers
of the Shares could find it difficult to dispose of, or obtain accurate
quotations as to the market value of such Shares. Sales of substantial amounts
of Common Stock of the Company in the public market following the effective date
of the Registration Statement of which this Prospectus forms a part could
adversely affect the market price for such Common Stock. At present, less than
2% of the Company's outstanding shares are believed to be in the public market.
Anti-takeover Provisions of the Company's Certificate of Incorporation and
By-Laws May Adversely Affect Holders of Common Stock or Delay or Prevent
Corporate Takeovers. Certain provisions of the Company's Certificate of
Incorporation and By-Laws could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. Certain of such provisions allow the Company to
issue preferred stock with rights senior to those of the Common Stock and impose
various procedural and other requirements which could make it more difficult for
stockholders to effect certain corporate actions. The issuance of preferred
stock and certain of the provisions in the Company's Certificate of
Incorporation and By-Laws may delay, defer or prevent a change in control of the
Company. The mere existence of these provisions could limit the price that
certain investors might be willing to pay in the future for shares of the Common
Stock and therefore may have a depressive effect on the market price of the
Common Stock.
Delaware Anti-takeover Provisions May Adversely Affect Holders of Common Stock
or Delay or Prevent Corporate Takeovers. Section 203 of the Delaware General
Corporation Law restricts certain business combinations with any "interested
stockholder" as defined in such law. This statute may delay, defer or prevent a
change in control of the Company.
4
<PAGE>
Risks Relating to the Company's Operations in Israel
Operations in Israel. The Company's two Israeli-based subsidiaries were
responsible for approximately 68% of the Company revenues in 1998. Accordingly,
the Company's operations are directly affected by economic, political and
military conditions in Israel. For information with respect to certain factors
concerning the State of Israel, and risks related to its economic and political
situation,
Some of the Company's employees are currently obligated to perform annual
reserve duty in the Israeli Defense Forces and are subject to being called for
active duty at any time upon the outbreak of hostilities. While the Company has
operated effectively under these requirements, no shareholder prediction can be
made as to the effect on the Company of any expansion of such obligation.
Impact of Inflation and Currency Fluctuations. Substantially all of the
Company's Israeli operations' expenses were in unlinked New Israeli Shekels
("NIS") and all of the expenses of the Company's Israeli subsidiaries continued
to be denominated in unlinked NIS. The Company's results are influenced by the
extent to which any inflation in Israel is not offset (or is offset on a lagging
basis) by the devaluation of the NIS in relation to the dollar. The inflation
rate in Israel was 7% in 1997 and 8.6% in 1998. At the same time, the
devaluation of the NIS against the dollar was limited to 8.8% in 1997 and 17.6%
in 1998. The Company could be adversely affected in the future as a result of
currency fluctuations.
5
