<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): APRIL 30, 1996
---------------------------
STECK-VAUGHN PUBLISHING CORPORATION
- - -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
DELAWARE 0-21730 33-0556929
- - ------------------ ------------ -------------------
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
8701 NORTH MOPAC EXPRESSWAY, SUITE 200, AUSTIN, TEXAS 78759-8365
- - ----------------------------------------------------- -------------------
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (512) 343-8227
-------------------------
- - -----------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
Page 1 of 40
Exhibit Index Appears on Page 3
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Effective April 30, 1996, Steck-Vaughn Publishing Corporation (the
"Registrant") acquired all of the outstanding capital stock of Edunetics Ltd.,
an Israeli corporation, pursuant to that certain Agreement dated February 29,
1996, between Registrant and Edunetics Ltd. Registrant purchased the capital
stock of Edunetics Ltd., which consisted of 6,000,000 authorized, issued and
outstanding shares of common stock, par value NIS 0.06, for aggregate
consideration of Twelve Million Dollars ($12,000,000). Registrant used cash on
hand and advances totalling $9,000,000 under its revolving bank credit
agreement with NationsBank of Texas, N.A., to fund the purchase price for the
capital stock of Edunetics Ltd.
Prior to April 30, 1996, Edunetics Ltd.'s capital stock was traded
publicly on the National Association of Securities Dealers, Inc. Automated
Quotation System, and was held by a broad number of shareholders, which
shareholders included The Israel Corporation, Ltd., an Israeli corporation
("TICL"). TICL held approximately 51.4% of the authorized, issued and
outstanding shares of common stock of Edunetics Ltd. In accordance with
applicable provisions of the Israel Companies Ordinance New Version 5743-1983,
the shareholders of Edunetics Ltd. and a court of competent jurisdiction in
Israel approved the acquisition by Registrant of all of the capital stock of
Edunetics Ltd. There were no known material relationships between the former
shareholders of Edunetics Ltd. and the Registrant or any of its affiliates,
directors, officers or associates thereof; however, certain employees of
Edunetics Ltd. and its subsidiaries, who now are employed by subsidiaries of
Registrant, may have been shareholders in Edunetics Ltd.
Edunetics Ltd. and its subsidiaries, through its principal operating
locations in Herzliya, Israel, Arlington, Virginia and Plano, Texas, develop,
market and support an extensive line of instructional software for teaching
grades K-12 in the United States. Registrant intends to continue Edunetics
Ltd.'s operations in developing, marketing and supporting instructional
software.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired. The following
financial statements of Edunetics Ltd. are incorporated by reference to the
Information Statement dated March 27, 1996, published by Edunetics Ltd. and
distributed to its stockholders (a copy of the financial statements is attached
hereto as Exhibit 20.1):
Page 2 of 40
<PAGE> 3
<TABLE>
<CAPTION>
Edunetics Ltd.
Information Statement
Item Page No.
---- --------
<S> <C>
Auditors' Report F-1
Consolidated Balance Sheets at December 31, 1995 and 1994 F-2
Consolidated Statements of Income for the Years
Ended December 31, 1995, 1994 and 1993 F-4
Consolidated Changes in Shareholders' Equity for
the Years Ended December 31, 1995, 1994 and 1993 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
(b) Pro Forma Financial Information. It is impracticable for
Registrant to file the pro forma financial information required by Item 7(b) at
this time. Such required pro forma financial information will be filed as soon
as it is available as an amendment to this Current Report on Form 8-K, and in
any event will be filed not later than 60 days after the date by which this
Current Report must be filed.
(c) Exhibits. The following exhibit is furnished in accordance
with the provisions of Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description Page Start
----------- ----------- ----------
<S> <C> <C>
10.1 Agreement between Registrant and Edunetics Ltd. *
dated February 29, 1996 (1)
20.1 Consolidated Financial Statements of Edunetics Ltd. (2) 5
</TABLE>
- - -----------------------
* Previously filed
(1) Incorporated by reference to Exhibit 10.19 in Registrant's Form 10-K
for the year ended December 31, 1995, filed with the Securities and
Exchange Commission on March 25, 1996.
(2) Filed herewith.
Page 3 of 40
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STECK-VAUGHN PUBLISHING CORPORATION
------------------------------------
(Registrant)
Date: May 13, 1996 By: /s/ FLOYD D. ROGERS
--------------------------------
Floyd D. Rogers
Vice President and Chief
Financial Officer
Page 4 of 40
<PAGE> 1
EXHIBIT 20.1
INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS OF
EDUNETICS LTD.
We have examined the consolidated balance sheets of Edunetics Ltd. (the
"Company") and its subsidiaries as at December 31, 1995 and 1994 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
Our examinations were made in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors Regulations (Mode
of Performance) 1973, and accordingly included such tests of the accounting
records and such other auditing procedures as we considered necessary under the
circumstances. Such auditing standards are substantially identical to generally
accepted auditing standards in the United States.
In our opinion, the aforementioned consolidated financial statements present
fairly the consolidated financial position of the Company and its subsidiaries
as at December 31, 1995 and 1994 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995,
in conformity with generally accepted accounting principles (GAAP) in Israel
and in the United States (as applicable to these financial statements, such
accounting principles are substantially identical), under the historical cost
convention.
Somekh Chaikin
Certified Public Accountants (Israel)
Tel-Aviv, Israel, March 11, 1996
F-1
<PAGE> 2
CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
NOTE $ $
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS 18
CURRENT ASSETS
Cash and cash equivalents 2C;3 3,400,491 2,719,307
Short-term bank deposits 4,13(6) 123,727 4,551,241
Trade receivables 2D;5 2,549,330 3,572,408
Billable receivable 13(4)(a) - 55,125
Other receivables 6 556,670 769,236
-------------- --------------
Total current assets 6,630,218 11,667,317
-------------- --------------
LONG-TERM RECEIVABLES 162,500 270,133
-------------- --------------
LONG-TERM DEPOSITS AND OTHER ASSETS 86,760 13,035
-------------- --------------
PROPERTY AND EQUIPMENT, NET 2E, 7 1,477,285 1,641,276
-------------- --------------
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET 2F, 8 2,142,294 1,476,462
-------------- --------------
-------------- --------------
10,499,057 15,068,223
============== ==============
</TABLE>
F-2
<PAGE> 3
Edunetics Ltd.
- - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
NOTE $ $
-------------- -------------- --------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY 18
CURRENT LIABILITIES
Short-term bank credits 9 1,411,095 753,842
Current maturities of long-term debt 11 - 78,970
Trade payables 348,694 694,067
Deferred income 2G 201,355 291,290
Other payables and accrued liabilities 10 1,283,089 1,481,470
-------------- --------------
Total current liabilities 3,244,233 3,299,639
-------------- --------------
LONG-TERM LIABILITIES
Severance pay 12 393,922 392,766
Deferred taxes 2I, 16C, 16D 278,490 71,200
-------------- --------------
Total long-term liabilities 672,412 463,966
-------------- --------------
Total liabilities 3,916,645 3,763,605
-------------- --------------
COMMITMENTS, CONTINGENCIES AND PLEDGE 13
SHAREHOLDERS' EQUITY 14
Share capital:
Ordinary shares of NIS 0.06 par value
(Authorized - 17,000,000 shares,
issued and outstanding 6,000,000 shares
as of December 31, 1995 and 1994) 142,081 142,081
Additional paid-in capital 15,843,939 15,843,939
Accumulated loss (9,403,608) (4,681,402)
-------------- -------------
Total shareholders' equity 6,582,412 11,304,618
-------------- --------------
-------------- --------------
10,499,057 15,068,223
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 4
Edunetics Ltd.
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
NOTE $ $ $
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES 2G, 15A 5,564,883 7,302,463 10,086,321
Costs of revenues 15B 2,360,231 2,523,014 1,526,576
-------------- ------------ ------------
GROSS PROFIT 3,204,652 4,779,449 8,559,745
-------------- ------------ ------------
COSTS AND EXPENSES
Research and product development costs 15C 3,716,697 3,730,247 2,468,795
Less - Royalty bearing participation 2H, 13(2)(a) 140,916 580,397 563,555
- Capitalization of software
development costs 2F 1,358,638 1,034,319 893,509
-------------- -------------- --------------
Research and product
development, net 2,217,143 2,115,531 1,011,731
-------------- -------------- --------------
Sales and marketing expenses 15D 3,670,651 6,789,675 4,398,899
Less - Participation of the
Fund for Encouragement of
Marketing Activities 2H, 13(2)(b) - 1,548 484,105
-------------- -------------- --------------
Sales and marketing expenses, net 3,670,651 6,788,127 3,914,794
-------------- -------------- --------------
General and administrative expenses 15E 1,922,437 2,328,833 1,322,240
-------------- -------------- --------------
Restructuring charge - 230,992 -
-------------- -------------- --------------
Total costs and expenses 7,810,231 11,463,483 6,248,765
-------------- -------------- --------------
OPERATING (LOSS) INCOME (4,605,579) (6,684,034) 2,310,980
Financial income, net 15F 104,622 381,219 68,567
-------------- -------------- --------------
NET (LOSS) INCOME BEFORE TAXES (4,500,957) (6,302,815) 2,379,547
Taxes on income 16C 221,249 186,025 10,000
-------------- -------------- --------------
NET (LOSS) INCOME (4,722,206) (6,488,840) 2,369,547
============== ============== ==============
PRIMARY (LOSS) EARNINGS PER SHARE 15G (0.79) (1.08) 0.42
============== ============== ==============
FULLY DILUTED LOSS PER SHARE 15G (0.79) (1.18) -
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 5
Edunetics Ltd.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF SHARE ADDITIONAL ACCUMULATED TOTAL
SHARES CAPITAL PAID-IN LOSS
OUTSTANDING(1) CAPITAL
-------------- ----------- -------------- -------------- --------------
$ $ $ $
----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AS AT
JANUARY 1, 1993 4,256,717 104,070 - (562,109) (458,039)
Issuance of
share capital 243,283 5,200 - - 5,200
Issuance of
share capital
to the public 1,500,000 32,811 17,967,189 - 18,000,000
Share issuance
expenses(2) - - (2,123,250) - (2,123,250)
Net income for
the year - - - 2,369,547 2,369,547
-------------- -------------- -------------- -------------- --------------
BALANCE AS AT
DECEMBER 31, 1993 6,000,000 142,081 15,843,939 1,807,438 17,793,458
Loss for the year - - - (6,488,840) (6,488,840)
-------------- -------------- -------------- -------------- --------------
BALANCE AS AT
DECEMBER 31, 1994 6,000,000 142,081 15,843,939 (4,681,402) 11,304,618
Loss for the year - - - (4,722,206) (4,722,206)
-------------- -------------- -------------- -------------- --------------
BALANCE AS AT
DECEMBER 31, 1995 6,000,000 142,081 15,843,939 (9,403,608) 6,582,412
============== ============== ============== ============== ==============
</TABLE>
(1) After giving retroactive effect to a stock split into shares of par
value NIS 0.06 each (see also Note 14A).
(2) Net of deferred taxes of $115,000.
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 6
Edunetics Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income (4,722,206) (6,488,840) 2,369,547
Total adjustments to reconcile net
(loss) income to net cash (used in)
provided by operating activities
(see Appendix 1) 2,145,613 2,115,349 (159,994)
-------------- -------------- --------------
Net cash (used in) provided by
operating activities (2,576,593) (4,373,491) 2,209,553
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalization of software development costs (1,358,638) (1,034,319) (893,509)
Purchase of equipment (372,001) (825,820) (910,764)
Proceeds from sale of equipment 56,344 27,117 5,977
Decrease (increase) in short-term bank deposits 4,427,514 (4,551,241) -
(Increase) decrease in long-term deposits
and other assets (73,725) 2,743 (8,351)
-------------- -------------- --------------
Net cash provided by (used in)
investing activities 2,679,494 (6,381,520) (1,806,647)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of shares,
net of issuance expenses - - 15,766,950
Proceeds (payments) relating to short-term
debt and bank credit, net 657,253 753,842 (3,238,864)
Proceeds from long-term debt issuance - - 75,000
Payments relating to long-term debt (78,970) (321,173) (33,118)
-------------- -------------- --------------
Net cash provided by financing activities 578,283 432,669 12,569,968
-------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 681,184 (10,322,342) 12,972,874
BALANCE OF CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,719,307 13,041,649 68,775
-------------- -------------- --------------
BALANCE OF CASH AND CASH EQUIVALENTS
AT END OF YEAR 3,400,491 2,719,307 13,041,649
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 7
Edunetics Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONT'D)
- - ------------------------------------------------------------------------------
APPENDIX 1 - RECONCILIATION OF (LOSS) NET INCOME TO NET CASH (USED IN)
PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
ADJUSTMENTS TO RECONCILE (LOSS) NET INCOME TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,158,029 1,589,993 449,877
Long-term deferred taxes 207,290 157,700 28,500
Increase in severance pay 1,156 95,768 74,647
Loss (gain) from disposal of equipment 14,425 (3,065) 2,032
CHANGES IN ASSET AND LIABILITY ITEMS:
Decrease (increase) in trade receivables
(including noncurrent accounts receivable) 1,130,711 (729,956) (472,792)
Decrease (increase) in billable receivable 55,125 194,375 (249,500)
Decrease in other receivables 212,566 43,197 335,505
(Decrease) increase in trade payables (345,373) 46,987 228,310
Decrease in deferred income (89,935) (534) (383,342)
(Decrease) increase in other payables and
accrued liabilities (198,381) 720,884 (173,231)
-------------- -------------- --------------
2,145,613 2,115,349 (159,994)
============== ============== ==============
APPENDIX 2 - SUPPLEMENTAL SCHEDULE OF NON-CASH
ACTIVITIES
Deferred taxes relating to share
issuance expenses - - 115,000
============= ============== ==============
APPENDIX 3 - CASH PAID DURING THE YEAR IN RESPECT OF
Interest 140,458 45,582 107,885
============== ============== ==============
Income tax 12,971 18,894 24,121
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 8
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 1 - GENERAL
A. (1) In these statements -
The Company - Edunetics Ltd. and subsidiaries.
Parent company - The Israel Corporation Ltd.
Related companies - Subsidiaries of The Israel
Corporation Ltd.
Interested parties - as defined in the Israeli Securities
(Preparation of Annual Financial Statements)
Regulations, 1993.
(2) Throughout the reported years the Company operated on a
"stand alone" basis, and its historical income statements
reflect all expenses relating to its operations.
B. The Company was formed on December 29, 1989 and began operations
on January 1, 1990. The Company develops, markets and supports
comprehensive, computer network-based software systems for
teaching science and mathematics curricula at the grades K-12.
The Company's principal customers and/or end-users include school
districts located primarily in the United States. These
customers are reached through direct sales, direct mail,
advertising and distributors.
C. On February 17, 1993, the Company changed its name from Edunetics
Educational Systems (1989) Limited to Edunetics Ltd.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
A. GENERAL
1. The financial statements of the Company are prepared in
conformity with generally accepted accounting principles. This
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.
These are management's best estimates based on experience and
historical data, however actual results may vary from these
estimates.
F-8
<PAGE> 9
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
A. GENERAL (CONT'D)
2. The accompanying financial statements are presented in U.S.
dollars. The Company's operations are conducted primarily in
U.S. dollars and the U.S. dollar is its functional currency,
with substantially the majority of sales and expenses being made
in U.S. dollars.
Transactions and balances denominated in U.S. dollars are
presented at their original amounts. Non-dollar transactions and
balances have been remeasured to U.S. dollars in accordance with
the principles set forth in statement No. 52 of the Financial
Accounting Standards Board of the United States (FASB). Dollar
amounts in the financial statements representing the dollar
equivalents of balances denominated in other currencies may not
necessarily be exchangeable for dollars. All exchange gains and
losses from remeasurement of monetary balance sheet items
denominated in non-dollar currencies are reflected in the income
statement as they arise. Such exchange gains and losses are
included in financial income or expenses as appropriate.
The financial statements are based upon the historical cost
convention.
3. Certain reclassifications were made to the prior years' figures
in the financial statements in order to present them in a manner
which conforms with the current year's presentation.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of the Company and of the following subsidiary companies:
<TABLE>
<CAPTION>
DIRECT AND
INDIRECT
OWNERSHIP
AND CONTROL
--------------
%
--------------
<S> <C>
Edunetics International B.V. - registered in the Netherlands 100
Edunetics Corporation - registered in the United States 100
</TABLE>
Another wholly-owned subsidiary, Edunetics Learning and Communication
Systems 1990 Ltd. is inactive and not consolidated into the financial
statements.
All intercompany transactions and balances have been eliminated in the
consolidation.
C. CASH EQUIVALENTS
The Company considers all highly liquid debt instruments, with a
maturity of three months or less at date of purchase, to be cash
equivalents.
F-9
<PAGE> 10
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
D. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The financial statements include specific allowances for doubtful debts
that fairly present, in management's opinion, the potential loss that
may result from debts collection of which is doubtful.
In determining the adequacy of the allowances, management based its
assessment of risk, on the ground of information available pertaining to
the financial position of the debtors.
Doubtful debts which, in management's opinion have no chances of
collection are written off the Company's accounts based on management's
decision.
E. PROPERTY AND EQUIPMENT
1. Property and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated by the "straight-line"
method at annual rates considered adequate to write-off the
assets over their estimated useful lives.
Annual deprecation rates are as follows:
<TABLE>
<CAPTION>
%
--------------
<S> <C>
Computers and related equipment 20
Motor vehicles 15, 20
Office furniture and equipment 6, 7, 15, 20
</TABLE>
Leasehold improvements are amortized by the straight-line method
over the remaining life of the lease, which is shorter than the
useful life of the improvements. The lease periods are up to 5
years with an option to renew for a period of another 4 years.
2. In March 1995, the Financial Accounting Standards Board (FASB)
issued Statement No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of".
The standard required that long-lived assets and certain
identifiable intangibles to be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable based on the fair value
of the asset. One of the ways to estimate the fair value is the
future cash flows expected to result from the use of the asset
and its eventual disposition.
The Company is required to adopt this standard for the fiscal
year beginning January 1, 1996.
Adoption of the standard is not expected to have a material
impact on the Company's financial statements.
F-10
<PAGE> 11
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
F. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The company capitalizes certain software development costs in
accordance with statement of Financial Accounting Standards
(SFAS) No. 86 "Accounting for costs of Computer Software to be
sold, leased or otherwise marketed". Capitalization of software
development costs begins upon the establishment of technological
feasibility as defined in the Statement and continues up to the
time the software is available for general release to customers.
Capitalized software development costs are amortized by the
greater of the amount computed using the: (i) ratio that current
gross revenues from sales of the software bear to the total of
current and anticipated future gross revenues from sales of that
software or (ii) the straight-line method over the estimated
useful life of the product (typically three-five years).
Software production costs include costs related to projects which
have recently been released or are not completed and not yet
available for release to customers. Based on past experience,
management believes these projects will be completed and that
future revenues related to these projects will be sufficient to
realize the amounts capitalized as at December 31, 1995, and as
such these amounts will be recovered over the lives of the
related products.
However it is reasonably possible, that those estimates of future
revenues could be impacted if these projects are not finally
completed and released or if the market acceptance of the related
products is not what is anticipated by management and as a
result, the recoveries of these capitalized software development
costs through future revenues could be reduced (see 2E2 above).
Costs incurred prior to establishment of technological
feasibility are charged to research and product development
expenses.
G. REVENUE RECOGNITION
In compliance with the provisions of SOP 91-1 "Software Revenue
Recognition", the Company recognizes revenues from software products
sales as follows:
(i) when a non-cancelable license agreement has been signed or a
purchase order has been received, the product has been delivered
and all significant obligations have been satisfied, or
(ii) based on license fee payments (such as payments under the Jostens
agreement) as they fall due, in the case where the conditions in
(i) above are met, but the license fee is payable over a period
which exceeds one year (for a further description of significant
agreements, see Note 13(3) and (4) hereunder).
The Company allocates a portion of contractual license fees attributable
to post-contract training and support. Revenues from these
post-contract support activities are recognized ratably over the service
period.
F-11
<PAGE> 12
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
H. ROYALTY BEARING PARTICIPATIONS
The Company receives royalty bearing participations, which represent
participation of the Government of Israel in approved programs for
research and development and marketing activities. These amounts are
recognized on the accrual basis as a reduction of research and
development and marketing expenses as such expenses are incurred. See
Note 13(2) relating to commitments under these programs.
I. DEFERRED INCOME TAXES
1. The Company adopted SFAS No. 109 - "Accounting for Income Taxes"
in 1993 and recorded such effect in the income statement as
"cumulative effect of change in accounting principle". Prior to
adoption of SFAS 109, the Company applied APB 11. SFAS 109 is a
liability approach to recording deferred taxes.
2. Deferred taxes at current tax rates are provided for temporary
differences between the tax and financial respecting basis of
balance sheet items.
A deferred tax asset is recorded related to net operating loss
carryforward. Valuation allowances are recorded against deferred
tax assets when it is considered more likely than not that the
deferred tax asset will not be realized.
The Company did not provide for deferred taxes on undistributed
earnings resulting of the "approved enterprises" as such earnings
are not taxable to the Company in a liquidation as such taxes
would be due from the shareholders (see Not 16A1).
3. In accordance with paragraph g(f) of FAS 109, no deferred taxes
are provided for differences between the book and tax basis
related to changes in exchange rate and indexing recognized for
tax purposes as these deferred taxes are immaterial.
F-12
<PAGE> 13
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 3 - CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
-------------- -------------
$ $
-------------- -------------
<S> <C> <C>
U.S. dollars 3,400,020(1) 2,718,678
NIS 471 629
-------------- -------------
3,400,491 2,719,307
============== =============
</TABLE>
(1) Including short-term deposits (see Note 2C) of $3,055,700 with
annual average interest rate of 5.673%.
NOTE 4 - SHORT-TERM BANK DEPOSITS
The amount was deposited for the period September 29, 1995 to January 2,
1996 and bears interest at an annual average rate of 5.8125%. See Note
13(6) as to pledge.
NOTE 5 - TRADE RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
-------------- -------------
$ $
-------------- -------------
<S> <C> <C>
Trade (1) 1,837,912 4,053,415
Income receivable (2) 1,311,768 53,993
-------------- -------------
3,149,680 4,107,408
Less - allowance for doubtful accounts 600,350 535,000
-------------- -------------
2,549,330 3,572,408
============== =============
(1) Including checks receivable 4,013 37,305
============== =============
(2) These amounts are billed in accordance with
specific contract terms.
</TABLE>
See Notes 2D and 13(7).
F-13
<PAGE> 14
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 6 - OTHER RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
-------------- -------------
$ $
-------------- -------------
<S> <C> <C>
Research and development grants receivable 175,192 382,152
Income receivable 32,947 111,176
Income tax refundable 9,704 71,669
Prepaid expenses 105,047 70,526
Employees 92,347 75,628
Deferred taxes (1) - 13,065
Prepaid packaging costs 86,952 8,424
Other 54,481 36,596
-------------- -------------
556,670 769,236
============== =============
</TABLE>
(1) See Note 16C.
F-14
<PAGE> 15
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 7 - PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
COMPUTERS MOTOR OFFICE LEASEHOLD TOTAL
VEHICLES FURNITURE AND IMPROVEMENTS
EQUIPMENT
-------------- -------------- -------------- -------------- --------------
$ $ $ $ $
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
COST
Balance as at
January 1, 1995 1,799,115 160,493 413,833 437,012 2,810,453
Additions 308,946 29,851 8,972 24,232 372,001
Disposals (142,853) (47,260) (42,066) (22,395) (254,574)
-------------- -------------- -------------- -------------- --------------
Balance as at
December 31,
1995 1,965,208 143,084 380,739 438,849 2,927,880
-------------- -------------- -------------- -------------- --------------
ACCUMULATED
DEPRECIATION
Balance as at
January 1, 1995 720,106 63,459 119,478 266,134 1,169,177
Additions 344,047 20,597 74,411 26,168 465,223
Disposals (119,145) (24,401) (37,178) (3,081) (183,805)
-------------- -------------- -------------- -------------- --------------
Balance as at
December 31,
1995 945,008 59,655 156,711 289,221 1,450,595
-------------- -------------- -------------- -------------- --------------
UNDEPRECIATED
BALANCE
As at
December 31,
1995 1,020,200 83,429 224,028 149,628 1,477,285
============== ============== ============== ============== ==============
As at
December 31,
1994 1,079,009 97,034 294,355 170,878 1,641,276
============== ============== ============== ============== ==============
</TABLE>
F-15
<PAGE> 16
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 8 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
-------------- --------------
$ $
-------------- --------------
<S> <C> <C>
COSTS:
Balance at beginning of year 2,741,828 1,707,509
Capitalization during the year 1,358,638 1,034,319
-------------- --------------
Balance at end of year 4,100,466 2,741,828
-------------- --------------
AMORTIZATION:
Balance at beginning of year 1,265,366 213,407
Amortization during the year 692,806 444,714
Write-down (1) - 607,245
-------------- --------------
Balance at end of year 1,958,172 1,265,366
-------------- --------------
Capitalized Software Development Costs, net 2,142,294 1,476,462
============== ==============
</TABLE>
(1) The $607,245 write-down was made due to product repositioning and
reassessment of the future revenue value of several software
development projects due to changes in market conditions.
NOTE 9 - SHORT-TERM BANK CREDITS
A. COMPRISED AS FOLLOWS:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
-------------- --------------
$ $
-------------- --------------
<S> <C> <C>
Bank overdraft 311,095 3,842
Bank short-term loans (1) 1,100,000 750,000
-------------- --------------
1,411,095 753,842
============== ==============
</TABLE>
(1) As to security - See Note 13(6)
F-16
<PAGE> 17
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 9 - SHORT-TERM DEBT AND BANK CREDIT (CONT'D)
B. DETAILS OF SHORT-TERM LOANS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------
1995 1994 1993
--------------------------- --------------------------- ---------------------------
SHORT-TERM REVOLVING SHORT-TERM REVOLVING SHORT-TERM REVOLVING
LOANS CREDIT LOANS CREDIT LOANS CREDIT
------------ ------------ ------------ ------------ ------------ ------------
$ $ $ $ $ $
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Maximum amount of
short-term credits
outstanding
during the year:
In U.S. $ 1,525,000 - 750,000 - - -
In NIS - 341,787 - 219,663 - -
Weighted average
balance of short-term
credits outstanding
during the year (1):
In U.S. $ 1,170,833 - 80,137 - - -
In NIS - 234,375 - 22,721 - -
Balance at
end of year:
In U.S. $ 1,100,000 - 750,000 - - -
In NIS - 311,095 - 3,842 - -
% % % % % %
------------ ------------ ------------ ------------ ------------ ------------
Interest rates
on credit at
the end of year:
In U.S. $ 6.93 - 9.50 - - -
In NIS - 18.2 - 21.00 - -
Weighted average
interest rates
on credit (2):
In U.S. $ 8.71 - 9.50 - - -
In NIS - 16.05 - 17.40 - -
</TABLE>
(1) The average amount outstanding during the year was computed by dividing
the total of month-end outstanding principal balances by the number of
months in the year.
(2) The weighted average interest rates during the year were computed by
dividing the actual interest expenses by the average short-term debt
outstanding.
F-17
<PAGE> 18
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 10 - OTHER PAYABLES AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
-------------- --------------
$ $
-------------- --------------
<S> <C> <C>
Payroll and related expenses 785,819 782,521
Accounts payable 182,124 460,682
Related company 3,589 183
Royalties payable to the Chief Scientist 29,854 81,168
Royalties payable to the fund for
encouragement of marketing activities 33,445 27,593
Prepaid income 41,140 50,346
Other payables 207,118 78,977
-------------- --------------
1,283,089 1,481,470
============== ==============
</TABLE>
NOTE 11 - LONG-TERM DEBT
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE DECEMBER 31 DECEMBER 31
INTEREST RATE 1995 1994
-------------- -------------- --------------
% $ $
-------------- -------------- --------------
<S> <C> <C> <C>
Bank loan - - 75,000
Bank loans related to Export Marketing
Encouragement Fund - - 3,970
-------------- --------------
- 78,970
Less - current maturities - 78,970
-------------- --------------
- -
============== ==============
</TABLE>
F-18
<PAGE> 19
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 12 - SEVERANCE PAY
A. ISRAELI EMPLOYEES
1. The Company's employees in Israel are entitled by Law to
severance pay upon dismissal and also in certain other
circumstances. The amount payable is based upon their latest
monthly salary and the length of time they have worked with the
Company.
2. The liability of the Company for severance pay is calculated on
the basis of the latest salary paid to its employees and the
length of time they have worked for the Company. This liability
is partly covered by current payments toward executives'
insurance policies (in respect of the senior staff) and partly by
the provision created in the books. The value of the insurance
policies at balance sheet date is not reflected in the accounts
as the policies are not under the control and management of the
Company.
3. Severance pay expenses amounted to $ 120,458, $157,738, and
$99,624 for the three years ended December 31, 1995, 1994 and
1993, respectively.
B. U.S. EMPLOYEES
Effective January 1, 1994, the U.S. subsidiary company established a
tax-deferred saving plan ("the Plan") which qualifies under Section
401(K) of the Internal Revenue Code of 1986, as amended (the "Code").
Employees are eligible to participate in the Plan following the
completion of one year of service and attainment of age 21. Employees
may contribute a percentage of their income, up to the amount allowable
under the limitation of the Internal Revenue code Section 401(K), 404
and 415. The subsidiary's contribution equals 25% on the first 6% of
participants' gross income. Employees vest in the subsidiary's
contribution over a five year period. The subsidiary contributed
approximately $20,000 and $38,000 to the plan for the two years ended
December 31, 1995 and 1994 respectively.
F-19
<PAGE> 20
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS, CONTINGENCIES AND PLEDGE
1. LEASE COMMITMENTS
The Company and one subsidiary have various operating leases for office
and product development facilities as well as equipment, which expire at
various dates through 1999. Aggregate minimum rental commitments under
these leases as of December 31, 1995, are as follows:
<TABLE>
<CAPTION>
$
--------------
<S> <C>
1996 369,371
1997 351,680
1998 280,214
1999 109,172
--------------
1,110,437
==============
</TABLE>
Total rental expense under operating leases was $465,800, $358,408, and
$156,675 for the three years ended December 31, 1995, 1994, and 1993,
respectively.
On February 2, 1994, the Company entered into a lease agreement for new
office premises measuring 1,670 square meters, in a new office building
in Herzlia Pituah, Israel. The lease is for a period of five years,
commencing October 1, 1994 with an option to extend the lease period
for up to four additional years. The yearly rental payments amount to
$302,580 (including garage space for 19 vehicles).
The rent for the extended period of the lease will be fixed according to
the then prevailing market rates in the area less a discount of 8%, as
determined by a licensed real estate appraiser to be chosen by the
parties.
The rent in each year following the first year of the lease period will
be increased by either 3% or by the rate of change in the United States
consumer price index, whichever is lower.
Some addendums to the lease agreement were signed during the year as to
reduce the leased area. The last addendum was signed on October 1, 1995
and reduced the lease area to 767 square meters (including 12 vehicles).
The yearly rental payments reduced to $141,618.
The above stated aggregate minimum rental include the commitments for
rentals under this addendum.
F-20
<PAGE> 21
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS, CONTINGENCIES AND PLEDGE (CONT'D)
2. ROYALTY COMMITMENTS
A. ISRAEL GOVERNMENT
(1) The Company is committed to pay royalties to the Government of
Israel on proceeds from the sale of products, the research and
development of which was carried out with the Government of
Israel's participation by way of grants. The royalty rate is 3%.
Royalties are payable from commencement of sales of each of these
products, until the cumulative amount of the royalties paid
equals 100% to 150% of the grant received in U.S. dollars (as the
case may be) without interest.
The net amount refundable resulting from successful projects only
in respect of these grants amounted to $ 4,876,061 and $4,190,874
at December 31, 1995 and 1994, respectively.
(2) Under the terms of the Government of Israel Fund for the
Encouragement of Marketing Activities, a royalty of 3% of the
increase in export sales from Israel must generally be paid, in
respect of grants received relating to marketing expenses, from
the end of the first year of implementation of the marketing plan
until the date at which the participation received in U.S.
dollars in respect of marketing expenses has been fully repaid.
The total amount refundable in respect of these grants amounted
to $1,199,927 and $ 1,205,779 at December 31, 1995 and 1994,
respectively.
B. OTHER
As part of its product development the Company acquired technology
developed by a third party. The Company is committed to pay the
developer royalties at the rate of 2% on proceeds from the sale of
products which are based on that technology.
3. SIGNIFICANT DISTRIBUTION AGREEMENTS
a. In June 1991, a subsidiary company signed an eight year
distribution agreement as amended during December 1992 with Wicat
Systems, Inc., now a division of Jostens Learning Corporation, to
distribute certain of the Company's products in exchange for
non-refundable advance minimum royalty payments totalling
$6,000,000, payable quarterly over the first three years of the
agreement. The Company has recognized revenue as the minimum
royalty became due.
For the year ended December 31, 1994 the Company recognized
$500,000 of revenue under this agreement, approximately 6.8% of
total revenues.
F-21
<PAGE> 22
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS, CONTINGENCIES AND PLEDGE (CONT'D)
3. SIGNIFICANT DISTRIBUTION AGREEMENTS
Guaranteed minimum royalty payments of $6,000,000 were completed
on June 30, 1994. For the remaining term of the agreement, the
distributor is liable to the Company for 40% of the distributors'
annual gross sales in excess of the previously paid non-
refundable advance minimum royalty payments. Commencing June 30,
1997 the agreement may be terminated under certain conditions
specified in the distribution agreement.
b. In May 1995, the subsidiary company entered into a two year
distribution agreement with TRO Learning to distribute certain of
the subsidiary company's products in exchange for non-refundable
advance minimum royalty payments totalling $1,250,000, payable
quarterly over the term of the agreement. The Company recognizes
as revenue the minimum guaranteed amount for the year.
For the year ended December 31, 1995 the Company recognized
$500,000 of revenue under this agreement, representing
approximately 9% of total revenues.
At December 31, 1995, approximately $449,000 was due from this
distributor.
4. SIGNIFICANT CONTRACTS
a. In June 1993, a subsidiary company entered into an agreement with
the Plano Independent School District ("Plano") in Plano, Texas,
to provide educational and technology-based instructional
material and on-site services for grades K-5. Under the terms of
the agreement with Plano, the subsidiary company will recognize
$8.9 million over a 40-month period, subject to early termination
under certain conditions specified in the contract.
In June 1995, the subsidiary company entered into an addendum
with Plano to change the format of the product deliverables and
increase the royalty to Plano from five percent to fifteen
percent of gross sales of certain of the instructional materials,
excluding software products, over five to seven years. The
subsidiary company retains ownership of the instructional
materials developed under the agreement.
Revenue on the amended contract is recognized on delivery of
services or completion of certain development stages for the
products, and when collectibility is probable.
For the years ended December 31, 1995 and 1994, the Company
recognized $ 1,633,487 and $1,002,650 of revenue, respectively,
under these agreements, representing approximately 20.9% and
13.7% of total revenues in the respective years.
At December 31, 1995 approximately $487,000 was due from Plano
under this cotract.
F-22
<PAGE> 23
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS, CONTINGENCIES AND PLEDGE (CONT'D)
4. SIGNIFICANT CONTRACTS (CONT'D)
At December 31, 1994 $55,125 of revenue, under this contract was
reported as billable receivables. These amounts relate to
instructional material delivered for which other remaining
Company obligations are insignificant. These amounts were
collected in full during the year ended December 31, 1995.
b. Effective June 30, 1994, a subsidiary company entered into an
agreement with the Niagara Falls City School District ("Niagara")
in Niagara Falls, New York, to provide an integrated
technology-based curriculum for the elementary, junior high
school and high school grades of Niagara. In December 1995, the
subsidiary Company entered into an addendum with Niagra to
increase the contract amount by $300,000, and extended the term
by two years. Under the new terms of the agreement with Niagra,
the subsidiary company will recognize $3.1 million over a 5-year
period, subject to early termination under certain conditions
specified in the contract. Revenue on this contract is
recognized on delivery of products or services for which
remaining company obligations are not significant and
collectibility is probable.
For the years ended December 31, 1995, and 1994 the Company
recognized $ 750,000 and $1,242,000 of revenue under this
agreement representing approximately 13.5% and 17% of the total
revenues in the respective years.
5. BANK GUARANTEES
At December 31, 1995 the Company is contingently liable for bank
guarantees issued on the Company's behalf totalling $17,270 (linked to
the CPI).
6. PLEDGE
An amount of $ 1,100,000 of the short term bank deposits included as
short-term bank deposits and cash equivalents is pledged as collateral
for a short-term loan granted to a subsidiary.
7. CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations
of credit risk consist principally of its cash and trade receivables.
The Company's cash has been deposited with major Israeli and U.S. banks
with a strong credit rating.
The Company has not experienced any losses on its cash.
F-23
<PAGE> 24
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS, CONTINGENCIES AND PLEDGE (CONT'D)
7. CONCENTRATION OF CREDIT RISK (CONT'D)
Substantially, most of the Company's trade receivables are due form
school districts located mainly in the United States.
Receipts on trade receivables are highly cyclical based upon the school
districts' fiscal years.
Most of school districts required extensive review and approval of
disbursements before they will be released. In some cases, this may
delay receipts by the Company.
The Company has established a reserve for amounts that may be
uncollectible based on management's estimates of the collectibility of
accounts receivables as at December 31, 1995 (See Notes 2D and 5).
NOTE 14 - SHAREHOLDERS' EQUITY
A. AUTHORIZED, ISSUED AND OUTSTANDING SHARE CAPITAL
1. As at December 31, 1992, the issued and outstanding share capital
comprised 254, 403 Ordinary Shares of par value NIS 1 each and
1,000 Management Shares of par value NIS 1 each, aggregating an
issued share capital of par value NIS 255,403. (Following a
later merger of the two classes of shares into one class of
Ordinary Shares and following the later change in the par value
denomination of each such share the said issued and outstanding
share capital at December 31, 1992 represented 4,256,717 Ordinary
Shares of par value NIS 0.06 each.)
Changes in the share capital during 1993, were as follows:
. The authorized share capital of the Company was increased
to NIS 1,020,000, by the authorization of an additional
20,000 Ordinary Shares of par value NIS 1 each.
. Pursuant to the agreement with a related company, 2,808
Ordinary Shares of par value of NIS 1 each were issued to
the order of the related company for a cash payment of
their par value and for waiver of the remaining rights of
the related company to royalties amounting to $366,000. At
the same time, 11,789 Ordinary Shares of par value NIS 1
each were issued to all existing shareholders in proportion
to their respective share holdings for a cash payment of
their par value.
F-24
<PAGE> 25
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 14 - SHAREHOLDERS' EQUITY (CONT'D)
A. AUTHORIZED, ISSUED AND OUTSTANDING SHARE CAPITAL (CONT'D)
Following these issues, the issued and outstanding share capital
constituted 269,000 Ordinary Shares of par value NIS 1 each and
1,000 Management Shares of par value of NIS 1 each.
. In February 1993, the two classes of the existing shares of
the Company were merged into one class of Ordinary Shares
of par value of NIS 1 each, having equal rights.
. Immediately thereafter, the Company effected a
recapitalization of its share capital, whereby the
authorized capital of 1,020,000 Ordinary Shares of par
value NIS 1 each was split into 17,000,000 Ordinary Shares
of par value NIS 0.06 each.
2. On April 13, 1993, 1,500,000 Ordinary Shares of par value of NIS
0.06 each were issued to the public.
3. Following the above mentioned changes the Company's share capital
at December 31, 1995 and 1994 is comprised of:
<TABLE>
<CAPTION>
AUTHORIZED ISSUED AND
OUTSTANDING
-------------- --------------
<S> <C> <C>
Ordinary Shares of a par
value of NIS 0.06 each 17,000,000 6,000,000
============== ==============
</TABLE>
B. DIVIDENDS
Dividends, if declared, may be paid by the Company only out of
unconsolidated retained earnings in Israeli currency as determined for
Israeli statutory purposes. There are no restrictions on the transfer
of funds to foreign shareholders for the payments of dividends.
C. STOCK OPTION PLAN
On March 28, 1993, the Board of Directors of the Company and a Meeting
of Shareholders adopted the Company's 1993 Stock Option Plan (the "1993
Plan").
The 1993 Plan provides that Option Awards may be granted to any officer,
key employee or other employee of the Company or any subsidiary of the
Company, whether or not a director of the Company. Directors of the
Company who are not employees may also be eligible to participate in the
1993 Plan. The 1993 Plan will expire on March 28, 2003. The 1993 Plan
is designed to benefit from the provisions of Section 102 of the Israeli
Income Tax Ordinance (New Version), 1961, with respect to employees of
the Company, and from the provisions of the Internal Revenue Code of
1986, as amended, with respect to employees of the Company's U.S.
subsidiary.
F-25
<PAGE> 26
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 14 - SHAREHOLDERS' EQUITY (CONT'D)
C. STOCK OPTION PLAN (CONT'D)
Under the terms of the 1993 Plan, the Company has reserved 540,000
unissued Ordinary Shares for purposes of the Plan, subject to anti-
dilution adjustments.
The Option Awards are personal and non-assignable and terminate upon the
cessation of employment or service as Director (except for approved
retirement or termination caused by death or disability).
The price per share under the Option Award shall be determined on the
date of grant, provided that such price shall not be less than 85% of
the fair market value on such date. The price per share under the
Option Awards qualifying as "incentive stock options" under the U.S.
Internal Revenue Code shall not be less than 100% of the fair market
value, or 110% if at the time of the grant the Grantee owns more than
10% of the total voting stock of the Company.
The option awards granted by the Company as detailed below were at an
exercise price of $12 per Ordinary Share, equal to the price of the
Initial Public Offering. The entitlement to purchase the said shares
vests at the rate of 33.33% per year as from the first anniversary of
the date the option awards were granted.
Effective March 6, 1995 the Stock Option committee of the company
decided to adopt certain changes at the option awards granted by the
Company to its employees.
The option awards granted by the Company will be at an exercise price of
$2 per Ordinary Share, vesting at the rate of 33 1/3% per year as of the
first anniversary of the Effective Date (March 6, 1995)
Following are the changes in the outstanding option awards during the
year:
<TABLE>
<CAPTION>
OPTION AWARDS
FOR ORDINARY SHARES
-------------------------------
OFFICERS AND
DIRECTORS EMPLOYEES
-------------- --------------
<S> <C> <C> <C>
OUTSTANDING AT JANUARY 1, 1995 78,000 196,000
Changes during 1995:
-------------------
Cancellation of option awards - (196,000)
Grants in March 1995 - 258,000
Cancellation of option awards
upon cessation of empoyment (30,000) (1,500)
-------------- --------------
OUTSTANDING AT DECEMBER 31, 1995 48,000 256,500
============== ==============
</TABLE>
F-26
<PAGE> 27
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 15 - DETAILS OF CONSOLIDATED STATEMENTS OF INCOME
A. REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
Sales of software products classified
by geographical markets:
United States 4,571,388 6,598,723 9,239,188
Israel 238,899 214,765 368,707
Other countries 475,745 354,662 214,574
-------------- -------------- --------------
5,286,032 7,168,150 9,822,469
Services and support 278,851 134,313 240,842
Exchange rate insurance - - 23,010
-------------- -------------- --------------
5,564,883 7,302,463 10,086,321
============== ============== ==============
Revenues from single customers
exceeding 10% of total revenues:(1)
Jostens Learning Corporation, a distributor - 500,000 2,500,000
Plano Independent School District 1,633,487 1,002,650 3,030,667
Niagara Falls City School District 750,000 1,242,000 -
TRO 500,000 - -
-------------- -------------- --------------
2,883,487 2,744,650 5,530,667
============== ============== ==============
</TABLE>
(1) See Note 13.3 and 4.
B. COST OF REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
Amortization of capitalized
software development costs 692,806 444,716 168,407
Write-down of capitalized
software development costs - 607,245 -
Support costs 471,157 305,033 423,368
Projects' management 892,796 823,302 692,229
Commissions 291,472 331,718 215,572
Other 12,000 11,000 27,000
-------------- -------------- --------------
2,360,231 2,523,014 1,526,576
============== ============== ==============
</TABLE>
F-27
<PAGE> 28
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 15 - DETAILS OF CONSOLIDATED STATEMENTS OF INCOME (CONT'D)
C. RESEARCH AND PRODUCT DEVELOPMENT COSTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
Payroll and related expenses 2,439,751 2,713,285 1,229,601
Consultants and subcontractors 406,055 201,913 142,884
Travel 83,009 93,506 113,709
Depreciation 217,809 186,855 111,792
Rentals 179,512 75,967 47,397
Local taxes 47,742 25,782 20,802
Other 342,819 432,939 802,610
-------------- -------------- --------------
3,716,697 3,730,247 2,468,795
============== ============== ==============
</TABLE>
D. SALES AND MARKETING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
Payroll and related expenses 1,448,208 3,348,059 2,927,104
Travel 155,637 662,339 377,419
Royalties to the Government of Israel 82,171 267,276 175,798
Advertising and shows 16,560 408,763 293,139
Rentals 102,677 174,410 71,518
Allowance for doubtful accounts 423,350 631,925 25,000
Other 1,442,048 1,296,903 528,921
-------------- -------------- --------------
3,670,651 6,789,675 4,398,899
============== ============== ==============
</TABLE>
E. GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
Payroll and related expenses 1,045,017 1,032,231 590,378
Rentals 41,685 50,240 37,760
Local taxes 10,553 39,768 18,422
Depreciation 80,342 191,874 91,408
(Gain) loss on disposal of equipment 14,425 (3,065) 2,032
Other 730,415 1,017,785 582,240
-------------- -------------- --------------
1,922,437 2,328,833 1,322,240
============== ============== ==============
</TABLE>
F-28
<PAGE> 29
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 15 - DETAILS OF CONSOLIDATED STATEMENTS OF INCOME (CONT'D)
F. FINANCIAL INCOME, NET
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
Interest and bank charges on short-term
and long-term debt (163,944) (42,741) (112,329)
Interest income 287,456 438,924 233,426
Translation differences, net (18,890) (14,964) (52,530)
-------------- -------------- ---------------
104,622 381,219 68,567
============== ============== ==============
</TABLE>
G. EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share are based on the weighted average
number of Ordinary Shares outstanding during each year (for 1993 - after
giving retroactive effect to the stock split made during 1993, and to
the dilutive effect of shares issued during the year prior to the date
of the public offering at below the public offering price).
No effect has been given in 1995 to employees' option warrants granted
in 1993 as the market price of the shares throughout 1995 was below the
exercise price.
Fully diluted loss per share is based on the number of Ordinary Shares
as above as well as the assumed exercise of the employees' exercisable
option warrants, less the number of treasury shares assumed to be
purchased from the proceeds using the market price of the Company's
shares at the end of the year.
For the year ended December 31, 1995 fully dilluted loss per share were
computed based on the weighted average number of shares outstanding
only, as the effect of the outstanding stock option was immaterial.
The weighted average number of the shares used to compute earnings
(loss) per share is:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
For primary (loss) earnings per share 6,000,000 6,000,000 5,580,782
============== ============== ==============
For loss per share assuming full dilution 6,000,000 5,482,000 -
============== ============== ==============
</TABLE>
F-29
<PAGE> 30
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 16 - TAXES ON INCOME
A. TAX PROGRAMS UNDER VARIOUS ISRAELI TAX LAWS
1. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959
The Company's three investment programs in expanding its
production facilities in Israel have been granted "Approved
Enterprise" status in accordance with the above Law. Pursuant
thereto, the Company elected to participate in an "Alternative
Benefits Program", which entitles the Company to zero tax rate on
its undistributed income arising from the revenue that is derived
from the expanded facilities, for a period of two to four years,
from the year in which the Company first earns taxable income.
The income from those facilities in the three and five subsequent
years, respectively, will be subject to tax at a reduced rate of
25%. The Company's period of tax benefits relating to the first
two investment programs commenced in 1993.
The Company applied to the Investment Center for an amendment of
the letter of approval relating to the third investment program
increasing the amount of the investment program.
This amendment was approved by the Investment Center on February
18, 1996.
Any dividends distributed out of profit subject to a zero tax
rate will be subject to withholding tax in Israel at the rate of
25%. As of December 31, 1995, such profits amount to
approximately $386,000.
2. Measurement of results for tax purposed under the Income Tax Law
(Adjustments to Inflation), 1985
The Company's income in Israel is subject to tax in Israel under
the provisions of the above Law, pursuant to which the Israel
currency results for tax purposes in historical terms, are
measured in real terms in accordance with changes in the Israel
consumer price index (CPI). As a result the Company is entitled
to deduct from its taxable income an "equity preservation
deduction" (which partially compensates for the decrease in the
value of shareholders' equity resulting from the annual rise in
the Israeli CPI).
Under this law and related regulations, the Company was entitled
to charge 150% of the existing depreciation rates on equipment
used during the years ended December 31, 1993 and 1994.
3. Tax benefits under the Law for the Encouragement of Industry
(Taxation), 1959
The Company is an "Industrial Company", as defined by this Law,
and as such, is entitled to certain tax benefits, mainly
accelerated depreciation of machinery and equipment and deduction
over a three-year period of expenses incurred in connection with
a public stock offering.
F-30
<PAGE> 31
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 16 - TAXES ON INCOME (CONT'D)
A. TAX PROGRAMS UNDER VARIOUS ISRAELI TAX LAWS (CONT'D)
4. Tax rates applicable to income from other sources in Israel
Income not eligible for "approved enterprise" benefits as
mentioned above is taxed at the ordinary tax rates as follows:
1995 - 37%; 1994 - 38% and 1993 - 39%.
Under an amendment dated December 31, 1992 to the Israeli Tax
Ordinance, tax rate is being scaled down from the rate of 40% in
1992 over four years, by 1% per annum.
B. NON-ISRAELI SUBSIDIARIES
Non Israeli subsidiaries are taxes based upon tax laws in their
countries of residence.
C. TAXES ON INCOME INCLUDED IN THE CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
Current
-------
Israel - - 19,000
Foreign subsidiaries 2,851 3,890 -
-------------- -------------- --------------
2,851 3,890 19,000
-------------- -------------- --------------
Deferred
--------
Israel 218,398 68,135 105,000
Foreign subsidiaries - 114,000 (114,000)
-------------- -------------- --------------
218,398 182,135 (9,000)
-------------- -------------- --------------
221,249 186,025 10,000
============== ============== ==============
</TABLE>
Presented in the balance sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
-------------- --------------
$ $
-------------- --------------
<S> <C> <C>
Current assets 13,065
Long-term deferred tax liability (278,490) (71,200)
-------------- --------------
(278,490) (58,135)
============== ==============
</TABLE>
F-31
<PAGE> 32
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 16 - TAXES ON INCOME (CONT'D)
D. COMPONENTS OF DEFERRED TAXES:
The deferred tax (liabilities) assets, net, at December 31, 1995 and
1994 are attributable to the following:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
-------------- --------------
$ $
-------------- --------------
<S> <C> <C>
Depreciable fixed assets (18,700) (13,962)
Share issuance expenses - 75,000
Other income and expense items (74,790) (36,173)
Net operating loss carryforwards (1) 2,962,000 1,862,000
Bad debt expenses 215,000 203,000
Deferred revenue 70,000 101,000
Accrued expenses 116,000 128,000
Depreciation (24,000) (30,000)
-------------- --------------
3,245,510 2,288,865
Valuation allowance (1) (3,524,000) (2,347,000)
-------------- --------------
(278,490) (58,135)
============== ==============
</TABLE>
(1) See Note 16E(1)-(2) below.
E. TAX LOSS CARRYFORWARDS
1. The Company has a loss carryforward for tax purposes of
approximately $849,000 which is available to offset future
taxable income without any time limit. Had FASB statement No.
109 been applied, deferred tax assets in accordance with these
losses would have been created and reserved in full.
2. The Company's subsidiary - Edunetics International B.V. has a
loss carryforward for tax purposes of approximately $5,700,000
which is available to offset future taxable income. Utilization
of the loss carryforward would on the basis of the currently
applicable tax rate give a future tax credit of approximately
$2,000,000. These carryforwards do not expire. Had FASB
statement No. 109 been applied, deferred tax assets in accordance
with these losses would have been created and reserved in full.
3. The Company's subsidiary - Edunetics Corporation has net
operating loss carryforwards for Federal income tax purposes of
approximately $7,800,000. Utilization of loss carryforwards may
be subject to limitations should a substantial change in
ownership occur. These carryforwards are available to offset
future taxable income and will expire through 2004-2009.
F-32
<PAGE> 33
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 16 - TAXES ON INCOME (CONT'D)
F. RECONCILIATION OF THE THEORETICAL TAX EXPENSE TO THE ACTUAL TAX
EXPENSE IN ISRAEL
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
(Loss) net income before taxes as reported in
the consolidated statement of income (4,500,957) (6,302,815) 2,379,547
============== ============== ==============
Theoretical tax on the above amount at the
statutory rate in Israel - 37% (1994 - 38%,
1993-39%) (1,665,354) (2,395,070) 928,023
Increase (decrease) in taxes resulting from:
Tax benefit arising from the
"approved enterprise" - (19,869) (138,111)
Deduction in respect of capitalized
future royalties - - (142,740)
Permanent differences:
Non-deductible expenses 11,448 11,332 14,237
Exempt income (102,089) (143,287) (81,370)
Utilization of tax loss carry-forward - - (291,425)
Non creation of deferred tax assets in respect of
current losses 1,305,807 2,902,163 -
Differences between Israeli currency income
and dollar income (1) 671,437 (169,244) (278,614)
-------------- -------------- --------------
Actual tax expense 221,249 186,025 10,000
============== ============== ==============
</TABLE>
(1) Resulting from the difference between the changes in the Israeli
CPI (the basis for computation of taxable income) and the
exchange rate of the Israeli currency relative to the U.S.
dollar.
F-33
<PAGE> 34
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 16 - TAXES ON INCOME (CONT'D)
G. TAX ASSESSMENTS
Final tax assessments have been received by the Company through
the 1993 tax year.
No tax assessments have been received by any subsidiary since inception.
NOTE 17 - RELATED PARTY AND INTERESTED PARTY BALANCES AND TRANSACTIONS
A. BALANCES WITH RELATED PARTIES AND INTERESTED PARTIES INCLUDED IN
BALANCE SHEET ITEMS ARE AS FOLLOWS:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
-------------- --------------
$ $
-------------- --------------
<S> <C> <C>
Other receivables 33,500 6,530
Trade payables - 1,992
Other payables and accrued liabilities 7,744 10,073
</TABLE>
B. TRANSACTIONS WITH RELATED PARTIES AND INTERESTED PARTIES INCLUDED
IN EXPENSE ITEMS ARE AS FOLLOWS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
Research, product development and support - 43,244 40,623
General and administrative - 4,807 10,155
Financing - 27 15,682
</TABLE>
F-34
<PAGE> 35
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 17 - RELATED PARTY AND INTERESTED PARTY BALANCES AND TRANSACTIONS (CONT'D)
C. RECEIVABLES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994
-------------- --------------
$ $
-------------- --------------
<S> <C> <C>
Maximum amount outstanding 39,388 15,672
============== ==============
</TABLE>
D. BENEFITS TO INTERESTED PARTIES*
<TABLE>
<CAPTION>
NUMBER OF PERSONS YEAR ENDED DECEMBER 31
------------------------------- -------------------------------
1995 1994 1995 1994
-------------- -------------- -------------- --------------
$ $
-------------- --------------
<S> <C> <C> <C> <C>
Employees 6 4 549,571 527,724
Non-employee directors - 1 - 4,167
-------------- --------------
549,571 531,891
============== ==============
</TABLE>
* As defined in the Israeli Securities (Preparation of Annual
Financial Statements) Regulations, 1993.
NOTE 18 - DETAILS OF MONETARY ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
ISRAEL U.S. $ OR TOTAL
CURRENCY ISRAELI
CURRENCY LINKED
TO U.S. $
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents 471 3,400,020 3,400,491
Short-term bank deposits - 123,727 123,727
Receivables 296,372(1) 2,867,081 3,163,453
Other assets - 86,760 86,760
-------------- -------------- --------------
296,843 6,477,588 6,774,431
============== ============== ==============
LIABILITIES
Short-term debt and bank credits 311,095 1,100,000 1,411,095
Trade payables 100,379 248,315 348,694
Other payables and accrued liabilities 472,532 769,417 1,241,949
-------------- -------------- --------------
884,006 2,117,732 3,001,738
============== ============== ==============
</TABLE>
(1) Includes $30,151 in Israeli currency linked to the Israeli CPI.
F-35
<PAGE> 36
Edunetics Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1995
- - ------------------------------------------------------------------------------
NOTE 18 - DETAILS OF MONETARY ASSETS AND LIABILITIES (CONT'D)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------
ISRAEL U.S. $ OR TOTAL
CURRENCY ISRAELI
CURRENCY LINKED
TO U.S. $
-------------- -------------- --------------
$ $ $
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents 629 2,718,678 2,719,307
Short-term bank deposits - 4,551,241 4,551,241
Receivables 532,177(1) 4,051,134 4,583,311
Long-term deposits - 13,035 13,035
-------------- -------------- --------------
532,806 11,334,088 11,866,894
============== ============== ==============
LIABILITIES
Short-term debt and bank credits 3,842 750,000 753,842
Current maturities of long-term debt - 78,970 78,970
Trade payables 184,002 510,065 694,067
Other payables and accrued liabilities 459,129 971,995 1,431,124
-------------- -------------- --------------
646,973 2,311,030 2,958,003
============== ============== ==============
</TABLE>
(1) Includes $20,057 in Israeli currency linked to the Israeli CPI.
NOTE 19 - SUBSEQUENT EVENT
As of February 29, 1996 Steck-Vaughn and the Company signed the
Agreement providing for the acquisition of all of the Ordinary Shares
for $2 per Ordinary Share in cash or a total of $12 million.
The closing under the Agreement remains subject to certain conditions,
including approval by the shareholders of the Company and receipt of
certain regulatory approvals under Israeli law.
F-36
