SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2001
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______________ to ________________
Commission file number 1-14827
EDUCATIONAL VIDEO CONFERENCING, INC.
(Exact name of small business as specified in its charter)
Delaware 06-1488212
(State of other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
35 East Grassy Sprain Road, Yonkers, New York 10710
(Address of principal executive offices)
(914) 787-3500
(Issuer's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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__
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 4,492,961 shares of Common
Stock as of August 1, 2001.
Table of Contents
Part I
Financial Information
Item 1. Financial Statements Page
Consolidated Balance Sheet as of June 30, 2001 (unaudited), Pro Forma as of
June 30, 2001 (unaudited) and as of December 31, 2000 (audited).................3
Consolidated Statement of Operations for the three and six month periods
ended June 30, 2001 (unaudited) and June 30, 2000 (unaudited)...................4
Consolidated Statement of Cash Flows for the six month periods ended
June 30, 2001 (unaudited) and June 30, 2000 (unaudited).........................5
Notes to Consolidated Financial Statements......................................6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Second Quarter Developments.....................................................9
Comparison of the Three Month Periods Ended
June 30, 2001 and June 30, 2000.................................................10
Comparison of the Six Month Periods Ended
June 30, 2001 and June 30, 2000.................................................11
Liquidity and Capital Resources.................................................12
Forward-Looking Statements and Risk Factors.....................................12
Part II
Other Information
Item 4. Submission of Matters to a Vote of Security Holders.....................14
Item 5. Other Information.......................................................15
Item 6. Exhibits and Reports on form 8-K........................................15
Signatures......................................................................16
EDUCATIONAL VIDEO CONFERENCING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Pro Forma
June 30, 2001 June 30, 2001 December 31, 2000
------------- ------------- -----------------
Assets (unaudited) (unaudited) (audited)
See Item 5
Current assets:
Cash and cash equivalents ............................................... $ 2,274,479 $ 2,274,479 $ 6,332,934
Accounts receivable, net of allowance for doubtful
accounts of $250,000 .................................................. 3,152,675 3,152,675 1,482,001
Notes Receivable, ICTS, Inc. ............................................ 150,000 150,000 --
Accounts receivable other ............................................... 155,472 155,472 304,634
Prepaid expenses and other current assets ............................... 10,000 10,000 11,510
------------ ------------ ------------
Total current assets ......................................................... 5,742,626 5,742,626 8,131,079
------------ ------------ ------------
Property and equipment, net .................................................. 4,919,395 4,919,395 5,013,003
------------ ------------ ------------
Deferred income tax asset, net of valuation allowance of $1,806,000 .......... -- -- --
License agreement, net ....................................................... 187,500 187,500 212,500
Intangible Assets ............................................................ 1,531,042 1,531,042 1,349,588
Other assets ................................................................. 197,772 197,772 45,081
------------ ------------ ------------
Total assets ................................................................. $ 12,578,335 $ 12,578,335 $ 14,751,251
============ ============ ============
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Accounts payable and accrued expenses ................................... 731,997 731,997 793,466
Deferred revenue ........................................................ 1,003,720 1,003,720 --
Accrued purchase price payable for Interboro ............................ 209,000 209,000 673,376
Current maturities of capitalized lease obligations ..................... 18,107 18,107 18,107
------------ ------------ ------------
Total current liabilities .................................................... 1,962,824 1,962,824 1,484,949
Accrued purchase price payable for Interboro, net of current portion .... 742,994 742,994 --
Capitalized lease obligations, net of current maturities ................ 18,819 18,819 27,937
Note payable ............................................................ -- 646,458 --
------------ ------------ ------------
Total liabilities ............................................................ 2,724,637 3,371,095 1,512,886
Series B 7% Convertible Preferred Stock -- $100 stated value;
130,000 shares issued and outstanding ........................................ 12,461,854 -- 12,342,266
Stockholders' equity (deficiency):
Preferred stock - $.0001 par value; authorized 1,000,000 shares,
including 200,000 shares of designated Series B ................... -- -- --
Series B 7% Convertible Preferred Stock -- $100 stated value;
130,000 shares issued and outstanding ............................. -- 12,461,854 --
Common stock - $.0001 par value; authorized 20,000,000 shares, issued
and outstanding 4,492,961 shares .................................. 450 450 450
Additional paid-in capital .......................................... 22,370,380 22,370,380 22,370,380
Accumulated deficit ................................................. (24,978,986) (25,625,444) (21,474,731)
------------ ------------ ------------
Stockholders' equity (deficiency) ............................................ (2,608,156) 9,207,240 896,099
------------ ------------ ------------
Total liabilities and stockholders' equity (deficiency) ...................... $ 12,578,335 $ 12,578,335 $ 14,751,251
============ ============ ============
See Notes to Consolidated Financial Statements
3
EDUCATIONAL VIDEO CONFERENCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Three months ended Six months ended
------------------ ----------------
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Net revenue ............................................. $ 2,154,999 $ 1,885,296 $ 4,670,520 $ 4,100,910
Other income ............................................ 23,916 8,517 37,226 33,794
----------- ----------- ----------- -----------
Total revenue ........................................... 2,178,915 1,893,813 4,707,746 4,134,704
----------- ----------- ----------- -----------
Operating expenses:
Cost of sales ...................................... 773,988 712,474 1,528,625 1,241,605
Selling, general and administrative ................ 3,174,010 3,659,446 6,575,177 7,093,331
----------- ----------- ----------- -----------
Total operating expenses ................................ 3,947,998 4,371,920 8,103,802 8,334,936
----------- ----------- ----------- -----------
Loss from operations .................................... (1,769,083) (2,478,107) (3,396,056) (4,200,232)
----------- ----------- ----------- -----------
Other income (expense)
Interest expense ................................... (1,559) -- (2,709) --
Interest income .................................... 34,855 49,042 103,097 133,289
----------- ----------- ----------- -----------
Loss before provision for income taxes .................. (1,735,787) (2,429,065) (3,295,668) (4,066,943)
Provision for income taxes .............................. 26,000 -- 89,000 --
------------ ----------- ----------- -----------
Net loss ................................................ (1,761,787) (2,429,065) (3,384,668) (4,066,943)
----------- ----------- ----------- -----------
Beneficial conversion feature of preferred stock series A -- 264,705) -- (441,176)
Accreted value of warrants-series A ..................... -- (31,567) -- (52,618)
Dividends on preferred stock-series A ................... -- (75,000) -- (125,000)
Accreted value of warrants and transaction costs series B (59,794) -- (119,588) --
Undeclared dividends on preferred stock
series B ................................................ (230,617) -- (455,000) --
----------- -----------
Net loss available to common stockholders ............... $(2,052,198) $(2,800,337) $(3,959,256) $(4,685,737)
=========== =========== =========== ===========
Basic and diluted loss per common share ................. $ (0.46) $ (0.64) $ (0.88) $ (1.07)
=========== =========== =========== ===========
Weighted average number of common shares outstanding .... 4,492,961 4,347,309 4,492,961 4,347,276
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
4
EDUCATIONAL VIDEO CONFERENCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Six months ended
----------------
June 30, 2001 June 30, 2000
------------- -------------
Cash flows from operating activities:
Net loss ......................................................................... $(3,384,668) $(4,066,943)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ............................................................ 685,885 423,123
Amortization of intangibles ............................................. 97,163 40,000
Amortization of licensing agreement ..................................... 25,000 12,500
Allowance for doubtful accounts ......................................... -- 10,000
Loss from equity method investment ...................................... -- 50,250
Changes in operating assets and liabilities, net of effects in the acquisition
of Interboro in 2000:
Increase in accounts receivable ......................................... (1,670,674) (1,302,087)
(Increase)/decrease in prepaid expense and other current assets ......... 150,673 (27,332)
Decrease in inventory ................................................... -- (96,444)
Increase in other assets ................................................ (152,691) (42,720)
Decrease in accounts payable and accrued expenses ....................... (61,469) (1,721,883)
Increase in deferred revenue ............................................ 1,003,780
Accrued purchase price on Interboro Institute ........................... 278,618 --
----------- -----------
Net cash used in operating activities ............................................ (3,028,443) (6,721,536)
----------- -----------
Cash flows used in investing activities:
Purchase of Interboro net of cash required .............................. (278,617) 16,057
Net payments for other investments ...................................... (150,000) (50,000)
Purchase of equipment ................................................... (592,277) (1,514,878)
----------- -----------
Net cash used in investing activities ............................................ (1,020,894) (1,548,821)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock .............................. -- 6,000
Increase in deferred offering costs ..................................... -- (78,926)
Principal payments under capital lease obligations ...................... (9,118) (11,703)
Additional expense incurred in connection with the issuance of preferred
stock ................................................................... -- (124,229)
Net proceeds from issuance of preferred stock ........................... -- 3,730,000
----------- -----------
Net cash provided by (used in) financing activities .............................. (9,118) 3,521,142
----------- -----------
Net decrease in cash and cash equivalent......................................... (4,058,455) (4,749,215)
Cash and cash equivalents at beginning of period ................................. 6,332,934 6,925,823
----------- -----------
Cash and cash equivalents at end of period ....................................... $ 2,274,479 $ 2,176,608
=========== ===========
Supplemental schedule of cash flow information
Cash paid during the period for:
Interest ................................................................ $ 2,709
Taxes ................................................................... $ 118,495
See Notes to Consolidated Financial Statements
5
Notes to Consolidated Financial Statements
Note 1 - Business and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Educational Video Conferencing, Inc. ("EVCI") and its wholly owned subsidiaries,
Interboro Institute, Inc. ("Interboro") and Interboro Holding, Inc. References
to "we," "our," and "us" mean EVCI and its subsidiaries unless the context
requires otherwise. All significant intercompany balances and transactions have
been eliminated.
We have two business segments:
o We provide on-campus education and training. Through June 30, 2001, our
campus education segment consisted solely of the operations of Interboro, a
two-year college located in New York City that offers degree programs
leading to the Associate of Occupational Studies Degree in business
administration, ophthalmic dispensing, paralegal studies, administrative
secretarial arts and security services and management. Our campus education
segment provided 86 % of our revenues for 2000 and 94% of our revenues for
the first six months of 2001. In the first six months of 2001, we decided
to place greater emphasis on growing this segment of our business through
internal expansion and acquisition. This has resulted in the opening of
Interboro's first satellite campus in Flushing, New York and our
acquisition, effective July 1, 2001, of ICTS, Inc., a provider of certified
training and certification programs in database network
engineering/administration, website design and e-commerce.
o Through EVCI, we are offering enhanced video communications technology
solutions and services that permit high quality multi-point video
conferencing over the Internet and broadband. Using our technology, we have
the capacity to deliver content aggregated by us to remote locations. We
can do this synchronously using interactive video conferencing
technologies. We are delivering our content asynchronously using narrow
band connections to the Internet.
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the requirements of item 310(b) of Regulation S-B. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments (consisting of normal recurring adjustments) which, in the opinion
of management, are necessary for a fair presentation of the results for the
periods shown. There have been no significant changes of accounting policy since
December 31, 2000.
Our results from operations for the interim period are not indicative of the
results expected for the full fiscal year or any future period and should be
read in conjunction with our audited financial statements as of December 31,
2000 and for the year then ended, and the notes thereto, in our 10-KSB/A for the
year ended December 31, 2000.
Note 2 - Earnings Per Share
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," requires dual presentation of basic earnings per share ("EPS") and
diluted EPS on the face of all statements for all entities with complex capital
structures. Basic EPS is computed as net earnings available to common
stockholders divided by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
6
from common shares issuable through stock based compensation including stock
options, restricted stock awards, warrants and other convertible securities.
Potential common stock has not been included in the computation of diluted EPS
since the effect would be antidilutive.
Note 3- Revenue Recognition
We recognize our campus education and training segment income ratably over the
semester in which courses are given and as services are performed. Unearned
revenue from advance student billings is netted against accounts receivable for
financial statement reporting. For the most recent semester beginning in May and
ending in August 2001, advance billings amounted to $1,003,720, which we expect
to recognize as revenue during the 3rd quarter of 2001.
Note 4 - Preferred Stock
On September 22, 2000, we designated 200,000 shares of our authorized preferred
stock as Series B 7% Convertible Preferred Stock. Between September 22 and
September 30, 2000, we received gross proceeds of $13,000,000 from the issuance
of 130,000 shares of our Series B preferred stock and three year warrants to
purchase 722,223 shares of our common stock at $20.25 per share. A value of
$400,000 was assigned to the warrants. The transaction costs of this private
placement were approximately $320,000. The $400,000 assigned value to the
warrants and the transaction costs of approximately $320,000 will be recognized
as a deemed dividend to the preferred stockholders over three years. A portion
of the net proceeds from the sale of the Series B preferred was used to redeem
our Series A preferred stock.
Our board of directors did not declare the December 31, 2000 dividend of
$246,055 or the June 30, 2001 dividend of $455,000 on our Series B preferred
stock, and does not expect to declare any Series B preferred dividends for the
foreseeable future. Cumulative dividends are payable upon conversion of Series B
preferred, subject to applicable law.
The Series B preferred stock was initially convertible into shares of our common
stock at $13.50 per share, the average closing bid price of our common stock for
20 trading days prior to September 22, 2000. As a result of anti-dilution
adjustments triggered by our issuance of warrants to the former stockholders of
ICTS, Inc., the current conversion price is $11.92 per share
See Item 5 below regarding the consent of our Series B preferred holders to an
amendment of our certificate of incorporation that will permit us to reclassify
our Series B preferred as permanent equity and, accordingly, the pro forma
balance sheet included above.
Note 5 - Income Taxes
No provision for federal income taxes has been made for all periods presented
since we have net operating losses. These net operating losses have resulted in
a deferred tax asset of approximately $1,806,000 at June 30, 2001. Due to the
uncertainty regarding the ultimate amount of income tax benefits to be derived
from our net operating losses, we have recorded a full valuation allowance. The
provision for taxes consists of state and city taxes for Interboro.
7
Note 6 - Segment Reporting
We follow SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information."
Reportable segment data were as follows:
Three months ended June 30 Six months ended June 30
-------------------------- ------------------------
Net revenue: 2001 2000 2001 2000
---- ---- ---- ----
Campus education and training ..................$ 2,056,892 $ 1,616,923 $ 4,402,890 $ 3,532,015
Enhanced video communications................... 98,107 268,373 267,630 568,895
------------ ------------ ------------ ------------
Total operating revenue ....................$ 2,154,999 $ 1,885,296 $ 4,670,520 $ 4,100,910
============ ============ ============ ============
Operating net income (loss):
Campus education and training ..................$ (134,896) $ 57,063 $ 330,217 $ 579,555
Enhanced video communications................... (1,634,187) (2,535,170) (3,726,273) (4,779,787)
------------ ------------ ------------ ------------
Total operating net loss ...................$ (1,769,083) $ (2,478,107) $ (3,396,056) $ (4,200,232)
============ ============ ============ ============
Assets: June 30, 2001
-------------
Campus education and training..................... $ 3,077,248
Enhanced video communications .................... 9,501,087
------------
Total assets ............................... $ 12,578,335
============
Note 7 - ICTS Acquisition
Effective July 1, 2001, EVCI acquired the outstanding shares of ICTS, Inc. for
the issuance of warrants to purchase 500,000 shares of EVCI's common stock at
$1.00 per share and 200,000 shares of EVCI's common stock at $3.00 per share,
plus 20% of ICTS' free cash flow, as defined, up to a maximum of $500,000. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, ICTS' results of operations are included in our financial
commencing July 1, 2001, and the assets and liabilities are to be recorded based
upon their fair values at July 1, 2001. EVCI acquired assets with a fair value
of approximately $2,000,000, assumed liabilities of approximately $6,000,000,
and will record approximately $4,500,000 in goodwill.
Note 8 - Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS Nos.
141 and 142, "Business Combinations" and "Goodwill and Other Intangibles." FASB
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under FASB 142, goodwill is no longer
subject to amortization over its estimated useful life. Rather, goodwill is
subject to at least an annual assessment for impairment by applying a fair-value
based test. Additionally, an acquired intangible asset should be separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of the acquirer's intent
to do so. EVCI is in the process of determining the impact of these
pronouncements on its financial position and results of operations.
8
Note 9 - Incentive Stock Option Plan
In May 2001, our board of directors adopted an incentive stock option plan in
which 250,000 shares of common stock were reserved for future issuance upon
exercise of options granted through May 15, 2003. The plan provides for grants
of nonqualified stock options and shares of common stock to employees (excluding
corporate officers), non-employee directors and others. Unless our compensation
committee determines otherwise, the option exercise price is the average closing
price of the common stock on Nasdaq for the five trading days prior to the grant
of the option. Options vest and become fully exercisable 90 days after the
grant, unless our compensation committee determines otherwise, provided the
participant is then an eligible employee of, or consultant to, EVCI or a related
entity. There were 160,250 options granted during the quarter ended June 30,
2001. These options are exercisable at $1.00 per share.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements and notes thereto for the year ended December 31, 2000,
included in our 10-KSB/A for the year ended December 31, 2000, and in
conjunction with the financial statements and notes thereto for the six months
ended June 30, 2001 and 2000, included in Item 1 of this report. References
below to EVCI mean our enhanced video communications segment, unless the context
requires otherwise. All numbers that have been rounded are approximate.
Second quarter developments
During the second quarter of 2001:
o We placed significantly greater emphasis on growing our campus education
business by doing the following:
o Interboro opened its first satellite campus, in Flushing, New York,
with a capacity for approximately 200 full-time students, initially,
and up to 500 full-time students when approval is received from New
York State regulators to operate as an extension center.
o We negotiated and closed, effective July 1, 2001, our acquisition of
ICTS, Inc., an owner and operator of information technology training
and certification centers in Atlanta, Georgia; Baltimore, Maryland;
and Alexandria and Hampton, Virginia. In addition, ICTS offers on-site
training to employers and recently began offering IT courseware on
line. For additional information regarding this acquisition and ICTS,
see our Form 8-K dated July 1, 2001.
o Our enhanced video communications segment operations included:
o expanding the capabilities of our network to permit cross connections
between clients with different connections (e.g. an ATM based client
can communicate with an Internet based client).
9
o adding 20 sites to our network on a pilot program basis.
o reducing network installation times from 6 months to six weeks.
o determining not to connect to the Excite@work network and, therefore,
not to activate our hubs in Virginia and California.
o continuing to implement programs to substantially reduce our expenses
so that, by June 30, 2001, we had reduced EVCI's selling general and
administrative expenses by $440,000 per month from what they were at
December 31, 2000.
Comparison of three months ended June 30, 2001 (second quarter of 2001) to three
months ended June 30, 2000 (second quarter of 2000)
Net revenues for the second quarter 2001 increased 14%, or $270,000, to
$2,155,000 from $1,885,000 for the second quarter 2000. Interboro student course
registrations increased to approximately 3,000 from 2,450 in the second quarter
of 2000, which included 175 student course registrations at Interboro's new
extension campus in Flushing, N.Y. Our revenue from Interboro increased
$440,000, which includes a tuition increase of 10% and initial revenues from the
Flushing campus of $160,000. Our distance learning student course registrations
were 157 for each of the second quarter of 2001 and 2000. In the second quarter
of 2001, we stopped offering synchronous courses using ISDN lines because these
course offerings were not profitable. We also refrained from actively marketing
synchronous courses for delivery using our technology and services because we
wanted to focus exclusively on validating and marketing our technology. As a
result, EVCI's revenue declined by $218,000, as compared to the second quarter
of 2000. This decline was offset by revenue of $54,000 from pilot programs using
our technology solutions and services.
Other income increased by $15,000 over the second quarter of 2000 because
Interboro reinstituted the requirement of student application fees.
Interest income decreased to $35,000 for first quarter of 2001 from $49,000 for
the second quarter of 2000 as more of the proceeds from our September 2000
financings were used to fund our operations.
Cost of sales increased by 9 %, or $62,000, to $774,000 for the second quarter
of 2001 from $712,000 for the second quarter of 2000 primarily due to an
increase of $228,000 for additional personnel and wage increases for Interboro's
professors, adjunct professors, recruiters and librarian. $68,000 of this
increase relates to Interboro's Flushing campus. These increases were offset by
a decrease in EVCI's communication costs of $166,000. As a percentage of our net
revenue, cost of sales decreased to 36% for the second quarter of 2001 as
compared to 38% for the second quarter of 2000. The improvement of 2% reflects
the cessation of our synchronous course offerings.
Salaries and benefits decreased by $655,000, or 32%, to $1,373,000 for the
second quarter of 2001 from $2,028,000 for the second quarter of 2000. These
costs increased at Interboro by $210,000 and decreased at EVCI by $865,000,
primarily due to staff reductions made at EVCI in the first quarter of 2001.
Additional staff reductions were made in the second quarter of 2001 which
reduced EVCI employees by 9 (2 in recruiting, 3 in sales, 3 in operations, 1 in
business development). Our total number of employees at June 30, 2001 was 18 at
EVCI and 113 at Interboro.
10
Marketing, brochures and student registrations costs decreased to $50,000 for
the second quarter of 2001 from $218,000 for the second quarter of 2000.
Marketing costs at Interboro were reduced by $62,000, net of marketing costs of
$32,000 for Interboro's Flushing campus. The remaining decrease of $106,000
resulted from EVCI's decision to stop offering courses using ISDN lines and to
reduce substantially its marketing of synchronous courses using the Internet or
broadband.
Professional fees increased to $324,000 for the second quarter of 2001 from $
277,000 for the second quarter of 2000, primarily as a result of the legal and
accounting fees related to potential acquisitions, our annual meeting of
stockholders and our responses to Nasdaq's delisting notice.
Depreciation and amortization increased to $423,000 for the second quarter of
2001 from $258,000 for the second quarter of 2000. The increase relates to
purchases of videoconferencing and other equipment acquired during the last two
quarters of 2000 and the goodwill amortization of $48,000 related to our
acquisition of Interboro.
Other expenses increased to $1,006,000 for the second quarter of 2001 from
$854,000 for the second quarter of 2000. The net increase of $152,000 was
attributable to a net reduction of $74,000 at EVCI, an increase of $14,000 at
Interboro's Manhattan campus and the additional cost of Interboro's Flushing
campus of $212,000.
Comparison of six months ended June 30, 2001 (first six months of 2001) to the
six months ended June 30, 2000 (first six months of 2000)
Net revenues for the first six months of 2001 increased 14 %, or $570,000, to
$4,671,000 from $4,101,000 for the first six months of 2000. Interboro student
course registrations increased to 6,500 from 5,450 for the first six months of
2000, resulting in additional revenue of $871,000. Our distance learning student
course registrations decreased from 1,066 for the first six months of 2000 to
499 for the first six months of 2001, a revenue decrease of $365,000, because we
stopped offering synchronous courses using ISDN lines. Our enhanced video
communications activities generated $64,000 in the first six months of 2001 from
pilot programs.
Other income increased to $37,000 for the first six months of 2001 from $34,000
for the first six months of 2000 because we reinstated the requirement of
student application fees.
Interest income decreased to $103,000 for first six months of 2001 from $133,000
for the first six months of 2000 because we used more of the proceeds from our
Series B preferred financings to fund our operations.
Cost of sales increased by 24%, or $287,000, to $1,529,000 for the first six
months of 2001 from $1,242,000 for the first six months of 2000 due primarily to
an increase of $372,000 for additional personnel and wage increases for
Interboro's professors, adjunct professors, recruiters and librarian. This
increase includes $67,000 attributable to Interboro's Flushing Campus. In
addition, we wrote-off textbook inventory of $61,000 when we outsourced
Interboro textbook sales. These increases were offset by a decrease in
communication costs at EVCI of $145,000, net of $18,000 recouped from customers.
11
Salaries and benefits decreased by 15 %, or $540,000, to $3,233,000 for the
first six months of 2001 from $3,773,000 for the first six months of 2000.
Salary and benefit costs increased at Interboro by $372,000 and decreased at
EVCI by $912,000. On June 30, 2001, we had 131 employees as compared to 167
employees on January 1, 2001 and 168 employees on June 30, 2000. Since January
1, 2001, Interboro had a net increase of 9 employees. During the same period,
EVCI reduced its employees by 45, who had been engaged as follows: 2 in general
office, 14 in recruiting, 17 in sales and marketing, 11 in operations and 1 in
business development.
Marketing, brochures and student registration costs decreased by $364,000 to
$224,000 for the first six months of 2001 from $588,000 for the first six months
of 2000. $338,000 of the decrease resulted from EVCI's decision to stop offering
courses using ISDN lines and to reduce substantially its marketing of
synchronous courses using the Internet and broadband. The remaining $26,000
resulted from Interboro reductions.
Professional fees increased to $519,000 for the first six months of 2001 from
$468,000 for the first six months of 2000, primarily as a result of legal and
accounting fees related to potential acquisitions, our annual meeting of
stockholders and our responses to Nasdaq's delisting notice.
Depreciation and amortization increased to $809,000 for the first six months of
2001 from $498,000 for the first six months of 2000. The increase relates to
purchases of videoconferencing and other equipment acquired during the last two
quarters of 2000 and the goodwill amortization of approximately $97,000 relating
to our acquisition of Interboro.
Other expenses increased to $1,790,000 for the first six months of 2001 from
$1,716,000 for the first six months of 2000. The net increase of $74,000 was
primarily due to increases of $51,000 to support Interboro's Manhattan campus
growth and costs of Interboro's new Flushing campus of $211,000. These increases
were offset by decreases at EVCI of $188,000.
Liquidity and capital resources
Equipment. Capital expenditures for the first six months of 2001 were $592,277
compared to $1,514,878 for the first six months of 2000. Most of the equipment
required for our hubs was purchased in 2000. The funds spent in the first six
months of 2001 were used to demonstrate our enhanced video communications
technology solutions and services and to implement pilot programs.
Cash Flow. We anticipate, based on current plans and assumptions relating to our
current operations, that cash flow from operations and the proceeds from our
September 2000 Series B preferred stock offering will be sufficient to satisfy
our cash requirements at least until December 31, 2001. In addition to
significant reductions in staff and other cost reductions made in the first six
months of 2001, we are working to reduce other expenses that do not adversely
impact our business prospects. If we are underestimating the cash requirements
of our current level of operations, we may require additional debt or equity
financing before year-end. There can be no assurance that any required debt or
equity financing will be available on acceptable terms.
Forward-looking statements and risk factors
This Form 10-QSB contains forward-looking statements that involve assumptions,
risks and uncertainties. The words "anticipates," "estimates," "believes,"
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"expects," "will," "could," "may," "plans," and similar words are intended to
identify forward-looking statements. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including:
o if we cannot significantly increase revenues to offset our continuing
losses, we may not to be able to achieve profitability;
o our continued negative cash flow could materially impede our ability to
operate;
o our success may depend on our ability to obtain substantial additional
financing in order to operate and grow;
o our greater emphasis on our campus education and training may not enable
us to achieve profitability;
o our acquisition of ICTS, Inc. may be more of a burden than benefit to us
as we continue to develop and implement our plan to turn it around;
o our plans to continue to grow our campus education and training segment
by acquisition may not succeed;
o our enhanced video communications segment may not generate any
significant revenues or profits;
o our video transmission technology may not provide a short or long term
competitive advantage;
o our common stock price will be adversely affected if we are delisted from
The Nasdaq SmallCap Market;
o demand for our technology solutions and services may not increase rapidly
if training and education via live interactive video conferencing does
not become widely accepted;
o we depend on our chairman, president and other key management to operate
and grow;
o our subsidiary, Interboro Institute, is subject to extensive Federal and
New York State regulation because it depends on substantial federal and
state funds in order to operate;
o Interboro Institute's prior problems with regulators could reoccur and
adversely affect its operations;
o other acquisitions by us may subject our operations to further regulatory
burdens; and
o the other specific risk factors included in our filings with the SEC,
including our most current Form 10-KSB/A
Should any of these or other risks and uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated by forward-looking statements. We undertake no obligation to
update forward-looking statements.
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PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At EVCI's annual meeting of stockholders held on June 27, 2001, the stockholders
voted as follows:
1. Election of class 1 directors to hold office until EVCI's 2003 annual
meeting. The voting result for each nominee was as follows:
Name Votes For Votes Withheld
Dr. Arol I. Buntzman 3,896,392 219,000
Philip M. Getter 3,896,392 219,000
2. Election of class 2 directors to hold office until EVCI's 2004 annual
meeting. The voting result for each nominee was as follows:
Name Votes For Votes Withheld
Dr. John J. McGrath 3,896,392 219,000
Royce N. Flippin, Jr. 3,896,642 217,750
Richard Goldenberg and Arthur H. Goldberg continue as class 3 directors of EVCI.
3. A vote of 2,613,688 votes for, 47,942 votes against and 8,332 votes
abstaining ratified the terms and issuance of EVCI's Series B 7% Convertible
Preferred Stock and related warrants. There were 1,445,430 broker non-votes.
4. A vote of 2,616,173 votes for, 35,907 votes against and 17,882 votes
abstaining approved an amendment of EVCI's certificate of incorporation deleting
a provision that requires the redemption of EVCI's Series B 7% Convertible
Preferred Stock at the option of the holders of the Series B preferred. There
were 1,445,430 broker non-votes.
The redemption option becomes exercisable in the event a federal court
having jurisdiction shall determine to be ineffective a provision in our
certificate of incorporation prohibiting a Series B preferred holder from
converting shares of Series B preferred into shares of EVCI's common stock where
the conversion would result in the holder being deemed a beneficial owner of
more than 9.99% of our outstanding common stock.
5. A vote of 4,095,642 votes for, 16,050 votes against and 3,700 shares
abstaining ratified the appointment of Goldstein Golub Kessler LLP as EVCI's
independent auditors for the 2001 fiscal year.
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Item 5. Other Information.
In an agreement dated August 17, 2001, holders owning all of the outstanding
shares of our Series B preferred consented to the amendment of our certificate
of incorporation referred to in paragraph 4 of Item 4 above. Additionally, under
the agreement, the Series B preferred holders waived their right to receive
payment of dividends on their shares, totaling $910,000, for the period
September 22, 2000 through September 21, 2001.
EVCI issued a promissory note for $910,000 to the Series B preferred holders due
September 22, 2003, together with interest at the rate of 5% per annum. Payment
of EVCI's note is secured by a pledge of the stock of Interboro Institute, Inc.
In addition, Interboro guaranteed payment of EVCI's note and secured its
guarantee by granting a first priority security interest in all of Interboro's
assets. Payment of EVCI's note out of Interboro's assets, following a default by
EVCI in payment of the note, is subordinate only to Interboro indebtedness of
$1,000,000 to Bruce R. Kalisch, the former owner of Interboro, and such
creditors as Interboro designates as senior creditors, provided that the total
amount of indebtedness to these senior creditors cannot exceed $2,000,000.
The agreement is conditional upon Nasdaq notifying EVCI that EVCI's common stock
will not be delisted from the Nasdaq SmallCap Market other than because of our
failure to meet the $1.00 minimum bid requirement before October 10, 2001. (By
letter dated July 12, 2001, Nasdaq informed us that we had until October 10,
2001 to regain compliance with this requirement.) If this condition is
satisfied, we will make the amendment referred to in paragraph 4 of Item 4
above.
An unaudited pro forma consolidated balance sheet has been included in Item 1
above to illustrate the pro forma effects of this transaction on EVCI's
financial position as of June 30, 2001 as if the transaction occurred on that
date. The pro forma balance sheet reflects the pro rata dividend waived through
June 30, 2001 as Note payable of $646,458.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of this report:
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Letter agreement dated August 17, 2001 among EVCI
and Amaranth Trading LLC, Seneca Capital
International, Ltd., Seneca Capital, L.P., Merced
Partners Limited Partnership and Lakeshore
International, Ltd., excluding Exhibits A and A-1,
which, as executed, are Exhibits 10.2 and 10.3
below.
10.2 Secured Promissory Note dated August 17, 2001
among EVCI and Amaranth Trading LLC, Seneca
Capital International, Ltd., Seneca Capital, L.P.,
Merced Partners Limited Partnership and Lakeshore
International, Ltd.
10.3 Escrow Agreement dated August 17, 2001 among EVCI,
Amaranth Trading LLC, Seneca Capital
International, Ltd., Seneca Capital, L.P., Merced
Partners Limited Partnership and Lakeshore
International, Ltd. and Fischbein Badillo Wagner
Harding
(b) A report on Form 8-K was filed on July 16, 2001 reporting the acquisition of
ICTS, Inc.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the issuer caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 20, 2001
EDUCATIONAL VIDEO CONFERENCING, INC.
By: /s/ Richard Goldenberg
-----------------------
Richard Goldenberg
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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