SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2001
[ ] Transition Report under Section 13 of 15(d) of the Securities Exchange Act
of 1934
For the transition period from ___________ to __________
Commission file number 1-14827
EDUCATIONAL VIDEO CONFERENCING, INC.
(Name of small business issuer in its charter)
Delaware 06-1488212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 East Grassy Sprain Road, Suite 200, Yonkers, New York 10710
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: (914) 787-3500
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common stock, Boston Stock Exchange
$.0001 par value per share Pacific Exchange, Inc.
Securities registered under Section 12(g) of the Exchange Act:
Common stock,
$.0001 par value per share
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB __________.
The issuer's revenues for its most recent fiscal year were $14,681,508.
As of March 1, 2002, the aggregate market value of the issuer's common
equity held by non-affiliates was $5,480,339, based on the closing price of $
1.57 for its common stock on The Nasdaq SmallCap Market on March 1, 2002.
4,421,996 shares of the issuer's common stock were outstanding as of March 1,
2002.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Formats (check one): Yes ____ No X
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PART I
Item 1. Description of Business.
General
We primarily provide on-campus education and training. This segment
consists of the operations of Interboro Institute and ICTS. Interboro is a
two-year college that offers degree programs leading to the Associate of
Occupational Studies degree and has a main campus in Manhattan and an extension
center in Flushing, New York. ICTS is an information technology training and
certification school with four schools, one in each of Atlanta, Georgia;
Baltimore, Maryland; and Alexandria and Hampton, Virginia. We acquired Interboro
in January 2000 and ICTS in July 2001. Our schools segment provided 100% of our
revenues for the year ended December 31, 2000 and 99% of our revenues for the
year ended December 31, 2001.
EVCI's new video enhanced communications segment, which we created in the
first quarter of 2001, offers second generation technology solutions and
services that permit high quality multi-point video conferencing with three
connectivity options: broadband, dedicated Internet access with service level
agreements and existing general Internet access from most Internet service
providers. This segment provided approximately 1% of our revenues for 2001.
In the third quarter of 2001, our board decided that we would stop
delivering synchronized courses using ISDN lines because this activity continued
to be unprofitable. Accordingly, we have reflected the closing of this segment
as a discontinued operation in the accompanying consolidated financial
statements. As a result, this segment's revenue, cost of sales and related
expenses have been reclassified in the consolidated statement of operations and
shown separately as a net amount under the caption "Loss from Discontinued
Operations" for all periods presented.
The events of September 11, 2001 and their aftermath did not significantly
impact Interboro. This is principally because student tuition and other costs of
attending Interboro are substantially paid out of federal and New York State
grants under the Pell and TAP programs and we were able to significantly
increase student enrollment and retention. In contrast, ICTS' enrollments were
adversely affected. We believe this is primarily because ICTS' students do not
receive government grants and, accordingly, must obtain the funds needed to take
ICTS courses from their employers or from their own resources.
We were organized in March 1997. We completed an underwritten initial
public offering of our common stock in the first quarter of 1999. Our principal
executive offices are located at 35 East Grassy Sprain Road, Suite 200, Yonkers,
New York 10710 and our telephone number is (914) 787-3500.
See "Forward-looking Statements and Risk Factors" below.
Demand for Career Education
We think there are three primary reasons for an increasing demand for
career-oriented education.
Recognition of need for training and professional development education
Many employers recognize the need for continuous enhancement of employee
knowledge, education and skill levels. Increasingly, individuals recognize that
training and professional development are essential to acquiring, maintaining
and advancing their employment and, consequently, their standard of living.
Rapid and continuing technological advances require entry level workers to
have training and education beyond a high school diploma.
We believe that enrollment for post-secondary campus-based schools
increases during economic slow downs because individuals have greater motivation
and time to enhance their academic and professional qualifications or re-train
in order to compete for jobs.
Availability of tuition grants and loans
Corporate, federal and state tuition assistance programs are available to
pay for higher education tuition costs. These are almost exclusively in the form
of grants and/or subsidized and unsubsidized loans.
Most Interboro students fund their education primarily through federal Pell
grants and New York State Tuition Assistance Program (TAP) grants. Interboro
students who do not qualify for full TAP and Pell funding can pay their tuition
balance either at the commencement or over the course of the semester.
Federal funds are not generally available for corporate training at ICTS.
Loans are available to creditworthy students from third parties for up to the
full cost of their ICTS tuition. These are unsubsidized loans and the student is
responsible for all loan payments. ICTS is implementing a program for its
courses, taking more than three months to complete, that will allow a student to
pay for the course over its term.
Corporate grants and loans are also generally available for training and
development through both tuition reimbursement plans and direct billing.
Typically, the employer reimburses its employees or pays the provider for a
course or a program of study as long as it has relevance to the employee's job
and the employee achieves a minimum grade. However, payment by corporate
sponsors generally is not made to us for three to four months after the class
ends.
A substantial portion of ICTS revenues comes from training groups of
employees under direct payment plans.
The rising cost of private colleges and universities
As four-year baccalaureate private education costs continue to rise, more
students will seek the faster and less expensive career route available through
technology training and certification schools and associate degree
post-secondary schools. At Interboro tuition is now $3,900 per semester, which
is lower than most private colleges and can be fully funded through TAP and Pell
grants. This gives students, who otherwise could not afford an education, the
opportunity, to obtain an Associates Degree in two years. ICTS students can
acquire career skills and certifications in programs that run from two days to
27 weeks for tuition between $199 to $12,000.
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Our Schools Operating Strategy
Key components of our operating strategy follow:
Focus on career based curricula
Our schools offer educational programs principally in the following
career-related areas of study:
o business studies
o information technology, including computer, Internet and networking
technology
o ophthalmic dispensary services
o paralegal studies
o executive, legal and medical office assistant services
o security services and management
We see a growing demand by employers for individuals, possessing
career-oriented skills in the above areas, to fill entry-level and advanced
positions. Our experience and expertise in these areas enables us to
differentiate ourselves from our competitors and to effectively tailor our
acquisition and marketing plans.
Encourage local school management autonomy and accountability and
centralize certain management functions
Management of each of our schools is principally directed by a local
president or director with local administrators who are directly accountable for
the operations and profitability of their school. Corporate review ensures
adherence to business plans. Business strategy, finance, accounting, risk
management and legal functions are centralized at our executive offices in
Yonkers. This allows us to provide continuity within our schools, along with
better administrative and financial oversight.
When we acquire new schools, we evaluate the capabilities of existing
management. We look to retain the most qualified management and use the most
efficient and cost-effective operating structure. This allows us to rapidly
integrate acquired schools into our business. During the transition, we
determine if a school needs additional or stronger managers in key areas and,
where necessary, replace existing management with new managers or assign our
existing staff to the school.
Provide a quality and caring educational experience
Most of our full and part-time faculty members have direct work experience
in the subjects they teach. They recreate a workplace environment in the
classroom.
We seek to provide a learning environment where student satisfaction is
achieved. We offer a flexible schedule of day, evening and weekend classes. Our
schools operate year-round and provide convenient day and evening course
scheduling. We encourage personal interaction between our students, faculty and
administration. We offer support programs such as on-campus advising, tutoring,
and mentoring programs.
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Improve student retention
Improving student retention is essential to the continued success of our
schools. The retention process starts from the initial enrollment and continues
through the completion of a student's course of study. As in many post-secondary
schools, a substantial portion of our students never finish their educational
programs for personal, financial or academic reasons. A substantial increase in
revenue and profitability can be achieved through even modest improvements in
student retention rates. Our costs to keep current students in school are much
less than the expense of our marketing efforts associated with attracting new
students.
We consider student retention the responsibility of the entire staff of
each school. Recently we have implemented additional retention programs. School
personnel typically work to establish personal relationships with students. For
example, students generally receive a telephone call from a school counselor or
faculty member if they miss classes. We set realistic goals for our students. We
typically group them into cohorts for their classes, tests and support
services. Their professors, counselors and advisors work with each cohort to
meet that group's particular needs.
Maintain cutting edge programs
We strive to meet the changing needs of our students and the employment
market. Our schools regularly evaluate their program offerings, consider
revisions to existing courses and programs and develop new curricula and tests
based upon their evaluations. We are evaluating the feasibility of offering
certain ICTS courses to Interboro students.
Our Schools' Growth Strategy
We see significant opportunities for us to grow this segment of our
business. We expect to grow by expanding our existing schools at current
locations, adding additional sites and acquiring new schools.
Enhance growth at existing schools
We have learned that student enrollment at Interboro directly correlates to
the amount of advertising and the placement and timing of the ads. By targeting
certain media at select times we have been able to exceed our enrollment
projections at Interboro. We believe this is in significant part due to the
defined target market for Interboro students and our ability to deliver our
advertising message to them. We are revising our ICTS marketing programs so we
can generate better qualified leads and convert a greater percentage of these
leads.
Opening additional sites
The success of Interboro's Flushing extension center encourages us to
continue to open new college sites. We believe that convenience is a strong
factor considered by our students when selecting a school. Accordingly, we are
planning to open additional Interboro sites in New York City and Westchester
County, New York. Additional sites will increase our enrollment capacity and
allow us to more effectively leverage our infrastructure and our extensive
investment in curricula. They will also increase our visibility and, therefore,
make it easier to open other sites in New York state. A key advantage of this
kind of strategy is that new sites will have immediate access to TAP and Pell
financial aid.
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Acquire additional schools
Acquisitions are an integral part of our growth strategy. We look to buy
for-profit, career-oriented schools which have sound management, fully
functional operations and quality educational programs. We seek schools that
will benefit from our management experience and operating strengths and will
allow us to increase their enrollment, revenue and profitability.
During 2001, we primarily targeted schools that needed to implement
significant operational changes in order to survive. As a result we acquired
ICTS. However, we also expended significant effort and financial resources on
due diligence and in negotiating agreements to make acquisitions that we
ultimately decided not to conclude. While we will continue to look at turnaround
opportunities, we are also focusing more on other acquisition candidates.
Distance Learning
Education delivered via the Internet is an increasingly important component
of the higher education market. ICTS, in partnership with a third party,
presently delivers some courses via the Internet. We anticipate expanding this
activity. We are exploring offering ICTS courses remotely to sites in New York.
Our Schools
Interboro Institute
Interboro is accredited by the New York State Board of Regents. The
Associate of Occupational Studies Degree can be obtained at Interboro in:
o business administration
o ophthalmic dispensing
o paralegal studies
o office technologies
o security services and management.
Interboro has spring, summer and fall terms. The increasing demand for
Interboro's college offerings prompted us, in 2001, to open a new site in
Flushing, New York. We also increased our classroom capacity at our Manhattan
campus by leasing space for additional administrative offices.
Most of Interboro's student body consists of non-traditional students who
pay their entire tuition using Pell and TAP grants. Students with a tuition
balance either pay prior to the start of the semester, during the course of the
term, or over time as required by the terms of their promissory note to
Interboro.
There are approximately 1400 students enrolled at Interboro for the spring
semester, 1100 in Manhattan and 300 in Flushing. Our total capacity in Manhattan
is now about 1150 students. We recently received regulatory approval of our
application for extension center status for Interboro's Flushing site. This
allows us to grow to our current target of 600 students, which we believe we can
do within 12 months.
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Some of our 2001 accomplishments at Interboro include:
o strengthening Interboro's academic programs, including by raising
the academic standards in english and mathematics, strengthening the
qualifications of its existing faculty and hiring highly qualified
new instructors, and upgrading our library and computer lab.
o increasing enrollments each semester over comparable 2000 semesters.
o enrolling 250 full-time students and generating a net operating
profit at the Flushing site for its fall semester, its first full
semester of operations.
o renewing activity in professional associations.
o moving the main campus admissions operations to a new modern midtown
facility.
o implementing new marketing strategies.
o incorporating new retention strategies.
o converting our secretarial sciences degree program to an office
technologies degree program by adding instruction in computer and
other office technologies. The new program trains students to become
an executive assistant, legal office assistant or medical office
assistant.
Interboro's plans for 2002 include:
o expanding Interboro's operations by obtaining more space for its
Manhattan campus and opening additional sites in the New York City
area.
o offering Associate in Applied Sciences (AAS) degrees in addition to
the AOS degrees now offered by Interboro. We are awaiting approval
of our request for AAS degree authority in computer networking and
programming that was filed with the New York State Education
Department in February 2001. AAS degrees carry a higher percentage
of liberal arts and sciences and are more easily accepted for
transfer to baccalaureate schools than the AOS degree.
o significantly revising the security management program major to meet
current market demands by including concentrations in transportation
and computer security.
o creating a new insurance and financial services certificate and
degree program.
o Beginning the process of securing Middle States Association
accreditation which, if obtained, will enhance Interboro's academic
credibility and enable it to recruit in additional markets.
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ICTS
ICTS provides a wide range of certified training and certification programs
in database, network engineering/administration, web site design, and
e-commerce. Its certification programs include:
o CCNA - Cisco Certified Network Associate
o CCNP - Cisco Certified Network Professional
o MCSA - Microsoft Certified Systems Administrator
o MCSE - Microsoft Certified Systems Engineer
o SSCP - Systems Security Certified Practitioner
o CISSP - Certified Information Systems Security Professional
o Oracle DBA - Oracle Database Administrator
o Network+ - CompTIA Network Plus Certification Program
o A+ - CompTIA A Plus Certification Program
o Various Application Programs (Word, Excel, PowerPoint, etc.)
o CIW - Certified Internet Webmaster
Many of ICTS' programs have been favorably reviewed by the American Council
on Education (ACE) and have been granted "ACE Credit Recommendations." As a
result, ICTS students may have the opportunity to earn credits when seeking
college degrees.
ICTS offers its programs through the continuing education departments of
its college and university partners at locations that are usually adjacent to
their college campuses. ICTS also offers on-site training to employers and
recently began offering IT courses online.
ICTS partners with Mercer University in Atlanta, Towson University in
Baltimore, North Hampton Community College in Alexandria and Thomas Nelson
Community College in Hampton. It recently entered into a contract with Old
Dominion University that allows ICTS to offer programs throughout Virginia.
ICTS students must pay their tuition from their own or their employers'
funds. ICTS is not eligible for federal or state tuition grant assistance. ICTS
courses take from two days to 27 weeks to complete.
For information relating to the terms upon which we acquired ICTS, see our
Form 8-K dated July 1, 2001, as amended.
Our 2001 activities at ICTS, since we acquired it, effective July 1, 2001,
have included:
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o implementing aggressive cost cutting strategies that have resulted
in annualized reductions of more than $1.7 million.
o determining the viability and prospects of each ICTS school. If we
don't think a school can become profitable or sustain profitability,
we will sell or close it.
o establishing a new marketing campaign that includes targeted direct
mail, e-mail, telemarketing, radio and newspaper advertising.
o increasing ICTS' focus on sales to corporations and government
agencies.
o receiving a Certificate of Appreciation from the U.S. Secret Service
for outstanding teaching by an ICTS instructor and for support
provided to the agency in its efforts to upgrade its computer
systems to Windows 2000.
o reacting to a significant decline in ICTS' revenues after September
11, 2001 by further reducing costs and restructuring our business
plan for the balance of 2001 and 2002.
Marketing
We employ a variety of advertising techniques to generate qualified leads
of potential applicants for our schools. Depending on the target market, we use
radio, e-mail blasts, direct mail, newspaper, subway and bus ads, cable
television and the yellow pages. The effectiveness of our advertising campaigns
depends on the placement and timing of ads and following up with timely and
accurate lead tracking. Each school is directly responsible for tracking its
leads and converting them to enrollments. Our lead tracking capability allows us
to identify leads generated by specific media and adjust our spending to focus
on the most cost effective lead sources.
Tuition
Tuition at Interboro is now $3,900 per semester. ICTS tuition ranges from
$199 for a computer application course to $12,000 for its A+, Net+ and MSCE
program. At ICTS, tuition presently includes the costs of textbooks and other
supplies. Our tuition ranges are competitive with similar institutions but, like
many proprietary institutions, are somewhat higher than public institutions such
as community colleges and state universities.
Interboro's tuition refund policy must meet the requirements of the U.S.
Department of Education and New York State Education Department. For example,
the DOE requires Interboro to return a portion of the Title IV funds disbursed
to it if a student withdraws prior to completion of 50% of a semester. Each of
the ICTS centers must comply with the refund policies of the states in which
they are located. These are generally similar to the Title IV refund policy.
Government Regulation of Proprietary Schools
In connection with the receipt by its students of government-sponsored
financial aid, Interboro is subject to extensive regulation by governmental
agencies and licensing and accrediting bodies. In particular, the Higher
Education Act of 1965, and the regulations issued thereunder by the DOE. The HEA
subjects participants to significant regulatory scrutiny in the form of numerous
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standards that schools must satisfy in order to participate in the various
federal student financial aid programs under Title IV of the HEA.
Under the HEA, regulatory authority is divided among:
o the federal government, which acts through the DOE
o the accrediting agencies recognized by the DOE
o state higher education regulatory bodies
The HEA regulations must be complied with on an institutional basis. The
regulations define an institution as a main campus and its additional locations,
if any.
Interboro Institute
Accreditation. The New York Board of Regents accredits Interboro.
Accreditation provides the basis for (i) the recognition and acceptance by
employers, other higher education institutions and governmental entities of the
degrees and credits earned by students and (ii) qualification to participate in
Title IV programs.
The New York State Education Department, through the Board of Regents,
requires registration approval of all degree programs. Interboro degrees were
reregistered in February 2002 for a period of three years. Under the Regents'
rules governing a change of ownership, the Regents presently issue degrees
earned by Interboro students. We expect that Interboro's ability to award its
own degrees will be reinstated in the near future. Interboro's Associate of
Occupational Sciences degree in Ophthalmic Dispensing is also accredited by the
Commission of Opticianry. The accreditation for this degree program was last
issued in March 1999 for a six-year period.
Pell grants. Interboro's participation in the federal Pell grant program
subjects it to substantial regulatory oversight by the DOE under Title IV. For
2001, approximately 39% of Interboro's revenue was derived from Title IV
funding. Interboro has chosen not to participate in the Title IV loan programs.
Aid under the Pell grant programs is awarded by the DOE on the basis of
financial need, generally defined as the difference between the cost of
attendance and the amount a student can reasonably contribute to that cost.
Under the Pell grant program, Interboro is subject to frequent compliance
and financial reviews and detailed oversight and must comply with a complex
framework of laws and regulations. Factors that could affect Interboro's
participation in the Pell grant program include:
o Interboro must satisfy minimum standards established to assess its
financial condition at the end of its fiscal year.
o Interboro could lose its eligibility to participate in Title IV if
it receives in excess of 90% of its cash basis revenue from Title IV
programs for tuition, fees and institutional charges.
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o Interboro cannot pay any commission, bonus, or other incentive
payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any
student recruitment, admission or financial aid awarding activity.
Interboro believes that its current compensation plans comply with
HEA standards.
o Interboro's participation in Title IV is based, in part, on
satisfying administrative capability requirements.
o Interboro's administration of Title IV funds is audited annually by
an independent accounting firm and the resulting audit report is
submitted to the DOE. If it is determined that Interboro improperly
disbursed Title IV funds or violated a provision of the HEA, it
could be required to repay such funds and might be assessed an
administrative fine. Interboro could also become subject to
heightened monitoring or transfer from the advance system of payment
to the reimbursement system, under which it must disburse its own
funds to students and document the student's eligibility for Title
IV funds before receiving funds from the DOE. Interboro was recently
required to provide a $35,000 letter of credit to the DOE because it
was late in making some required refund payments.
o Substance violations of Title IV requirements could also subject
Interboro to other civil and criminal penalties including loss of
Title IV eligibility.
Participants in the Title IV programs are evaluated for compliance with
minimum financial standards in several circumstances, including as part of the
DOE's recertification process and also annually after submission of audited
financial statements to the DOE.
Under new regulations, the DOE calculates three financial ratios for an
institution, an equity ratio, a primary reserve ratio, and a net income ratio.
Each ratio is scored separately and is then combined to determine the
institution's financial responsibility. If an institution's composite score is
below the minimum requirement for unconditional approval (which is a score of
1.5) but above a designated threshold level (the "Intermediate Zone," which is
1.0 to 1.4), the institution may take advantage of an alternative that allows it
to continue to participate in the Title IV programs for up to three years under
additional monitoring and reporting procedures, but without having to post a
letter of credit in favor of the DOE. If an institution's composite score falls
below the minimum threshold level of 1.0 or is in the Intermediate Zone for more
than three consecutive years, the institution may be required to post a letter
of credit in favor of the DOE. Our calculations show that Interboro meets the
minimum requirement for unconditional approval.
An institution that the DOE determines does not to meet any one of the
standards of financial responsibility is nonetheless entitled to participate in
the Title IV programs if it can demonstrate to the DOE that it is financially
responsible on an alternative basis.
TAP grants. Interboro is subject to extensive regulation in New York State
in connection with its participation in TAP. TAP is a tuition grant program in
which most of Interboro's students participate.
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TAP funds disbursed to Interboro subsequent to academic year 1992 are still
subject to audit as are future disbursements. The purchase price payable by EVCI
for Interboro would be reduced to the extent of any disallowance under TAP or
Pell with respect to periods prior to January 14, 2000.
Factors that could affect Interboro's participation in TAP include:
o Interboro must timely disburse financial aid funds due to students.
o Interboro cannot certify ineligible students to receive TAP grants.
o Interboro must provide a copy of any draft and final audit report,
final determination, and notices of disciplinary action which are
issued or brought by any State, federal or accrediting agency and
are relevant to the administration of, or eligibility of students
for, financial aid programs administered by New York State Higher
Education Services Corporation.
Change of ownership or control
A change in control of an institution eligible for Title IV funds can
affect the institution's eligibility to participate in Title IV programs. In
order to maintain eligibility the institution must reestablish its state
authorization and accreditation and satisfy DOE's requirements to be recertified
by the DOE as an eligible institution under new ownership.
A school which undergoes a change of ownership resulting in a change of
control, including Interboro, must be reviewed and recertified for participation
in the Title IV programs under its new ownership. If a school is recertified
following a change of ownership, it will be on a provisional basis. During the
time an institution is provisionally certified, it may be subject to closer
review by the DOE and to summary adverse action for violations of Title IV
Program requirements. Provisional certification does not otherwise limit an
institution's access to Title IV Program funds.
Interboro initially received its temporary certification that became a
provisional certification on April 4, 2000. Subsequently the DOE renewed
Interboro's provisional certification through December 31, 2004.
The DOE, state education agencies and the accrediting agencies that
accredit our schools have their own definitions of when a transaction is deemed
a change of control. Because we are a publicly traded corporation, DOE
regulations provide that a change of control of EVCI occurs under either of two
standards.
First, it occurs if a person acquires ownership and control that requires
us to file a Form 8-K with the Securities and Exchange Commission disclosing a
change of control. Second, a change of control occurs if a stockholder (other
than an institutional investor) that owns at least 25% of our voting stock and
more voting stock than any other stockholder ceases to satisfy either of those
conditions.
New York, Virginia, Maryland and Georgia and accrediting agencies for our
schools also include the sale of a controlling interest of common stock in their
definition of a change of control. A change of control under the definition of
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one of these agencies would require the affected institution to reaffirm its
state authorization or accreditation. The requirements to obtain such
reaffirmation from the states and accrediting agencies vary widely.
The potential adverse effects of a change of control could influence future
decisions by us and our stockholders regarding the sale, purchase, transfer,
issuance or redemption of our capital stock.
Opening additional schools and adding educational programs
The HEA generally requires that proprietary schools be fully operational
for two years before applying to participate in Title IV programs. However, a
school that is certified to participate in Title IV programs may establish an
additional location and apply to participate in Title IV programs at that
location immediately, if such additional location satisfies all other applicable
eligibility requirements including approval by the state licensing agency and
accrediting agency. In Interboro's case, the New York State Education Department
is both our licensing and accrediting agency. Our expansion plans are based, in
part, on our ability to open new sites as additional locations of our existing
schools. A school that satisfies certain conditions may open an additional
location that can begin participating in Title IV programs as soon as the school
notifies the DOE of such location, rather than waiting for DOE approval.
Generally, a school that is eligible to participate in Title IV programs
may add a new educational program without DOE approval if that new program leads
to an associate level or higher degree and the school already offers programs at
that level, or if it prepares students for gainful employment in the same or
related occupation as an educational program that has previously been designated
as an eligible program at that school and the program meets minimum length
requirements. If a school erroneously determines that an educational program is
eligible for Title IV programs, the school would likely be liable for repayment
of the Title IV funds provided to students in that educational program. We do
not believe that current DOE regulations will create significant obstacles to
our plans to add new programs.
Some of the state education agencies and accrediting agencies also have
requirements that may affect a school's ability to open a new site, acquire an
existing site, establish an additional location of an existing institution or
begin offering a new educational program.
Competition Among Schools
Our schools compete with other schools to recruit students. The
post-secondary education market is highly fragmented and competitive. Our
schools often compete with traditional public and private two-year and four-year
colleges and universities and other proprietary schools, including those that
offer distance learning programs. Private and public colleges and universities
may offer courses of study similar to those of our schools.
Interboro's eligibility for Pell and TAP funds gives it a competitive edge
in its target market over non-accredited career schools. Interboro also holds a
competitive edge because it accepts students under federal ability to benefit
regulations. These students are not high school graduates. Many schools only
accept high school graduates or the equivalent. To accept students who are not
high school graduates, Interboro must demonstrate that the student has the
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"ability to benefit" from Interboro's programs, principally through the
student's achievement of a minimum score on a test approved by the DOE and
independently administered in accordance with DOE rules.
In contrast, ICTS usually charges higher tuition than some public
institutions because government subsidies, government and foundation grants,
tax-deductible contributions and other financial resources are available to the
public institutions.
We also believe that our schools compete with others principally based upon
the quality of educational programs, reputation in the business community, costs
of programs and availability of tuition assistance.
Competition for School Acquisitions
Many of our competitors in both the public and private sectors have
substantially greater financial and other resources than us. We have,
accordingly, been seeking to acquire schools that are not of interest to most of
these companies because of their modest size and need for new management that
can devise and implement turn-around strategies.
Changes in the regulatory environment have stimulated consolidation in the
post-secondary education industry. Regulations adopted in recent years have
tightened standards for educational content, established strict standards for
student loan default rates, required intensified scrutiny by state education
agencies and accrediting agencies and created more stringent standards for the
evaluation of an institution's financial responsibility and administrative
capability. As a result, some career-oriented schools have been forced to sell
out or close because they lacked sufficient quality or financial resources or
could not manage the increased regulatory burden. The opportunity for us to
acquire Interboro arose because its former management was unable to satisfy TAP
authorities.
We have competitive advantages over potential new entrants into the
post-secondary education market. They will face significant barriers to entry
due to the highly regulated nature of the industry and the considerable expense
of start-up operations. In addition, our senior management has significant
experience in starting and operating new college centers.
Our Enhanced Video Communications Technology and Services
In 2001, we provided video conferencing services to 15 companies or
institutions either directly, though reseller relationships, or as partners. The
total number sites in service on our network was 29 at December 31, 2001, of
which 19 were used by paying customers. Our customers primarily used our
services and network for internal communications and training. Some used our
services to interact with other companies on our network.
Our clients can access our network by using the Internet to reach one of
our three hubs that are geographically dispersed throughout the New York
metropolitan area. Each hub has multiple multi-point conferencing units that
allow interactive video conferencing among as many as 300 participants located
anywhere there is high speed Internet access. None of our Internet-based clients
using our network had interruptions of service on account of the September 11
attack because of the redundancy we have built into the network.
We believe our multi-point video conferencing technology solutions and
services are superior to those currently being offered in the marketplace. The
13
most widely used multi-point video conferencing equipment generally broadcasts
two to four interactive participants. However, our proprietary software allows
for simultaneous interaction among as many as 33 enabled stations (PCs and/or
full room stations) located in up to 33 dispersed geographical locations. One
facilitator / instructor orchestrates the ability of participants to see and
speak to each other. Our solutions and services cost much less than our
competition and require less bandwidth while providing a higher quality video
experience. We are doing this synchronously, using interactive video
conferencing technologies.
Material portions of our software are owned by us and are protected by
agreements with a third party software developer. Other portions are licensed to
us by the developer.
Under new leadership during the last half of 2001, this segment's
accomplishments included:
Enhancing the network by:
o reducing network installation time frames from six months to six
weeks and technology solution installation time frames from months
to hours.
o introducing remote servicing capabilities for installations and
troubleshooting.
o subcontracting labor-intensive business functions to outside
specialists, thereby allowing us to manage the division with fewer
employees.
o substantially reducing monthly networking costs by redesigning
EVCI's network.
o redesigning EVCI's network to include three geographically dispersed
hubs that permit scalability to support 300 client stations within
72 hours, full redundancy and virtual private network services.
o expanding the capabilities of our network to permit cross
connectivity between clients that don't have broadband but do have
high speed Internet protocol communications for video, audio and
data transmissions (e.g. using fractional Ts or cable modems).
Improving the functionality of our technology by:
o enabling video conferencing using a laptop.
o using pan/tilt/zoom cameras to improve the quality of video
conferencing delivered to a room full of students.
o making our software compatible with Windows 2000 and any other
application that will open on the facilitator's or instructor's
station.
o enabling ISDN sites to participate in video conferenced classes
(video and audio only)
o incorporating password protection into our classes.
o using VCR/DVD playback to allow any site to share a tape or CD with
the class.
Establishing a visible user base representing a cross-section of markets
by:
o video enabling 29 sites, from business, education and not-for-profit
market sectors.
o delivering programs to H. Lavity Stout Community College in Tortola,
British Virgin Islands through our New York City hub over ATM.
14
In 2002, we are focusing more on revenue generation. Our marketing
activities include seeking relationships with large distributors and introducing
a new agent program that will give us market reach without the expense
associated with setting up a large sales force.
Our ability to grow this division has been impeded by the limited cash
resources we have allocated to it. Most of our financial and other resources are
being allocated to the operation and growth of our schools. We are, however,
considering various alternatives for the future of the division. These include a
spin off under circumstances where additional financing is provided, a joint
venture, a sale of the division or growing the division from within by
increasing the opportunities for revenue that can sustain the division's
operation without diverting cash from our schools business.
Employees
As of March 1, 2002, we had 232 full-time employees and 45 adjunct faculty.
None of our employees is covered by a collective bargaining agreement. We
believe that our relationship with our employees is satisfactory.
Forward-looking Statements and Risk Factors
Statements and financial discussion and analysis by our management
contained in this 10-KSB that are not historical facts are forward-looking
statements. They reflect management's current views with respect to future
events and, accordingly, are subject to certain assumptions, risks and
uncertainties, including the risk factors discussed below. If any of the
following or other risks actually occur, or should our assumptions prove
incorrect, actual results may vary materially from those anticipated by those
forward-looking statements. Furthermore, our business, financial condition and
results of operations could be materially and adversely affected.
If we cannot generate more revenue and stem our continuing losses, we will
not become profitable.
Our net revenue and net loss for the year ended December 31, 2000 was
$7,479,000 and $10,140,000. Our accumulated deficit at December 31, 2000 was
$21,475,000. Our net revenue and net loss for the year ended December 31, 2001
was $14,525,000 and $8,837,000 and our accumulated deficit at December 31, 2001
was $31,478,000. Although we achieved our first profit from operations in the
fourth quarter of 2001, we may be unable to generate enough revenue to offset
our operating costs so that we have net income and positive earnings per share.
In large measure, this could be true because ICTS' losses could continue to be
greater than Interboro's profits.
Our continued negative cash flow could materially impede our ability to operate.
Our negative cash flow from operations was $10,143,000 for 2000 and
$3,314,000 for 2001. At December 31, 2001, we had $ 2,441,000 in cash and cash
equivalents. The rate at which we have used cash to operate and grow our
business has limited, and may further limit, our ability to implement our
business strategy.
Our success may depend on our ability to obtain substantial additional
financing.
From our inception in March 1997 through December 31, 2001, we have
received net proceeds from offerings of our debt and equity securities of
approximately $35,130,000.
15
From November 2001 to March 2002, we attempted to raise up to $2,000,000 in
a private offering to accredited investors of a new series of our preferred
stock. As of December 31, 2001, we had raised $130,000. As of March 1, 2002, we
had raised $623,000. As a result, we are considering making another private
offering because we want to have more cash to grow internally, to compete for
and complete acquisitions, assure our compliance with Nasdaq's minimum
stockholders' equity requirement of $2.5 million for continued listing, and have
reserves for unanticipated developments.
At December 31, 2001, we had negative working capital of $2,750,000 which
includes $4,271,000 of deferred tuition revenue. We believe that cash flow from
our operations and the cash we now have will be sufficient to satisfy our
minimum cash requirements until at least December 31, 2002. If, however, we are
underestimating our cash needs, we will require additional debt or equity
financing sooner. After December 31, 2002, we may, require additional funding in
order to operate. Our ability to obtain necessary financing and its cost to us
are uncertain.
ICTS may continue to be more of a burden than a benefit to us as we continue to
try to turn it around.
Although ICTS' monthly loss has been significantly reduced, it is still
losing an average of $75,000 each month. As part of the our cost reduction
activities, the Baltimore school is focusing exclusively on the corporate,
government and agency markets. To reduce expenses further we may be required to
close one or more schools.
If we close a school, we will incur significant costs to teach-out the
students currently enrolled in its programs. If we cancel classes, we will be
required to refund tuition deposits.
In addition, closing one school would adversely affect our relationships
with our college or university partners and revenue generated by other ICTS
schools.
ICTS may not be able to increase revenues if the current down turn in the
information technology market is protracted or as a result of the uncertainty
regarding the market's future.
If ICTS continues to lose money, our board may decide to stop funding its
cash deficits and we may be required to write down all or a substantial portion
of approximately $4.6 million of goodwill currently attributable to ICTS.
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.
Interboro's participation in the Pell grant program under Title IV of the
HEA subjects it to frequent reviews and detailed oversight and requires it to
comply with complex laws and regulations. Similarly, Interboro is subject to
extensive regulation and oversight by New York State administrators of TAP.
Approximately $9.2 million in Pell and TAP financial aid was provided to
Interboro students during 2001. Most of Interboro's students rely on this aid to
pay their tuition. Any significant change, curtailment or delays in
disbursement of Pell or TAP funds would have a material adverse effect on
Interboro and, therefore, on us. This could result from our failure to comply
with existing regulations or significant changes in Federal or New York State
regulations governing eligibility for, or the amount or timing of, aid
disbursements among other things. Current funding for Title IV expires on
December 31, 2003 and New York State has considered modifying TAP funding.
16
The regulations, standards and policies of the regulatory agencies
frequently change. Changes or new interpretations could have material
consequences for our schools' accreditation, authorization to operate in various
states, permissible activities, receipt of funds under Title IV, TAP or other
programs and/or costs of doing business.
Interboro Institute's prior problems with regulators could reoccur and adversely
affect its operations.
Prior to our acquiring Interboro, TAP administrators disallowed
approximately $4,800,000 of grants previously disbursed to Interboro for
academic years 1989/1990 through 1991/1992. After protracted litigation,
Interboro was required to repay approximately $5,850,000, including $1,050,000
of interest, to the New York State Higher Education Services Corporation. The
entire amount has been fully paid and all but approximately $700,000 was paid
prior to our purchase of Interboro. However, funds disbursed to Interboro
subsequent to academic year 1992 are still subject to audit by TAP
administrators as are future disbursements. Interboro cannot predict if any
future disallowances might occur as a result of additional TAP audits. Interboro
believes it is operating in compliance with TAP rules.
Regulatory agencies or third parties may commence investigations or institute
litigation against us.
From time to time, we may be subject to investigations, claims of
non-compliance, or lawsuits by governmental agencies or third parties, which may
allege statutory violations, regulatory infractions, or common law causes of
action. If the results of the investigations are unfavorable to us or if we are
unable to successfully defend against third-party lawsuits, we may be required
to pay money damages or be subject to fines, penalties, injunctions, loss of
financial aid eligibility, or other censure that could have a materially adverse
effect on our business. Even if we adequately address the issues raised by an
agency investigation or successfully defend a third-party lawsuit, we may have
to devote significant money and management resources to address these issues.
This could also materially hurt our business.
Failure to effectively manage our growth could hurt our business.
We want to continue to grow rapidly. If we can, this will probably strain
our management, operations, employees and resources. We cannot assure our
stockholders that we will be able to maintain or accelerate our current growth
rate, effectively manage our expanding operations or achieve significant growth
on a timely or profitable basis. If we are unable to manage our growth
effectively, our business could be materially hurt.
Our business could materially suffer if we cannot effectively identify, acquire
and integrate additional schools.
We expect to continue to seek acquisitions in order to grow. We often
engage in evaluations of, and discussions with, possible acquisition candidates.
We may be unable to acquire certain schools because we may not be able to raise
sufficient funds to finance their acquisition or we may be unable to use our
stock to fund the purchase. In addition, we may choose not to purchase a school
after we conduct our due diligence. In 2001, after a significant expenditure of
time, effort and money, we decided not to acquire IBS International Business
Schools Inc., which had been one of Canada's largest operators and franchisors
of post-secondary business career schools. From this and other experiences, we
17
know that it takes time and resources to identify and acquire suitable
acquisition candidates.
We have been focusing primarily on distress situations that we believe are
well priced and that we can turnaround as we did successfully with Interboro.
Our success with Interboro may not be repeated. Potential hurdles for us
include:
o an inability to fund operations of the acquired company while we seek to
turn it around
o possible loss of key employees
o diversion of our management resources
o adverse effects on our operating results
o unanticipated business or regulatory uncertainties or liabilities
o breaches of representations or warranties by the seller of the acquired
company for which we do not have adequate recourse
o underestimation of the turn around costs for an acquisition
o failure to develop or implement a viable turn around strategy
o an inability to continue a school's participation in financial aid
programs as a result of regulatory change in control provisions
Our failure to effectively open new schools or add new services could adversely
affect our business.
Opening additional school sites requires us to use our cash for new
personnel, capital expenditures, marketing expenses and other startup costs. To
open a new site, we are also required to obtain appropriate federal, state and
accrediting agency approvals. Our failure to effectively locate, open and manage
the operations, or to obtain authorization to participate in the federal and
state financial aid programs, of newly established sites could have a material
adverse effect on those and our other sites.
Payment for acquisitions with our stock could substantially dilute our current
stockholders.
For the foreseeable future, we expect we will be required to use our stock
as currency to pay for school acquisitions. While the low price of our stock may
be attractive to sellers of schools, our current stockholders may be
substantially diluted as a result of the number of shares we are required to
issue to those sellers.
If our common stock is delisted from the Nasdaq, the liquidity of our common
stock and our ability to raise additional capital and make acquisitions could
adversely affected.
In 2001, our common stock was nearly delisted from the Nasdaq SmallCap
Market because we were not in compliance with the continued listing requirements
of a minimum of $2.5 million of stockholders' equity and a minimum bid price of
$1.00. After protracted and expensive negotiations with our Series B preferred
stockholders, we were able to reclassify our Series B preferred stock as
permanent equity. This resulted in an increase in stockholders' equity by more
than $12.4 million. Our stock price rebounded and has been more than $1.00 since
August 27, 2001. As a result of continuing losses, including a $4 million charge
for discontinued operations, at December 31, 2001 our stockholders' equity was
$3,641,000.
Our net worth could fall below $2.5 million if we are required to
substantially write down the approximately $4.6 million of goodwill attributable
to our acquisition of ICTS.
18
If our common stock is delisted in the future because we are not then in
compliance with the Nasdaq minimum stockholders' equity and minimum bid price
requirements, trading would thereafter be conducted in the over-the-counter
market on the "electronic bulletin board" or in the "pink sheets": As a
consequence:
o the liquidity of our common stock would be impaired, not only in the
number of securities which could be bought and sold but also through
delays in a the timing of transactions, reduction in security
analysts' and the news media's coverage of us and lower prices for
our common stock.
o these trading factors would also make our common stock less
attractive to potential sources of financing and as a currency to
pay for acquisitions by us.
Our enhanced video communications segment has not and may never generate
profits.
Some of the more significant reasons why this segment might not ever become
profitable are:
o our inability to operate and grow this segment has been impeded by
the limited cash resources we have allocated to it.
o this segment depends on third parties that may not be able to
provide the required services or products in a timely manner. These
include hardware, software, network and content providers.
o because we do not have the capital necessary to broadly deploy our
video transmission technology solutions, they may become obsolete
before gaining market acceptance or providing a competitive
advantage.
o demand for our technology solutions and services may not become
significant if training and education via live interactive video
conferencing does not become widely accepted.
o our marketing strategies to use large distributors and an agent
program may not provide us with any significant market penetration.
o the loss of the segment's key personnel could impact or the
segment's ability to operate and grow.
In a continued economic downturn, it could become more difficult for us to
operate and grow.
We believe that our campus schools segment should do well in a continuing
recession because schools such as ours have historically been able to do this.
However, other than the current one, we have had no experience operating our
business during a recession. At ICTS and our enhanced video communications
division, we have already had to make significant cutbacks in personnel and
reallocate our resources in order for us to continue their operations. As the
recession continues, we may be required to make additional cutbacks and/or
reallocate additional resources.
19
We depend on our chairman, president and other key management personnel to
operate and grow.
We believe the efforts of our executive officers and other management
personnel, especially Dr. Arol I. Buntzman, our chairman and chief executive
officer, and Dr. John J. McGrath, our president, are essential to our operations
and growth. The loss of the services of Drs. Buntzman or McGrath would
materially adversely affect us. We maintain insurance on the life of Dr.
Buntzman in the amount of $2 million. We have employment agreements, expiring
December 31, 2002, with each of Dr. Buntzman and Dr. McGrath.
Our chairman and other principal stockholders can act together to control our
business and policies without the approval of other stockholders.
Our officers and directors as a group, together with Tayside Trading, Ltd.,
DEWI Investments Limited and B&H Investments Ltd., can vote more than 40% of our
currently outstanding common stock. This is probably sufficient to control the
outcome of any stockholder vote except where the vote of our Series B preferred
stock is required on matters that include:
o any increase or decrease in our authorized capital stock;
o the sale of all or substantially all of our assets or the assets of any
of our subsidiaries; or
o any merger involving us or any of our subsidiaries.
In addition, as a result of voting agreements our chairman has with our
president and chief financial officer and his spouse, our chairman has the power
to direct the vote of more than 20% of our common stock. This may be sufficient
for Dr. Buntzman to alone control the outcome of any stockholder vote not
requiring the vote of holders of our Series B preferred stock.
Our share price has ranged greatly since we went public and may be very volatile
in the future.
Since our public offering in February 1999, the market price of our common
stock has ranged between $0.26 and $40.94.
In the future, our share price could be affected by a number of factors,
including:
o actual or anticipated fluctuations in our operating results;
o changes in expectations as to our future financial performance or
changes in financial estimates of securities analysts;
o increased competition from major corporations or well-known
colleges, universities and professional training organizations;
o announcements of technological innovations;
o the operating and stock price performance of other comparable
companies;
o general stock market or economic conditions;
20
o sales of our stock by our management or others pursuant to a
prospectus or otherwise;
o acquisition of post-secondary institutions; and
o additional financings.
In addition, the stock market in general has experienced volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may adversely affect the trading
price of our common stock regardless of our actual operating performance.
Provisions of law and two agreements may prevent takeovers and depress the price
of our shares.
Certain provisions of Delaware law, an agreement with our chief executive
officer and an agreement with holders of our Series B preferred stock could make
it more difficult for a third party to acquire, or discourage a third party from
attempting to acquire, control of us. The provisions of these agreements
include:
o our chairman is entitled to certain payments if his employment is
terminated following a change of control of us.
o Series B preferred stockholders can require redemption of their
shares if our board authorizes a transaction resulting in change of
control of us.
o Series B preferred stockholders must consent to transactions that,
in addition to those referred to above, include:
o paying dividends on our common stock
o incurring indebtedness in excess of $15,000,000
o incurring indebtedness of more than $2,000,000 that is senior to
our $910,000 note payable to the Series B holders
Such provisions could limit the price that investors might be willing to
pay in the future for our common stock because they believe our management and
holders of our Series B preferred can defeat a takeover of us that could be
beneficial to non-management stockholders.
Our classified board limits stockholder voting for election and removal of
directors.
Our board of directors is divided into three classes. The directors in each
class are elected for three-year terms when their class stands for election at a
stockholder meeting. This staggering of director terms protects directors from
being removed from office by anyone engaged in a proxy contest for control of
the board and dilutes the ability of stockholders to influence corporate
governance policies. Furthermore, a director may only be removed, with or
without cause, by the holders of 66 2/3% of the shares entitled to vote at an
election of directors.
21
Indemnification and limitation of liability of our officers and directors may
insulate them from accountability to stockholders at substantial cost to us.
Our certificate of incorporation and by-laws include provisions whereby our
officers and directors are to be indemnified against liabilities to the fullest
extent permissible under Delaware law. Our certificate of incorporation also
limits a director's liability for monetary damages for breach of fiduciary duty,
including gross negligence. In addition, we have agreed to advance the legal
expenses of our officers and directors who are required to defend against
claims. These provisions and agreements may have the effect of reducing the
likelihood of suits against directors and officers even though such suits, if
successful, might benefit our stockholders and us. Furthermore, we may be
adversely affected by paying the cost of settlement and damage awards against
directors and officers.
Item 2. Description of Property.
The following table sets forth information about our facilities, all of
which are leased and are adequate for our current operations.
Location Approximate Square Feet Purpose
-------- ----------------------- -------
Yonkers, New York 8,000 EVCI's corporate and
administrative offices
New York, New York 28,000 Interboro's Manhattan
campus
New York, New York 2,000 Interboro's admissions
department
Flushing, New York 11,000 Interboro's Flushing
extension center
Atlanta, Georgia 14,000 ICTS school
Baltimore, Maryland 14,000 ICTS school
Alexandria, Virginia 5,500 ICTS corporate and
administrative offices
Alexandria, Virginia 14,000 ICTS school
Hampton, Virginia 5,000 ICTS school
Item 3. Legal Proceedings.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
22
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock is quoted on The Nasdaq SmallCap Market and the Boston
Stock Exchange under the symbol "EVCI," and on the Pacific Exchange under the
symbol "EVC." The following table sets forth the high and low sales prices, of
our common stock, as reported by Nasdaq, for each quarter of 2000 and 2001.
2000:
First Quarter $40.938 $15.500
Second Quarter 38.000 12.000
Third Quarter 18.500 10.375
Fourth Quarter 12.063 1.750
2001
First Quarter 4.375 .813
Second Quarter 2.250 .260
Third Quarter 1.360 .290
Fourth Quarter 2.200 1.420
As of February 15, 2002, the number of stockholders of round lots (100 or
more shares) of our common stock was 1,474.
We have never declared or paid any cash dividends on our common stock. We
currently anticipate retaining any future earnings to finance internal growth
and potential acquisitions.
We cannot pay any dividends on our common stock unless we have paid all
cumulative dividends and set aside enough money to pay the next dividend due on
our Series B preferred. Cash dividends are payable semi-annually on our Series B
preferred, as and when declared by our Board. Our Board did not declare the
December 31, 2001 dividend of $249,315 on our Series B preferred. Cumulative
dividends are payable upon conversion of Series B preferred, subject to
applicable law.
Series C Preferred and Warrants
On November 29, 2001, we created a new series of preferred stock designated
Series C 8% Convertible Preferred Stock. The Series C preferred consists of
20,000 shares, each having a stated value of $100. The Series C preferred were
sold in Units consisting of 250 shares each and Warrants to purchase the number
of shares of our common stock determined as provided below.
This offering was made solely to accredited investors, as defined in
Regulation D under the Securities Act of 1933 and in reliance upon the exemption
afforded by Section 4(2) of that Act.
Conversion. Series C preferred has optional and automatic conversion
features:
o Shares are convertible into our common stock, at the holder's option,
until the 90th day after the effective date the registration statement
that registers the resale of such common stock under the Securities Act.
23
We are filing the registration statement contemporaneously with the
filing of this report and will use our best efforts to have it declared
effective within 150 days.
o The number of shares of common stock issuable upon the optional
conversion of one share of Series C preferred will be determined by
dividing $100 by the optional conversion price.
o The optional conversion price initially is $1.52, subject to adjustment.
o If our profit from operations is at least $.075 per common share
outstanding, for the quarter ending March 31, 2002, the optional
conversion price will adjust to $2.00.
The optional conversion price also will be adjusted in the event of
subdivisions, combinations, stock dividends, reclassifications and
recapitalizations relating to our common stock.
o On the 90th day following the effective date of the registration
statement, all of the outstanding shares of Series C preferred will
automatically convert into our common stock. The automatic conversion
price will be the higher of the optional conversion price, as adjusted,
and 80% of the average of the closing bid prices for our common stock for
the ten-day period ending on the automatic conversion date.
Warrants
Exercisability and exercise price. Warrants are exercisable for five years.
A holder, that satisfies private offering suitability standards, can purchase
shares of our common stock upon exercise of a Warrant at a price that is the
same as the conversion price of the Series C preferred.
Calculation of the number of shares purchasable. The number of shares that
can be purchased upon exercise of a Warrant will equal 33%, 30% or 25% of the
number of shares into which the Series C preferred shares included in the Unit
are convertible, after giving effect to adjustments resulting from our achieving
operating profit targets. Examples of how to calculate the number of shares
follow:
o If the optional conversion price is $1.52 and we have a profit from
operations of less than $.05 per common share outstanding, for the first
quarter of 2002, the number of shares of our common stock that could be
bought upon exercise of a Warrant included in one full Unit is computed
as follows:
$25,000
-------
$1.52 X .33 = 5,427.63 = 5,428 shares
o If our profit from operations is at least $.05 but less than $.075 per
common share outstanding, for the first quarter of 2002, the 33% will be
reduced to 30%. Accordingly, using the same $1.52 conversion price, 4,934
shares could be bought upon exercise of a Warrant included in one full
Unit.
24
o If our profit from operations is at least $.075 per common share
outstanding, for the first quarter of 2002, the conversion price would
increase from $1.52 to $2.00 and the 30% will decrease to 25%. The result
would be:
$25,000
-------
$2.00 X .25 = 3,125 shares
Registered broker-dealers who sold shares of Series C preferred received
cash commissions equal to 8% of the gross proceeds received by us from their
sales and Warrants to purchase 8% of the number of shares of our common stock
that can be purchased upon exercise of the Warrants included in the Units sold
by them. All sales thus far of Units were made by registered broker-dealers.
By the expiration of the offering of the Units on March 1, 2002, we had
sold 6,230 shares of Series C preferred and received net proceeds, after
deduction of cash commissions and expenses, of approximately $550,000
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion should be read in conjunction with the financial
statements of EVCI and the notes thereto appearing elsewhere in this report.
Operational Overview
Transition year
2001 was a period of significant transition for us, primarily because in
our fourth quarter we had our first profit from operations:
Nine months ended Quarter ended
September 30, 2001 December 31, 2001
------------------ -----------------
Income (loss) from continuing operations $(3,751,000) $ 177,000
Loss from discontinued operations and disposal of
discontinued operations (5,263,000) --
------------ -----------
Net income (loss) (9,014,000) 177,000
------------ -----------
Accreted value of warrants and transaction costs - Series B (179,000) (60,000)
Accreted value of warrants and transaction costs - Series C (17,000)
Waived dividends on preferred stock (664,000)
Undeclared dividends on preferred stock (246,000)
------------ -----------
Net loss available to common stockholders $(9,857,000) $ (146,000)
=========== ===========
Basic and diluted earnings (loss) per common share from continuing
operations $ (0.83) $ 0.04
Basic and diluted loss per common share from discontinued
operations (1.17) --
Basic and diluted loss per common share from warrants, transaction costs
and dividends (0.19) (0.08)
------------ -----------
Basic and diluted loss per common share $ (2.19) $ (0.04)
============ ===========
25
In addition:
o We reduced our EVCI corporate overhead expenses by over $4,230,000,
including reductions in wages and benefits of $2,960,000 and general
and administrative and other expenses of $1,270,000.
o We changed the focus of our business to emphasize growing our
schools segment. As a result, Interboro opened its first site in
Flushing, New York and, effective July 1, 2001, we acquired ICTS,
Inc. We pursued several other school acquisitions, but, following
our due diligence, chose not to close then.
o We discontinued delivering synchronized courses using ISDN lines. We
are no longer marketing asynchronized courses and we are completing
our obligations to teach the students enrolled in these programs.
o We created our enhanced video communications division. This division
offers clients the ability to provide synchronized training via the
Internet.
o After protracted discussions with Nasdaq, the SEC and our Series B
preferred stockholders, we were able to reclassify our Series B
preferred stock as permanent equity. This allowed us to avoid being
delisted by Nasdaq for failure to maintain minimum stockholders
equity of $2.5 million and a minimum bid price of $1.00 for our
common stock.
Revenue
We recognize revenue ratably over the period we earn it by teaching the
courses to which the revenue relates. To the extent not recognized, because it
has not been earned by us, revenue is classified on our balance sheet under
current liabilities as deferred revenue.
Interboro has a fall, spring and summer semester. Each is approximately 15
weeks. ICTS programs have many different start dates. Because they vary in
duration, from two days to 27 weeks, we can schedule courses to accommodate
students, assuming a sufficient number will be taking the course.
Accounts receivable
Interboro. Most Interboro students receive grants for tuition and related
fees. The maximum aid a student can receive from New York State under TAP is
$2,500 per semester. The maximum federal aid a student can receive from the Pell
program is $1,875 per semester. For 2001, Interboro students qualifying for aid
received an average of $2,206 in TAP grants and $1,540 in Pell grants. In 2001,
approximately 94% of Interboro's net revenue consisted of TAP and Pell grants.
Our students are responsible for the portion of their tuition that is not paid
with TAP and Pell funds.
Pell and TAP funds are received by us, with respect to each new semester,
when students satisfy specific criteria that include:
o New York residency (for TAP grants).
26
o high school diploma or GED or, demonstrating through testing, the
ability to benefit from Interboro's course offerings
o matriculation into a program leading to a degree
o satisfactory attendance
o for continuing students, meeting progress and pursuit standards
during the prior semester
Up to 20% of Pell funds is generally received by us after 50% of the
semester is completed. Generally, we receive the balance before the end of the
semester.
Up to 40% of TAP funds is generally received by us prior to the start of
the semester, as a pre-payment based on prior roster certification. At least
75% of TAP funds are generally received by us prior to the start of the next
semester and the balance is substantially collected over the next 2 to 3 months.
ICTS
Receivables from corporate and government customers are generally collected
by ICTS within 100 to 120 days after the completion of a class. At December 31,
2002, corporate and government customer receivables constituted approximately
62% of ICTS' receivables. The balance is from individual students and is
generally collected within 30 days after enrollment for a course.
Cost of sales
Interboro's cost of sales primarily consists of the salary costs of deans,
instructors, recruiters and library staff. Other costs include transportation,
testing, and vaccination costs.
ICTS' cost of sales includes wages of instructors as well as the costs of
books, testing, royalties and commissions and miscellaneous other direct costs.
Marketing costs
Generally, marketing costs are expensed as incurred. However, costs of
brochures and related materials are expensed over the duration of the course to
which they relate.
Interboro's marketing costs mostly relate to subway advertising and also
advertising in local newspapers and some radio advertising.
ICTS marketing costs are incurred mostly for local newspapers ads.
2001 Compared to 2000
All discussion about ICTS relates to the period July 1 - December 31, 2001
unless otherwise noted.
Net revenues for 2001 increased 94%, or $ $7,046,000, to $14,525,000 from
$7,479,000 for 2000. The 2001 net revenue is comprised of: $208,000 at EVCI,
$9,736,000 at Interboro and $4,581,000 at ICTS. The 2000
27
net revenue is comprised of $7,479,000 at Interboro and none at EVCI because
EVCI revenue is included in discontinued operations. Interboro student course
registrations increased to 11,500 for 2001 from 9,350 for 2000, resulting in
additional revenue of $2,257,000. This includes $884,000 from Interboro's
Flushing site. The EVCI revenue for 2001 relates to our enhanced video
communications segment.
Other income increased by $89,000 to $156,000 for 2001 from $67,000 for
2000. The difference was made up of $44,000 from application fees charged by
Interboro and $65,000 from registration fees charged by ICTS. This was offset by
a net loss of $20,000 from outsourcing Interboro's book sales.
Interest income decreased by $125,000 to $141,000 for 2001 from $266,000
for 2000 because we used more of the proceeds from our Series B preferred
financings to fund our growth at Interboro and fund our efforts to turnaround
ICTS.
Cost of sales increased by 136%, or $2,861,000, to $4,970,000 for 2001 from
$2,109,000 for 2000. The cost of $4,970,000 in 2001 is made up of: EVCI,
$16,000; Interboro-Manhattan, $2,613,000; Interboro-Flushing, $171,000; and ICTS
$2,170,000. Year 2000 cost of sales is solely attributable to
Interboro-Manhattan. The increase in 2001 of $504,000 at Interboro-Manhattan
consisted of $454,000 of additional teaching costs to support Interboro's
increase in revenue and the write off of its book inventory. The balance is made
up of various other items which have an overall credit balance of $6,000. The
increase of $171,000 at Interboro-Flushing relates to the opening of this site
in 2001 and includes $167,000 for instructors. ICTS' costs include teaching
costs of $1,235,000, book costs of $516,000, royalties and commission of
$359,000 and other direct costs of $60,000 which are required to deliver its
programs. The increase at EVCI relates to the operations of our enhanced video
communications division. As a percentage of our net revenue, cost of sales was:
EVCI 8%, Interboro-Manhattan, 30%; Interboro-Flushing 19%; and ICTS, 47%, for
2001, as compared to 28% from Interboro-Manhattan for 2000.
Salaries and benefits decreased by 8%, or $519,000, to $6,313,000 for 2001
from $6,832,000 for 2000. These costs consist of: EVCI, $1,144,000;
Interboro-Manhattan, $3,601,000; Interboro-Flushing, $200,000; and ICTS,
$1,368,000, in 2001, compared to $4,104,000 at EVCI and $2,728,000 at
Interboro-Manhattan in 2000. The decrease of $2,960,000 at EVCI resulted from a
reduction in staff, from 60 to 13 full-time employees, that provided a cost
saving of $2,246,000 and a reduction in bonuses for EVCI's corporate staff to
$5,000 from $719,000 in 2000. The Interboro-Manhattan payroll increased by
$873,000, which includes a 4% COLA increase, 11 new administrators and full-time
teachers and 4 new part-time instructors. The $200,000 cost at Flushing relates
to 16 teachers and administrative personnel employed there since the site opened
in March 2001. ICTS had executive and administrative salaries and benefits of
$1,368,000. ICTS has reduced its staff from 92 to 77
full-time employees.
Marketing, brochures and student registration costs increased by $688,000
to $1,324,000 for 2001 from $636,000 for 2000. These costs consist of:
Interboro, $667,000 and ICTS, $657,000, compared to Interboro, $636,000 in 2000.
Marketing costs at Interboro increased by $31,000 as a result of $195,000 of
marketing costs for our Flushing site that was offset by a reduction of $164,000
at our Manhattan campus due to our use of more economical and effective
advertising, such as subway ads. ICTS marketing cost includes targeted direct
mail, e-mail, telemarketing, radio and newspaper advertising.
28
Professional fees and consulting fees increased to $1,070,000 for 2001 from
$658,000 for 2000, primarily as a result of legal and accounting fees related to
potential and completed acquisitions and financings, our annual meeting of
stockholders, our protracted negotiations with our Series B preferred
stockholders, and our responses to Nasdaq's delisting notice.
Depreciation and amortization increased to $768,000 for 2001 from $439,000
for 2000. These costs consist of: EVCI, $102,000; Interboro-Manhattan; $318,000,
Interboro-Flushing, $44,000; and ICTS, $304,000, in 2001, and EVCI, $157,000 and
Interboro-Manhattan, $282,000, in 2000. Interboro-Manhattan includes
amortization of goodwill of $169,000 in 2001 and $153,000 in 2000. ICTS includes
amortization of goodwill of $160,000.
Other expenses decreased to $3,782,000 for 2001 from $3,882,000 for 2000.
These costs are comprised of: EVCI, $1,590,000; Interboro, $1,566,000 and ICTS
$626,000, in 2001, and EVCI $2,943,000 and Interboro, $939,000 in 2000. An EVCI
decrease of $1,353,000 is primarily due to: a $165,000 reduction in investor
relations costs; decreases, related to our staff reductions, in telephone
expense of $228,000, travel expense of $431,000 and $656,000 for items such as
postage, printing, computer costs and other general overhead items. These
decreases were offset by a $127,000 increase in insurance expenses. Of the
increase at Interboro of $627,000, the Flushing site contributed $547,000,
including $440,000 for rent. The $626,000 incurred by ICTS includes: rent,
$312,000; utilities, $31,000; telephone, $57,000 and $226,000 of other general
overhead items such as insurance, supplies, outside services, dues and
memberships and bank fees.
Non-cash consulting services in 2000 were of $56,000 and relate to the
issuance of warrants and options. Our warrants are valued at their face value at
the date of their issuance using the Black-Scholes option-pricing model or an
opinion of an investment banker.
Interest and financing costs increased to $72,000 in 2001, from $8,000 in
2000, of which $53,000 was interest on capital lease obligations primarily
related technical equipment required at ICTS to teach its certification
programs. The balance of $19,000 was interest on our promissory note issued to
the Series B preferred holders.
The decrease in our loss from discontinued operations to $951,000 in 2001
from $3,167,000 relates to our decision in July 2001 to stop delivering
synchronized courses using ISDN lines because this activity continued to be
unprofitable. The items from this activity include salaries and benefits,
communications and depreciation. These costs were all directly related to
activities prior to September 30, 2001.
Loss from disposal of discontinued operations was $4,313,000 which includes
$3,913,000 of disposed equipment, net of depreciation, and $400,000 of other
costs related to the discontinued operations.
Net loss for 2001 was $8,837,000 as compared to $10,140,000 for 2000.
However, for the fourth quarter of 2001, our first profitable quarter, we had
net income of approximately $177,000. Our net loss for 2001 consists of
$8,429,000 at EVCI and $574,000 at ICTS that was offset by a net profit at
Interboro of $166,000. Interboro's net profit was $441,000 from its Manhattan
campus. This was offset by a net loss at Interboro-Flushing of $274,000. Our net
loss in 2000 consists of a net loss at EVCI of $10,787,000 that was offset by a
net profit at Interboro of $647,000.
29
Seasonality
Our Interboro revenue varies seasonally as a result of changes in the level
of its student enrollment.
Interboro traditionally has experienced a seasonal increase in enrollments
for the fall semester, the most popular time to enroll for post-secondary
programs. Interboro's spring semester enrollments are usually less because there
are a greater number of drop outs than new enrollees. However, due to our
expansion and progress in increasing retention of Interboro students, we are
experiencing a record enrollment for the spring semester. Although we have a
summer semester at Interboro and we encourage year-round attendance at all
schools, enrollment during the summer is significantly lower than the remainder
of the year. As a result of these factors, total student enrollment and net
revenue are typically highest in our fourth and first quarters, which include
October through March.
Liquidity and Capital Resources
Operating activities
Cash used in operating activities in 2001 was $3,314,000 compared to
$10,143,000 in 2000. The improvement of $7,359,000 is composed of $5,505,000 of
changes in our net loss after adjusting for non-cash items such as depreciation
and amortization, allowances for doubtful accounts, loss on disposal of
discontinued operations and net loss on sale of equity investment which total
$3,157,000 and the balance of $1,324,000 was comprised mainly of changes in a
decrease in accounts receivable and current liabilities. The primary reasons for
these changes in the uses of cash are:
o our decision to stop delivering synchronized courses using ISDN
o Interboro's opening a new campus in Flushing, New York
o our acquisition of ICTS
Investing activities
Cash used in investing activities decreased by $2,963,000 to $483,000 in
2001 from $3,445,000 in 2000. Capital expenditures of $348,000 related to the
opening of our new site in Flushing and a new admissions office on 54th street
in Manhattan and upgrading our computer equipment in Manhattan. Through December
31, 2001 we funded ICTS with $1,100,000. We are continuing to fund ICTS'
negative cash flow from cash generated by Interboro and EVCI's cash on hand.
Through February 28, 2002, we have provided approximately $1,400,000 to ICTS. We
are closely monitoring ICTS to determine whether there are real prospects for an
improvement in its revenue that will make ICTS cash flow positive in the
foreseeable future and relieve EVCI from the burden of funding ICTS' cash
deficiencies.
Financing activities
Net cash used in financing activities in 2001 included $123,000 to pay
capital leases and $83,000 to purchase 51,965 shares of our common stock in the
open market at prices ranging from $1.18 and $2.30, or an average cost of $1.59
per share. We received net proceeds of $110,000 from sales of our Series C
30
preferred stock through December 31, 2001. The offering of our Series C
preferred expired on March 1, 2002. This offering provided us with total gross
proceeds of $623,000 and net proceeds of approximately $550,000.
We anticipate, based on current plans and assumptions relating to our
current operations, that cash flow from operations and the proceeds from our
recent Series C preferred stock offering will be sufficient to satisfy our cash
requirements at least until December 31, 2002. We expect to require additional
funding, thereafter, in order to operate. We need more financing now in order to
grow. We are, therefore, considering various available financing options. If we
are underestimating our operating cash requirements, we will require additional
debt or equity financing before year end. There can be no assurance that any
such required debt or equity financing will be available on acceptable terms.
Item 1. Financial Statements.
The financial information required by this item is set forth beginning on
page F-1.
Item 2. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
Not applicable.
31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
Directors and Executive Officers
The following table lists our directors and executive officers.
Name Age Positions with EVCI
---- --- -------------------
Dr. Arol I. Buntzman* 59 Chairman of the board and chief
executive officer
Dr. John J. McGrath* 49 President and director
Richard Goldenberg* 56 Chief financial officer, secretary
and director
Royce N. Flippin, Jr. 67 Director
Philip M. Getter 64 Consultant and director
Elie Housman 65 Director
-------------------------
*Executive Officer
Biographical information provided to us by our directors and executive
officers follows.
Dr. Arol I. Buntzman has served as chairman of the board and chief
executive officer of EVCI since it's inception in March 1997 and as a member of
our compensation committee since February 1999. From October 1996 until he
founded EVCI with Dr. John McGrath, Dr. Buntzman worked with Dr. McGrath on
EVCI's business plan. From August 1995 to October 1996 he was chairman of the
board and chief executive officer and a principal stockholder of Educational
Televideo Communications, Inc., a provider of distance learning services. From
July 1995 through June 1996, he served as director of interactive video
conferencing distance learning of Fordham University. From September 1992
through July 1995, he was an adjunct professor and the director of the weekend
program, a college program for working adults, at Mercy College, Dobbs Ferry,
New York.
Dr. Buntzman received a doctorate in education through the executive
leadership program of Fordham University's Graduate School of Education in May
1995, a professional diploma in educational administration from Fordham
University's Graduate School of Education in May 1993 and a Masters of Business
Administration from Arizona State University in September 1970. His doctoral
dissertation focused on using live interactive video conferencing as an
educational delivery method for graduate education programs.
32
Dr. John J. McGrath has served as president and a director of EVCI since
it's inception in March 1997. From October 1996 until he founded EVCI with Dr.
Buntzman, he worked with Dr. Buntzman on EVCI's business plan. From August 1995
to October 1996, he was president, a director and a principal stockholder of
Educational Televideo Communications, Inc.
From January 1995 to February 1997, Dr. McGrath served as special assistant
to the president of the Mercy College, Dobbs Ferry, New York. Through December
1994, he served as assistant vice-president for extension Centers of Mercy
College where he was responsible for establishing and managing seven college
extension centers in New York City and Westchester County, New York. He also
served as the dean of the White Plains Campus of Mercy College from 1990 through
1993.
Dr. McGrath holds a Ph.D. from the Fordham University Graduate School of
Arts and Sciences, with a specialization in law and criminal justice.
Richard Goldenberg has served as chief financial officer, secretary and a
director of EVCI since its inception. From October 1996 until October 1997, Mr.
Goldenberg served as chief financial officer, treasurer and secretary of RDX
Acquisition Corp., a company that provides proprietary electronic messaging and
automation software. From 1986 through September 1996, he served as
vice-president, treasurer and secretary of Celadon Group, Inc., a publicly
traded transportation company. He has a B.B.A. in accounting from Baruch
College, CUNY.
Royce N. Flippin, Jr. has been a director and a member of EVCI's audit
committee since February 1999. He has been a member of our compensation
committee since November 2001. He has served, since 1992, as president of
Flippin Associates, a consulting firm focusing on the development of resources,
programs and new markets and human resource management for career planning,
communication and leadership skills. After serving as a tenured professor and
director of athletics at MIT from 1980 to 1992, he was a director of program
advancement at MIT from 1992 to 1999, in which capacity he provided consulting
services to the MIT Office of Individual Giving -Resource Development regarding
projects that include technology transfers, individual gift bequests and the
planned MIT athletic center. In 2000, Mr. Flippin was appointed a senior
managing director and member of the executive committee of Universal Genesis,
LLC, a Privately owned financial services and development company. Mr. Flippin
is a trustee or board member of several profit and non-profit organizations,
including Ariel Capital Management Funds (trustee since 1986), Thorium Power
Corporation, a privately-held company that is developing non-proliferative
nuclear fuels (director since 1994 and chairman from 1995-1997) and The
Princeton Club of New York. Mr. Flippin holds an A.B. degree from Princeton
University and an M.B.A. degree from Harvard University Graduate School of
Business Administration.
Philip M. Getter has been a director since May 1999 and a member of our
audit committee since November 2001. He has been a consultant to us since
January 2001. Since December 2000, he has been President of DAMG Ventures LLC,
an investment bank. From March 1996 to December 2000, he served as a managing
director and head of corporate finance of Prime Charter Ltd., the lead
underwriter of EVCI's IPO. From 1992 to March 1996, he was a senior vice
president, investment banking, at Josephthal Lyon & Ross. Mr. Getter has more
than 30 years of experience in the securities industry. From 1975 to 1981 he was
chairman and chief executive officer of Generics Corporation of America, a
public company that was one of the largest generic drug companies in the U.S. He
is a member of the League of American Theatres and Producers, serves on the
Board of the American Theatre Wing and is a Trustee of the Kurt Weill Foundation
33
for Music. Mr. Getter has produced events for Broadway, film and television. Mr.
Getter received his B.S. in industrial relations from Cornell University.
Elie Housman has served as a director and member of EVCI's audit committee
since February 2002. Since June 2001, he has been an independent consultant.
Prior thereto for more than 10 years, Mr. Housman was a principal and then a
consultant to Charterhouse Group International, Inc., a private equity firm. He
is a director of Top Image Systems, Ltd. (Nasdaq: TISA) and deltathree, Inc.
(Nasdaq: DDDC). Top Image is a provider of digital information recognition, data
capture and content delivery solutions for forms processing, e-forms and mobile
applications. deltathree is a global provider of integrated voice over Internet
Protocol (VoIP) telephony services. Mr. Housman received a B.A. and M.A. in
economics from the New School for Social Research.
Executive officers of EVCI are appointed by the board of directors and
serve at the discretion of the Board, subject to the terms of applicable
employment agreements. There are no family relationships among any of the
directors or executive officers of EVCI.
Section 16(a) beneficial ownership reporting compliance.
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, executive officers and beneficial owners of more than 10% of our
common stock to file with the SEC reports of their holdings of, and transactions
in, our common stock. Based solely upon our review of copies of such reports and
written representations from reporting persons that were provided to us, we
believe that our officers, directors and 10% stockholders complied with these
reporting requirements, except that Messrs. Flippin and Getter did not file a
Form 4 or 5 reporting the automatic grant to them, on March 1, 2001, of options
to purchase 5,000 shares of our common stock.
34
Item 1. Executive Compensation.
Summary compensation table
The following table shows compensation paid for the years ended December
31, 2001, 2000, and 1999 to EVCI's chief executive officer and its other highest
paid executive officers who earned more than $100,000 in 2001.
Long Term
Compensation
Annual Compensation Awards
----------------------------------------------------------
Name and Principal Position Common Stock
Other Annual Underlying
Year Salary Bonus Compensation Options
-----------------------------------------------------------------------------------------------
Dr. Arol I. Buntzman 2001 $346,500 $ -- --
Chairman of the 2000 $332,750 500,000 -- --
board and chief 1999 270,000 293,333(1) -- 120,000
executive officer
Dr. John J. McGrath 2001 173,750 -- --
President 2000 200,000 70,000 -- --
1999 158,666 91,667(2) -- 40,000
Richard Goldenberg 2001 139,587 -- --
Chief financial officer 2000 125,000 40,000 -- --
1999 117,666 55,000(3) -- 15,000
-------------------------
(1) Includes $43,333 of bonus earned in 1998, payment of which was
deferred at the election of Dr. Buntzman.
(2) Includes $21,667 of bonus earned in 1998, payment of which was
deferred at the election of Dr. McGrath.
(3) Includes $15,000 of bonus earned in 1998, payment of which was
deferred at the election of Mr. Goldenberg.
35
Aggregated option exercises in 2001 and 2001 year-end option values
Number of Shares of Common Stock Value of Unexercised In-The-Money
Underlying Unexercised Options at Options at
December 31, 2001 December 31, 2001 (1)
Name Exercisable Unexercisable Exercisable (2) Unexercisable (2)
---- ----------- ------------- ------------ -----------------
Dr. Arol I. Buntzman 60,000 60,000 0 0
Dr. John J. McGrath 20,000 20,000 0 0
Richard Goldenberg 7,500 7,500 0 0
-----------------------
(1) Based on $1.80 per share, the December 31, 2001 last sale price reported on
Nasdaq.
(2) Based on exercise prices ranging from $7.00 to $40.00 per share.
Director compensation
Directors who are not officers or employees of EVCI are paid $1,000 for
attending each meeting of the board of directors or any committee thereof and
travel expenses.
In addition, our 1998 incentive plan authorizes the automatic grant of an
option to purchase 5,000 shares of common stock to non-employee directors on the
date on which he or she first becomes a non-employee director. Each non-employee
director is automatically granted an option to purchase 5,000 shares of common
stock on March 1 of each year, provided he or she is then a non-employee
director and, as of such date, he or she has served on the board of directors
for at least the preceding six months. Options granted to non-employee directors
vest in three annual installments commencing on the first anniversary of the
date of grant and have a term of ten years. The exercise price of options
granted to non-employee directors is 100% of the fair market value per share of
our common stock on the date of grant. A non-employee director who has been
granted stock or options by EVCI under a consulting or other arrangement is
ineligible to receive any subsequent automatic grants unless our compensation
committee determines otherwise.
Employment agreements
Each of Dr. Buntzman, Dr. McGrath, and Mr. Goldenberg has an employment
agreement with EVCI.
The employment agreement with Dr. Buntzman provides for his employment as
chairman and chief executive officer at an annual salary of $346,500 since
November 15, 2000.
The employment agreement with Dr. McGrath provides for his employment as
president at an annual salary of $210,000 since February 15, 2002.
The employment agreement with Mr. Goldenberg provides for his employment as
chief financial officer at an annual salary of $160,000 since February 15, 2002.
Each of the employment agreements expires December 31, 2002. Dr. Buntzman
and Dr. McGrath's agreements expressly permit salary increases and bonuses as
the Board determines. Each employment agreement entitles the officer to
36
participate in the health, insurance, pension and other benefits, if any,
generally provided to our employees. Dr. Buntzman and Dr. McGrath's agreements
entitle them to additional life insurance equal to three times their respective
salaries. Each employment agreement also provides that, with certain exceptions,
until 18 months after the termination of employment with EVCI, the officer may
not induce employees to leave the employ of EVCI or participate in any capacity
in any business activities that compete with the business conducted by EVCI
during the term of the employment agreement.
EVCI can terminate the employment of an officer upon extended disability or
for cause (as defined in his agreement). If employment is terminated by EVCI
without cause, the agreements generally provide EVCI must pay the officer's
salary and health and insurance benefits until the earlier of a specified date
or the scheduled termination date of the employment agreement or, in the case of
each of Dr. Buntzman and Dr. McGrath, until 36 months after termination of his
employment.
Change of control agreement
EVCI entered has an agreement with Dr. Buntzman providing for payments to
him, in the event his employment with EVCI is terminated after a change in
control of EVCI during the term of the agreement. A change of control means any
of the following:
o any person becomes the beneficial owner of 25% or more of our voting
securities; or
o during any consecutive three years, EVCI's directors at the beginning of
such three year period and any new director whose election was approved
by at least 662/3% of the directors, cease to constitute a majority of
the Board; or
o our stockholders approve a merger or consolidation other than one where
our outstanding voting securities before the transaction constitute 50%
or more of the outstanding securities of the entity surviving the
transaction or where a recapitalization is effected in which no person
acquires 25% or more of EVCI's voting securities; or
o our stockholders approve a total liquidation of EVCI or sale of all or
substantially all of EVCI's assets.
The agreement expires December 31, 2002, but is subject to automatic
extension for successive one-year terms, unless otherwise terminated by either
party. It requires severance payments to Dr. Buntzman of 2.99 times the sum of
his base salary and the highest annual bonus, if any, paid to him during the
three previous years and the continuation of his medical and dental insurance
benefits. The agreement requires these payments to be made in equal installments
over a 36-month period and for the insurance benefits to continue for 36 months.
Item 2. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 15, 2002, the beneficial
ownership of common stock by each person (or group of affiliated persons) known
by EVCI to own beneficially more than 5% of the outstanding shares of common
stock, each director and executive officer of EVCI, and all directors and
executive officers as a group. Our knowledge regarding such ownership is based
37
solely on filings with the SEC of Schedules 13D or G or upon responses to
written inquiry made by us. Except as indicated in the footnotes to the table,
the persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.
Name of Beneficial Owner* Shares of Percentage
Common Stock of Total
Beneficially Owned Shares
------------------ ---------
Dr. Arol I. Buntzman 1,018,834 (1) 22.8
Dr. John J. McGrath 204,346 (2) 4.6
Richard Goldenberg (3) 62,127 1.6
Tayside Trading Ltd. (4) 381,805 (5) 8.3
125/5 Sanhedria Murchevet, Jerusalem, Israel
DEWI Investments Limited (6) 507,334 11.4
37 Bar Ilan Street, Jerusalem, Israel
B&H Investments Ltd (7) 239,409 (8) 5.3
50 Town Range, Gibraltar
Amaranth Trading LLC 483,573 (9) 9.9
2 American Lane, Greenwich, CT
Royce N. Flippin, Jr. 10,000 (10) 0.2
Philip M. Getter 37,750 (11) 0.8
All directors and executive officers as a group
(5 persons) 1,066,584 (12) 23.4
----------------------
*Unless otherwise indicated, the address for each stockholder is c/o
Educational Video Conferencing, Inc., 35 East Grassy Sprain Road, Suite
200, Yonkers, New York 10710.
(1) Includes 60,000 shares underlying currently exercisable options. Also
includes the 204,346 and 69,127 shares beneficially owned, respectively, by
Dr. McGrath and Mr. and Mrs. Goldenberg. An agreement between Drs. Buntzman
and McGrath gives Dr. Buntzman the right to direct the vote of the shares
owned by Dr. McGrath as Dr. Buntzman directs until December 31, 2002.
Additionally, Dr. Buntzman has the right to direct the vote of the shares
owned by Mr. and Mrs. Goldenberg until December 31, 2002 pursuant to an
agreement with them.
(2) Includes 20,000 shares underlying currently exercisable options.
(3) Includes 7,500 shares underlying currently exercisable options. The
remaining shares are owned jointly by Mr. Goldenberg and his wife. Excludes
5,000 shares owned by Mr. Goldenberg's adult children, as to which Mr. and
Mrs. Goldenberg disclaim beneficial ownership.
(4) The ultimate beneficial owner is Mr. Esriel Pines.
(5) Includes 167,705 shares underlying currently exercisable warrants.
(6) The ultimate beneficial owner is Mr. Aron Gee.
(7) The ultimate beneficial owners are Mr. Chaim Segal and Mr. Simcha
Senerovitch.
(8) Includes 46,545 shares underlying currently exercisable warrants.
(9) Also owned beneficially by Amaranth LLC, the parent of Amaranth Trading,
Amaranth Advisors, LLC, the managing member of Amaranth Trading, and
Nicholas M. Maounis, the managing member of Amaranth Advisors. Includes
45,000 shares owned by Amaranth Securities LLC, an affiliate of Amaranth
Trading, and 20,000 shares owned by Mr. Maounis. The remaining 418,573
shares underlie a portion of the 100,000 shares of Series B preferred and
related warrants held by Amaranth Trading. Except for the ownership
limitation described below, the 100,000 shares of Series B preferred stock
would be convertible into 1,610,306 shares of common stock, based on the
current conversion price of $6.21 per share, and the related warrants would
be exercisable for 555,556 shares of common stock, or a total of 2,165,862
shares. However, the number of shares of common stock into which the shares
of Series B preferred and related warrants are convertible and exercisable
is limited, by the terms of the Series B preferred and warrants, to the
number which would result in Amaranth Trading and its affiliates
beneficially owning, together, not more than 9.99% of all the outstanding
shares of our common stock. Amaranth Trading and its affiliates expressly
disclaim beneficial ownership of any shares of our common stock in excess
of this limitation. Amaranth Trading, Amaranth LLC, Amaranth Advisors and
38
Amaranth Securities also disclaim any beneficial ownership of the 20,000
shares owned by Mr. Maounis. Mr. Maounis disclaims any equitable ownership
of, or pecuniary interest in, any shares other than such 20,000 shares.
(10) Shares underlying currently exercisable options.
(11) Includes 3,750 shares owned by Mr. Getter's wife, as to which Mr. Getter
disclaims beneficial ownership, 10,000 shares underlying currently
exercisable options and 24,000 shares underlying currently exercisable
warrants.
(12) Includes 131,500 shares underlying currently exercisable options and
warrants.
The above table does not include common stock beneficially owned by Seneca
Capital International, Ltd. or Seneca Capital, L.P.
We believe that Seneca Capital International beneficially owns 210,628
shares that can be acquired upon conversion of our Series B preferred and 72,667
shares that can be purchased upon exercise of warrants. The total of 283,295
shares would constitute 6.0% of our outstanding common stock.
We also believe that Seneca Capital L.P. beneficially owns 111,433 shares
that can be acquired upon conversion of our Series B preferred and 38,444 shares
that can be purchased upon exercise of warrants. The total of 149,877 shares
would constitute 3.3% of our outstanding common stock.
Neither Seneca Capital International nor Seneca Capital, L.P. has responded
to our request for confirmation of their beneficial ownership and no 13D or 13G
was filed by either of them prior to March 12, 2002.
Item 3. Certain Relationships and Related Transactions
In November 2000, EVCI engaged Prime Charter Ltd. to value warrants to
purchase 722,223 shares of our common stock issued in September 2000 in the
private placement of 130,000 shares of our 7% Series B, Convertible Preferred
Stock described below. For this services, we paid Prime Charter $75,000 plus
accountable expenses not exceeding $500. Philip M. Getter, who is a Class 1
director, was a managing director and head of corporate finance of Prime Charter
when we received and paid for this valuation. Effective January 1, 2001, Mr.
Getter became a consultant to EVCI, on a month to month basis. For his
consulting services, we paid him $60,000 in 2001 and are currently paying him
$5,000 per month.
Item 13. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
Exhibit No.* Description of Exhibit
3.1[1] -- Certificate of Incorporation of the Registrant.
3.1(a)[3] -- Certificate of Amendment to Certificate of
Incorporation of the Registrant.
3.2 -- Amended and Restated By-Laws of the Registrant.
3.3[1] -- Certificate of Merger of Educational Video
Conferencing, Inc. (a New York Corporation) into the
Registrant (a Delaware Corporation).
39
3.4[1] -- Certificate of Correction of the Certificate of
Incorporation of the Registrant.
3.5[8] -- Certificate Eliminating Reference to Series A 7.5%
Convertible Preferred Stock from the Certificate of
Incorporation of the Registrant.
3.6[8] -- Certificate of Designations of Series B 7%
Convertible Preferred Stock of the Registrant.
3.6(a)[8] -- Certificate of Correction of Certificate of
Designations of the Series B 7% Convertible Preferred
of the Registrant.
3.6(b)[13] -- Certificate of Amendment of Certificate of
Incorporation of the Registrant.
3.7 -- Certificate of Designations of Series C 8%
Convertible Preferred Stock of the Registrant.
4.1[1] -- Form of Common Stock Purchase Warrant issued to
investors in private placements and for services
provided in connection with such private placements.
4.2[1] -- Tayside Common Stock Purchase Warrant.
4.3[2] -- Adelphi Common Stock Purchase Warrant.
4.4[2] -- Form of Representative's Warrant Agreement (including
Form of Representative's Warrant).
4.5[2] -- Form of Common Stock Certificate.
4.6[2] -- Amended and Restated 1998 Incentive Stock Option Plan
of the Registrant.
4.7[4] -- Warrant Agreement, dated January 14, 2000, between
the Registrant and Bruce R. Kalisch.
4.8[7] -- Warrant Agreement, dated April 18, 2000, between the
Registrant and Peter J. Solomon Company Limited.
4.9[5] -- Common Stock Purchase Warrant, dated February 3,
2000, issued to The Shaar Fund Ltd.
4.10[5] -- Form of Finders' Warrant (relating to the issuance of
warrants to purchase 3,870 shares of the Registrant's
common stock).
4.11[8] -- Form of Common Stock Purchase Warrant issued to
purchasers of the Registrant's Series B 7%
Convertible Preferred Stock.
4.12[10] -- Form of Warrant issued to each seller of shares of
ICTS, Inc.
4.13[12] -- 2001 Non-Qualified Stock Option Plan.
40
4.14 -- Form of Common Stock Purchase Warrant issued to
purchasers of the Registrant's Series C 8%
Convertible Preferred Stock.
10.1[3] -- Lease Agreement between the Registrant and Realty Co.
(doing business as Royal Realty), dated December 15,
1998.
10.2[1] -- Employment Agreement between the Registrant and Dr.
Arol I. Buntzman, dated October 1, 1998.
10.3[1] -- Employment Agreement between the Registrant and Dr.
John J. McGrath, dated October 1, 1998.
10.4[1] -- Employment Agreement between the Registrant and
Richard Goldenberg, dated October 1, 1998.
10.5[1] -- Chief Executive Officer Change in Control Agreement
between the Registrant and Dr. Arol I. Buntzman,
dated October 1, 1998.
10.6[1] -- Form of Indemnification Agreement.
10.7 -- Agreement between Arol I. Buntzman and Richard and
Bonnie Goldenberg, dated January 15, 2002.
10.8 -- Agreement between Arol I. Buntzman and John J.
McGrath, dated January 15, 2002.
10.9[4] -- Stock Purchase Agreement, dated January 14, 2000,
among Bruce R. Kalisch, Interboro Holding, Inc. and
Interboro Institute, Inc.
10.10[8] -- Form of Series B Stock Purchase Agreement.
10.11[8] -- Amended and Restated Registration Rights Agreements,
dated September 27, 2000, among Paloma Strategic Fund
L.P. ("Paloma"), Seneca Capital International, Ltd.
("Seneca Ltd."), Seneca Capital, L.P. ("Seneca
L.P."), Merced Partners Limited Partnership
("Merced") , Lakeshore International, Ltd.
("Lakeshore") and the Registrant.
10.12[8] -- Amended and Restated Co-Sale Agreement, dated
September 29, 2000, among Dr. Arol I. Buntzman, the
Registrant, Paloma, Seneca Ltd., Seneca L.P., Merced
and Lakeshore.
10.13[10] -- Stock Purchase Agreement dated June 29, 2001 among
Amee Devine, Taylor Devine, Louis Vescio and Margaret
Vescio, ICTS, Inc., Interboro Holding, Inc. and the
Registrant.
10.14[10] -- Form of Letter Agreement dated as of June 29, 2001
pursuant to which David Vescio and Robert Vescio each
sold 20,000 shares of ICTS, Inc. to Interboro
Holding, Inc.
41
10.15[10] -- Letter Agreement dated as of July 1, 2001 among Amee
Devine, Taylor Devine, Louis Vescio and Margaret
Vescio, Interboro Holding, Inc. and the Registrant.
10.16[10] -- Stock Purchase Agreement dated as of July 2, 2001,
effective July 1, 2001, among Infrastructure &
Environmental Private Equity Fund III, Environmental
& Information Technology Private Equity Fund III and
the Productivity Fund, L.P., Interboro Holding, Inc.
and the Registrant.
10.17[11] -- 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 10.18 and 10.19 below.
10.18[11] -- Secured Promissory Note dated August 17, 2001 among
the Registrant and Amaranth Trading LLC, Seneca
Capital International, Ltd., Seneca Capital, L.P.,
Merced Partners Limited Partnership and Lakeshore
International, Ltd.
10.19[11] -- Escrow Agreement dated August 17, 2001 among the
Registrant, Amaranth Trading LLC, Seneca Capital
International, Ltd., Seneca Capital, L.P., Merced
Partners Limited Partnership and Lakeshore
International, Ltd. and Fischbein Badillo Wagner
Harding.
10.17 -- Form of Subscription and Registration Rights
Agreement for Series C preferred purchases.
23.1 -- Consent of Goldstein Golub Kessler LLP
------------------------------
* Numbers inside brackets indicate documents from which exhibits have been
incorporated by reference.
[1] Incorporated by reference to the Registrant's Registration Statement on
Form SB-2, filed October 23, 1998, Registration No. 333-66085.
[2] Incorporated by reference to Amendment No. 4, dated February 10, 1999, to
the Registrant's Form SB-2, Registration No. 333-66085.
[3] Incorporated by reference to Registrant's Form 10-QSB, for the quarter
ended March 31, 1999.
[4] Incorporated by reference to the Registrant's Form 8-K dated January 14,
2000.
[5] Incorporated by reference to the Registrant's Form 8-K dated February 3,
2000.
[6] Incorporated by reference to the Registrant's Form 10-KSB for the year
ended December 31, 1999.
[7] Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended June 30, 2000.
42
[8] Incorporated by reference to the Registrant's Form 8-K dated October 6,
2000.
[9] Incorporated by reference to the Registrant's Registration Statement on
Form S-3, filed October 30, 2000, Registration No. 333-48934.
[10] Incorporated by reference to the Registrant's Form 8-K dated July 1, 2001.
[11] Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended June 30, 2001.
[12] Incorporated by reference to the Registrant's Registration Statement on
Form S-8, filed October 23, 2001, Registration No. 333-72080.
[13] Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended September 30, 2001.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
EDUCATIONAL VIDEO CONFERENCING, INC.
Date: March 15, 2002 By: /s/ Dr. Arol I. Buntzman
--------------------------
Dr. Arol I. Buntzman
Chairman and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Date
--------- ----
/s/ Dr. Arol I. Buntzman March 15, 2002
-------------------------------------
Dr. Arol I. Buntzman
Chairman and Chief Executive Officer
/s/ Dr. John J. McGrath March 15, 2002
-------------------------------------
Dr. John J. McGrath
President and Director
/s/ Richard Goldenberg March 15, 2002
-------------------------------------
Richard Goldenberg
Chief Financial Officer, Secretary
and Director (Principal
Financial and Accounting Officer)
/s/ Royce N. Flippin, Jr. March 15, 2002
-------------------------------------
Royce N. Flippin, Jr.
Director
/s/ Philip M. Getter March 15, 2002
-------------------------------------
Philip M. Getter
Director
/s/ Elie Housman March 15, 2002
-------------------------------------
Elie Housman
Director
44
EXHIBIT INDEX
Exhibit No.* Description of Exhibit
3.1[1] -- Certificate of Incorporation of the Registrant.
3.1(a)[3] -- Certificate of Amendment to Certificate of
Incorporation of the Registrant.
3.2 -- Amended and Restated By-Laws of the Registrant.
3.3[1] -- Certificate of Merger of Educational Video
Conferencing, Inc. (a New York Corporation) into the
Registrant (a Delaware Corporation).
3.4[1] -- Certificate of Correction of the Certificate of
Incorporation of the Registrant.
3.5[8] -- Certificate Eliminating Reference to Series A 7.5%
Convertible Preferred Stock from the Certificate of
Incorporation of the Registrant.
3.6[8] -- Certificate of Designations of Series B 7%
Convertible Preferred Stock of the Registrant.
3.6(a)[8] -- Certificate of Correction of Certificate of
Designations of the Series B 7% Convertible Preferred
of the Registrant.
3.6(b)[13] -- Certificate of Amendment of Certificate of
Incorporation of the Registrant.
3.7 -- Certificate of Designations of Series C 8%
Convertible Preferred Stock of the Registrant.
4.1[1] -- Form of Common Stock Purchase Warrant issued to
investors in private placements and for services
provided in connection with such private placements.
4.2[1] -- Tayside Common Stock Purchase Warrant.
4.3[2] -- Adelphi Common Stock Purchase Warrant.
4.4[2] -- Form of Representative's Warrant Agreement (including
Form of Representative's Warrant).
4.5[2] -- Form of Common Stock Certificate.
4.6[2] -- Amended and Restated 1998 Incentive Stock Option Plan
of the Registrant.
4.7[4] -- Warrant Agreement, dated January 14, 2000, between
the Registrant and Bruce R. Kalisch.
4.8[7] -- Warrant Agreement, dated April 18, 2000, between the
Registrant and Peter J. Solomon Company Limited.
E-1
4.9[5] -- Common Stock Purchase Warrant, dated February 3,
2000, issued to The Shaar Fund Ltd.
4.10[5] -- Form of Finders' Warrant (relating to the issuance of
warrants to purchase 3,870 shares of the Registrant's
common stock).
4.11[8] -- Form of Common Stock Purchase Warrant issued to
purchasers of the Registrant's Series B 7%
Convertible Preferred Stock.
4.12[10] -- Form of Warrant issued to each seller of shares of
ICTS, Inc.
4.13[12] -- 2001 Non-Qualified Stock Option Plan.
4.14 -- Form of Common Stock Purchase Warrant issued to
purchasers of the Registrant's Series C 8%
Convertible Preferred Stock.
10.1[3] -- Lease Agreement between the Registrant and Realty Co.
(doing business as Royal Realty), dated December 15,
1998.
10.2[1] -- Employment Agreement between the Registrant and Dr.
Arol I. Buntzman, dated October 1, 1998.
10.3[1] -- Employment Agreement between the Registrant and Dr.
John J. McGrath, dated October 1, 1998.
10.4[1] -- Employment Agreement between the Registrant and
Richard Goldenberg, dated October 1, 1998.
10.5[1] -- Chief Executive Officer Change in Control Agreement
between the Registrant and Dr. Arol I. Buntzman,
dated October 1, 1998.
10.6[1] -- Form of Indemnification Agreement.
10.7 -- Agreement between Arol I. Buntzman and Richard and
Bonnie Goldenberg, dated January 15, 2002.
10.8 -- Agreement between Arol I. Buntzman and John J.
McGrath, dated January 15, 2002.
10.9[4] -- Stock Purchase Agreement, dated January 14, 2000,
among Bruce R. Kalisch, Interboro Holding, Inc. and
Interboro Institute, Inc.
10.10[8] -- Form of Series B Stock Purchase Agreement.
10.11[8] -- Amended and Restated Registration Rights Agreements,
dated September 27, 2000, among Paloma Strategic Fund
L.P. ("Paloma"), Seneca Capital International, Ltd.
("Seneca Ltd."), Seneca Capital, L.P. ("Seneca
L.P."), Merced Partners Limited Partnership
("Merced") , Lakeshore International, Ltd.
("Lakeshore") and the Registrant.
E-2
10.12[8] -- Amended and Restated Co-Sale Agreement, dated
September 29, 2000, among Dr. Arol I. Buntzman, the
Registrant, Paloma, Seneca Ltd., Seneca L.P., Merced
and Lakeshore.
10.13[10] -- Stock Purchase Agreement dated June 29, 2001 among
Amee Devine, Taylor Devine, Louis Vescio and Margaret
Vescio, ICTS, Inc., Interboro Holding, Inc. and the
Registrant.
10.14[10] -- Form of Letter Agreement dated as of June 29, 2001
pursuant to which David Vescio and Robert Vescio each
sold 20,000 shares of ICTS, Inc. to Interboro
Holding, Inc.
10.15[10] -- Letter Agreement dated as of July 1, 2001 among Amee
Devine, Taylor Devine, Louis Vescio and Margaret
Vescio, Interboro Holding, Inc. and the Registrant.
10.16[10] -- Stock Purchase Agreement dated as of July 2, 2001,
effective July 1, 2001, among Infrastructure &
Environmental Private Equity Fund III, Environmental
& Information Technology Private Equity Fund III and
the Productivity Fund, L.P., Interboro Holding, Inc.
and the Registrant.
10.17[11] -- 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 10.18 and 10.19 below.
10.18[11] -- Secured Promissory Note dated August 17, 2001 among
the Registrant and Amaranth Trading LLC, Seneca
Capital International, Ltd., Seneca Capital, L.P.,
Merced Partners Limited Partnership and Lakeshore
International, Ltd.
10.19[11] -- Escrow Agreement dated August 17, 2001 among the
Registrant, Amaranth Trading LLC, Seneca Capital
International, Ltd., Seneca Capital, L.P., Merced
Partners Limited Partnership and Lakeshore
International, Ltd. and Fischbein Badillo Wagner
Harding.
10.17 -- Form of Subscription and Registration Rights
Agreement for Series C preferred purchases.
23.1 -- Consent of Goldstein Golub Kessler LLP
------------------------------
* Numbers inside brackets indicate documents from which exhibits have been
incorporated by reference.
[1] Incorporated by reference to the Registrant's Registration Statement on
Form SB-2, filed October 23, 1998, Registration No. 333-66085.
[2] Incorporated by reference to Amendment No. 4, dated February 10, 1999, to
the Registrant's Form SB-2, Registration No. 333-66085.
E-3
[3] Incorporated by reference to Registrant's Form 10-QSB, for the quarter
ended March 31, 1999.
[4] Incorporated by reference to the Registrant's Form 8-K dated January 14,
2000.
[5] Incorporated by reference to the Registrant's Form 8-K dated February 3,
2000.
[6] Incorporated by reference to the Registrant's Form 10-KSB for the year
ended December 31, 1999.
[7] Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended June 30, 2000.
[8] Incorporated by reference to the Registrant's Form 8-K dated October 6,
2000.
[9] Incorporated by reference to the Registrant's Registration Statement on
Form S-3, filed October 30, 2000, Registration No. 333-48934.
[10] Incorporated by reference to the Registrant's Form 8-K dated July 1, 2001.
[11] Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended June 30, 2001.
[12] Incorporated by reference to the Registrant's Registration Statement on
Form S-8, filed October 23, 2001, Registration No. 333-72080.
[13] Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended September 30, 2001.
E-4
EDUCATIONAL VIDEO CONFERENCING, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Independent Auditor's Report F-2
Consolidated Financial Statements:
Balance Sheet as of December 31, 2001 and 2000 F-3
Statement of Operations for the Years Ended December 31, 2001 and 2000 F-4
Statement of Stockholders' Equity for the Years Ended December 31, 2001 and 2000 F-5
Statement of Cash Flows for the Years Ended December 31, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7 - F-21
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Educational Video Conferencing, Inc.
We have audited the accompanying consolidated balance sheets of Educational
Video Conferencing, Inc. ("EVCI") and Subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of EVCI's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Educational Video
Conferencing, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
February 1, 2002
F-2
EDUCATIONAL VIDEO CONFERENCING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
December 31, 2001 2000
-------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,441,172 $ 6,332,934
Student accounts receivable, less allowance for doubtful accounts of
$950,000 and $250,000, respectively 1,850,141 1,482,001
Accounts receivable, other 34,585 304,634
Prepaid expenses and other current assets 304,677 11,510
Assets held for resale 261,000 --
-------------------------------------------------------------------------------------------------------------------
Total current assets 4,891,575 8,131,079
Property and Equipment - net 1,635,214 5,013,003
Intangible Assets 6,261,857 1,349,588
License Agreement -- 212,500
Deferred Income Tax Asset, net of valuation allowance of $4,200,000
and $1,581,000, respectively -- --
Other Assets 264,700 45,081
-------------------------------------------------------------------------------------------------------------------
Total Assets $ 13,053,346 $ 14,751,251
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,746,826 $ 793,466
Accrued purchase price payable for Interboro Institute, Inc. 206,000 --
Accrued costs relating to discontinued operations 141,123 --
Deferred tuition revenue 4,270,698 --
Current portion of capital lease obligation 277,292 18,107
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,641,939 811,573
Capital Lease Obligation, net of current portion 113,956 27,937
Accrued Purchase Price Payable for Interboro Institute, Inc., net of current portion 745,994 673,376
Note Payable 910,000 --
-------------------------------------------------------------------------------------------------------------------
Total liabilities 9,411,889 1,512,886
-------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Series B 7% Convertible Preferred Stock - $100 stated value; issued
and outstanding 130,000 shares -- 12,342,266
-------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock - $.0001 par value; authorized 1,000,000 shares:
Series B 7%Convertible Preferred Stock - $100 stated value; 200,000 shares
designated Series B; issued and outstanding 130,000 shares 12,581,442 --
Series C 8% Convertible Preferred Stock - $100 stated value; 20,000 shares
designated Series C; issued and outstanding 1,300 shares 130,000 --
Common stock - $.0001 par value; authorized 20,000,000 shares, issued 4,492,961
shares; outstanding 4,440,996 and 4,492,961 shares, respectively 450 450
Additional paid-in capital 22,489,935 22,370,380
Accumulated deficit (31,477,790) (21,474,731)
Treasury stock - at cost; 51,965 shares (82,580) --
-------------------------------------------------------------------------------------------------------------------
Stockholders' equity 3,641,457 896,099
-------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 13,053,346 $ 14,751,251
===================================================================================================================
See Notes to Consolidated Financial Statement
F-3
EDUCATIONAL VIDEO CONFERENCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
Year ended December 31, 2001 2000
--------------------------------------------------------------------------------------------------
Net revenue $ 14,525,316 $ 7,479,348
Other income 156,192 67,413
---------------------------------------------------------------------------------------------------
Total revenue 14,681,508 7,546,761
---------------------------------------------------------------------------------------------------
Operating expenses:
Cost of sales 4,969,962 2,109,117
Selling, general and administrative 13,248,503 12,449,298
Noncash consulting services -- 56,000
---------------------------------------------------------------------------------------------------
Total operating expenses 18,218,465 14,614,415
---------------------------------------------------------------------------------------------------
Loss from operations (3,536,957) (7,067,654)
Other income (expense):
Interest and financing costs (71,830) (8,439)
Interest income 140,617 265,552
Loss from equity method investment -- (95,283)
Gain on sale of equity investment -- 50,000
---------------------------------------------------------------------------------------------------
Loss from continuing operations (3,468,170) (6,855,824)
---------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from discontinued operations (950,587) (3,167,416)
Loss from disposal of discontinued operations (4,312,462) --
---------------------------------------------------------------------------------------------------
Loss from discontinued operations (5,263,049) (3,167,416)
---------------------------------------------------------------------------------------------------
Loss before provision for income taxes (8,731,219) (10,023,240)
Provision for income taxes (106,000) (117,000)
---------------------------------------------------------------------------------------------------
Net loss (8,837,219) (10,140,240)
---------------------------------------------------------------------------------------------------
Beneficial conversion feature of preferred stock - Series A -- (705,882)
Accreted value of warrants - Series A -- (378,918)
Dividends on preferred stock - Series A -- (191,458)
Redemption premium -- (420,000)
Accreted value of warrants and transaction costs - Series B (239,176) (59,794)
Accreted value of warrants - Series C (16,664)
Waived dividends on preferred stock - Series B (910,000) (246,055)
---------------------------------------------------------------------------------------------------
Net loss available to common stockholders $(10,003,059) $(12,142,347)
===================================================================================================
Basic and diluted loss per common share from continuing operations $ (1.06) $ (2.04)
===================================================================================================
Basic and diluted loss per common share from discontinued operations $ (1.17) $ (0.72)
===================================================================================================
Basic and diluted loss per common share $ (2.23) $ (2.76)
===================================================================================================
Weighted-average number of common shares outstanding 4,485,333 4,391,533
===================================================================================================
See Notes to Consolidated Financial Statements
F-4
EDUCATIONAL VIDEO CONFERENCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
Preferred Stock Preferred Stock
Common Stock Series A Series B
Number Number Number
of Shares Amount of Shares Amount of Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 4,347,243 $435 -- -- -- --
Issuance of preferred stock Series A -- -- 400,000 $ 4,000,000 -- --
Beneficial conversion feature of Series A -- -- -- (705,882) -- --
Allocated value of warrants issued with Series A -- -- -- (378,918) -- --
Amortization of warrants and beneficial conversion feature -- -- -- 1,084,800 -- --
Conversion of Series A preferred stock into common stock 103,341 10 (120,000) (1,200,000) -- --
Redemption of Series A preferred stock -- -- (280,000) (2,800,000) -- --
Exercise of warrants and stock options 25,250 3 -- -- -- --
Allocated value of warrants issued with Series B -- -- -- -- -- --
Dividends paid in common stock 17,127 2 -- -- -- --
Issuance of common stock purchase warrants and stock
options for services -- -- -- -- -- --
Expenses incurred in connection with the issuance of stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 492,961 450 450 -- -- -- --
Reclassification of Series B preferred stock to permanent -- -- -- -- 130,000 $12,342,266
equity
Accreted value of warrants and transaction costs - Series B -- -- -- -- -- 239,176
Warrants issued in connection with acquisition of ICTS, Inc. -- -- -- -- -- --
Waived dividends on Series B preferred stock converted -- -- -- -- -- --
to note payable
Issuance of preferred stock Series C -- -- -- -- -- --
Allocated value of warrants issued with Series C -- -- -- -- -- --
Purchase of treasury shares, at cost; 51,965 shares -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 4,492,961 $450 -- $ - 0 - 130,000 $12,581,442
====================================================================================================================================
Preferred Stock Treasury
Series C Stock Additional
Number Paid-in Accumulated Stockholders'
of Shares Amount Amount Capital Deficit Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 -- -- -- $19,889,224 $ (9,578,439) $ 10,311,220
Issuance of preferred stock Series A -- -- -- (480,463) -- 3,519,537
Beneficial conversion feature of Series A -- -- -- 705,882 -- --
Allocated value of warrants issued with Series A -- -- -- 378,918 -- --
Amortization of warrants and beneficial conversion feature -- -- -- -- (1,144,594) (59,794)
Conversion of Series A preferred stock into common stock -- -- -- 1,199,990 -- --
Redemption of Series A preferred stock -- -- -- -- (420,000)
Exercise of warrants and stock options -- -- -- 108,473 -- 108,476
Allocated value of warrants issued with Series B -- -- -- 400,000 -- 400,000
Dividends paid in common stock -- -- -- 191,456 (191,458) --
Issuance of common stock purchase warrants and stock
options for services -- -- -- 56,000 -- 56,000
Expenses incurred in connection with the issuance of stock -- -- -- (79,100) -- (79,100)
Net loss -- -- -- -- (10,140,240) (10,140,240)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 -- -- -- 22,370,380 (21,474,731) 896,099
Reclassification of Series B preferred stock to permanent -- -- -- -- -- 12,342,266
equity
Accreted value of warrants and transaction costs - Series B -- -- -- -- (239,176) --
Warrants issued in connection with acquisition of ICTS, Inc. -- -- -- 123,000 -- 123,000
Waived dividends on Series B preferred stock converted -- -- -- -- (910,000) (910,000)
to note payable
Issuance of preferred stock Series C 1,300 $130,000 -- (20,109) -- 109,891
Allocated value of warrants issued with Series C -- -- -- 16,664 (16,664) --
Purchase of treasury shares, at cost; 51,965 shares -- -- $ (82,580) -- -- (82,580)
Net loss -- -- -- -- (8,837,219) (8,837,219)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 1,300 $130,000 $ (82,580) $22,489,935 $(31,477,790) 3,641,457
====================================================================================================================================
See Notes to Consolidated Financial Statements
F-5
EDUCATIONAL VIDEO CONFERENCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001 2000
-------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (8,837,219) $(10,140,240)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 415,036 1,060,171
Amortization of intangibles 328,360 153,695
Allowance for doubtful accounts 600,000 125,000
Amortization of license agreement 25,000 37,500
Common stock options and warrants issued for services -- 56,000
Loss on disposal of discontinued operations 4,312,462 --
Loss from equity method investment -- 95,283
Gain on equity investment -- (50,000)
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease (increase) in accounts receivable 65,272 (981,874)
Increase in licensing agreement -- (50,000)
(Increase) decrease in prepaid expenses and other current assets (2,002) 412,968
Increase in other assets (141,019) (29,835)
Decrease in accounts payable and accrued expenses (668,902) (1,505,013)
Increase in deferred revenue 590,469 --
Accrued purchase price payable on Interboro Institute Inc. 673,376
------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (3,312,543) (10,142,969)
------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (184,567) (632,318)
Purchases of property and equipment (347,510) (2,963,275)
Proceeds from sale of property and equipment 49,000 --
Proceeds from sale of equity investment -- 150,000
------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (483,077) (3,445,593)
------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 108,473
Principal payments on capital lease obligation (123,453) (15,707)
Net proceeds from issuance of preferred stock Series A -- 3,519,535
Redemption of preferred stock Series A -- (3,220,000)
Net proceeds from issuance of preferred stock Series B -- 12,682,472
Net proceeds from issuance of preferred stock Series C 109,891 --
Expenses incurred in connection with the issuance of preferred stock Series B -- (79,100)
Purchase of treasury stock (82,580) --
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (96,142) 12,995,673
------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,891,762) (592,889)
Cash and cash equivalents at beginning of year 6,332,934 6,925,823
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,441,172 $ 6,332,934
============================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 71,830 $ 8,439
============================================================================================================
Income taxes $ 149,475 $ 71,955
============================================================================================================
Supplemental schedules of noncash investing and financing activities:
Conversion of Series A to common stock $ -- 120,000
============================================================================================================
Issuance of common stock in lieu of dividends on Series A preferred stock $ -- 191,458
============================================================================================================
Conversion of Series B dividends to note payable $ 910,000 --
============================================================================================================
Warrants issued in connection with acquisition of ICTS, Inc. $ 123,000 $ --
============================================================================================================
See Notes to Consolidated Financial Statements
F-6
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. PRINCIPAL Educational Video Conferencing, Inc. ("EVCI") was
BUSINESS formed on March 4, 1997. EVCI has two business
ACTIVITY AND segments. EVCI provides on-campus education and
SUMMARY OF Flushing, New York, and ICTS, Inc., an information
SIGNIFICANT training. This segment four campuses located in
ACCOUNTING video-enhanced communications which provide Atlanta,
POLICIES: Baltimore, consists of the operations of technology
training and certification school with Interboro
Institute, Inc., a two-year college with technology
solutions and services that permit one Alexandria and
Hampton, Virginia. EVCI also high-quality multi-point
video conferencing with offers campus in New York City
and one in three connectivity options: broadband,
dedicated Internet access with service level
agreements, and existing general Internet access from
almost any Internet Service Provider ("ISP").
In January 2000, EVCI acquired all the outstanding
common stock of Interboro Institute, Inc.
("Interboro"). The acquisition was accounted for under
the purchase method of accounting.
In July 2001, Interboro Holdings, Inc. (a wholly owned
subsidiary of EVCI) acquired all the outstanding common
stock of ICTS, Inc. ("ICTS"). The acquisition was
accounted for under the purchase method of accounting.
The accompanying consolidated financial statements
include the accounts of EVCI and its wholly owned
subsidiaries, Interboro Holdings, Inc., Interboro
Institute, Inc. and ICTS (collectively referred to as
the "Company"). All intercompany accounts and
transactions have been eliminated in consolidation.
In July 2001, the Company's board of directors reached
a decision to stop delivering synchronized courses
using ISDN lines because this activity has continued to
be unprofitable. Accordingly, the Company has reflected
the closing of this segment as a discontinued operation
in the accompanying consolidated financial statements.
As a result, this segment's revenue, cost of sales and
related expenses have been reclassified in the
consolidated statement of operations and shown
separately as a net amount under the caption loss from
discontinued operations for the years presented.
The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be
cash equivalents.
The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits.
It has not experienced any losses in such accounts.
The Company reviews long-lived assets and identified
intangibles for impairment whenever events or changes
in circumstances indicate that the carrying value of an
asset may not be fully recoverable. The Company
performs nondiscounted cash flow analyses to determine
if an impairment exists.
Intangible assets include goodwill, the excess of the
cost over the fair value of assets acquired and
noncompete agreements. Amortization is computed using
the straight-line method over 10 years and 5 years,
respectively, which are the expected benefit periods.
F-7
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
At December 31, 2001, intangible assets were as
follows:
Noncompete
Goodwill Agreements Total
---------------------------------------------------------------------------
Intangibles $ 6,696,855 $ 47,057 $ 6,743,912
Less accumulated amortization (465,242) (16,813) (482,055)
-------------------------------------------------------------------------
$ 6,231,613 $ 30,244 $ 6,261,857
===========================================================================
The Company recognizes income ratably over the semester
in which courses are given. The courses range from 2
days to 27-week periods. Deferred revenue represents
tuition and fees received but not yet earned.
Interboro participates in federal and state financial
aid programs (Title IV Programs, NYS TAP, etc.). Most
of the students attending Interboro rely on these
federal and state financial aid programs to meet their
tuition needs. Changes in the programs may have a
direct impact on Interboro.
Property and equipment is recorded at cost.
Depreciation is provided for by the straight-line
method over the estimated useful lives of the property
and equipment. Amortization of leasehold improvements
is provided for by the straight-line method over the
term of the lease.
Based on the borrowing rates currently available to the
Company for loans with similar terms and average
maturities, the fair value of the notes payable
approximates the carrying amount.
The preparation of financial statements in accordance
with generally accepted accounting principles requires
the use of estimates by management. Actual results
could differ from these estimates.
Costs incurred for producing and communicating
advertising are expensed as incurred and included in
selling, general and administrative expenses in the
accompanying statement of operations. The cost of
brochures is capitalized and amortized over the
semester to which the specific courses relate.
Advertising expenses approximated $1,324,000 and
$1,125,000 for the years ended December 31, 2001 and
2000, respectively.
The Company employs the liability method of accounting
for income taxes pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 109, under which
method recorded deferred income taxes reflect the tax
consequences on future years of temporary differences
(differences between the tax basis of assets and
liabilities and their financial amounts at year-end).
The Company provides a valuation allowance that reduces
deferred tax assets to their net realizable value.
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 divided by
F-8
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the
potential dilution that could occur from common shares
issuable through stock-based compensation including
stock options, restricted stock awards, warrants and
other convertible securities. Potential common shares
have not been included in the computation of diluted
EPS since the effect would be antidilutive.
The Company accounts for employee stock options in
accordance with Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to
Employees. Under APB No. 25, the Company applies the
intrinsic value method of accounting and therefore does
not recognize compensation expense for options granted,
because options are only granted at a price equal to
the market price on the day of grant. SFAS No. 123,
Accounting for Stock-Based Compensation, prescribes the
recognition of compensation expense based on the fair
value of options as determined on the grant date.
However, SFAS No. 123 allows companies to continue
applying APB No. 25 if certain pro forma disclosures
are made assuming hypothetical fair value method
application (see Note 10).
In July 2001, the Financial Accounting Standards Board
("FASB") issued SFAS Nos. 141 and 142, Business
Combinations and Goodwill and Other Intangibles,
respectively. SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS No.
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. The Company is in the
process of determining the impact of these
pronouncements on its financial position and
operations.
In August 2001, the FASB issued SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived
Assets. The statement supercedes APB No. 30, effective
for fiscal years beginning after December 15, 2000.
Management believes that had this statement been
adopted currently, there would not have been a material
impact on the financial statements.
Certain 2000 amounts have been reclassified, where
appropriate, to conform to the 2001 presentation.
2. ACQUISITIONS: On January 14, 2000, EVCI acquired the outstanding
shares of Interboro for $672,500 plus 50% of earnings
before interest, taxes, debt and amortization
("EBITDA") for the three years ending December 31,
2001, 2002 and 2003. Payment of Interboro's purchase
price is contingent upon there being EBITDA, as
defined. The acquisition was accounted for under the
purchase method of accounting and, accordingly, the
results of operations are included in the financial
statements as of the date of the acquisition, and the
assets and liabilities are to be recorded based upon
their fair values at the date of the acquisition. EVCI
acquired assets with a fair value of approximately
$1,000,000 and assumed liabilities of approximately
$1,800,000.
F-9
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In connection with the acquisition of Interboro, EVCI
recorded approximately $1,500,000 in goodwill and
noncompete agreements, which was being amortized on a
straight-line basis over a period of 10 years and 5
years, respectively. Approximately $278,000 of
additional purchase price has been recorded based on
50% of Interboro's EBITDA, as defined in the agreement.
Effective July 1, 2001, Interboro Holdings, Inc.
acquired the outstanding shares of ICTS for warrants to
purchase 700,000 shares of EVCI's common stock (500,000
shares at $1.00 per share and 200,000 shares at $3.00
per share) valued at $123,000. In addition, certain
ICTS shareholders are entitled to receive 20% of ICTS's
free cash flows, as defined, up to a maximum of either
$500,000 or $600,000. The acquisition was accounted for
under the purchase method of accounting and,
accordingly, the results of operations are included in
the financial statements as of the date of the
acquisition, and the assets and liabilities are to be
recorded based upon the fair values at the date of the
acquisition. EVCI acquired assets with a fair value of
approximately $2,000,000, and assumed liabilities of
approximately $6,500,000. EVCI incurred approximately
$377,000 in professional fees and other costs related
to the acquisition.
In connection with the acquisition of ICTS, EVCI
recorded approximately $5,000,000 in goodwill, which
was being amortized on a straight-line basis over a
period of 10 years.
The following summarized EVCI pro forma consolidated
statement of operations (unaudited) assumes the
acquisition of the business of ICTS as if it had
occurred as of the beginning of these periods.
Year ended December 31, 2001 2000
--------------------------------------------------------
Net revenue $ 20,647,484 $ 19,961,957
========================================================
Net loss $ 10,393,479 $ 12,321,711
========================================================
Basic loss per common share $ (2.59) $ (3.21)
========================================================
This pro forma financial information is presented for
informational purposes only and is not necessarily
indicative of the operating results that would have
occurred had the acquisition been consummated as of the
assumed date, nor is it necessarily indicative of
future operating results.
3. DISCONTINUED In July 2001, EVCI's board of directors decided to stop
OPERATIONS: delivering synchronized courses using ISDN lines
because this activity has continued to be unprofitable.
Accordingly, the Company has reflected the closing of
this segment as a discontinued operation in the
accompanying
F-10
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
consolidated financial statements. As a result, segment
revenue, cost of sales and related expenses have been
reclassified in the consolidated statement of
operations and shown separately as a net amount under
the caption loss from discontinued operations for all
periods presented. Accordingly, the Company recorded a
loss from discontinued operations totaling $950,587 for
the year ended December 31, 2001. Net revenue from the
discontinued segment was $203,880 and $1,112,085 for
the years ended December 31, 2001 and 2000,
respectively. The December 31, 2000 consolidated
statement of operations has been restated to present
this segment as a discontinued operation. The Company
recorded a loss on the disposal of discontinued
operations amounting to $4,312,462, including $100,000
in severance payments, $200,000 in discontinued rental
agreements, $100,000 in uncollectible receivables and
$3,912,462 in abandoned equipment and software.
In connection with discontinuation of this segment, the
Company has identified certain assets that are saleable
and expects to dispose of these items in 2002. These
assets amounting to $261,000 have been recorded at
their net realizable value.
4. PROPERTY AND Property and equipment, at cost, consists of the
EQUIPMENT: following:
Estimated
December 31, 2001 2000 Useful Life
------------------------------------------------------------------------
Furniture and fixtures $ 487,785 $ 247,715 7 years
Office computers 730,740 1,872,424 3 to 5 years
Video teaching equipment 192,806 4,028,004 5 years
Computer software -- 367,770 5 years
Automobile 22,233 22,233 5 years
Leasehold improvements 593,822 154,994 Term of lease
Equipment acquired under
capital lease 413,763 73,338 5 years
------------------------------------------------------------------------
2,441,149 6,766,478
------------------------------------------------------------------------
Less accumulated depreciation
and amortization:
Equipment acquired under
capital lease 95,826 23,453
Other 710,109 1,730,022
------------------------------------------------------------------------
805,935 1,753,475
------------------------------------------------------------------------
$1,635,214 $5,013,003
========================================================================
5. LICENSE During October 1999, EVCI entered into a $250,000
AGREEMENT: five-year exclusive limited license and services
agreement with an entity. The license agreement was
terminated and part of the assets disposed of in July
2001 (see Note 3).
F-11
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. ACCOUNTS Accounts payable and accrued expenses consist of the
PAYABLE AND following:
ACCRUED
EXPENSES: December 31,
2001 2000
-------------------------------------------------------
Accounts payable $ 991,750 $431,807
Accrued professional fees 330,207 78,126
Accrued telephone -- 71,484
Accrued state income taxes -- 62,517
Accrued salaries and benefits 349,017 55,000
Accrued marketing and advertising 268,641 --
Student refunds payable 676,617 --
Accrued other 130,594 94,532
-------------------------------------------------------
$2,746,826 $793,466
=======================================================
7. OBLIGATIONS The Company leases office and computer equipment under
UNDER CAPITAL a capital lease expiring at various dates through 2004.
LEASE: The lease requires monthly payments of principal and
interest imputed at rates ranging from 13% to 23% per
annum.
Minimum future obligations under this lease are as
follows:
Year ending December 31,
2002 $284,124
2003 119,984
2004 35,768
-------------------------------------------------------
439,876
Less amount representing interest 48,628
-------------------------------------------------------
391,248
Less current portion 277,292
-------------------------------------------------------
$113,956
=======================================================
8. INCOME TAXES: The tax effects of loss carryforwards and the valuation
allowance that give rise to deferred tax assets are as
follows:
December 31, 2001 2000
-------------------------------------------------------
Net operating losses $ 4,200,000 $ 1,581,000
Less valuation allowance (4,200,000) (1,581,000)
-------------------------------------------------------
Deferred tax assets $ - 0 - $ - 0 -
=======================================================
F-12
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The provision (benefit) for income taxes differs from
the amount computed using the federal statutory rate of
34% as a result of the following:
Year ended December 31, 2001 2000
-------------------------------------------------------
Federal statutory rate (34)% (34)%
State income taxes of Interboro 1 1
Increase in valuation allowance 34 34
-------------------------------------------------------
1 % 1 %
=======================================================
As of December 31, 2001, the Company had net operating
loss carryforwards available to offset future taxable
income of approximately $28,000,000 which expire in
various years through 2021. Between October 1997 and
August 1998, EVCI completed private offerings of
securities. In February 1999, EVCI had an IPO of its
securities. Under Section 382 of the Internal Revenue
Code, these activities effect an ownership change and
thus may severely limit, on an annual basis, the
Company's ability to utilize its net operating loss
carryforwards. The Company uses the lowest marginal
U.S. corporate tax of 15% to determine deferred tax
amounts and the related valuation allowance because the
Company had no taxable earnings through December 31,
2001.
9. COMMITMENTS AND The Company leases office space and classrooms under
CONTINGENCIES: noncancelable operating leases which expire in January
2007. The leases are subject to escalations for
increases in the Company's share of increases in real
estate taxes and other expenses.
Minimum future obligations under these leases are as
follows:
Year ending December 31,
2002 $1,169,000
2003 1,065,000
2004 667,000
2005 649,000
2006 113,000
Thereafter 9,000
-------------------------------------------------------
$3,672,000
=======================================================
Rent expense charged to operations for the years ended
December 31, 2001 and 2000 amounted to approximately
$1,577,000 and $774,000, respectively.
The Company has employment agreements with executive
officers and other employees of the Company which
provide for compensation and other benefits as defined
in the agreements. Aggregate compensation under these
agreements for the year ending December 31, 2002 is
$705,000.
F-13
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In May 2000, the Company entered into an employment
agreement which provided, as additional compensation,
the opportunity to be awarded up to 30,000 options to
purchase common stock at $31.31 per share. The options
are exercisable only upon the Company reaching certain
revenue goals, as defined in the agreement.
Accordingly, the Company will incur a charge to
operations for the intrinsic value of the options at
such time as the revenue goals are met. The goals for
the year ended December 31, 2001 were not met.
In May 2000, the Company entered into an employment
agreement which provided, as additional compensation,
the opportunity to be awarded up to 20,000 options to
purchase common stock at $17.00 per share, based upon
the performance of Interboro, as defined in the
agreement. Any options awarded under the agreement
shall vest in equal amounts over three years.
Accordingly, the Company will incur a charge to
operations for the intrinsic value of the options at
such time as the revenue goals are met.
Tuition Assistance Program ("TAP") funds received
through the academic grant years 1992 have been
audited. Subsequent and future funds received are still
subject to audit. At this time, it is not possible to
determine the periods which will be audited or any
adjustments which might be necessary as a result.
10. STOCKHOLDERS' In October 1998, the board of directors of EVCI adopted
EQUITY: an incentive stock option plan in which 356,000 shares
of common stock have been reserved for future issuance
through September 30, 2008. The plan provides for
grants of incentive stock options, nonqualified stock
options and shares of common stock to employees,
nonemployee directors and others. The option price
cannot be less than the fair market value of the shares
of the incentive stock options at the date of grant.
Vesting of options and stock awards and certain other
conditions are determined by, or a committee appointed
by, the board of directors. At December 31, 2001, there
are 321,750 options outstanding under this plan.
In May 2001, the board of directors adopted a new
incentive stock option plan in which 250,000 shares of
common stock are reserved for future issuance through
May 2003. The plan provides for grants of nonqualified
stock options to employees and nonemployee directors.
The exercise price of the options 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. At December 31, 2001, there are 109,250
options outstanding under this plan.
In February 2000, the Company received gross proceeds
of $4,000,000 for the issuance of 400,000 shares of
7.5% Series A Convertible Preferred Stock and
three-year warrants to purchase 40,000 shares of common
stock at $21.27 per share. The transaction costs of
this private placement were approximately $480,000. A
value of $378,918 was assigned to the warrants. The
Series A preferred stock was convertible into shares of
EVCI common stock at a discount from the "market
price," as defined. The Company is accounting for the
issuance of the Series A preferred stock in accordance
with Emerging Issues Task Force No. 98-5 which
addresses the issuance of convertible securities that
have a beneficial conversion feature. The conversion
feature is recognized and measured by allocating a
portion of the proceeds equal to the intrinsic value of
F-14
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
that feature to additional paid-in capital. The amount
is calculated as the difference between the conversion
price and the fair market value of the common stock at
the date of issuance. Any discount resulting from the
allocation of the proceeds to the beneficial conversion
feature is analogous to a dividend and will be
recognized as a return to the preferred stockholder
over the period from the date of issuance through the
date of the earliest conversion, as defined.
In April 2000, the Company issued warrants to an
unaffiliated entity to purchase up to 25,000 shares of
common stock for $16.09 per share as additional payment
under a consulting agreement. The warrants are
exercisable upon issuance and expire in seven years.
Accordingly, the Company recorded a noncash charge to
operations of $35,000, the value assigned to the
warrants issued.
In July 2000, in connection with an advertising
agreement, the Company issued warrants to purchase up
to 15,000 shares of common stock as additional payment.
The warrants are exercisable upon issuance with
exercise prices ranging from $15.20 per share to $21.20
per share. Accordingly, the Company recorded a noncash
charge to operations of $21,000, the value assigned to
the warrants issued.
In September 2000, certain holders of the Series A
preferred stock converted 120,000 shares or $1,200,000
in total stated value into 103,341 shares of the
Company's common stock at an average price of
approximately $11.80 per common share. The remaining
balance of $2,800,000 of Series A preferred stock was
redeemed by the Company during September 2000 at 15%
over the stated value, thus resulting in a charge to
retained earnings of $420,000. The accumulated accrued
dividends on Series A preferred stock of $191,458 were
paid by issuing 17,127 shares of common stock valued at
$11.18 per share.
In September 2000, the Company designated 200,000
shares of authorized preferred stock as Series B 7%
Convertible Preferred Stock. Between September 22 and
September 30, 2000, the Company received gross proceeds
of $13,000,000 from the issuance of 130,000 shares of
Series B preferred stock and three-year warrants to
purchase 722,223 shares of 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 shareholders over
three years. A portion of the net proceeds from the
sale of the Series B preferred was used to redeem the
Company's Series A preferred stock.
The Series B preferred stock was initially convertible
into shares of common stock at $13.50 per share, the
average closing bid price of the common stock for 20
trading days prior to September 22, 2000. In September
2001, the conversion price was reset to $6.75 in
accordance with the provisions of the Series B
preferred that required the reset to the lower of the
initial conversion price and the current market price,
but not less than 50% of the initial conversion price.
In December 31, 2001, in connection with the issuance
of the Series E preferred stock, the conversion price
was again reset to $6.62 in accordance with the
dilution provisions of the Series B preferred. The
Series B preferred stockholders could initially require
the Company to redeem their preferred shares upon the
occurrence of certain matters as defined in the
agreement. In August 2001, the Series B preferred
F-15
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
shareholders consented to an amendment of EVCI's
certificate of incorporation, which permitted the
Company to reclassify the Series B stock as permanent
equity. Additionally, under the agreement, the Series B
preferred shareholders waived their right to receive
payment of dividends on their shares. In consideration,
the Company issued a 5% interest-bearing promissory
note in the amount of $910,000. The promissory note is
payable on September 22, 2003 and is secured by the
common stock of Interboro. Additionally, Interboro has
guaranteed payment of the note and has secured its
guarantee by granting a first lien on its assets that
is subordinate to specified creditors.
As permitted by the terms of the Series B preferred,
the board of directors of EVCI did not declare the
semi-annual dividends of $249,315 which was payable
December 31, 2001.
In September 2001, the board of directors authorized
the purchase of up to 5% of the issued and outstanding
common stock of EVCI at the prevailing market prices on
the open market. At December 31, 2001, the Company has
repurchased 51,965 shares of their common stock at a
cost of $82,580.
In November 2001, the Company designated 20,000 shares
of authorized preferred stock as Series C 8%
Convertible Preferred Stock. The preferred stock is
being sold in units. Each unit consists of 250 shares
of preferred stock and one warrant. Each warrant
entitles the holder the right to purchase a certain
number of shares, as defined in the agreement. Between
November 27 and December 31, 2001, the Company received
gross proceeds of $130,000 from the issuance of 5.2
units consisting of 1,300 shares of Series C preferred
stock and five-year warrants to purchase 29,852 shares
of common stock at $1.52 per share. A value of $16,664
was assigned to the warrants. The transaction costs of
this private placement were approximately $20,000. The
value of the warrants has been recognized as a deemed
dividend to the Series C preferred shareholders.
During January 2002, EVCI received approximately
$200,000 of gross proceeds from the issuance of an
additional 8 units.
F-16
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following table represents the warrants outstanding
as of December 31, 2001 and 2000:
Exercise Warrants Outstanding
Price per December 31,
Expiration Date Warrant 2001 2000
July 2001 $ 15.20 -- 5,000
July 2001 18.20 -- 5,000
July 2001 21.50 -- 5,000
June 2002 2.00 500 500
August 2002 4.00 2,000 2,000
October 2002 4.00 100,000 100,000
October 2002 20.00 50,000 50,000
December 2002 4.00 17,000 17,000
January 2003 6.00 88,252 88,252
February 2003 6.00 37,500 37,500
February 2003 21.27 40,000 40,000
April 2003 6.00 4,000 4,000
August 2003 12.00 25,000 25,000
September 2003 20.25 722,223 722,223
February 2004 17.50 5,000 5,000
February 2004 19.80 120,000 120,000
February 2004 20.00 10,000 10,000
February 2004 22.50 7,500 7,500
February 2004 25.00 7,500 7,500
February 2005 5.44 37,500 37,500
January 2006 25.00 25,000 25,000
May 2006 12.00 50,000 50,000
June 2006 1.00 500,000 --
June 2006 3.00 200,000 --
December 2006 1.52 29,852 --
April 2007 16.09 25,000 25,000
-------------------------------------------------------
2,103,827 1,388,975
=======================================================
F-17
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Presented below is a summary of stock option activity
for the periods shown:
Weighted- Weighted-
Average Average
Exercise Exercise Options Exercise
Price Range Options Price Exercisable Price
------------------------------------------------------------------------------
Balance at December 31, 1999 420,000 $ 11.84 55,000 $ 9.09
Granted 40,000
Canceled (13,000)
Exercised (1,750)
------------------------------------------------------------------------------
Balance at December 31, 2000 445,250 13.22 56,332 $ 9.33
Granted 234,750
Canceled (249,000)
------------------------------------------------------------------------------
Balance at December 31, 2001 431,000 $ 8.06 19,499 $ 7.07
==============================================================================
The following table summarizes information for options
currently outstanding and exercisable at December 31,
2001:
Options Outstanding Options Exercisable
------------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Remaining Exercise Exercise
Price Range Number Life Price Number Price
--------------------------------------------------------------------------------
$ 1.00 - $10.00 219,250 2.50 years $ 3.74 209,250 $ 3.87
10.00 - 20.00 191,750 2.50 years 10.57 96,916 10.64
20.00 - 32.00 20,000 2.25 years 31.41 13,333 31.36
--------------------------------------------------------------------------------
$ 1.00 - $32.00 431,000 2.50 years $ 8.06 319,499 $ 7.07
================================================================================
The Company has elected, in accordance with the
provisions of SFAS No. 123, to apply the current
accounting rules under APB Opinion No. 25 and related
interpretations in accounting for stock options and,
accordingly, is presenting the disclosure-only
information as required by SFAS No. 123. If the Company
had elected to recognize compensation cost based on the
fair value of the options granted at the grant date as
prescribed by SFAS No. 123, the Company's net loss
F-18
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
and net loss per common share would approximate the pro
forma amounts shown in the following table:
Year ended December 31, 2001 2000
----------------------------------------------------------------------------
Reported net loss available to common
shareholders $ (10,003,059) $ (12,142,347)
==========================================================================
Pro forma net loss available to common
shareholders $ (10,562,444) $ (17,693,834)
==========================================================================
Reported net loss per common share $ (2.23) $ (2.76)
==========================================================================
Pro forma net loss per common share $ (2.35) $ (2.89)
==========================================================================
The fair value of options granted (which is amortized
to expense over the option vesting period in
determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option-pricing
model with the following assumptions: no dividend
yield, volatility of 136% in 2001 and 104% in 2000,
risk-free interest rates ranging from 3.76% to 6.57%
and an expected life of 2 to 10 years from the date of
vesting.
The weighted-average fair value of options granted is
as follows:
Year ended December 31, 2001 2000
--------------------------------------------------------------------------
Fair value of each option granted $ .717 $ 14.745
--------------------------------------------------------------------------
Total number of options granted 234,750 40,000
--------------------------------------------------------------------------
Total fair value of all options granted $168,316 $589,800
==========================================================================
In accordance with SFAS No. 123, the weighted-average
fair value of stock options granted is required to be
based on a theoretical statistical model using the
preceding Black-Scholes assumptions. In actuality,
because EVCI's incentive stock options do not trade on
a secondary exchange, employees can receive no value or
derive any benefit from holding stock options under
these plans without an increase in the market price of
EVCI. Such an increase in stock price would benefit all
stockholders commensurately.
11. SEGMENT The Company follows SFAS No. 131, Disclosure About
REPORTING: Segments of an Enterprise and Related Information. As a
result of the acquisition of Interboro, the Company has
two operating segments: (1) operator of Interboro and
ICTS, on-campus education and training and (2)
video-enhanced communications providing technology
solutions and services.
F-19
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
For the year ended December 31, 2001 and 2000,
reportable segment data were as follows:
December 31, 2001 2000
------------------------------------------------------------------------
Net revenue:
Video-enhanced communications $ 207,613 --
Campus education and training 14,473,895 $ 7,546,761
------------------------------------------------------------------------
14,681,508 7,546,761
Discontinued operations 203,880 1,112,085
------------------------------------------------------------------------
Total net revenue $ 14,885,388 $ 8,658,846
========================================================================
Operating companies, net income (loss):
Video-enhanced communications $ (3,340,139) $ (7,503,704)
Campus education and training (128,031) 647,880
------------------------------------------------------------------------
Total net loss from continuing
operations $ (3,468,170) $ (6,855,824)
========================================================================
Interest income:
Video-enhanced communications $ 107,478 $ 257,633
Campus education and training 33,139 7,919
------------------------------------------------------------------------
Total interest income $ 140,617 $ 265,552
========================================================================
Depreciation and amortization:
Video-enhanced communications $ 121,729 $ 92,303
Campus education and training 621,667 281,741
------------------------------------------------------------------------
743,396 374,044
Discontinued operations 615,890 839,822
------------------------------------------------------------------------
Total depreciation and amortization $ 1,359,286 $ 1,213,866
========================================================================
Assets:
Video-enhanced communications $ 915,161 $ 10,758,658
Campus education and training 11,877,185 3,992,593
Discontinued operations 261,000 --
------------------------------------------------------------------------
Total assets $ 13,053,346 $ 14,751,251
========================================================================
Loss from equity method investments
- EVCI -- $ 95,283
Provision for income taxes - Interboro $ 106,000 $ 117,000
========================================================================
F-20
EDUCATIONAL VIDEO CONFERENCING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
During the year ended December 31, 2000, two education
providers accounted for 76% (52% and 24%) of EVCI's net
revenue from discontinued operations.