SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
January 14, 2000
EDUCATIONAL VIDEO CONFERENCING, INC.
(Exact name of registrant as specified in its charter)
Delaware 001-14827 061488212
-------- --------- ---------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) file number) Identification No.)
35 East Grassy Sprain Road, Suite 200, Yonkers, New York 10710
----------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (914) 787-3500
---------------
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On January 14, 2000, registrant's newly formed wholly-owned subsidiary,
Interboro Holding, Inc., acquired all of the outstanding stock of Interboro
Institute, Inc. ("Interboro") from Bruce R. Kalisch.
Interboro's sole business consists of owning and operating Interboro
Institute, a two-year college located in New York City, that was founded in
1884. Interboro Institute is currently authorized by the New York State Board of
Regents to grant the Associate of Occupational Studies Degree in business
administration (accounting and business management), ophthalmic dispensing,
paralegal studies, administrative secretarial arts (executive, legal,
correspondence or medical secretary) and security services and management. It
also offers a concentration in computer technology in its business management
program. Most of Interboro Institute's student body consists of
non-traditional students who pay their tuition using Federal (Pell) and New York
State (TAP) tuition grants.
The purchase price for the outstanding stock of Interboro is contingent
upon Interboro having earnings before interest, taxes, depreciation, and
amortization, as determined by registrant's auditors ("EBITDA"), over the three
fiscal years commencing July 1, 2000 (or January 1, 2001 if registrant changes
Interboro's fiscal year to a calendar year). The purchase price has two
components: (i) a fixed portion of $672,500, and (ii) a percentage portion equal
to 50% of EBITA. The purchase price is payable out of between 20% and 50% of
EBITDA that is allocated first to the fixed and then to the percentage portion
of the purchase price. Any earned but deferred percentage portion becomes
payable in eight quarterly installments after the fixed portion has been fully
paid. Unless Interboro has sufficient EBITDA, the fixed portion is not payable.
<PAGE>
In addition, registrant has agreed to issue to Mr. Kalisch warrants to
purchase up to 25,000 shares of registrant's common stock at the rate of 5,000
warrants per year provided Interboro has at least $500,000 of EBITDA for the
applicable fiscal year during the five year period commencing July 1, 2001 (or
January 1, 2002 if registrant charges Interboro's fiscal year to a calendar
year).
Registrant has infused $1,000,000 into Interboro, out of its own funds, for
working capital and in order to satisfy certain net worth and other financial
requirements.
The acquisition will be accounted for under the purchase method of
accounting and, accordingly, the results of operations will be included in the
financial statements as of the date of the acquisition, and the assets and
liabilities will be recorded based upon their fair values at the date of the
acquisition. Registrant has allocated the excess purchase price over the fair
value of net tangible assets acquired to approximately $580,000 of goodwill,
which will be amortized on a straight-line basis over a period of ten years.
Additional information regarding Interboro and Interboro Institute is
included in the press release filed as Exhibit 99 to this report.
Item 7. Financial Statements and Exhibits
Financial Statements
--------------------
(i) Educational Video Conferencing, Inc. Financial Information.
(ii) Interboro Institute, Inc. Financial Statements for the Year
Ended June 30, 1999.
(iii) Interboro Institute, Inc. Financial Statements for the Six
Months Ended December 31, 1999.
<PAGE>
(iv) Interboro Institute, Inc. Financial Statements for the Six
Months Ended June 30, 1998.
(v) Interboro Institute, Inc. Financial Statements for the Year
Ended December 31, 1997
Exhibits
--------
10.1 Stock Purchase Agreement dated as of January 14, 2000 among
Bruce R. Kalisch, Interboro Holding, Inc. and Interboro
Institute, Inc.
Schedules (Copies will be provided to the Commission upon
request)
3.5 - Consents
3.6 - Compliance with Law
3.7 - Financial Records; Statements
3.9 - Taxes
3.12(a) - Inventory - Categories of items exceeding $10,000 in value
3.12(b) - Equipment
3.13 - Contracts
3.14 - Employees
3.15 - Employee Benefit Plans
3.16 - Insider/Affiliate Arrangements; Shareholder Debt
3.17 - Litigation
3.18 - Insurance
3.19 - Absence of Change
3.21 - Intellectual Property Rights
3.22(a) - Student Enrollment
3.23 - Student Financial Assistance
3.25 - Powers of Attorney and Suretyship
10.2 Warrant Agreement dated as of January 14, 2000 between
Educational Video Conferencing, Inc. and Bruce R. Kalisch.
10.3 Escrow Agreement dated January 14, 2000 among Bruce R.
Kalisch, Interboro Holding, Inc. and
FischbeinoBadillooWagneroHarding.
99.1 Press Release of Educational Video Conferencing, Inc. dated
January 20, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment to its Current Report to be signed on
its behalf by the undersigned hereunto duly authorized.
EDUCATIONAL VIDEO CONFERENCING, INC.
Dated: March 27, 2000 By: /s/ Richard Goldenberg
-------------------------------
Name: Richard Goldenberg
Title: Chief Financial Officer
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Educational Video Conferencing, Inc.
Pro Forma Financial Information (Unaudited)................................F-2
Educational Video Conferencing, Inc.
Pro Forma Balance Sheet for the year
ended December 31, 1999(Unaudited)..........................................F-3
Educational Video Conferencing, Inc.
Pro Forma Statement of Operations
for the year ended December 31, 1999(Unaudited).............................F-4
Interboro Institute, Inc. Financial Statements for the Six Months
ended December 31, 1999 and 1998(Unaudited).................................F-5
Interboro Institute, Inc. Financial Statements
for the year ended June 30, 1999...........................................F-19
Interboro Institute, Inc. Financial Statements for the Six Months
ended June 30, 1998........................................................F-34
Interboro Institute, Inc. Financial Statements for the year
ended December 31, 1997....................................................F-47
F-1
<PAGE>
EDUCATIONAL VIDEO CONFERENCING, INC.
PRO FORMA FINANCIAL INFORMATION
(Unaudited)
On January 14, 2000, Educational Video Conferencing, Inc. (EVC) acquired
Interboro Institute, Inc. ("Interboro"). The accompanying unaudited pro forma
statements of operations are intended to present the combined results of
operations of EVC and Interboro for the year ended December 31, 1999 as if the
acquisition had occurred on January 1, 1999.
The unaudited pro forma balance sheet is intended to present the financial
position of the Company as if the acquisition of Interboro had occurred on
December 31, 1999.
Assumptions underlying the adjustments are described in the accompanying notes,
which should be read in conjunction with these statements. This pro forma
financial information should be read in conjunction with the historical
financial statements and related notes thereto of Educational Video
Conferencing, Inc. and Interboro Institute, Inc. The pro forma statements of
operations may not be indicative of the results of operations that actually
would have occurred had the operations of the companies been combined during the
period, and may not be indicative of the future results of operations of the
Company.
F-2
<PAGE>
EDUCATIONAL VIDEO CONFERENCING, INC.
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1999
- --------------------------------------------------------------------------------------------------------------------------------
Educational
Video Interboro Pro Forma Pro Forma
Conferencing, Inc. Institute, Inc. Adjustments Combined
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $6,925,823 $39,995 $6,965,818
Accounts receivable, net 461,234 424,476 885,710
Inventory - 109,862 109,862
Prepaid Expenses and other current assets 138,583 56,153 194,736
Deferred tax asset 4,425 4,425
- --------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 7,525,640 634,911 8,160,551
Property and Equipment, net 2,916,091 195,534 3,111,625
License Agreement 200,000 - 200,000
Goodwill, net of accumulated amortization - 107,057 (1) ($107,057) 648,020
(1) 648,020
Equity and other investments 240,533 - (2) (45,000) 195,533
Other assets 15,246 - - 15,246
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $10,897,510 $937,502 $495,963 $12,330,975
================================================================================================================================
Current Liabilities:
Accounts payable and accrued expenses $524,539 $644,887 - $1,169,426
Due to New York HESC 788,578 788,578
Due to Educational Video Conferencing,Inc. 45,000 (2) (45,000) -
Current portion of capitalized lease obligations 15,717 - 15,717
- --------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 540,256 1,478,465 1,973,721
Capital Lease Obligations, net of current portion 46,034 - 46,034
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 586,290 1,478,465 - 2,019,755
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock 435 50,000 (1) (50,000) 435
Additional paid-in capital 19,889,224 726,193 (1) (726,193) 19,889,224
-
Accumulated deficit (9,578,439) (1,317,156) 1,317,156 (9,578,439)
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Deficiency) 10,311,220 (540,963) 540,963 10,311,220
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $10,897,510 $937,502 $540,963 $12,330,975
================================================================================================================================
</TABLE>
(1) Reflects the adjustments necessary to account for the acquisition of
Interboro Institute, Inc.
(2) Reflects the adjustment for intercompany accounts.
F-3
<PAGE>
EDUCATIONAL VIDEO CONFERENCING, INC.
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 (a)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Educational
Video Interboro Pro Forma Pro Forma
Conferencing, Inc. Intstitute, Inc. Adjustments Combined
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Revenue:
Services $752,777 - $ 752,777
Tuition $ 6,429,048 6,429,048
Bookstore 547,863 547,863
Interest income 437,645 - 437,645
- -------------------------------------------------------------------------------------------------------------------
1,190,422 6,976,911 8,167,333
- -------------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of sales 295,640 0 295,640
Instructional salaries and expenses 1,687,314
Books and supplies - 383,703 - 383,703
Selling, general and administrative 7,017,142 3,068,061 $ 64,802 (b) 10,150,005
Interest and financing costs 5,519 0 5,519
TAP disallowance loss - 4,748,797 4,748,797
- -------------------------------------------------------------------------------------------------------------------
7,318,301 9,887,875 64,802 15,583,664
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) ($6,127,879) ($2,910,964) ($64,802) ($9,103,645)
=================================================================================================================================
Basic loss per common share ($1.48) ($29,109.64) ($2.19)
==================================== ==================
Weighted-average number of
common shares outstanding 4,147,604 100 4,147,604
==================================== ==================
</TABLE>
(a) - The pro forma combined statements of operations assume that the
acquisition of Interboro Institute, Inc. occurred on January 1, 1999.
(b) - Reflects the amortization of excess of cost over fair value of net assets
acquired resulting from the acquisition of Interboro Institute, Inc. over
10 years.
F-4
<PAGE>
INTERBORO INSTITUTE, INC.
INTERIM FINANCIAL STATEMENTS
For the Six Months Ended December 31, 1999
F-5
<PAGE>
INTERBORO INSTITUTE, INC.
INTERIM FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
INDEPENDENT ACCOUNTANT'S REPORT F-7
FINANCIAL STATEMENTS
Balance Sheet F-8
Statement of Operations and Accumulated Deficit F-9
Statement of Cash Flows F-10
Notes to Financial Statements F-11 - F-18
F-6
<PAGE>
INDEPENDENT ACCOUNTANT'S COMPILATION REPORT
TO THE BOARD OF DIRECTORS OF
INTERBORO INSTITUTE, INC.
We have compiled the accompanying balance sheet of Interboro
Institute, Inc. as of December 31, 1999 and the related statements
of operations and accumulated deficit and cash flows for the six
months then ended in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of
Certified Public Accountants.
A compilation is limited to presenting in the form of financial
statements information that is the representation of management
(the owners). We have not audited or reviewed the accompanying
financial statements and, accordingly, do not express an opinion
or any other form of assurance on them.
Donald D. Devine Company
January 13, 2000
F-7
<PAGE>
INTERBORO INSTITUTE, INC.
Balance Sheet
December 31, 1999
ASSETS
Current Assets
Cash $ 39,995
Accounts and Notes Receivable 424,476
(less allowance for doubtful accounts of $50,000)
Prepaid Expenses 56,153
Inventory 109,862
Deferred Tax Asset 4,425
------------
Total Current Assets 634,911
Property and Equipment - Net 195,534
Goodwill - Net 107,057
------------
TOTAL ASSETS $ 937,502
============
LIABILITIES AND DEFICIENCY
Current Liabilities
Accounts Payable $ 556,554
Accrued Expenses Payable 70,333
Due to New York HESC 788,578
Due to EVCI 45,000
Other Current Liabilities 18,000
------------
Total Current Liabilities 1,478,465
Stockholder's Deficiency
Common Stock (no par value 50,000
Authorized 200 shares, issued and
outstanding 100 shares)
Additional Paid In Capital 726,193
Accumulated Deficit ( 1,317,156)
------------
Total Stockholder's Deficiency ( 540,963)
-------------
TOTAL LIABILITIES AND DEFICIENCY $ 937,502
============
See accountant's report and notes to financial statements
F-8
<PAGE>
INTERBORO INSTITUTE, INC.
Statement of Operations and Retained Earnings and Accumulated Deficit
For the Six Months Ended December 31, 1999 and 1998
1999 1998
Revenue
Tuition Revenue - Net $ 3 337,981 $ 3,043,913
Bookstore Revenue 253,536 180,533
------------- -------------
Total Revenue 3,591 517 3,224,446
Cost of Operations
Books and Supplies 192,552 237,467
Instructional Salaries 614,653 683,460
Instructional Expenses 177,077 176,152
------------- -------------
Total Cost of Operations 984,282 1,097,079
Gross Profit 2,607,235 2,127,367
------------- -------------
General & Administrative
Administrative Salaries 499,685 573,608
Administrative Expenses 159,291 153,132
Student Recruitment 508,578 527,591
Occupancy Expenses 328,841 324,260
Student Services 216,460 231,670
Depreciation 27,795 32,495
Amortization 2,433 2,433
------------- -------------
Total General & Administrative 1,743,083 1,845,189
============= =============
Income From Operations 864,152 282,178
Other Income and (Expense) ( 9,601) 3,375
Net Income before Taxes 854,551 285,553
Income Taxes 11,505 3,831
Net Income 843,046 281,722
Retained Earnings (Accumulated ( 2,160,202) 1,312,080
Deficit), Beginning
Retained Earnings (Accumulated $( 1,317,156) $ 1,593,802
Deficit), Ending
F-9
<PAGE>
INTERBORO INSTITUTE, INC.
Statement of Cash Flows
For the Six Months Ended December 31, 1999 and 1998
1999 1998
Cash flows from operating activities:
Net income $ 843,046 $ 281,722
----------- ----------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 30,228 34,928
Changes in operating assets and liabilities
(Increase) decrease in Accounts and Notes Receivable 1,013 823 1,374,628
(Increase) decrease in Prepaid Expenses ( 9,175) 8,894
(Increase) decrease in Inventory 33,691 ( 147,698)
(Increase) decrease in deferred tax asset 11,505 3,518
Increase (decrease) in Accounts Payable 99,212 33,864
Increase (decrease) in Accrued Expenses Pay 3,504 22,827
Increase (decrease) in Unearned Tuition ( 792,684) ( 676,563)
Increase (decrease) in NYHESC Payable (2,058,000) ( 300,000)
Increase (decrease) in Other Current Liabilities ( 129,588) 0
----------- ----------
Total adjustments (1,797,484) 354,398
----------- ----------
Net cash provided (used) by operating activities ( 954,438) 636,120
----------- ----------
Cash flows from investing activities:
Purchase of property & equipment ( 20,704) ( 55,962)
Cash proceeds from the sale of property 8,335 0
----------- ----------
Net cash provided (used) by investing activities ( 12,369) ( 55,962)
----------- ----------
Cash flows from financing activities:
Proceeds from Loan 45,000 0
Capital Contribution 695,876 0
---------- ----------
Net cash provided by financing activities 740,876 0
---------- ----------
Net increase (decrease) in cash ( 225,931) 580,158
Cash and equivalents, beginning 265,926 432,532
---------- ----------
Cash and equivalents, ending $ 39,995 $1, 012,690
---------- ----------
Supplemental Disclosures
Interest Paid $ 5,000 $ 0
F-10
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Interboro Institute, Inc., the Company, was incorporated under
the laws of the State of New York on November 21, 1981, under
the name of Kinterboro Corporation. Its principal business
activity consists of the operation of a post-secondary
two-year degree-granting college located in New York City. It
subsequently changed its name to Interboro Institute, Inc. in
conjunction with the liquidation of its subsidiary of the same
name.
USE OF ESTIMATES
The presentation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company analyzes its accounts receivable and loans
receivable reviewing the age of the receivable, subsequent
collections, and the items in collection. Accordingly, it sets
up an appropriate allowance.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is
calculated on the applicable straight-line or accelerated
methods over the estimated useful lives of the assets, which
range from three to seven years. Leasehold improvements are
amortized over the term of the lease.
INCOME TAXES
The Company has elected to be taxed under the provision of
Subchapter S of the Internal Revenue Code whereby the income
or loss is passed on to the stockholders. New York State
recognizes the Subchapter S Provision in lieu of its corporate
franchise tax, but New York City does not. New York City
taxable income is reported under the direct write off method
of accounting while the financial statements are prepared on
the allowance method of accounting. As a result, the timing of
the bad debt expenses differs for financial accounting and tax
reporting purposes giving rise to a deferred tax asset
account.
F-11
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
NOTE 1 -ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(Cont.)
FINANCIAL AID
The School participates in most Federal and State Financial
Aid programs (Title IV Programs, NYS TAP, etc.). A substantial
portion of the students attending Interboro Institute, Inc.
rely on these Federal and State Financial Aid programs to meet
their tuition needs. Changes in the programs may have direct
impact on the institute.
INVENTORY
Inventory consists of books and supplies to be sold to
students. The Company values its inventory at the lower of
cost or market, using the first-in, first-out method.
INTANGIBLE ASSETS
Goodwill arose in 1982 in connection with the Corporation's
purchase of 100% of the stock of Interboro Institute, Inc. and
its subsequent liquidation. Goodwill is being amortized over a
period of 40 years. At December 31, 1999 accumulated
amortization totaled $87,589.
UNEARNED TUITION REVENUE
Revenue is recognized ratably over the term of the semester.
Tuition revenue from school tuition contracts is deferred to
a subsequent period when the contract services will be
rendered. The Company's policy is to calculate unearned
tuition income based on the percentage of the semester
remaining uncompleted.
COMPENSATED ABSENCES
Employees of the company are entitled to paid vacation. It is
impracticable to estimate the amount of compensation for
future absences, and, accordingly, no liability has been
recorded in the accompanying financial statement. The
Company's policy is to recognize the costs of compensated
absences when actually paid to employees.
NOTE 2 - CASH
The Company deposits the majority of its cash in one
commercial bank in New York City, NY. From time to time cash
balances in this account exceed the federally insured limits.
To date, the Company has not experienced any losses in such
accounts and believes it is not exposed to any significant
credit risk on its cash and cash equivalents.
F-12
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
The following schedule shows the components of accounts and
notes receivable:
Accounts Receivable - Students $ 429,376
Undisbursed TAP Funds ( 58,475)
Student Loans Receivable 102,005
Employee Loans 1,570
----------
474,476
Allowance for Doubtful Accounts ( 50,000)
-----------
Accounts and Notes Receivable - Net $ 424,476
==========
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at January 13, 2000 consists of the
following:
Property and Equipment - Cost
Furniture, Fixtures & Equipment $1,550,062
Leasehold Improvements 73,817
Library 21,348
------
Sub-Total - Property and Equipment 1,645,227
---------
Accumulated Depreciation
Furniture, Fixtures & Equipment 1,414,006
Leasehold Improvements 14,339
Library 21,348
--------
Sub-Total - Accumulated Depreciation 1,449,693
---------
Property and Equipment - Net $ 195,534
=========
NOTE 5 - ADVERTISING EXPENSE
Advertising expense is charged as it is incurred. The total
advertising expense for the six months ended December 31, 1999
was $ 494,770.
NOTE 6 - CAPITAL STOCK
At December 31, 1999 the Company has 100 shares of no par
value common stock issued and outstanding. Common shares are
voting and dividends are paid at the discretion of the Board
of Directors.
F-13
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
NOTE 7 - LEASE COMMITMENT
The Company leases administrative offices and classrooms in
New York City at 450 West 56th Street. The lease commenced on
February 1, 1984 and has since been amended twice to include
additional space and to extend the term to January 31, 2003.
The Company is liable for its share of increases in real
estate taxes over the base year. Rent expense for the period
ended December 31, 1999 was $208,120, inclusive of real estate
taxes. At December 31, 1999 future minimum lease payments,
inclusive of real estate taxes, are as follows:
For the year ended
June 30, Rent
-------------------- --------
2000 $ 213,232
2001 $ 437,943
2002 $ 449,423
2003 $ 384,086
NOTE 8 - EMPLOYEE BENEFIT PLANS
During July of 1992, the Company adopted a Savings Plan which
meets all of the requirements of the Internal Revenue Service
Code for a profit sharing plan under Code Sections 401(a) and
401(k). While the Company may elect to set aside contributions
for employees, it did not do so for the period ended December
31, 1999.
Employees may make before and after tax contributions in
accordance with normal 401(k) requirements. The Company
applied for and has received a favorable determination letter
from the IRS.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company uses a related party, Bruce Advertising (a sole
proprietorship) operated by the sole shareholder of the
Corporation as an advertising agency. For the six months ended
December 31, 1999 the institution incurred expenses to the
agency of $350,876. As of December 31, 1999 there is no
balance due to Bruce Advertising.
The sole shareholder Bruce Kalisch contributed capital of
$695,876 during the period.
F-14
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
NOTE 10 - LOANS PAYABLE20
Educational Video Conferencing, Inc., Yonkers, New York has
loaned the corporation $45,000 during the period to provide
operating capital (see Note 13).
NOTE 11 - INCOME TAXES
Income taxes for the six months ended December 31, 1999
consists of deferred corporate income tax for the City of New
York in the amount of $11,505.
Management estimates a net operating loss carryforward of
$2,500,000 for New York State S Corporation Franchise Tax and
New York City General Corporation Tax.
NOTE 12 - DUE TO NEW YORK HESC (HIGHER EDUCATION SERVICES
CORPORATION)
The Office of the Comptroller of the State of New York ("OSC")
in its final audit report of Interboro Institute's
participation in the Tuition Assistance Program (TAP) and the
Supplemental Tuition Assistance Program (STAP) for the
academic grant years 1989-90 through 1991-92, dated November
15, 1996, had recommended the disallowance of $4,796,132 of
TAP and STAP funds disbursed to Interboro during the audit
period. In the report, OSC recommended that the New York State
Higher Education Services Corporation (NYHESC), the state
agency responsible for disbursing TAP funds, recover these
disallowed funds plus applicable interest.
By letter dated November 19, 1996, the New York State Higher
Education Services Corporation demanded from Interboro a
refund of the full amount of the recommended disallowance plus
applicable interest at the rate of 9% per annum, from the date
of the letter.
On or about December 12, 1996, Interboro commenced a civil
action in the United States District Court for the Northern
District of New York against several state officials,
including H. Carl McCall, the Comptroller of the State of New
York, Robert J. Maurer, the President of HESC, and Donald J.
Nolan, the former Deputy Commissioner of Higher and
Professional Education within the State Education Department,
seeking, among other things, a permanent injunction and
declaratory judgement against the defendants in their
individual and official capacities. Interboro alleged claims
under 42 U.S.C 1983, et. seq. premised upon defendants'
selective enforcement of the applicable laws and
F-15
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
NOTE 12 - DUE TO NEW YORK HESC (HIGHER EDUCATION SERVICES
CORPORATION) (cont.)
regulations in violation of the Equal Protection Clause of the
Fourteenth Amendment of the United States Constitution.
On or about March 13, 1997, Interboro commenced a second
proceeding in the Supreme Court of the State of New York,
Albany County, under Article 78 of the Civil Practice Law and
Rules alleging, among other things, that the actions of OSC,
HESC and the State Education Department are arbitrary and
capricious. In this special proceeding, Interboro sought,
among other things, to recover all TAP and STAP funds withheld
by HESC and OSC as well as incidental and consequential
damages resulting from defendants' action.
By letter agreement dated March 7, 1997 Interboro entered into
an interim repayment agreement with HESC which permitted HESC
to withhold a portion of the TAP and STAP awards prospectively
awarded to Interboro's eligible students in consideration for
restoring Interboro to full pre-payment status as an
institution eligible to receive student assistance
prospectively. Without prejudice to its right to continue the
above referenced litigation through a judicial determination,
Interboro agreed to pay the following sums:
$500,000 Upon execution of the agreement
$400,000 December 10, 1997
$300,000 April 10, 1998
$600,000 December 10, 1998
By Decision and Order dated October 8, 1997, the district
court granted the defendants' motion for summary judgment and
dismissed the Federal Action. Interboro filed a timely appeal
of the district court's decision which was fully briefed,
argued and submitted to the United States Court of Appeals for
the Second Circuit on April 20, 1998.
On or about October 16, 1997, the New York State Supreme
Court, Albany County, entered an order dismissing the State
Action. Thereafter, Interboro filed a timely Notice of Appeal
and perfected that appeal to the Supreme Court of the State of
New York, Appellate Division for the Third Department.
Both the state and federal court appeals have been determined
conclusively in favor of the state agencies upholding the
validity of the audit disallowances.
F-16
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 12 - DUE TO NEW YORK HESC (HIGHER EDUCATION SERVICES
CORPORATION) (cont.)
As of December 31, 1999, Interboro Institute has paid
$5,024,617 to NYHESC through withheld TAP funds, $1,017,063 of
these withholdings was accrued interest on the disallowance
and $4,007,554 reduced the remaining balance of the
disallowance due to NYHESC to $788,578.
Management represents that this balance could be paid in its
entirety as a result of funds to be withheld from TAP
certifications for students enrolled during the Spring 2000
term, which come due by the end of March 2000. The Company
will thereafter be immediately eligible to continue to receive
TAP disbursements in the ordinary course.
NOTE 13- CONTINGENCIES AND COMMITMENTS
SALES TAX AUDIT
During December 1999, the State of New York initiated a Sales
and Use Tax Audit for the period from March 31, 1997 through
August 31, 1999. This audit is to determine if all the
appropriate sales and use taxes have been collected and paid.
Since the audit began recently and is still in progress,
management is unable to determine if any assessment may result
from this audit.
TUITION ASSISTANCE PROGRAM (TAP)
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.
NOTE 14 - GOING CONCERN
The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. The
Company has a working capital deficiency and has suffered a
loss and negative cash flows resulting from the disallowance
and withholding of TAP funds, as explained in Note 12, which
raise doubt about the Company's ability to continue as a going
concern.
As of the date of this report, the Corporation's stock has
been purchased and a substantial capital contribution has been
made to the Company. Management believes that this infusion of
capital, along with expected operating profits and the
reinstatement of TAP disbursements in the ordinary course,
should eliminate the working capital deficit.
F-17
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 15 - SUBSEQUENT EVENTS
CHANGE OF OWNERSHIP On January 13, 2000 the Corporation's
stock was purchased by Interboro Holding, Inc., a Delaware
corporation with offices at Educational Video Conferencing,
Inc., Yonkers.
F-18
<PAGE>
INTERBORO INSTITUTE, INC.
FINANCIAL STATEMENTS
For the Year Ended June 30, 1999
F-19
<PAGE>
INTERBORO INSTITUTE, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
INDEPENDENT AUDITOR'S REPORT F-21
FINANCIAL STATEMENTS
Balance Sheet F-22
Statement of Operations and Accumulated Deficit F-23
Statement of Cash Flows F-24
Notes to Financial Statements F-25-F-33
F-20
<PAGE>
Independent Auditor's Report
To the Board of Directors and Stockholders
of Interboro Institute, Inc.
We have audited the balance sheet of Interboro Institute, Inc.
as of June 30, 1999 and the related statements of income,
retained earnings, and cash flows for the year then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly in all material respects, the financial
position of Interboro Institute, Inc. as of June 30, 1999 and
the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting
principles.
In accordance with Government Auditing Standards, we have also
issued a report dated January 11, 2000 on our consideration of
the Interboro Institute Inc. internal control structure and a
report dated January 11, 2000 on its compliance with laws and
regulations.
Donald D. Devine Company
Certified Public Accountants
January 11, 2000
F-21
<PAGE>
INTERBORO INSTITUTE, INC.
Balance Sheet
June 30, 1999
ASSETS
Current Assets
Cash and Cash Equivalents $ 265,926
Accounts and Notes Receivable 1,438,299
(less allowance for doubtful accounts
of $ 180,000)
Prepaid Expenses 46,978
Inventory 143,553
Deferred Tax Asset 15,930
Total Current Assets 1,910,686
Property and Equipment - Net 210,960
Goodwill - Net 109,490
------------
TOTAL ASSETS $ 2,231,136
============
LIABILITIES AND DEFICIENCY
Current Liabilities
Accounts Payable $ 457,342
Accrued Expenses Payable 66,829
Unearned Tuition 792,684
Due to New York HESC 2 846,578
Other Current Liabilities 147,588
------------
Total Current Liabilities 4,311,021
============
Stockholder's Deficiency
Common Stock (no par value 50,000
Authorized 200 shares, issued and
outstanding 100 shares)
Additional Paid In Capital 30,317
Accumulated Deficit ( 2,160,202)
Total Stockholder's Deficiency ( 2,079,885)
-----------
TOTAL LIABILITIES AND DEFICIENCY $ 2,231,136
============
See accountant's report and notes to financial statements.
F-22
<PAGE>
INTERBORO INSTITUTE, INC.
Statement of Operations and Accumulated Deficit
For the Year Ended June 30, 1999
Revenue
Tuition Revenue - Net $ 6,142,574
Bookstore Revenue 474,860
------------
Total Revenue 6,617,434
Cost of Operations
Books and Supplies 406,676
Instructional Salaries 1,369,663
Instructional Expenses 199,034
------------
Total Cost of Operations 1,975,373
Gross Profit 4,642,061
============
General & Administrative
Administrative Salaries 1,134,289
Administrative Expenses 406,304
Student Recruitment 568,918
Occupancy Expenses 671,552
Student Services 523,309
Depreciation and Amortization 76,494
============
Total General & Administrative 3,380,866
Income From Operations 1,261,195
Interest Income 12,206
Loss from Disallowance of TAP Funds ( 4,748,797)
Loss before Income Tax Benefit ( 3,475,396)
Income Tax Benefit ( 3,114)
Net Loss ( 3,472,282)
Retained Earnings, June 30, 1998 1,312,080
Accumulated Deficit, June 30, 1999 $( 2,160,202)
See accountant's report and notes to financial statements.
F-23
<PAGE>
INTERBORO INSTITUTE, INC.
Statement of Cash Flows
For the Year Ended June 30, 1999
Cash flows from operating activities:
Net loss $(3,472,282)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 76,493
===========
Changes in operating assets and liabilities
(Increase) decrease in Accounts and Notes Receivable 273,680
(Increase) decrease in Prepaid Expenses 134,088
(Increase) decrease in Inventory ( 79,288)
(Increase) decrease in Deferred Tax Asset ( 3,739)
Increase (decrease) in Accounts Payable 97,698
Increase (decrease) in Accrued Expenses Payable ( 235,737)
Increase (decrease) in Unearned Tuition 116,121
Increase (decrease) in NYHESC Payable 2,846,578
Increase (decrease) in Other Current Liabilities 147,588
-----------
Total adjustments 3,373,482
===========
Net cash used in operating activities ( 98,800)
Cash flows from investing activities:
Purchase of property & equipment ( 67,806)
Net cash used in investing activities ( 67,806)
Net decrease in cash and cash equivalents ( 166,606)
Cash and cash equivalents, beginning 432,532
Cash and cash equivalents, ending $ 265,926
Supplemental Disclosure
Income Taxes Paid $ 625
See accountant's report and notes to financial statements
F-24
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Interboro Institute, Inc., the Company, was incorporated under
the laws of the State of New York on November 21, 1981, under
the name of Kinterboro Corporation. Its principal business
activity consists of the operation of a post-secondary
two-year degree-granting college located in New York City. It
subsequently changed its name to Interboro Institute, Inc. in
conjunction with the liquidation of its subsidiary of the same
name.
USE OF ESTIMATES
The presentation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company analyzes its accounts receivable and loans
receivable reviewing the age of the receivable, subsequent
collections, and the items in collection. Accordingly, it sets
up an appropriate allowance.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is
calculated on the applicable straight-line or accelerated
methods over the estimated useful lives of the assets, which
range from three to seven years. Leasehold improvements are
amortized over the term of the lease.
INCOME TAXES
The Company has elected to be taxed under the provision of
Subchapter S of the Internal Revenue Code whereby the income
or loss is passed on to the stockholders. Taxable income is
reported under the direct write off method of accounting while
the financial statements are prepared on the allowance method
of accounting. As a result, the timing of the bad debt
expenses differs for financial accounting and tax reporting
purposes giving arise to a deferred benefit account.
New York State recognizes the Subchapter S Provision in lieu
of its corporate franchise tax, but New York City does not.
F-25
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1999
NOTE 1 -ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(Cont.)
FINANCIAL AID
The School participates in most Federal and State Financial
Aid programs (Title IV Programs, NYS TAP, etc.). A substantial
portion of the students attending Interboro Institute, Inc.
rely on these Federal and State Financial Aid programs to meet
their tuition needs. Changes in the programs may have direct
impact on the institute.
INVENTORY
Inventory consists of books and supplies to be sold to
students. The Company values its inventory at the lower of
cost or market, using the first-in, first-out method.
INTANGIBLE ASSETS
Goodwill arose in 1982 in connection with the Corporation's
purchase of 100% of the stock of Interboro Institute, Inc. and
its subsequent liquidation. Goodwill is being amortized over a
period of 40 years. At June 30, 1999 accumulated amortization
totaled $85,156.
UNEARNED TUITION REVENUE
Revenue is recognized ratably over the term of the semester.
Tuition revenue from school tuition contracts are deferred to
a subsequent period when the contract services will be
rendered. The Company's policy is to calculate unearned
tuition income based on the percentage of the semester
remaining uncompleted.
COMPENSATED ABSENCES
Employees of the company are entitled to paid vacation. It is
impracticable to estimate the amount of compensation for
future absences, and, accordingly, no liability has been
recorded in the accompanying financial statement. The
Company's policy is to recognize the costs of compensated
absences when actually paid to employees.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company deposits the majority of its cash in one
commercial bank in New York City, NY. From time to time cash
balances in this account exceed the federally insured limits.
To date, the Company has not experienced any losses in such
accounts and believes it is not exposed to any significant
credit risk on its cash and cash equivalents.
F-26
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1999
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
The following schedule shows the components of accounts and
notes receivable:
Accounts Receivable - Students $1,264,410
Undisbursed TAP Funds ( 9,422)
Student Loans Receivable 360,292
Employee Loans 3,019
----------
1,618,299
Allowance for Doubtful Accounts ( 180,000)
-----------
Accounts and Notes Receivable - Net $1,438,299
==========
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1999 consists of the
following:
Property and Equipment - Cost
Furniture, Fixtures & Equipment $ 1,529,359
Leasehold Improvements 73,817
Library 21,348
Automobiles 26,774
----------
Sub-Total - Property and Equipment $1,651,298
----------
Accumulated Depreciation
Furniture, Fixtures & Equipment $ 1,389,125
Leasehold Improvements 13,257
Library 21,091
Automobiles 16,865
----------
Sub-Total - Accumulated Depreciation $ 1,440,338
---------
Property and Equipment - Net $ 210,960
==========
Depreciation expense for the year was $71,628.
NOTE 5 - CAPITAL STOCK
At June 30, 1999, the Company has 100 shares of no par value
common stock issued and outstanding. Common shares are voting
and dividends are paid at the discretion of the Board of
Directors.
F-27
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1999
NOTE 6 - LEASE COMMITMENT
The Company leases administrative offices and classrooms in
New York City at 450 West 56th Street. The lease commenced on
February 1, 1984 and has since been amended twice to include
additional space and to extend the term to January 31, 2003.
The Company is liable for its share of increases in real
estate taxes over the base year. Rent expense for the year
ended June 30, 1999 was $403,503, inclusive of real estate
taxes. At June 30, 1999 future minimum lease payments,
inclusive of real estate taxes, are as follows:
For the year ended
June 30, Rent
---------------------- ----------
2000 $ 426,463
2001 $ 437,943
2002 $ 449,423
2003 $ 384,086
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company uses a related party, Bruce Advertising (a sole
proprietorship) operated by the sole shareholder of the
Corporation as an advertising agency. For the year ended June
30, 1999 the institution incurred expenses to the agency of
$537,564. As of June 30, 1999 the amount still owed and
included in accounts payable was $176,536.
NOTE 8 - EMPLOYEE BENEFIT PLANS
During July of 1992, the Company adopted a Savings Plan which
meets all of the requirements of the Internal Revenue Service
Code for a profit sharing plan under Code Sections 401(a) and
401(k). While the Company may elect to set aside contributions
for employees, it did not do so for the year ended June 30,
1999.
Employees may make before and after tax contributions in
accordance with normal 401(k) requirements. The Company
applied for and has received a favorable determination letter
from the IRS. The Company has a liability of $6,875 due to the
plan at June 30, 1999.
F-28
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1999
NOTE 9 - INCOME TAXES
The income tax benefit at June 30, 1999 consists of current
and deferred income tax for the State of New York and the City
of New York, as follows:
Current Taxes
New York State Franchise Tax $ 325
New City Corporation Tax 300
-----
625
Deferred Tax Benefit (3,739)
-----
Provision for Income Taxes $(3,114)
========
NOTE 10 - DUE TO NEW YORK HESC (HIGHER EDUCATION SERVICES
CORPORATION)
The Office of the Comptroller of the State of New York ("OSC")
in its final audit report of Interboro Institute's
participation in the Tuition Assistance Program (TAP) and the
Supplemental Tuition Assistance Program (STAP) for the
academic grant years 1989-90 through 1991-92, dated November
15, 1996, had recommended the disallowance of $4,796,132 of
TAP and STAP funds disbursed to Interboro during the audit
period. In the report, OSC recommended that the New York State
Higher Education Services Corporation (NYHESC), the state
agency responsible for disbursing TAP funds, recover these
disallowed funds plus applicable interest.
By letter dated November 19, 1996, the New York State Higher
Education Services Corporation demanded from Interboro a
refund of the full amount of the recommended disallowance plus
applicable interest at the rate of 9% per annum, from the date
of the letter.
On or about December 12, 1996, Interboro commenced a civil
action in the United States District Court for the Northern
District of New York against several state officials,
including H. Carl McCall, the Comptroller of the State of New
York, Robert J. Maurer, the President of HESC, and Donald J.
Nolan, the former Deputy Commissioner of Higher and
Professional Education within the State Education Department,
seeking, among other things, a permanent injunction and
declaratory judgement against the defendants in their
individual and official capacities. Interboro
F-29
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1999
NOTE 10 - DUE TO NEW YORK HESC (HIGHER EDUCATION SERVICES
CORPORATION) (cont.)
alleged claims under 42 U.S.C 1983, et. seq. premised upon
defendants' selective enforcement of the applicable laws and
regulations in violation of the Equal Protection Clause of the
Fourteenth Amendment of the United States Constitution.
On or about March 13, 1997, Interboro commenced a second
proceeding in the Supreme Court of the State of New York,
Albany County, under Article 78 of the Civil Practice Law and
Rules alleging, among other things, that the actions of OSC,
HESC and the State Education Department are arbitrary and
capricious. In this special proceeding, Interboro sought,
among other things, to recover all TAP and STAP funds withheld
by HESC and OSC as well as incidental and consequential
damages resulting from defendants' action.
By letter agreement dated March 7, 1997 Interboro entered into
an interim repayment agreement with HESC which permitted HESC
to withhold a portion of the TAP and STAP awards prospectively
awarded to Interboro's eligible students in consideration for
restoring Interboro to full pre-payment status as an
institution eligible to receive student assistance
prospectively. Without prejudice to its right to continue the
above referenced litigation through a judicial determination,
Interboro agreed to pay the following sums:
$500,000 Upon execution of the agreement
$400,000 December 10, 1997
$300,000 April 10, 1998
$600,000 December 10, 1998
By Decision and Order dated October 8, 1997, the district
court granted the defendants' motion for summary judgment and
dismissed the Federal Action. Interboro filed a timely appeal
of the district court's decision which was fully briefed,
argued and submitted to the United States Court of Appeals for
the Second Circuit on April 20, 1998.
On or about October 16, 1997, the New York State Supreme
Court, Albany County, entered an order dismissing the State
Action. Thereafter, Interboro filed a timely Notice of Appeal
and perfected that appeal to the Supreme Court of the State of
New York, Appellate Division for the Third Department.
F-30
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1999
NOTE 10 - DUE TO NEW YORK HESC (HIGHER EDUCATION SERVICES
CORPORATION) (cont.)
As of June 30, 1999, both the state and federal court appeals
have been determined conclusively in favor of the state
agencies upholding the validity of the audit disallowances.
As of June 30, 1999, Interboro Institute has paid $2,876,334
to NYHESC through withheld TAP funds, $926,780 of these
withholdings was accrued interest on the disallowance and
$1,949,554 reduced the remaining balance of the disallowance
due to NYHESC to $2,846,578.
As of the date of this report, NYHESC continued to withhold
TAP Funds for payment of the liability and accrued interest.
Based on information provided by NYHESC as of December 30,
1999 the remaining balance due to NYHESC is $788,383.
Management represents that this balance could be paid in its
entirety as a result of funds to be withheld from TAP
certifications for students enrolled during the Spring 2000
term, which come due by the end of March 2000. The Company
will thereafter be immediately eligible to continue to receive
TAP disbursements in the ordinary course.
NOTE 11 - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
401(k) Contributions Withheld $ 6,875
Legal Fees on TAP Disallowance 32,495
Accrued Interest on TAP Disallowance 108,218
-----------
$ 147,588
NOTE 12 - LOSS - DISALLOWANCE OF TAP FUNDS
Original TAP Disallowance $ 4,796,132
Payment of Interim Payment Agreement
through June 30, 1998 (1,202,819)
Accrued Interest 621,384
----------
Reduction of Balance (581,435)
Legal Fees 127,700
Interest 406,400
-----------
Loss From Disallowance of TAP Funds $ 4,748,797
===========
F-31
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 13 - LOSS - LEGAL SETTLEMENT
In 1996, a former instructor filed a complaint in the United
States District Court for the Southern District of New York
under the Civil Rights Act of 1964, alleging that her
employment was unlawfully terminated on the basis of alleged
acts of racial discrimination. The Company denied all charges
of discrimination, but in the later part of 1998 a settlement
in the amount of $22,500 was reached and that amount was paid
in full by the Company.
NOTE 14 - 90/10 PERCENT RULE OF TITLE IV HEA PROGRAM FUNDS
REVENUE TEST
The Company is in compliance with the U.S. Department of
Education's "90/10 Revenue Test", that no more than 90% of an
institution's revenue can come from Title IV programs.
The percentage of revenues derived from Title IV funds
received during the period July 1, 1998 through June 30, 1999
was 42.5%.
The following calculation used for the "90/10 Percent" rule of
Title IV HEA Program Funds was prepared on the cash basis of
accounting; consequently, revenues and the related assets are
recognized when received rather than when earned, for this
test.
Revenues derived from Title IV Funds $3,350,655
received during the period
Total eligible program revenues received 7,887,546
Percentage of Title IV program revenues
received to total eligible program
revenues received 42.5%
The eligible Title IV program revenues collected are less than
90 percent of the total eligible program revenues; Therefore,
the institute is in compliance with the "90/10 Percent" rule
of Title IV HEA Program Funds.
F-32
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 15 - CONTINGENCIES AND COMMITMENTS
SALES TAX AUDIT
During December 1999, the State of New York initiated a Sales
and Use Tax Audit for the period from March 31, 1997 through
August 31, 1999. This audit is to determine if all the
appropriate sales and use taxes have been collected and paid.
Since the audit began recently and is still in progress,
management is unable to determine if any assessment may result
from this audit.
TUITION ASSISTANCE PROGRAM (TAP)
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.
NOTE 16 - GOING CONCERN
The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. The
Company has a working capital deficiency and has suffered a
loss and negative cash flows resulting from the disallowance
and withholding of TAP funds, as explained in Notes 10 and 12,
which raise substantial doubt about the Company's ability to
continue as a going concern.
Negotiations are currently in progress for the purchase of the
Corporation's stock whereby a substantial capital contribution
would be made to the Company. Management believes that this
infusion of capital, along with expected operating profits and
the reinstatement of TAP disbursements in the ordinary course,
should eliminate the working capital deficit. If this
transaction cannot be consummated, the Company would be
materially and adversely affected. The financial statements do
not include any adjustments necessary if the Company becomes
unable to continue operations for any reason.
NOTE 17 - SUBSEQUENT EVENTS
CHANGE OF OWNERSHIP
A written agreement reflecting the commitment to the continued
negotiation, drafting, and consummation of a stock purchase by
Interboro Holding, Inc., a Delaware corporation with offices
at Educational Video Conferencing, Inc., Yonkers, New York was
signed on December 30, 1999. This purchase agreement is
scheduled to be completed by January 14, 2000.
F-33
<PAGE>
INTERBORO INSTITUTE, INC.
FINANCIAL STATEMENTS
For the Six Months ended June 30, 1998
F-34
<PAGE>
INTERBORO INSTITUTE, INC.
Table of Contents
Page
INDEPENDENT AUDITOR'S REPORT F-36
FINANCIAL STATEMENTS
Balance Sheet F-37
Statement of Income and Retained Earnings F-38
Statements of Cash Flows F-39
Notes to Financial Statements F-40-F-46
F-35
<PAGE>
Independent Auditor's Report
----------------------------
To the Board of Directors and Stockholders
of Interboro Institute Inc.
We have audited the balance sheet of Interboro Institute Inc. as of
June 30, 1998 and the related Statements Of income, retained earnings,
and cash flows for the six months then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller
General of the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly in all material respects, the financial position of Interboro
Institute Inc. as of June 30, 1998 and the results of its operations
and its cash flows for the six months then ended, in conformity with
generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued a
report dated December 15, 1998 on our consideration of the Interboro
Institute Inc. internal control structure and a report dated December
15, 1998 on its compliance with laws and regulations.
Donald D. Devine Company
Certified Public Accountants
December 15, 1998
F-36
<PAGE>
INTERBORO INSTITUTE, INC.
Balance Sheet
June 30, 1998
ASSETS
Current Assets
Cash $ 432,532
Accounts and Notes Receivable 2,011,979
(less allowance for doubtful accounts of $ 137,756)
Prepaid Expenses 66,388
Inventory 64,265
------------
Total Current Assets 2,575,164
Fixed Assets - Net 214,783
Other Assets
Goodwill - Net 114,356
Deferred Tax Benefit 12,191
------------
Total Other Assets 126 547
------------
TOTAL ASSETS $ 2 916 494
============
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable $ 359,644
Accrued Expenses 187,889
Unearned Tuition 676,563
Due to New York HESC 300,000
------------
Total Current Liabilities 1,524,096
Stockholder's Equity
Capital Stock - Common (no par value 50,000
Authorized 200 shares, issued and
outstanding 100 shares)
Additional Paid In Capital 30,317
Retained Earnings - Unappropriated 1,312,081
------------
Total Stockholder's Equity 1,392,398
------------
TOTAL LIABILITIES AND EQUITY $ 2,916,494
============
See accountant's report and notes to financial statements.
F-37
<PAGE>
INTERBORO INSTITUTE, INC.
Statement of Income and Retained Earnings
For the Six Months Ended June 30, 1998
Revenue
Tuition Revenue - Net $ 2,375,819
Bookstore Revenue 216,597
------------
Total Revenue 2,592,416
Cost of Operations
Books and Supplies 247,876
Instructional Salaries 645,048
Instructional Expenses 88,660
Total Cost of Operations 981,584
-----------
Gross Profit 1,610,832
General & Administrative
Administrative Salaries 559,549
Administrative Expenses 286,681
Student Recruitment 130,385
Occupancy Expenses 321,706
Student Services 256,591
Depreciation 35,149
Amortization 2,433
-----------
Total General & Administrative 1,592,494
-----------
Income From Operations 18,338
Other Income and (Expenses) - Net 2,967
Litigation Settlement ( 300,000)
------------
Income Before Provision for Income Tax ( 278,695)
Provision for Income Taxes 4,385
-----------
Net Income ( 283,080)
Retained Earnings,
beginning of year (December 31, 1998) 1,595,161
------------
Retained Earnings,
end of year (June 30, 1998) $ 1 312 081
============
See accountant's report and notes to financial statements.
F-38
<PAGE>
INTERBORO INSTITUTE, INC.
Statement of Cash Flows
For the Six Months Ended June 30, 1998
Cash flows from operating activities:
Net income $( 283,082)
------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 37,582
Deferred Income Taxes 4,072
(Increase) decrease in Accounts Receivable ( 990,842)
(Increase) decrease in Prepaid Expenses 4,823
(Increase) decrease in Inventories 126,652
Increase (decrease) in Accounts Payable 38,020
Increase (decrease) in Accrued Liabilities ( 59,025)
Increase (decrease) in Unearned Tuition 676,563
Increase (decrease) in Other Liabilities 300,000
Total adjustments 137,845
-----------
Net cash provided (used) by operating activities ( 145,237)
-----------
Cash flows from investing activities:
Cash payments for the purchase of property ( 24,471)
-----------
Net cash provided (used) by investing activities ( 24,471)
Net increase (decrease) in cash and equivalents ( 169,708)
Cash and equivalents, beginning 602,240
-----------
Cash and equivalents, ending $ 432,532
===========
See accountant's report and notes to financial statements.
F-39
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Interboro Institute, Inc. was incorporated under the laws of
the State of New York on November 21, 1981, under the name of
Kinterboro Corporation. Its principal business activity
consists of the operation of a post-secondary secretarial and
business school located in New York City. It subsequently
changed its name to Interboro Institute, Inc. in conjunction
with the liquidation of its subsidiary of the same name.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company analyzes its accounts receivable reviewing the age
of the receivable, subsequent collections, and the items in
collection. Accordingly, it sets up an appropriate allowance.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is calculated on
the applicable straight-line or accelerated methods over the
estimated useful lives of the assets.
INCOME TAXES
The Company has elected to be taxed under the provision of
Subchapter S of the Internal Revenue Code whereby the income
or loss is passed on to the stockholders. Taxable income is
reported under the direct write off method of accounting while
the financial statements are prepared on the allowance method
of accounting. As a result, the timing of the bad debt
expenses differs for financial accounting and tax reporting
purposes giving arise to a deferred benefit account.
New York State recognized the Subchapter S Provision in lieu
of its corporate franchise tax, but New York City does not.
As of January 1, 1998 the Company has elected to change its
year end from December 31 to June 30 for financial statement
presentation to be consistent with the Student Financial Aid
Year utilized by the Department of Education. The Company
continues to maintain a calendar year for tax purpose. The
financial statements presented are therefore for the six month
period ended June 30, 1998 (the first new year end).
F-40
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1 -ORGANIZATION AND SIGNIFICANT ACCOUNTING
POLICIES (Cont.)
FINANCIAL AID
The School participates in most Federal and State Financial
Aid programs (Title IV Programs, NYS TAP, etc.). A substantial
portion of the students attending Interboro Institute, Inc.
rely on these Federal and State Financial Aid programs to meet
their tuition needs. Changes in the programs may have direct
impact on the institute.
INVENTORY
Inventory consists of books and supplies to be sold to
students. The Company values its inventory at the lower of
cost or market, using the first-in, first-out method.
INTANGIBLE ASSETS
Goodwill arose in 1982 in connection with the Corporation's
purchase of 100% of the stock of Interboro Institute, Inc. and
its subsequent liquidation. Goodwill is being amortized over a
period of 40 years.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company deposits the majority of its cash in one
commercial bank in New York City, NY. From time to time cash
balances in this account exceed the federally insured limits.
To date, the Company has not experienced any losses in such
accounts and believes it is not exposed to any significant
credit risk on its cash and cash equivalents. At June 30,
1998, cash balances related to the concentration totaled
$177,657.
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
The following schedule shows the components of accounts and
notes receivable:
Accounts Receivable - Students $1,720,199
Student Loans Receivable 424,576
Employee Loans 4,960
----------
2,149,735
Allowance for Doubtful Accounts 137,756
----------
Accounts and Notes Receivable - Net $2,011,979
==========
F-41
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 4 - FIXED ASSETS
Furniture, Fixtures & Equipment $1,467,658
Leasehold Improvements 73,817
Library 21,348
Automobiles 26,774
----------
Sub-Total - Fixed Assets $1,589,597
==========
Accumulated Depreciation
Furniture, Fixtures & Equipment 1,329,420
Leasehold Improvements 10,914
Library 19,190
Automobiles 15,290
----------
Sub-Total - Accumulated Depreciation 1,374,814
---------
Fixed Assets - Net $ 214,783
==========
NOTE 5 - CAPITAL STOCK
At June 30, 1998, the Company has 100 shares of no par value
common stock issued and outstanding. Common shares are voting
and dividends are paid at the discretion of the Board of
Directors.
NOTE 6 - LEASE COMMITMENT
The Company leases administrative offices and classrooms in
New York City at 450 West 56th Street. The lease commenced on
February 1, 1984 and has since been amended twice to include
additional space and to extend the term to January 31, 2003.
The Company is liable for its share increases in real estate
taxes over the base year. Leasehold rent expense for the
period ended June 30, 1998 was $198,403. At June 30, 1998,
future minimum lease payments for the next five years are as
follows:
For the year ended
June 30, Rent
------------------------- --------
1998 $ 403,503
1999 $ 414,983
2000 $ 426,463
2001 $ 437,943
2002 $ 449,423
F-42
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company uses a related party, Bruce Advertising (a sole
proprietorship) operated by the sole shareholder of the
Corporation as an advertising agency. For the year ended June
30, 1998 the institution paid and owed the agency $229,355. As
of June 30, 1998 the amount still payable was $229,355.
The Company uses a related party, Educational Service Mart,
Inc., (owned 100% by the shareholder of the Company) to
maintain and upgrade its computers. For the year ended June
30, 1998, the Company did not require these services and there
was no balance outstanding.
NOTE 8 - EMPLOYEE BENEFIT PLANS
During July of 1992, the Company adopted a Savings Plan which
meets all of the requirements of the Internal Revenue Service
Code for a profit sharing plan under Code Sections 401(a) and
401(k). While the Company may elect to set aside contributions
for employees, it did not do so for 1997.
Employees may make before and after tax contributions in
accordance with normal 401(k) requirements. The Company
applied for and has received a favorable determination letter
from the IRS. The Company has no unfunded liability with
regard to this plan.
NOTE 9 - INCOME TAXES
The provision for income taxes at June 30, 1998 consist of
current and deferred income tax for the State of New York and
the City of New York, as follows:
Current Taxes
New York State Franchise Tax $ 163
New City Corporation Tax 150
-------
313
Deferred Taxes 4,072
-------
Provision for Income Taxes $ 4,385
=======
F-43
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 10 - 85 PERCENT RULE OF TITLE IV HEA PROGRAM FUNDS
The Company is in compliance with the U.S. Department of
Education's "85/15 requirement", that no more than 85% of an
institution's revenue can come from Title IV programs.
The percentage of revenues derived from Title IV funds
received during the year ended June 30, 1998 was 32.3%.
The following calculation used for the 85 Percent Rule of
Title IV HEA Program Funds was prepared on the cash basis of
accounting; consequently, revenues and related assets are
recognized when received rather than when earned.
Eligible Title IV program revenues collected $ 918,085
Total eligible program revenues 2,846,811
Percentage of eligible Title IV program 32.3%
revenue to total eligible program revenues
The eligible Title IV program revenues collected are less than
85 percent of the total eligible program revenues, therefore,
the institution is in compliance with the 85 percent rule.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Office of the Comptroller of the State of New York ("OSC")
in its final audit report of Interboro Institute's
participation in the Tuition Assistance Program (TAP) and the
Supplemental Tuition Assistance Program (STAP) for the
academic grant years 1989-90 through 1991-92, dated November
15, 1996, has recommended the disallowance of $4,796,132 of
TAP and STAP funds disbursed to Interboro during the audit
period. In the report, OSC recommended that the New York State
Higher Education Services Corporation, the state agency
responsible for disbursing TAP funds, recover these disallowed
funds plus applicable interest.
By letter dated November 19, 1996, the New York State Higher
Education Services Corporation demanded from Interboro a
refund of the full amount of the recommended disallowance plus
applicable interest at the rate of 9% per annum, from the date
of the letter.
On or about December 12, 1996, Interboro commenced a civil
action in the United States District Court for the Northern
District of New York against several state officials,
including H. Carl McCall, the Comptroller of the State of New
York, Robert J. Maurer, the President of HESC, and Donald J.
Nolan, the former Deputy Commissioner of Higher and
Professional Education within the State Education Department,
seeking, among other things, a permanent
F-44
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Cont.)
injunction and declaratory judgement against the defendants in
their individual and official capacities. Interboro alleges
claims under 42 U.S.C 1983, et. seq. premised upon defendants'
selective enforcement of the applicable laws and regulations
in violation of the Equal Protection Clause of the Fourteenth
Amendment of the United States Constitution.
On or about March 13, 1997, Interboro commenced a second
proceeding in the Supreme Court of the State of New York,
Albany County, under Article 78 of the Civil Practice Law and
Rules alleging, among other things, that the actions of OSC,
HESC and the State Education Department are arbitrary and
capricious. In this special proceeding, Interboro seeks, among
other things, to recover all TAP and STAP funds withheld by
HESC and OSC as well as incidental and consequential damages
resulting from defendants' action.
By letter agreement dated March 7, 1997 Interboro entered into
an interim repayment agreement with HESC which permits HESC to
withhold a portion of the TAP and STAP awards prospectively
awarded to Interboro's eligible students in consideration for
restoring Interboro to full pre-payment status as an
institution eligible to receive student assistance
prospectively. Without prejudice to its right to continue the
above referenced litigation through a judicial determination,
Interboro agreed to pay the following sums:
$500,000 Upon execution of the agreement
$400,000 December 10, 1997
$300,000 April 10, 1998
$600,000 December 10, 1998
This agreement expressly provides that any sums withheld by
HESC shall be refunded to Interboro with interest in the event
and to the extent that defendants, actions are deemed to be
unlawful.
By Decision and Order dated October 8, 1997, the district
court granted the defendants' motion for summary judgment and
dismissed the Federal Action. Interboro filed a timely Donald
J. Nolan, the former Deputy Commissioner of Higher and
Professional Education within the State Education Department,
seeking, among other things, a permanent
F-45
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 11- COMMITMENTS AND CONTINGENCIES (Cont.)
appeal of the district court's decision which was fully
briefed, argued and submitted to the United States Court of
Appeals for the Second Circuit on April 20, 1998.
On or about October 16, 1997, the New York State Supreme
Court, Albany County, entered an order dismissing the State
Action. Thereafter, Interboro filed a timely Notice of Appeal
and is currently in the process of perfecting that appeal to
the Supreme Court of the State of New York, Appellate Division
for the Third Department.
Legal counsel for the Company states, "Though we believe that
Interboro stands a reasonable chance of success on the appeals
from the district court and the Supreme Court, it is probable
that all or a portion of the monetary disallowances will be
sustained on appeal."
Should all the monetary disallowances be sustained, Interboro
would be obligated to pay the $ 4,796,132 disallowance plus
applicable accrued interest at 9% per annum from November 19,
1996. As of June 30, 1998, the Company has paid $ 900,000. An
additional $300,000 was due as of June 30, 1998, which was
subsequently paid in July 1998. An additional $600,000 was due
and paid per the agreement on December 10, 1998.
F-46
<PAGE>
INTERBORO INSTITUTE, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
F-47
<PAGE>
INTERBORO INSTITUTE, INC.
Table of Contents
Page
INDEPENDENT AUDITOR'S REPORT F-49
FINANCIAL STATEMENTS
Balance Sheet F-50
Statement of Income and Retained Earnings F-51
Statements of Cash Flows F-52
Notes to Financial Statements F-53-F-59
F-48
<PAGE>
Independent Auditor's Report
----------------------------
To the Board of Directors and Stockholders
of Interboro Institute Inc.
We have audited the balance sheet of Interboro Institute Inc. as of December 31,
1997 and the related Statements Of income, retained earnings, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Interboro Institute Inc. as of
December 31, 1997 and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued a report
dated June 11, 1998 on our consideration of the Interboro Institute Inc.
internal control structure and a report dated June 11, 1998 on its compliance
with laws and regulations.
Donald D. Devine Company
Certified Public Accountants
June 11, 1998
F-49
<PAGE>
INTERBORO INSTITUTE, INC.
Balance Sheet
December 31, 1997
ASSETS
Current Assets
Cash $ 602,238
Accounts and Notes Receivable 1 021,136
(less allowance for doubtful accounts
of $ 183 760)
Prepaid Expenses 71,212
Inventory 190,917
------------
Total Current Assets 1,885,503
============
Fixed Assets - Net 225,461
Other Assets
Goodwill - Net 116,789
Deferred Tax Benefit 16,263
Total Other Assets 133,052
------------
TOTAL ASSETS $ 2,244,016
============
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable & Accrued Expense $ 568,538
------------
Total Current Liabilities 568,538
============
Stockholder's Equity
Capital Stock - Common (no par value 50,000
Authorized 200 shares, issued and
outstanding 100 shares)
Additional Paid In Capital 30,317
Retained Earnings - Unappropriated 1,595,161
------------
Total Stockholder's Equity 1,675,478
============
TOTAL LIABILITIES AND EQUITY $ 2,244,016
============
See accountant's report and notes to financial statements.
F-50
<PAGE>
INTERBORO INSTITUTE, INC.
Statement of Income and Retained Earnings
For the Year Ended December 31, 1997
Revenue
Tuition Revenue - Net $ 6,076,474
Bookstore Revenue 367,142
-------------
Total Revenue 6,443,616
Cost of Operations
Books and Supplies 219,910
Instructional Salaries 1,282,709
Instructional Expenses 156,692
-------------
Total Cost of Operations 1,659,311
-------------
Gross Profit 4,784,305
General & Administrative
Administrative Salaries 1,216,768
Administrative Expenses 743,570
Student Recruitment 647,572
Occupancy Expenses 638,439
Student Services 516,054
Depreciation 84,179
Amortization 4,866
------------
Total General & Administrative 3,851,448
------------
Income From Operations 932,857
Other Income and (Expenses) - Net ( 494)
Litigation Settlement ( 901,373)
------------
Income Before Provision for Income Tax 30,990
Provision for Income Taxes 4,884
------------
Net Income 26,106
Retained Earnings,
beginning of year 1,569,055
------------
Retained Earnings,
end of year $ 1,595,161
============
See accountant's report and notes to financial statements.
F-51
<PAGE>
INTERBORO INSTITUTE, INC.
Statement of Cash Flows
For the Year Ended December 31, 1997
Cash flows from operating activities:
Net income $ 26,106
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 89,045
(Gain) loss on disposal of property 8,734
(Increase) decrease in Accounts Receivable ( 300,649)
(Increase) decrease in Prepaid Expenses 197,599
(Increase) decrease in Inventories ( 65,359)
(Increase) decrease in other assets ( 4,323)
Increase (decrease) in Accounts Payable ( 290,806)
-----------
Total adjustments ( 365,759)
-----------
Net cash provided (used) by operating activities ( 339,653)
-----------
Cash flows from investing activities:
Purchase of Property ( 17,911)
Proceeds from Sale of Property 2,500
-----------
Net cash provided (used) by investing activities ( 15,411)
Net increase (decrease) in cash and equivalents ( 355,064)
Cash and equivalents, beginning of year 957,302
-----------
Cash and equivalents, end of year $ 602,238
-----------
See accountant's report and notes to financial statements.
F-52
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Interboro Institute, Inc. was incorporated under the laws of
the State of New York on November 21, 1981, under the name of
Kinterboro Corporation. Its principal business activity
consists of the operation of a post-secondary secretarial and
business school located in New York City. It subsequently
changed its name to Interboro Institute, Inc. in conjunction
with the liquidation of its subsidiary of the same name.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company analyzes its accounts receivable reviewing the age
of the receivable, subsequent collections, and the items in
collection. Accordingly, it sets up an appropriate allowance.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is calculated on
the applicable straight-line or accelerated methods over the
estimated useful lives of the assets.
INCOME TAXES
The Company has elected to be taxed under the provision of
Subchapter S of the Internal Revenue Code whereby the income
or loss is passed on to the stockholders. Taxable income is
reported under the direct write off method of accounting while
the financial statements are prepared on the allowance method
of accounting. As a result, the timing of the bad debt
expenses differs for financial accounting and tax reporting
purposes giving arise to a deferred benefit account.
New York State recognized the Subchapter S Provision in lieu
of its corporate franchise tax, but New York City does not.
FINANCIAL AID
The School participates in most Federal and State Financial
Aid programs (Title IV Programs, NYS TAP, etc.). A substantial
portion of the students attending Interboro Institute, Inc.
rely on these Federal and State Financial Aid programs to meet
their tuition needs. Changes in the programs may have direct
impact on the institute.
F-53
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997
NOTE 1 -ORGANIZATION AND SIGNIFICANT ACCOUNTING
POLICIES(Cont.)
INVENTORY
Inventory consists of books and supplies to be sold to
students. The Company values its inventory at the lower of
cost or market, using the first-in, first-out method.
INTANGIBLE ASSETS
Goodwill arose in 1982 in connection with the Corporation's
purchase of 100% of the stock of Interboro Institute, Inc. and
its subsequent liquidation. Goodwill is being amortized over a
period of 40 years.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company deposits the majority of its cash in one
commercial bank in New York City, NY. From time to time cash
balances in this account exceed the federally insured limits.
To date, the Company has not experienced any losses in such
accounts and believes it is not exposed to any significant
credit risk on its cash and cash equivalents. At December 31
1997, cash balances related to the concentration totaled $
651,172.
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
The following schedule shows the components of accounts and
notes receivable:
Accounts Receivable - Students $ 882,983
Student Loans Receivable 321,613
Employee Loans 300
----------
1,204,896
Allowance for Doubtful Accounts 183,760
----------
Accounts and Notes Receivable - Net $1,021,136
NOTE 4 - FIXED ASSETS
Furniture, Fixtures & Equipment $1,437,084
Leasehold Improvements 73,817
Library 21,348
Automobiles 26,774
----------
Sub-Total - Fixed Assets $1,559,023
==========
F-54
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997
NOTE 4 - FIXED ASSETS (Cont.)
Accumulated Depreciation
Furniture, Fixtures & Equipment 1,291,334
Leasehold Improvements 9,833
Library 17,893
Automobiles 14,502
----------
Sub-Total - Accumulated Depreciation 1,333,562
----------
Fixed Assets - Net $ 225,461
==========
NOTE 5 - CAPITAL STOCK
At December 31, 1997, the Company has 100 shares of no par
value common stock issued and outstanding. Common shares are
voting and dividends are paid at the discretion of the Board
of Directors.
NOTE 6 - LEASE COMMITMENT
The Company leases administrative offices and classrooms in
New York City at 450 West 56th Street. The lease commenced on
February 1, 1984 and has since been amended twice to include
additional space and to extend the term to January 31, 2003.
The Company is liable for its share increases in real estate
taxes over the base year. Leasehold rent expense for 1997 was
$386,283. At December 31, 1997, future minimum lease payments
for the next five years are as follows:
1998 $ 397,763
1999 $ 409,243
2000 $ 420,723
2001 $ 432,203
2002 $ 443,683
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company uses a related party, Bruce Advertising (a sole
proprietorship) operated by the sole shareholder of the
Corporation as an advertising agency. For the year ended
December 31, 1997 the institution paid and owed the agency
$607,618. As of December 31, 1997 the amount still payable was
$339,618.
F-55
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997
NOTE 7 - RELATED PARTY TRANSACTIONS (Cont.)
The Company uses a related party, Educational Service Mart,
Inc., (owned 100% by the shareholder of the Company) to
maintain and upgrade its computers. For the year ended
December 31, 1997, the Company did not require these services
and there was no balance outstanding.
NOTE 8 - EMPLOYEE BENEFIT PLANS
During July of 1992, the Company adopted a Savings Plan which
meets all of the requirements of the Internal Revenue Service
Code for a profit sharing plan under Code Sections 401(a) and
401(k). While the Company may elect to set aside contributions
for employees, it did not do so for 1997.
Employees may make before and after tax contributions in
accordance with normal 401(k) requirements. The Company
applied for and has received a favorable determination letter
from the IRS. The Company has no unfunded liability with
regard to this plan.
NOTE 9 - INCOME TAXES
The provision for income taxes at December 31, 1997 consist of
current and deferred income tax for the State of New York and
the City of New York, as follows:
Current Taxes
New York State Franchise Tax $ 325
New City Corporation Tax 8,882
-------
9 207
Deferred Benefit ( 4,323)
------
Provision for Income Taxes $ 4,884
=======
NOTE 10 - 85 PERCENT RULE OF TITLE IV HEA PROGRAM FUNDS
The Company is in compliance with the U.S. Department of
Education's "85/15 requirement", that no more than 85% of an
institution's revenue can come from Title IV programs.
The percentage of revenues derived from Title IV funds
received during the year ended December 31, 1997 was 37.5%.
F-56
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997
NOTE 10 - 85 PERCENT RULE OF TITLE IV HEA PROGRAM FUNDS
(Cont.)
The following calculation used for the 85 Percent Rule of
Title IV HEA Program Funds was prepared on the cash basis of
accounting; consequently, revenues and related assets are
recognized when received rather than when earned.
Eligible Title IV program revenues collected $ 2,162,124
Total eligible program revenues 5,836,478
Percentage of eligible Title IV program 37.5%
revenue to total eligible program revenues
The eligible Title IV program revenues collected are less than
85 percent of the total eligible program revenues, therefore,
the institution is in compliance with the 85 percent rule.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Office of the Comptroller of the State of New York ("OSC")
in its final audit report of Interboro Institute's
participation in the Tuition Assistance Program (TAP) and the
Supplemental Tuition Assistance Program (STAP) for the
academic grant years 1989-90 through 1991-92, dated November
15, 1996, has recommended the disallowance of $4,796,132 of
TAP and STAP funds disbursed to Interboro during the audit
period. In the report, OSC recommended that the New York State
Higher Education Services Corporation, the state agency
responsible for disbursing TAP funds, recover these disallowed
funds plus applicable interest.
By letter dated November 19, 1996, the New York State Higher
Education Services Corporation demanded from Interboro a
refund of the full amount of the recommended disallowance plus
applicable interest at the rate of 9% per annum, from the date
of the letter.
On or about December 12, 1996, Interboro commenced a civil
action in the United States District Court for the Northern
District of New York against several state officials,
including H. Carl McCall, the Comptroller of the State of New
York, Robert J. Maurer, the President of HESC, and
F-57
<PAGE>
INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Cont.)
Donald J. Nolan, the former Deputy Commissioner of Higher and
Professional Education within the State Education Department,
seeking, among other things, a permanent injunction and
declaratory judgement against the defendants in their
individual and official capacities. Interboro alleges claims
under 42 U.S.C 1983, et. seq. premised upon defendants'
selective enforcement of the applicable laws and regulations
in violation of the Equal Protection Clause of the Fourteenth
Amendment of the United States Constitution.
On or about March 13, 1997, Interboro commenced a second
proceeding in the Supreme Court of the State of New York,
Albany County, under Article 78 of the Civil Practice Law and
Rules alleging, among other things, that the actions of OSC,
HESC and the State Education Department are arbitrary and
capricious. In this special proceeding, Interboro seeks, among
other things, to recover all TAP and STAP funds withheld by
HESC and OSC as well as incidental and consequential damages
resulting from defendants' action.
By letter agreement dated March 7, 1997 Interboro entered into
an interim repayment agreement with HESC which permits HESC to
withhold a portion of the TAP and STAP awards prospectively
awarded to Interboro's eligible students in consideration for
restoring Interboro to full pre-payment status as an
institution eligible to receive student assistance
prospectively. Without prejudice to its right to continue the
above referenced litigation through a judicial determination,
Interboro agreed to pay the following sums:
$500,000 Upon execution of the agreement
$400,000 December 10, 1997
$300,000 April 10, 1998
$600,000 December 10, 1998
This agreement expressly provides that any sums withheld by
HESC shall be refunded to Interboro with interest in the event
and to the extent that defendants, actions are deemed to be
unlawful.
By Decision and Order dated October 8, 1997, the district
court granted the defendants' motion for summary judgment and
dismissed the Federal Action. Interboro filed a timely appeal
of the district court's decision which was fully briefed,
argued and submitted to the United States Court of Appeals for
the Second Circuit on April 20, 1998.
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INTERBORO INSTITUTE, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997
NOTE 11- COMMITMENTS AND CONTINGENCIES (Cont.)
On or about October 16, 1997, the New York State Supreme
Court, Albany County, entered an order dismissing the State
Action. Thereafter, Interboro filed a timely Notice of Appeal
and is currently in the process of perfecting that appeal to
the Supreme Court of the State of New York, Appellate Division
for the Third Department.
Legal counsel for the Company states, "Though we believe that
Interboro stands a reasonable chance of success on the appeals
from the district court and the Supreme Court, it is probable
that all or a portion of the monetary disallowances will be
sustained on appeal."
Should all the monetary disallowances be sustained, Interboro
would be obligated to pay the $ 4,796,132 disallowance plus
applicable accrued interest at 9% per annum from November 19,
1996. As of December 31, 1997, the Company has paid $ 901,373
and has paid an additional $300,000 on April 10, 1998.
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