<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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) March 31, 1997
EDUCATIONAL MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 000-21567 65-0038445
- ---------------------------- ----------------------- ------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
1327 Northmeadow Parkway, Suite 132, Roswell, Georgia 30076
- ----------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 770-475-9930
-------------------
- -------------------------------------------------------------
(Former name or former address, if changed since last report)
1
<PAGE> 2
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS
a) Financial Statements of Business Acquired.
The audited combined financial statements of
Educational Management, Inc. and Wikert and Rhude,
general partnership, as of and for the years ended
December 31, 1996 and 1995 are filed as part of this
Current Report on Form 8-K/A.
In addition, the unaudited combined statements of
income and cash flows of Educational Management, Inc.
and Wikert and Rhude, general partnership, for the
nine months ended December 31, 1996 and 1995
are filed as part of this Current Report on Form
8-K/A.
b) Pro Forma Financial Information
The unaudited pro forma condensed consolidated
balance sheet of Educational Medical, Inc. as of
December 31, 1996 and the pro forma condensed
consolidated statements of income of Educational
Medical, Inc. for the year ended March 31, 1996 and
the nine months ended December 31, 1996 are filed as
a part of this Current Report on Form 8-K/A.
c) Exhibits
10.1 Agreement and Plan of Reorganization dated
as of March 29, 1997, by and among the Company,
Acquisition and Management with attached Exhibit A -
Plan of Merger; filed as part of the Current Report
on Form 8-K filed on April 14, 1997:
10.2 Escrow Agreement dated as of March 29,
1997 by and among the Company, Acquisition and
Richard O. Wikert, the Lila Rhude Trust, the Scott
L. Rhude Trust, the A. Lauren Rhude Trust, Roger B.
Bojens and Sacks Tierney, P.A. as Escrow Agent; filed
as part of the Current Report on Form 8-K filed on
April 14, 1997
23.1 Consent of Independent Auditors.
(filed herein)
2
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
Board of Directors
Educational Management, Inc.
and
Partners
Wikert and Rhude, General Partnership
Lincoln, NE 68501
We have audited the accompanying combined balance sheets of Educational
Management, Inc. and Wikert and Rhude, general partnership, (collectively, the
"Company") as of December 31, 1996 and 1995 and the related combined statements
of operations, owners' equity, and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Educational Management, Inc. and Wikert and Rhude, general partnership, as of
December 31, 1996 and 1995, and the results of their combined operations and
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Winther, Stave & Co. LLP
Spencer, Iowa
April 18, 1997
<PAGE> 4
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ..................................................... $ 295,110 $ 695,331
Accounts receivable, less allowance for doubtful accounts of
$176,047 and $148,222, respectively .......................................... 241,142 286,294
Prepaid expenses .............................................................. 17,095 11,101
Other receivables ............................................................. 18,592 778,848
Notes receivable from owners .................................................. 213,500 --
Other current assets .......................................................... 35,799 5,376
------------ -----------
TOTAL CURRENT ASSETS 821,238 1,776,950
------------ -----------
PROPERTY AND EQUIPMENT:
Buildings ..................................................................... 1,638,638 2,256,305
Leasehold improvements ........................................................ 208,925 262,631
Furniture, fixtures, and equipment ............................................ 1,423,217 1,660,948
------------ -----------
TOTAL PROPERTY AND EQUIPMENT ............................................ 3,270,780 4,179,884
Less accumulated depreciation ................................................. (1,407,051) (1,574,694)
------------ -----------
PROPERTY AND EQUIPMENT - NET 1,863,729 2,605,190
------------ -----------
OTHER ASSETS ..................................................................... 38,031 3,066
------------ -----------
TOTAL ASSETS $ 2,722,998 $ 4,385,206
============ ===========
</TABLE>
See Notes to Combined Financial Statements
<PAGE> 5
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
COMBINED BALANCE SHEETS - Continued
DECEMBER 31, 1995 AND 1996
LIABILITIES AND OWNERS' EQUITY
<TABLE>
<CAPTION>
1995 1996
---- ----
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable .............................................................. $ 345,824 $ 237,807
Accrued expenses .............................................................. 63,215 75,443
Due to students ............................................................... 241,862 637,866
Teach out liability ........................................................... 40,700 25,900
Refunds payable ............................................................... 409,600 474,800
Notes payable and current portion of long-term debt ........................... 11,371 1,716,031
Note payable to related party ................................................. -- 125,000
---------- ----------
TOTAL CURRENT LIABILITIES 1,112,572 3,292,847
LONG-TERM LIABILITIES:
Notes payable - net of current portion ........................................ 590,328 --
---------- ----------
TOTAL LIABILITIES 1,702,900 3,292,847
---------- ----------
OWNERS' EQUITY:
Common stock, $.01 par, 1,000,000 shares authorized,
500,000 shares issued and outstanding ....................................... 5,000 5,000
Additional paid-in capital .................................................... 45,000 45,000
Retained earnings ............................................................. 111,295 93,870
Partners' capital accounts .................................................... 858,803 948,489
---------- ----------
TOTAL OWNERS' EQUITY 1,020,098 1,092,359
---------- ----------
TOTAL LIABILITIES AND OWNERS' EQUITY $2,722,998 $4,385,206
========== ==========
</TABLE>
See Notes to Combined Financial Statements
<PAGE> 6
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
COMBINED STATEMENTS OF OWNER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
Additional Partners'
Common Paid-in Retained Capital
Stock Capital Earnings Accounts Total
------ --------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ........... $5,000 $45,000 $ 332,618 $ 830,409 $1,213,027
Distributions to owners ................ (464,474) (285,000) (749,474)
Net income ............................. 243,151 313,394 556,545
------ ------- --------- --------- ----------
Balance at December 31, 1995 5,000 45,000 111,295 858,803 1,020,098
Distributions to owners ................ (668,921) (257,000) (925,921)
Net income ............................. 651,496 346,686 998,182
------ ------ --------- --------- ----------
BALANCE DECEMBER 31, 1996............... $5,000 $45,000 $ 93,870 $ 948,489 $1,092,359
====== ======= ========= ========= ==========
</TABLE>
See Notes to Combined Financial Statements
<PAGE> 7
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
NET REVENUES ..................................................................... $4,915,897 $5,777,001
---------- ----------
SCHOOL OPERATING COSTS:
Cost of education ............................................................. 1,632,832 1,801,405
Facilities .................................................................... 604,998 640,701
Selling and promotional ....................................................... 930,685 1,002,213
Provision for losses on accounts receivable ................................... 234,486 164,972
General and administrative expenses ........................................... 951,160 1,097,607
---------- ----------
TOTAL SCHOOL OPERATING COSTS 4,354,161 4,706,898
---------- ----------
INCOME FROM OPERATIONS 561,736 1,070,103
INTEREST EXPENSE (net of interest income of
$9,638 and $23,327, respectively) ............................................... 5,191 71,921
---------- ----------
NET INCOME $ 556,545 $ 998,182
=========== ==========
</TABLE>
See Notes to Combined Financial Statements
<PAGE> 8
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................... $ 556,545 $ 998,182
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................................................ 170,913 167,643
Gain on disposition of property and equipment ............................... (35,008)
Other ....................................................................... 1,440 34,965
Accrued interest on notes receivable from owners ............................ (13,500)
(Increase) decrease in:
Accounts receivable - net ................................................. (48,637) (45,152)
Other receivables ......................................................... 75,164 (760,256)
Prepaid expenses .......................................................... 12,736 5,994
Other current assets ...................................................... (24,309) 30,423
Increase (decrease) in:
Accounts payable .......................................................... 175,745 (108,017)
Accrued expenses .......................................................... 26,966 12,228
Due to students ........................................................... 163,625 396,004
Teach-out liability ....................................................... 40,700 (14,800)
Unearned tuition - net .................................................... (456,856)
Refunds payable ........................................................... 197,100 65,200
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 842,624 782,414
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................................ (481,073) (909,104)
Proceeds from sale of property and equipment .................................. 22,410
Allocation from reserved cash ................................................. 150,000
Other ......................................................................... 4,443
--------- ----------
NET CASH USED BY INVESTING ACTIVITIES (304,220) (909,104)
--------- ----------
</TABLE>
<PAGE> 9
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS - Continued
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term note payable ......................................... $ 15,000 $ 80,000
Repayment of short-term note payable .......................................... (30,485) (74,420)
Proceeds from long-term note payable .......................................... 390,000 1,376,000
Repayment of long-term note payable ........................................... (121,807) (267,248)
Proceeds from note payable to related party.................................... -- 125,000
Distributions to owners ....................................................... (749,474) (712,421)
---------- -----------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (496,766) 526,911
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 41,638 400,221
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................... 253,472 295,110
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 295,110 $ 695,331
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ...................................................................... $ 21,504 $ 86,716
========== ===========
Income taxes .................................................................. $ 0 $ 0
========== ===========
NONCASH INVESTING AND FINANCING TRANSACTION:
Notes receivable from owners distributed to
the owners ...................................................................... $ 0 $ 213,500
=========== ==========
</TABLE>
See Notes to Combined Financial Statements
<PAGE> 10
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
Educational Management, Inc. operates post-secondary schools offering
business and technical programs in Nebraska through schools in Lincoln
and Omaha and grants credit under standard terms without collateral to
students substantially all of whom are residents of Nebraska and western
Iowa. Wikert and Rhude (the Partnership) owns and leases school buildings
and dormitories to Educational Management, Inc. The Partnership's three
partners also own 92% of the common stock of Educational Management, Inc.
The accompanying combined financial statements include the financial
position, results of operations and cash flows of Educational Management,
Inc. and the Partnership (collectively, the "Company").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The combined financial statements include Educational Management Inc. and
Wikert and Rhude. All significant intercompany balances and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all money market accounts, cash on deposit, and
cash on hand to be cash and cash equivalents for purposes of the combined
statements of cash flows. At December 31, 1996, the Company's cash
deposits totaled $649,000 in excess of federally insured amounts.
ACCOUNTS RECEIVABLE, DUE TO STUDENTS, AND UNEARNED TUITION
Generally, program enrollment generates billings of program tuitions
through the current academic term. Such tuitions, when earned, become
receivable to the extent uncollected. At December 31, 1995 and 1996, the
current term had ended and all tuitions were earned and, to the extent
unpaid, represent receivables to the Company; therefore no unearned
tuition was recorded at year end. In addition, some students have prepaid
tuition for the upcoming term or are due refunds attributable to
withdrawal from programs of study. These balances are recorded as due to
students.
ADVERTISING COSTS
Advertising costs are charged to expenses as incurred.
OTHER RECEIVABLES
Other receivables include amounts due to the Company from Federal and
State student financial aid programs for grants and loans awarded to
students.
8
<PAGE> 11
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets
which range from five to thirty-nine years.
LONG-LIVED ASSETS
In accordance with Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"), the Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts of those assets.
REVENUE RECOGNITION
Tuition revenue is recognized pro rata over the current academic term of
the student's program and is presented net of refunds to students.
ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and footnotes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, receivables,
accounts payable, and notes payable. The carrying amounts of these items
reported in the combined balance sheets approximate fair values due to
the short maturity of those instruments.
INCOME TAXES
Educational Management, Inc., with consent of its stockholders, has
elected to have its income taxed under the provisions of Subchapter S of
the Internal Revenue Code which provides that, in lieu of corporate
income taxes, the stockholders are taxed on their proportionate share of
the company's taxable income. For income tax purposes, the Partnership's
net income is allocated to the partners based upon their ownership
interest. The partners are taxed individually on their proportionate
share of the Partnership's taxable income. Therefore, no provision or
liability for income taxes is reflected in these combined financial
statements.
9
<PAGE> 12
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
3. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
8%bank revolving term loan agreement of $1,630,000 ($840,000 at December
31, 1995) with interest payable monthly, principal payable in annual
amounts to reduce the outstanding balance to predetermined amounts
through June 30, 2001. The agreement is secured by substantially all
assets of the Company. If the Partnership defaults on the loan, the
partners of the Partnership are responsible for the loan repayments
according to their ownership percentages in
the Partnership. ........................................................ $590,328 $ 1,199,080
Note payable to bank, unsecured, monthly payments of $3,500
plus interest at 8.25%, due May 1997. ................................... 16,951
Note payable to bank, unsecured, interest at 8.25%, due in full
January 1998. ........................................................... 500,000
Note payable to bank, unsecured, monthly payments of $1,315
plus interest at 8.75%, due September 1996. ............................. $ 11,371
-------- -----------
TOTAL LONG-TERM DEBT 601,699 1,716,031
Less current portion of long-term debt .................................... (11,371) (1,716,031)
-------- -----------
LONG-TERM DEBT - NET OF CURRENT PORTION........................... $590,328 $ -0-
======== ===========
</TABLE>
In conjunction with the merger agreement described in Note 8, the
long-term debt at December 31, 1996 was paid off during February and
March 1997 and, accordingly, has been classified as current as of
December 31, 1996.
4. NOTE PAYABLE TO RELATED PARTY
Chaparral Career College is owned, in part, by an owner of the Company.
Note payable to related party as of December 31, 1995 and 1996 consisted
of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Note payable to Chaparral Career College, unsecured, bearing interest at
8.25% for the first 12 months thereafter adjusted
annually to the National Prime Rate, due in full February 1998. -- $125,000
======== ========
</TABLE>
The note was paid off in January 1997. Accordingly, it has been
classified as current as of December 31, 1996.
Interest expense related to this note was $57 for the year ended December
31, 1996.
<PAGE> 13
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
5. LEASES
The Company leases real estate, buildings, and a vehicle under operating
lease agreements expiring through 2000. Rent expense totaled $118,096 and
$84,711, including rent expense to a related party of $14,970 and
$15,940, for the years ended December 31, 1995 and 1996, respectively.
Future minimum lease payments under non-cancelable operating leases at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Related Party Other Total
---- ------------- ----- -----
<S> <C> <C> <C> <C>
1997 $ 6,028 $4,574 $10,602
1998 6,028 -- 6,028
1999 6,028 -- 6,028
2000 1,507 -- 1,507
-------- ------ -------
TOTAL FUTURE
MINIMUM RENTALS $ 19,591 $4,574 $24,165
======== ====== =======
</TABLE>
6. EMPLOYEE RETIREMENT PLAN
The Company has established a qualified 401(k) employee retirement plan
covering substantially all of its full-time employees. The Plan allows
eligible employees to defer a portion of their salary and the Company
makes a matching contribution equal to the employees' deferral of up to
five percent (5%) of the employees' compensation. In addition, at the
discretion of the Board of Directors, the Company may make a basic
employer contribution. Company contributions to the plan during the years
ended December 31, 1995 and 1996 were $42,386 and $55,509, respectively.
11
<PAGE> 14
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
7. REGULATORY MATTERS
The Company derives a substantial portion of its revenues from financial
aid received by its students under Title IV programs ("Title IV
Programs") administered by the United States Department of Education
pursuant to the federal Higher Education Act of 1965 ("HEA"), as amended.
In order to continue to participate in Title IV Programs, the Company and
its schools must comply with complex standards set forth in the HEA and
the regulations promulgated thereunder (the "Regulations"). Among other
things, these Regulations require the Company's schools to exercise due
diligence in approving and disbursing funds and servicing loans, limit
the proportion of cash receipts by the Company's schools derived from
Title IV Programs to no more than 85% of the total revenue derived from
the school's students in its Title IV eligible educational programs, and
to exercise financial responsibility related to maintaining certain
financial covenants (including cash reserve for refunds, an "acid test"
ratio, a positive tangible net worth test and limitations on the amount
of operating losses in comparison to tangible net worth, as defined). The
Company's two schools participate in Title IV programs.
The failure of any of the Company's schools to comply with the
requirements of the HEA or the Regulations could result in the
restriction or loss by the Company or such school of its ability to
participate in Title IV Programs. If the Department of Education
("Department") determines that any of the Company's schools is not
financially responsible, the Department may require that the Company or
such school post an irrevocable letter of credit in an amount equal to
not less than one-half of Title IV Program funds received by the relevant
school during the last complete award year or, at the Department's
discretion, require some other less onerous demonstration of financial
responsibility. One-half of the aggregate Title IV funds received by the
Company's schools in the most recent award year totaled approximately
$2.0 million.
For the years ended December 31, 1995 and 1996, a school is required to
submit to the Secretary of the Department an irrevocable letter of credit
payable to the Secretary in an amount equal to 25% of the total dollar
amount of Title IV HEA refunds paid by the school in the previous fiscal
year. Regulations provide for an exception to this requirement based on
the institution's previous refund payment performance. At December 31,
1995, management believed the Company qualified for the exception and
therefore did not submit an irrevocable letter of credit. During 1996,
the Company posted two irrevocable letters of credit totaling $145,000
which are payable to the Secretary of the Department and expire on
January 31, 1998.
Many of the financial responsibility standards are new, difficult to
interpret, and subject to the interpretation of the Department for
implementation. Further, the process for resolving lack of compliance
with such Regulations is also subject to interpretation and, in some
cases, negotiation with the Department.
12
<PAGE> 15
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
8. SUBSEQUENT EVENTS
Effective March 29, 1997, Educational Management, Inc. agreed to merge
into Educational Medical, Inc., an unrelated publicly-held
company. Under the merger agreement, the stockholders of
Educational Management, Inc. exchanged their stock for 761,263 shares
of Educational Medical, Inc.'s common stock and the repayment of
approximately $1,100,000 in mortgage debt. Prior to the merger,
Educational Management, Inc. acquired all of the interests of the
Partnership, hence becoming the owner of the assets and responsible for
the liabilities of the Partnership.
13
<PAGE> 16
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
UNAUDITED COMBINED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Net revenues $ 3,586,513 $ 4,461,794
School operating costs:
Cost of education and facilities 1,512,117 1,750,523
Selling and promotional 716,723 793,183
General and administrative expenses 838,135 810,982
Provisions for losses on account receivable 173,548 150,364
------------ ------------
Income from operations 345,990 956,742
Interest (income) expense (2,323) 57,622
------------ ------------
Income before income taxes 348,313 899,119
Provision for income taxes - -
============ ------------
Net income $ 348,313 $ 899,120
============ ============
</TABLE>
3
<PAGE> 17
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 348,313 $ 899,120
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................. 119,484 126,724
Gain on disposition of property and equipment (35,008) -
Other......................................................... 1,080 34,605
Accrued interest on notes receivable from owners.............. (9,186) -
(Increase) decrease in:
Accounts receivable - net.................................... 62,703 (77,021)
Other receivables............................................ 143,266 (778,715)
Prepaid expenses............................................. 42,822 62,793
Other current assets......................................... (27,399) 23,373
Increase (decrease) in:
Accounts payable............................................. 279,692 148,158
Accrued expenses............................................. (35,933) (48,620)
Due to students and unearned tuition-net..................... (368,143) 83,120
Teach-out liability.......................................... 40,700 (14,800)
Refunds payable.............................................. 96,168 65,200
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 658,559 523,937
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................. (481,118)
Proceeds from sale of property and equipment................... 22,410 (845,376)
Other.......................................................... 4,443 -
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (454,265) (845,376)
--------- ---------
</TABLE>
4
<PAGE> 18
EDUCATIONAL MANAGEMENT, INC. AND
WIKERT AND RHUDE, GENERAL PARTNERSHIP
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS - continued
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
Decemer 31, 1995 December 31, 1996
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net proceeds from short-term note payable.................... $ (23,002) $ 10,552
Net proceeds from long-term note payable..................... 367,114 1,084,029
Proceeds from note payable to related party.................. 125,000
Distribution to owners....................................... (456,244) (378,473)
NET CASH PROVIDED (USED) ------------ -------------
BY FINANCING ACTIVITIES (112,132) 841,108
------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................ 92,162 519,669
CASH AND CASH EQUIVALENT AT BEGINNING OF YEAR 202,948 175,662
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 295,110 $ 695,331
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest..................................................... $ 4,349 $ 79,145
============ =============
Income taxes................................................. $ - -
============ =============
NONCASH INVESTING AND FINANCING TRANSACTION:
Notes receivable from owners distributed to
the owners...................................................... $ - $ 213,500
============ =============
</TABLE>
5
<PAGE> 19
Item 7 (b). Pro Forma Financial Statements
The following unaudited pro forma condensed consolidated financial statements of
Educational Medical, Inc. ("EMI") and Educational Management, Inc. and Wikert
and Rhude, general partnership, (the latter two collectively, referred to herein
as "Nebraska") are derived from, and should be read in conjunction with the
audited and unaudited combined financial statements of Nebraska included in
item 7(a) herein and the audited consolidated financial statements of EMI as
previously filed on Form S-1 No. 333-09777 for the year ended March 31, 1996
with the Securities and Exchange Commission and the unaudited condensed
consolidated financial statements of EMI as previously filed on Form 10-Q for
the quarter ended December 31, 1996. The pro forma condensed consolidated
financial statements do not purport to be indicative of the results of
operations or financial position which would have actually been reported had
the acquisition been consummated on the dates indicated, or which may be
reported in the future.
EMI intends to account for the acquisition as a pooling of interests in
accordance with Accounting Principles Board Opinion No. 16. Nebraska's fiscal
year-end was December 31.
Prior to the combination, Nebraska elected to be taxed as a Subchapter
S-Corporation and included no federal taxes in its financial statements since
its income was taxed at the shareholder level. Nebraska made regular cash
distributions to its shareholders sufficient to meet their tax liabilities. Upon
termination of S-Corporation status on March 31, 1997, the undistributed
S-Corporation retained earnings were reclassified to additional paid-in capital.
Additionally, Nebraska established deferred income taxes for the cumulative
differences in the timing of reporting certain items for financial statement and
income tax purposes. These deferred income taxes related primarily to the
basis of certain assets, depreciation, bad debt deductions, and other accrued
expenses.
The unaudited pro forma condensed consolidated balance sheet reflects
adjustments as if the acquisition had been consummated on December 31, 1996.
The combined balance sheet of Nebraska used in the pro forma balance sheet is
as of December 31, 1996.
The pro forma statements of income reflect adjustments as if the acquisition had
been consummated at the beginning of the period of each statement (i.e., April
1, 1995 for the twelve-month statement of income and April 1, 1996 for the
nine-month statement of income.) The statement of income of Nebraska for the
year ended December 31, 1995 was used in the unaudited pro forma condensed
consolidated statement of income for the year ended March 31, 1996. The
statement of income of Nebraska for the nine month period ended December 31,
1996 was used in the unaudited pro forma condensed consolidated statement of
income for the nine-month period ended December 31, 1996.
6
<PAGE> 20
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
December 31, 1996
<TABLE>
<CAPTION>
Historical
------------------------------------- Pro Forma Educational
Educational Acquisition Medical, Inc.
Medical, Inc. Nebraska Adjustments Pro Forma
-------------------------------------------------------------------------------
(Dollars and shares in thousands)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,973 $ 695 $ (1,716) (a) $ 14,952
Restricted cash 633 - 633
Trade accounts receivable, net 4,920 1,065 5,985
Prepaid expenses 1,198 17 1,215
----------- ---------- --------- -----------
Total current assets 22,724 1,777 (1,716) 22,785
Property and equipment, net 4,764 2,605 7,369
Deferred debt issuance costs, net 54 - 54
Covenants not to compete, net 880 - 880
Deferred income taxes - - 696 (j) 696
Goodwill and other intangible assets, net 10,305 - 10,305
Other assets 229 3 232
----------- ---------- --------- -----------
Total assets $ 38,956 $ 4,385 $ (1,020) $ 42,321
=========== ========== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33 $ 238 $ $ 271
Accrued payroll compensation 789 - 789
Accrued income taxes 16 - 16
Accrued expenses 652 576 1,228
Deferred tuition income 5,072 638 5,710
Current portion of long-term debt 927 1,841 (1,716) (a) 1,052
----------- ---------- --------- -----------
Total current liabilities 7,489 3,293 (1,716) 9,066
Long-term debt, less current portion 4,812 - 4,812
Other liabilities 1,163 - 1,163
----------- ---------- --------- -----------
Total liabilities 13,464 3,293 (1,716) 15,041
Stockholders' equity
Common stock, $.01 par value 66 5 7 (b) 73
(5) (f)
Additional paid-in capital on common 28,689 45 (7) (30,470)
stock 5 (f)
696 (j)
1,042 (i)
Retained earnings (accumulated deficit) (3,228) 1,042 (1,042) (i) (3,228)
Less treasury stock, at cost (35) - - (35)
----------- ---------- --------- -----------
Total stockholders' equity 25,492 1,092 696 (j) 27,280
----------- ---------- --------- -----------
Total liabilities and
stockholders' equity $ 38,956 $ 4,385 $ (1,020) $ 42,321
=========== ========== ========= ===========
</TABLE>
7
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Year Ended March 31, 1996
<TABLE>
<CAPTION>
Historical
------------------ ------------------- Pro Forma Educational
Educational Acquisition Medical, Inc.
Medical, Inc. Nebraska (c) Adjustments Pro Forma
-----------------------------------------------------------------------------------
(Dollars except per share data and shares in thousands)
<S> <C> <C> <C> <C>
Net revenues $ 38,652 $ 4,915 $ $ 43,567
Cost of education and facilities 17,639 2,238 19,877
Selling and promotional expenses 5,569 931 6,500
Administrative expenses 11,110 1,184 (301) (h) 11,993
Amortization of goodwill and intangibles 883 - 883
---------- ----------- ---------- ----------
Income from operations
before other expenses 3,451 562 301 4,314
Other expenses 1,929 - - 1,929
---------- ----------- ---------- ----------
Income from operations 1,522 562 301 2,385
Interest expense (income), net 811 5 (32) (g) 784
---------- ----------- ---------- ----------
Income before income taxes 711 557 333 1,601
Provision for income taxes 632 - 356 (e) 988
---------- ----------- ---------- ----------
Net income $ 79 $ 557 $ (23) $ 613
========== =========== ========== ==========
Net income per share $ .02 $ .12 (k)
========== ==========
Weighted average number of shares used
in computing net income
per share 4,426 5,149 (b)
========== ==========
See accompanying pro forma adjustments.
</TABLE>
8
<PAGE> 22
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Nine Months Ended December 31, 1996
<TABLE>
<CAPTION>
Historical
------------------ ------------------- Pro Forma Educational
Educational Acquisition Medical, Inc.
Medical, Inc. Nebraska (d) Adjustments Pro Forma
-----------------------------------------------------------------------------------
(Dollars , except per share data, and shares in thousands)
<S> <C> <C> <C> <C>
Net revenues $ 31,302 $ 4,462 $ $ 35,764
Cost of education and facilities 15,266 1,751 17,017
Selling and promotional expenses 4,623 793 5,416
Administrative expenses 8,886 961 (259) (h) 9,588
Amortization of goodwill and intangibles 632 - 632
---------- ----------- ---------- ----------
Income from operations 1,895 957 259 3,111
Interest expense (income), net 315 58 (60) (g) 313
---------- ----------- ---------- ----------
Income before income taxes 1,580 899 319 2,798
Provision for income taxes 569 - 487 (e) 1,056
---------- ----------- ---------- ----------
Net income $ 1,011 $ 899 $ (168) $ 1,742
========== =========== ========== ==========
Net income per share $ .19 $ .29 (b)
========== ==========
Weighted average number of shares used
in computing net income per share
5,291 6,014 (b)
========== ==========
</TABLE>
See accompanying pro forma adjustments.
9
<PAGE> 23
Pro Forma Adjustments:
(a) To reflect payoff of $1,100,000 mortgage debt of Nebraska at the date
of acquisition (balance of $1,716,000 at December 31, 1996).
(b) To reflect 761,263 shares issued to consummate the acquisition, less
37,810 shares to be returned from escrow due to resolution of certain
contingencies related to the acquisition.
(c) Reflects Nebraska's results of operations for the year ended December
31, 1995.
(d) Reflects Nebraska's results of operations for the nine months ended
December 31, 1996. The Company will also recognize a benefit for
income taxes related to reducing its deferred income tax assset
valuation allowance. Such benefit has not been rewarded in the
unaudited pro forma condensed consolidated statements of income.
(e) Nebraska operated as a subchapter S Corporation under the Internal
Revenue Code prior to the acquisition and hence incurred no income
tax expense. This adjustment considers the effect of Nebraska's
income and the pro forma adjustments. The Company will also recognize
a benefit for income taxes related to reducing its deferrred income
tax asset valuation allowance. Such benefit has not been recorded in
the unaudited pro forma condensed consolidated statements of income.
(f) To eliminate Nebraska's common stock and additional paid in capital.
(g) To reflect interest expense reduction due to the payoff of
approximately $1,100,000 of mortgage debt at the acquisition date
(balance of $1,716,000 at December 31, 1996).
(h) To reflect management salaries and related costs which ceased upon the
acquisition.
(i) To reclassify Nebraska's undistributed Corporation earnings to APIC.
(j) To reflect Nebraska's deferred tax assets at March 31, 1997, when the
Subchapter S election was terminated.
(k) Net income per share was computed by dividing net income by the
weighted average number of shares of common stock outstanding after
giving effect as of the beginning of the period to (i) the automatic
conversion of all of the outstanding shares of convertible preferred
stock into 1,705,082 shares of common stock, (ii) the issuance of
141,667 shares of common stock upon exercise of certain outstanding
warrants and (iii) the issuance of 933,333 shares of common stock
upon the cashless exercise of outstanding warrants to purchase
1,333,333 shares of common stock, (iv) cheap stock as defined below,
and the 723,453 shares issued to consummate the Nebraska acquisition.
Net income per share was computed using the requirements of Accounting
Principles Board Opinion No. 15 and SEC Staff Accounting Bulletin
No. 83.
Pursuant to SEC Staff Account Bulletin No. 83, common stock and common
stock equivalents issued at prices equal to or below the initial
public price offering per share ("cheap stock") during the
twelve-month period immediately preceding the initial filing date of
the Company's registration statement for its initial public offering
(August 8, 1996) have been included in earnings per share as if
outstanding for all periods presented (using the treasury stock method
at the offering price).
In connection with the Nebraska Acquisition, approximately $391,000 of
merger costs and expenses will be incurred and expensed in the quarter
ended March 31, 1997. The expenses consists of legal and accounting
fees. These expenses have not been included in the unaudited pro forma
condensed consolidated financial statements.
10
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: June 16, 1997 EDUCATIONAL MEDICAL, INC.
By: /s/ Vince Pisano
--------------------------------------------
Vince Pisano
Chief Financial Officer, Principal Financial
Officer and Principal Accounting Officer
11
<PAGE> 25
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBIT PAGE NO.
-----------------------------------------------------------------------
10.1 Agreement and Plan of Reorganization dated as
of March 29, 1997, by and among the Company,
Acquisition and Management with attached
Exhibit A - Plan of Merger; filed as part of
the Current Report on Form 8-K filed on April
14, 1997
10.2 Escrow Agreement dated as of March 29, 1997 by
and among the Company, Acquisition and Richard O.
Wikert, the Lila Rhude Trust, the Scott L. Rhude
Trust, the A. Lauren Rhude Trust, Roger B. Bojens
and Sacks Tierney, P.A. as Escrow Agent. Filed as
part of the Current Report on Form 8-K filed on April
14, 1997.
23.1 Consent of Winther, Stave & Co., LLP
12
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated April 18, 1997 with respect to
the audited combined financial statements of Educational Management, Inc. and
Wikert and Rhude, general partnership, as of and for the years ended December
31, 1996 and 1995 in the Form 8-K/A dated March 31, 1997 of
Educational Medical, Inc.
/s/ Winther, Stave & Co., LLP
June 16, 1997
13
