<PAGE> 1
United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
(MARK ONE)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From __________ to __________
Commission file number 000-21567
---------------
Educational Medical, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0038445
- ---------------------------------------------- -------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1327 Northmeadow Parkway, Suite 132
Roswell, GA 30076
- ---------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(770) 475-9930
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes No
--- ---
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. Common Stock, $.01 Par Value,
7,369,766 shares as of February 13, 1998.
1
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EDUCATIONAL MEDICAL, INC.
FORM 10-Q
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets-December 31, 1997
(unaudited) - and March 31, 1997
Condensed consolidated statements of income (unaudited) - Three
months ended December 31, 1997 and 1996; nine months ended
December 31, 1997 and 1996
Condensed consolidated statements of cash flows (unaudited) -
Nine months ended December 31, 1997 and 1996
Notes to condensed consolidated financial statements (unaudited) -
December 31, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
The following exhibits are included herein:
27.1* Restated Financial Data Schedule - December 31, 1997 (for SEC use only)
27.2* Restated Financial Data Schedule - September 30, 1997 (for SEC use
only)
27.3* Restated Financial Data Schedule - June 30, 1997 (for SEC use only)
27.4* Restated Financial Data Schedule - March 31, 1997 (for SEC use only)
27.5* Restated Financial Data Schedule - December 31, 1996 (for SEC use only)
* Restated per SEC Regulation S-K, Item 601, to conform to SFAS No. 128
and SAB 98.
2
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EDUCATIONAL MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,303,194 $14,047,889
Trade accounts receivable, net 7,816,598 5,238,742
Income taxes receivable -- 155,542
Prepaid expenses and other current assets 1,521,270 1,149,146
Deferred income tax assets 1,208,669 1,208,669
----------- -----------
Total current assets 19,849,731 21,799,988
Property and equipment, net 8,364,457 7,617,958
Deferred debt issuance costs, net 252,324 297,492
Covenants not to compete, net 900,063 1,082,987
Goodwill and other intangible assets, net 9,529,737 10,152,625
Deferred income tax assets 944,629 944,629
Other assets 176,855 176,855
----------- -----------
Total assets $40,017,796 $42,072,534
=========== ===========
</TABLE>
3
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EDUCATIONAL MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 271,235 $ 820,784
Accrued payroll compensation 1,115,497 858,049
Accrued expenses 458,880 2,486,532
Accrued income taxes 214,038 --
Deferred tuition income 4,454,616 3,184,225
Current portion of long-term debt 599,990 3,964,851
------------ ------------
Total current liabilities 7,114,256 11,314,441
Long-term debt, less current portion 1,951,089 2,163,880
Other liabilities 549,264 394,145
------------ ------------
Total liabilities 9,614,609 13,872,466
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares,
none issued and outstanding -- --
Common stock, $.01 par value - authorized
15,000,000 shares, 7,369,100 and 7,418,100 shares
issued and outstanding at December 31, and March 31,
1997 respectively 73,691 74,181
Additional paid-in capital 30,221,127 30,222,776
Accumulated earnings (deficit) 108,369 (1,996,889)
Less treasury stock, at cost -- (100,000)
------------ ------------
Total stockholders' equity 30,403,187 28,200,068
------------ ------------
Total liabilities and stockholders' equity $ 40,017,796 $ 42,072,534
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
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EDUCATIONAL MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 14,819,829 $ 13,324,406 $ 41,468,515 $ 35,763,629
School operating costs:
Cost of education and facilities 6,345,091 6,055,190 19,348,384 17,016,466
Selling and promotional 2,234,015 2,005,240 6,272,299 5,415,871
General and administrative expenses 3,836,173 3,610,684 11,656,708 9,846,753
Amortization of goodwill and intangibles 312,745 249,018 938,233 631,913
------------ ------------ ------------ ------------
Income from operations 2,091,805 1,404,274 3,252,891 2,852,626
Interest (income) expense, net (88,856) (52,127) (256,082) 372,661
------------ ------------ ------------ ------------
Income before income taxes and extraordinary item 2,180,661 1,456,401 3,508,973 2,479,965
Provision for income taxes 872,275 316,189 1,403,715 568,965
------------ ------------ ------------ ------------
Income before extraordinary item 1,308,386 1,140,212 2,105,258 1,911,000
Extraordinary item - loss on early
extingushment of debt, net of income taxes -- 308,683 -- 308,683
------------ ------------ ------------ ------------
Net income $ 1,308,386 $ 831,529 $ 2,105,258 $ 1,602,317
============ ============ ============ ============
Pro forma income tax data:
Income before income taxes and extraordinary item $ 1,456,401 $ 2,479,965
Provision for income taxes 385,641 611,005
------------ ------------
Income before extraordinary item 1,070,760 1,868,960
Extraordinary item, net of income taxes 308,683 308,683
------------ ------------
Pro forma net income $ 762,077 $ 1,560,277
============ ============
Basic Earnings per Share:
Earnings per Share $ 0.18 -- $ 0.29 --
Pro forma earnings per share -- $ 0.13 -- $ 0.44
Diluted Earnings per Share:
Earnings per Share $ 0.17 -- $ 0.28 --
Pro forma earnings per share -- $ 0.11 -- $ 0.26
Basic weighted average shares outstanding 7,363,260 5,889,651 7,349,612 3,548,225
============ ============ ============ ============
Diluted weighted average shares outstanding 7,585,365 7,022,826 7,582,962 6,041,316
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5
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EDUCATIONAL MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,105,258 $ 1,602,317
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,162,006 1,003,483
Amortization of other intangible assets 938,233 631,913
Extraordinary item, net of income taxes -- 308,683
Provision for losses on accounts receivable 803,414 1,012,430
Amortization of discount on long-term debt -- 72,044
Loss on school closure -- (97,225)
Changes in operating assets and liabilities, net of
assets acquired and liabilities assumed (4,326,375) 3,382,588
------------ ------------
Net cash provided by operating activities 682,536 7,916,233
INVESTING ACTIVITIES:
Net additions to goodwill and intangibles -- (5,781,336)
Purchases of property and equipment, net (1,562,729) (2,640,869)
------------ ------------
Net cash used in investing activities (1,562,729) (8,422,205)
FINANCING ACTIVITIES:
Issuance of common stock 97,861 19,260,000
Proceeds from long-term debt -- 532,295
Principal payments on long-term debt (3,923,424) (4,494,360)
Distribution to previous owners -- (1,023,472)
Increase in deferred debt issue costs (38,939) (286,931)
------------ ------------
Net cash (used in) provided by financing activities (3,864,502) 13,987,532
------------ ------------
(Decrease) increase in cash and cash equivalents (4,744,695) 13,481,560
Cash and cash equivalents at beginning of period 14,047,889 3,819,045
------------ ------------
Cash and cash equivalents at end of period $ 9,303,194 $ 17,300,605
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
6
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EDUCATIONAL MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended December 31,
1997 are not necessarily indicative of the results that may be expected for the
year ending March 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K/A for the fiscal year ended March 31, 1997 filed with the
Securities and Exchange Commission.
The balance sheet at March 31, 1997 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
2. INITIAL PUBLIC OFFERING
On October 28, 1996, the Company completed its Initial Public Offering ("IPO")
of common stock. A total of 2,610,000 shares were sold at $10 per share which
included 2,200,000 shares sold by the Company and 410,000 shares sold by certain
selling stockholders. The net proceeds to the Company were approximately $19.2
million and were partially used to repay $4.8 million in subordinated debt. The
balance of the offering proceeds is being used for general corporate purposes,
including the expansion of its operations through the acquisition of additional
schools.
3. PRO FORMA INCOME TAX DATA
Prior to March 31, 1997, the operations of two Nebraska schools acquired by the
Company in a transaction accounted for as a pooling of interests were conducted
by a Subchapter S Corporation and a partnership and, accordingly, were not
subject to federal or state income taxes. For information purposes, the
Company's prior periods statements of income include a pro forma presentation
that includes a provision for income taxes as if the merged entities had been
taxable corporations for these periods and had filed a consolidated income tax
return with the Company. Such pro forma calculations were based on the income
tax laws and rates in effect during those periods and Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
7
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EDUCATIONAL MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 requires the disclosure of basic earnings per
share, which replaces primary earnings per share, and diluted earnings per
share, which replaces fully diluted earnings per share. While primary earnings
per share is based on the weighted average number of shares of common stock
outstanding plus the dilutive effect of options and other common stock
equivalents, basic earnings per share does not consider any dilution. Diluted
earnings per share is similar to fully diluted earnings per share, which
considers all potentially dilutive securities. SFAS No. 128 became effective
with annual and interim financial statements for periods ending after December
15, 1997. All earnings per share data presented have been restated to conform to
the new standard and with Staff Accounting Bulletin 98.
All earnings per share calculations include 761,263 shares issued on March 31,
1997 to effect the Nebraska Acquisition less shares returned pursuant to the
contingency clause as if outstanding for all periods.
The table below presents the restated computations and required disclosures
under Financial Accounting Standards Board Statement No. 128 and Staff
Accounting Bulletin 98 for the computation of basic and diluted earnings per
share for the three and nine months ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Three Months Nine months Nine months
ended ended ended ended
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item $ 1,308,386 $ 1,140,212 $ 2,105,258 $ 1,911,000
Extraordinary item -- 308,683 -- 308,683
----------- ----------- ----------- -----------
Net income $ 1,308,386 $ 831,529 $ 2,105,258 $ 1,602,317
----------- ----------- ----------- -----------
Pro forma income before extraordinary item $ 1,070,760 $ 1,868,960
Extraordinary item 308,683 308,683
----------- -----------
Pro forma net income $ 762,077 $ 1,560,277
----------- -----------
Denominator:
Denominator for basic earnings per share -
weighted average shares 7,363,260 5,889,651 7,349,612 3,548,225
Effect of dilutive securities:
Convertible preferred stock, options, and warrants 222,105 1,133,175 233,350 2,493,091
----------- ----------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted average shares 7,585,365 7,022,826 7,582,962 6,041,316
----------- ----------- ----------- -----------
Earnings per share - basic
Earnings per share $ 0.18 $ -- $ 0.29 $ --
Pro forma earnings per share before extraordinary item 0.18 -- 0.53
Extraordinary item -- (0.05) -- (0.09)
Pro forma earnings per share -- 0.13 -- 0.44
Earnings per share - diluted
Earnings per share $ 0.17 $ -- $ 0.28 $ --
Pro forma earnings per share before extraordinary item -- 0.15 -- 0.31
Extraordinary item -- (0.04) -- (0.05)
Pro forma earnings per share -- 0.11 -- 0.26
</TABLE>
Options and warrants to purchase 520,000 shares of common stock for the three
and nine month periods ended December 31, 1997 were outstanding but were not
included in the computation of diluted earnings per share because the option's
exercise price was greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
8
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EDUCATIONAL MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
5. ACQUISITIONS
The Company has made the following acquisitions since April 1, 1996:
<TABLE>
<CAPTION>
SCHOOL METHOD OF
DATE ACQUIRED CURRICULUM ACCOUNTING
- ----------------------------- ---------------------------- ---------------------------- -------------------------
<S> <C> <C> <C>
San Antonio College of
Medical and Dental
Assistants -
San Antonio, TX 9/96 Healthcare Purchase
San Antonio College of
Medical and Dental
Assistants -
McAllen, TX 9/96 Healthcare Purchase
Career Centers of Texas -
El Paso, TX 9/96 Healthcare Purchase
Hagerstown Business College -
Hagerstown, MD
12/96 Healthcare/
Business Purchase
Lincoln School of Commerce -
Lincoln, NE
3/97 Healthcare/ Pooling
Business of Interests (1)
Nebraska College of
Business - Omaha, NE 3/97 Healthcare/ Pooling
Business of Interests (1)
</TABLE>
(1) The Nebraska Acquisition was accounted for as a pooling of interests;
therefore, all financial statements presented have been restated to reflect this
acquisition.
See Note 4 to the March 31, 1997 consolidated financial statements included in
the Company's Form 10-K/A for additional information on these acquisitions.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of education and facilities 42.8 45.4 46.6 47.6
Selling and promotional expenses 15.1 15.1 15.1 15.1
General and administrative expenses 25.9 27.1 28.1 27.5
Amortization of goodwill and intangibles 2.1 1.9 2.3 1.8
------- ------- ------- -------
Income from operations 14.1 10.5 7.9 8.0
Interest (income) expense, net (0.6) (0.4) (0.6) 1.0
------- ------- ------- -------
Income before income taxes and
extraordinary item 14.7 10.9 8.5 7.0
Provision for income taxes 5.9 2.4 3.4 1.6
------- ------- ------- -------
Income before extraordinary item 8.8 8.5 5.1 5.4
Extraordinary item -- 2.3 -- 0.9
------- ------- ------- -------
Net income 8.8% 6.2% 5.1% 4.5%
======= ======= ======= =======
OTHER OPERATING DATA:
Number of schools at end of period 18 19 18 19
Number of students at end of period 5,978 5,658 5,978 5,658
Number of new students starts during
the period 1,345 1,225 5,598 4,934
</TABLE>
Three Months Ended December 31, 1997 Compared With Three Months Ended December
31, 1996.
Net Revenue. Net revenue increased by $1,496 or 11.2%, to $14,820 for the three
months ended December 31, 1997 from $13,324 for the three months ended December
31, 1996. Revenue growth was primarily a result of an increase of 8.0% from the
operations of schools included in Company's results for the entire third
quarters ended December 31, 1997 and 1996, with the remainder attributed to the
acquisition in December 1996 of Hagerstown Business College. The number of
students attending the Company's schools at the end of the quarter increased
5.7% to 5,978 from 5,658 at the end of the corresponding quarter in 1996
principally from the results of operations of the Texas and Nebraska schools.
The number of new student starts at the Company's schools during the three
months ended December 31, 1997 increased to 1,345 from 1,225 for the
corresponding three months of the prior year, a 9.8% increase. The Company's San
Diego area schools which previously experienced a decline in new student starts
experienced an increase of 2.9% in new student starts for the current quarter
when compared to the corresponding period of the prior year. Student withdrawal
rates did not change materially compared to withdrawal rates experienced by the
Company during the corresponding three months of the prior year.
10
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Cost of Education and Facilities. Cost of education and facilities
increased by $290, or 4.8%, to $6,345 for the three months ended December 31,
1997 from $6,055 for the three months ended December 31, 1996, principally as a
result of facility expansions, the addition of the Texas and Maryland schools in
fiscal 1997, and costs related to the increased enrollments in the Nebraska
schools. The cost of education and facilities as a percentage of net revenue was
42.8% in 1997 compared with 45.4% in 1996 principally as a result of increased
utilization and efficiency.
Selling and Promotional. Selling and promotional expenses increased by
$229 or 11.4%, to $2,234 for the three months ended December 31, 1997 from
$2,005 for the three months ended December 31, 1996 principally as a result of
the addition of the Texas and Maryland schools. Selling and promotional expenses
as a percentage of net revenue was 15.1% in both 1997 and 1996.
General and Administrative. General and administrative expenses
increased by $225, or 6.2%, to $3,836 for the three months ended December 31,
1997 from $3,611 for the three months ended December 31, 1996. General and
administrative expenses as a percentage of net revenue decreased to 25.9% in
1997 compared with 27.1% in 1997 principally as a result of increased
utilization and efficiency.
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles increased $64 or 25.7%, to $313 for the three months ended December
31, 1997 from $249 for the three months ended December 31, 1996. The increase
was primarily a result of the amortization of goodwill arising from the
acquisition of the Texas and Maryland schools.
Interest Income, Net. Net interest income increased $37 to $89 of
interest income for the three months ended December 31, 1997 from net interest
income of $52 for the three months ended December 31, 1996. The change was
principally a result of lower debt levels and increased interest income during
the three months ended December 31, 1997 due to the investment of a portion of
the proceeds of the Company's Initial Public Offering on October 28, 1996.
Income Taxes. Income taxes increased by $556 to $872 for the three
months ended December 31, 1997 from $316 for the three months ended December 31,
1996 due to the taxation of the Nebraska operations which operated as a
Subchapter S Corporation and partnership during the three months ended December
31, 1996. Income taxes for the three month period ended December 31, 1997 as
compared to pro forma taxes for the corresponding period of 1996 increased due
to the decrease in the deferred income tax asset valuation allowance which in
the 1996 period resulted in a lower income tax rate.
Net Income. Net income increased to $ 1,308 for the three months ended
December 31, 1997 from net income of $832 (pro forma net income of $762) for the
three months ended December 31, 1996 primarily as a result of a 49.0% increase
in income from operations, partially offset by a higher tax rate, and giving
effect to the extraordinary loss which occurred during the three-month period
ended December 31, 1996.
11
<PAGE> 12
Nine months Ended December 31, 1997 Compared With Nine months Ended December 31,
1996.
Net Revenue. Net revenue increased by $5,705 or 16.0%, to $41,469 for the nine
months ended December 31, 1997 from $35,764 for the nine months ended December
31, 1996. Revenue growth was primarily attributable to an increase in earning
students at the Texas, Maryland and Nebraska schools which were acquired in
September 1996, December 1996, and March 1997, respectively. The number of new
student starts at the Company's schools during the nine months ended December
31, 1997 increased to 5,598 from 4,934 for the corresponding nine months of the
prior year, a 13.5% increase. The Company's San Diego area schools experienced a
decline in new student starts of 10.1% for the current nine months as compared
to the corresponding period of the prior year. The Company believes the decline
in new student starts is attributable to several factors in the San Diego area,
including a shift in employer requirements for medical assistants, a continued
decline in military personnel, and an increase in employment opportunities. All
other schools recorded a combined increase of 16.1% in new student starts, with
overall student population largely offsetting the declines discussed above. The
monthly student withdrawal rate decreased to 3.8% when compared to a 4.3% rate
experienced by the Company during the corresponding nine months of the prior
year, due in part to the Company's "Retention Program" in each of its schools.
This program includes commitment counseling prior to acceptance and follow-up
counseling for active students as well as counseling in the event a decision to
withdraw is made by the student.
Cost of Education and Facilities. Cost of education and facilities
increased by $2,332, or 13.7%, to $19,348 for the nine months ended December 31,
1997 from $17,016 for the nine months ended December 31, 1996, principally as a
result of facility expansions, the addition of the Texas and Maryland schools in
fiscal 1997, and costs related to the increased enrollments in the Nebraska
schools. The cost of education and facilities as a percentage of net revenue was
46.6% in 1997 compared with 47.6% in 1996.
Selling and Promotional. Selling and promotional expenses increased by
$856, or 15.8%, to $6,272 for the nine months ended December 31, 1997 from
$5,416 for the nine months ended December 31, 1996 principally as a result of
the addition of the Texas and Maryland schools. Selling and promotional expenses
as a percentage of net revenue was 15.1 % in both 1997 and 1996.
General and Administrative. General and administrative expenses
increased by $1,810 or 18.4%, to $11,657 for the nine months ended December 31,
1997 from $9,847 for the nine months ended December 31, 1996. General and
administrative expenses as a percentage of net revenue increased to 28.1% in
1997 compared with 27.5% in 1996 as a result of the Company's addition of a Vice
President-Operations, regional sales positions, and increased costs at the
Company's home office.
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles increased $306 or 48.4%, to $938 for the nine months ended December
31, 1997 from $632 for the nine months ended December 31, 1996. The increase was
primarily a result of the amortization of goodwill arising from the acquisition
of the Texas and Maryland schools.
12
<PAGE> 13
Interest Income, Net. Net interest income increased $629 to $256 of
interest income for the nine months ended December 31, 1997 from net interest
expense of $373 for the nine months ended December 31, 1997. The change was
principally a result of lower debt levels and increased interest income during
the nine months ended December 31, 1997 due to the investment of a portion of
the proceeds of the Company's Initial Public Offering on October 28, 1996.
Income Taxes. Income taxes increased by $835 to $1,404 for the nine
months ended December 31, 1997 from $569 for the nine months ended December 31,
1996 due to the taxation of the Nebraska operations which operated as a
Subchapter S Corporation and partnership during the nine months ended December
31, 1996. Income taxes for the nine month period ended December 31, 1997 as
compared to pro forma taxes for the corresponding period of 1996 increased due
to the decrease in the deferred income tax asset valuation allowance which in
the 1996 period resulted in a lower income tax rate.
Net Income. Net income increased to $2,105 for the nine months ended
December 31, 1997 from net income of $1,602 (pro forma net income of $1,560) for
the nine months ended December 31, 1996. The increase is primarily a result of a
14.0% increase in income from operations and reduced net interest expense,
partially offset by an increased effective tax rate for the nine months ended
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the nine months ended
December 31, 1997 was $683 compared to $7,916 cash provided by operating
activities for the nine months ended December 31, 1996. Cash provided by
operating activities decreased in the current nine month period due to increased
payments of income taxes, professional fees, and other merger expenses related
to the Nebraska Acquisition, and working capital provided to fund the Nebraska
operations during the change of ownership period when federal funding is
suspended by the Department of Education. The Company's principal source of
funds at December 31, 1997 were cash and cash equivalents of $9,303 and accounts
receivable of $7,817. The $2,578 increase in net trade accounts receivable
experienced for the nine months ended December 31, 1997 was primarily a result
of revenue recognized for the Nebraska operations during the change of ownership
period when federal funding was suspended.
Historically, the Company's investment activity consisted of capital
asset purchases and the purchase of schools. Capital expenditures, excluding
capital leases, totaled $1,562 and $8,422 for the nine months ended December 31,
1997 and 1996, respectively, as a result of purchasing additional equipment,
upgrading and replacing existing equipment such as computers and medical
equipment, for school programs, and expanding facilities at some of the
Company's schools during the current period. Capital expenditures during the
prior period was primarily due to the purchase of schools in Texas and Maryland.
The Company's capital assets consist primarily of classroom and
laboratory equipment (such as computers and medical devices), classroom and
office furniture, and leasehold improvements. All building facilities are
leased, with the exception of the land and building owned by the Company in
Dayton, Ohio, Lincoln and Omaha, Nebraska. The Company plans to continue to
expand current facilities, upgrade and replace equipment, and acquire new
schools. The Company expects that its fiscal 1998 operations and planned capital
expenditures will be funded through cash generated from existing operations.
13
<PAGE> 14
The use of cash in financing activities experienced for the nine month
period ended December 31, 1997 was primarily a result of payments of debt
related to the Texas and Maryland acquisitions.
Cash flow from operations on a long-term basis is highly dependent on
the receipt of funds from Title IV Programs, and presently a majority of the
Company's net revenue is derived from Title IV programs. Disbursement of Title
IV Program funds is governed by federal regulations. For students enrolled in
"non-term" programs, (i.e., not divided into quarters or semesters), payments
are generally made in two equal installments, one in the first 30 days following
the student's first day of class and the second when the student reaches the
midpoint of the program. For students enrolled in term programs (i.e., quarters
or semesters) payments are made at the beginning of each term, with the
exception of the initial disbursement which is made 30 days following the
student's first day of class.
In the routine course of acquiring other schools, the Company must
obtain certain regulatory approvals, typically from state agencies and the U.S.
Department of Education. After change of control, the Department of Education
suspends payments of the school's Title IV funding until the Department
completes a recertification. This recertification process typically takes from
three to nine months. The Company's Title IV funding for its two Nebraska
schools, which was previously suspended, was approved in October 1997.
OTHER MATTERS
The Company is currently in the process of evaluating its computer
software and database to ensure that any modifications required to be year 2000
compliant are made in a timely manner. Management does not expect the financial
impact of such modifications, which are expected to be implemented in 1999, to
be material to the Company's financial position or results of operations in any
given year.
14
<PAGE> 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
ROUTINE PROCEEDINGS
The Company is a party to routine litigation incidental to its business,
including ordinary course employment litigation. Management does not believe
that the resolution of any or all of such routine litigation is likely to have a
material adverse effect on the Company's financial condition or results of
operations.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
27.1* Restated Financial Data Schedule - December 31, 1997 (for SEC use only)
27.2* Restated Financial Data Schedule - September 30, 1997 (for SEC use only)
27.3* Restated Financial Data Schedule - June 30, 1997 (for SEC use only)
27.4* Restated Financial Data Schedule - March 31, 1997 (for SEC use only)
27.5* Restated Financial Data Schedule - December 31, 1996 (for SEC use only)
* Restated per SEC Regulation S-K, Item 601, to conform to SFAS No. 128
and SAB 98.
Reports on Form 8-K:
None
15
<PAGE> 16
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 thereunto duly authorized.
Educational Medical, Inc.
Date: February 13,1998 /s/ Vince Pisano
---------------------------------
(Signature)
Vince Pisano
Chief Financial Officer
Principal Financial Officer
and
Principal Accounting Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EDUCATIONAL MEDICAL, INC. FOR THE 9 MONTHS ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,303,194
<SECURITIES> 0
<RECEIVABLES> 8,838,422
<ALLOWANCES> 1,021,824
<INVENTORY> 0
<CURRENT-ASSETS> 19,849,731
<PP&E> 14,911,805
<DEPRECIATION> 6,547,348
<TOTAL-ASSETS> 40,017,796
<CURRENT-LIABILITIES> 7,114,256
<BONDS> 2,551,079
0
0
<COMMON> 73,691
<OTHER-SE> 30,329,496
<TOTAL-LIABILITY-AND-EQUITY> 40,017,796
<SALES> 41,468,515
<TOTAL-REVENUES> 41,468,515
<CGS> 36,473,977
<TOTAL-COSTS> 36,473,977
<OTHER-EXPENSES> 938,233
<LOSS-PROVISION> 803,414
<INTEREST-EXPENSE> (256,082)
<INCOME-PRETAX> 3,508,973
<INCOME-TAX> 1,403,715
<INCOME-CONTINUING> 2,105,258
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,105,258
<EPS-PRIMARY> 0.29<F1>
<EPS-DILUTED> 0.28
<FN>
<F1>TAG (EPS - PRIMARY) DENOTES BASIC EPS.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EDUCATIONAL MEDICAL, INC. FOR THE 6 MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,285,954
<SECURITIES> 0
<RECEIVABLES> 9,233,666
<ALLOWANCES> 1,174,210
<INVENTORY> 0
<CURRENT-ASSETS> 18,162,371
<PP&E> 14,169,844
<DEPRECIATION> 6,120,493
<TOTAL-ASSETS> 38,328,075
<CURRENT-LIABILITIES> 6,546,850
<BONDS> 2,824,316
0
0
<COMMON> 93,972
<OTHER-SE> 28,989,633
<TOTAL-LIABILITY-AND-EQUITY> 38,328,075
<SALES> 26,648,687
<TOTAL-REVENUES> 26,648,687
<CGS> 24,300,397
<TOTAL-COSTS> 24,300,397
<OTHER-EXPENSES> 625,488
<LOSS-PROVISION> 561,715
<INTEREST-EXPENSE> (167,226)
<INCOME-PRETAX> 1,328,313
<INCOME-TAX> 531,440
<INCOME-CONTINUING> 796,873
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 796,873
<EPS-PRIMARY> 0.11<F1>
<EPS-DILUTED> 0.11
<FN>
<F1>TAG (EPS - PRIMARY) DENOTES BASIC EPS.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EDUCATIONAL MEDICAL, INC. FOR THE 3 MONTHS ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,158,426
<SECURITIES> 0
<RECEIVABLES> 7,079,347
<ALLOWANCES> 924,713
<INVENTORY> 0
<CURRENT-ASSETS> 17,771,463
<PP&E> 13,355,113
<DEPRECIATION> 5,738,072
<TOTAL-ASSETS> 37,816,851
<CURRENT-LIABILITIES> 6,931,729
<BONDS> 2,599,372
0
0
<COMMON> 74,181
<OTHER-SE> 28,338,810
<TOTAL-LIABILITY-AND-EQUITY> 37,816,851
<SALES> 12,909,020
<TOTAL-REVENUES> 12,909,020
<CGS> 12,077,952
<TOTAL-COSTS> 12,077,952
<OTHER-EXPENSES> 314,880
<LOSS-PROVISION> 251,665
<INTEREST-EXPENSE> (94,130)
<INCOME-PRETAX> 358,653
<INCOME-TAX> 145,730
<INCOME-CONTINUING> 212,923
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 212,923
<EPS-PRIMARY> 0.03<F1>
<EPS-DILUTED> 0.03
<FN>
<F1>TAG (EPS - PRIMARY) DENOTES BASIC EPS.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EDUCATIONAL MEDICAL, INC. FOR THE YEAR ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 14,047,889
<SECURITIES> 0
<RECEIVABLES> 6,161,446
<ALLOWANCES> 922,704
<INVENTORY> 0
<CURRENT-ASSETS> 21,799,988
<PP&E> 13,005,327
<DEPRECIATION> 5,387,369
<TOTAL-ASSETS> 42,072,534
<CURRENT-LIABILITIES> 11,314,441
<BONDS> 6,128,731
0
0
<COMMON> 74,181
<OTHER-SE> 28,125,887
<TOTAL-LIABILITY-AND-EQUITY> 42,072,534
<SALES> 49,449,680
<TOTAL-REVENUES> 49,449,680
<CGS> 43,483,781
<TOTAL-COSTS> 43,483,781
<OTHER-EXPENSES> 1,421,306
<LOSS-PROVISION> 1,239,151
<INTEREST-EXPENSE> 284,162
<INCOME-PRETAX> 3,021,280
<INCOME-TAX> (845,363)
<INCOME-CONTINUING> 3,866,643
<DISCONTINUED> 0
<EXTRAORDINARY> (308,683)
<CHANGES> 0
<NET-INCOME> 3,557,960
<EPS-PRIMARY> 0.51<F1>
<EPS-DILUTED> 0.36<F1>
<FN>
<F1>TAG (EPS - PRIMARY) DENOTES BASIC EPS. BOTH BASIC AND DILUTED EPS ARE SHOWN
ON A PRO-FORMA BASIS GIVING EFFECT TO A MARCH 31, 1997 POOLING OF INTERESTS.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EDUCATIONAL MEDICAL, INC. FOR THE 9 MONTHS ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,300,605
<SECURITIES> 0
<RECEIVABLES> 5,991,058
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,500,987
<PP&E> 7,369,363
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,341,327
<CURRENT-LIABILITIES> 10,781,479
<BONDS> 7,580,733
0
0
<COMMON> 71,277
<OTHER-SE> 26,513,257
<TOTAL-LIABILITY-AND-EQUITY> 43,341,327
<SALES> 35,763,629
<TOTAL-REVENUES> 35,763,629
<CGS> 31,266,660
<TOTAL-COSTS> 31,266,660
<OTHER-EXPENSES> 631,913
<LOSS-PROVISION> 1,012,430
<INTEREST-EXPENSE> 372,661
<INCOME-PRETAX> 2,479,965
<INCOME-TAX> 568,965
<INCOME-CONTINUING> 1,911,000
<DISCONTINUED> 0
<EXTRAORDINARY> (308,683)
<CHANGES> 0
<NET-INCOME> 1,602,317
<EPS-PRIMARY> 0.44<F1>
<EPS-DILUTED> 0.26<F1>
<FN>
<F1>TAG (EPS - PRIMARY) DENOTES BASIC EPS. RECEIVABLES AND PP&E ARE SHOWN NET.
BOTH BASIC AND DILUTED EPS ARE SHOWN ON A PRO-FORMA BASIS GIVING EFFECT TO A
MARCH 31, 1997 POOLING OF INTERESTS.
</FN>
</TABLE>
