SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from _______________ to ________________
Commission File No. 33-18174
SIEMANN EDUCATIONAL SYSTEMS, INC.
--------------------------------------------
(Name of Small Business Issuer in its Charter)
Colorado 84-1067172
- --------------------------------------------- -------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
405 South Platte River Drive
Denver, Colorado 80203
- ---------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 733-9673
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.10 Par Value Common Stock
---------------------------
(Title of Class)
<PAGE>
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
----- -----
As of March 31, 1998, 3,765,000 shares of the Registrant's no par value
Common Stock were outstanding. As of February 28, 1998, the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$2,444,750 based upon a closing bid price of $3.85 per share of Common Stock on
the Electronic Bulletin Board ("EBB").
Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
-----
The Registrant's revenues for its most recent fiscal year were $3,110,345.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- -------------------------------
The following is a summary of certain information contained in this Report
and is qualified in its entirety by the detailed information and financial
statements that appear elsewhere herein. Except for the historical information
contained herein, the matters set forth in this Report include forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to risks and uncertainties that may cause actual results to differ
materially. These risks and uncertainties are detailed throughout the Report and
will be further discussed from time to time in the Company's periodic reports
filed with the Commission. The forward-looking statements included in the Report
speak only as of the date hereof.
Introduction
Since August 1997 the Company has owned and operated the Denver Automotive
& Diesel College ("DADC"), a for-profit, post-secondary education college which
trains its students to be automotive and diesel mechanics and technicians. In
March 1998, the Company acquired Data Processing Training Co., ("DPT") for
$8,959,564 comprised of $3,869,564 in cash, a promissory note in the amount of
$4,340,000 bearing interest at 7% per annum payable in installments through
April 15, 2000, and the balance of $750,000 in Common Stock of the Company
issued and valued as of March 24, 1999. DPT provides post-secondary education in
computer programming, business computer applications, medical office
administration and English as a second language. Unless otherwise indicated, the
description of the Company's business and operations throughout this Report
refers to the combined operations of DADC and DPT.
The Company provides diversified career-oriented, post-secondary education
to approximately 1,280 students through DADC (training approximately 380
students) and DPT (training approximately 900 students). The Company's schools
offer programs designed to provide students with the knowledge and skills
necessary to qualify them for entry level employment in the fields of automotive
and diesel mechanics, computer programming and applications and medical office
administration.
History of the Company
The Company was incorporated in the state of Colorado in 1987 under the
name Chartwell Cable Fund, Inc. to acquire, develop and operate cable television
systems. The Company conducted an initial public offering of its securities in
January 1988, which resulted in net proceeds of approximately $800,000. In 1994,
after suffering continuing losses from operations, the Company sold its
remaining assets for nominal consideration and ceased operations. In August 1997
the Company issued 2,250,000 shares of its Common Stock to Paul T. Siemann
("Siemann") and 500,000 shares to CBAS, Inc. ("CBAS") for $.001 per share and
3
<PAGE>
subsequently issued an additional 400,000 shares to acquire all of the
outstanding stock of Siemann Educational Systems, Inc. ("SES"), the owner of
DADC, a company owned and controlled by Siemann. In September 1997 the Company
changed its name to Siemann Educational Systems, Inc., and a new Board of
Directors was elected comprised of Siemann, Joseph R. Chalupa, the school
director of DADC, and Barbara S. Siemann. In August and September 1997, the
Company sold an aggregate of 100,000 shares for $2.00 per share. See
"Management."
History of DADC and DPT
DADC was founded in 1963 as a private vocational school providing
instruction in automotive repair and body, fender and paint. In 1968 it adopted
the Denver Automotive and Diesel College trade name and offered courses in
automotive and diesel repair, body, fender and paint programs. In September
1987, DADC was approved to offer Associate of Occupational Studies Degree
programs for Master Technician, Automotive Technology and Diesel Technology. In
May 1991 DADC received certification as a "Master Certified Automotive School"
by the National Automotive Technicians Education Foundation ("NATEF"), a
division of the Automotive Service Excellence ("ASE") organization. Following a
1992 Chapter 11 bankruptcy filing, DADC was purchased out of the bankruptcy
proceedings by SES. In August 1995 the school was approved to offer Associate of
Applied Science Degree Programs for Master Technician, Automotive and Diesel
Technology.
DPT was founded in 1987 and trains its students in computer programming,
business computer applications, medical office administration and English as a
second language. DPT is licensed by the Pennsylvania State Board of Private
Licensed Schools and is accredited by the Accrediting Council for Continuing
Education and Training.
Industry Overview
The Company believes the demand for post-secondary, career-oriented
education will increase over the next several years as a result of a number of
recognized trends, including (i) a projected 21% growth in the number of new
high school graduates from approximately 2.5 million in 1993-94 to approximately
3.0 million in 2005-6, (ii) the increasing enrollment of students over the age
of 24 in post-secondary education institutions as they seek to enhance their
skills or retrain for new technologies, and (iii) the increasing recognition of
the income premium attributable to higher technical education certifications,
with individuals holding such certifications earning substantially more income
during their lifetimes than individuals holding only high school diplomas.
According to the National Center for Education Statistics, education is the
second largest sector of the U.S. economy, accounting for approximately 9% of
gross domestic product in 1994, or over $600 billion. The Company's schools are
part of the education management organization ("EMO") sector of the
post-secondary education market, which accounts for approximately one-third of
the total education sector, or $200 billion annually. Of the approximately 6,000
post-secondary schools that are eligible to participate in federally-funded
4
<PAGE>
Title IV Programs, approximately 500 are proprietary degree-granting
institutions, and the balance are certified technical or vocational training
programs such as the Company. The U.S. Department of Education estimates that by
the year 2005 the number of students enrolled in post-secondary education
institutions will increase by more than 1.5 million to over 16 million students.
The U.S. Department of Education estimates that, over the next five years,
initial enrollments in post-secondary education institutions by working adults
will increase more rapidly than initial enrollments of recent high school
graduates. The post-secondary education industry is also expected to benefit
from the public's increased recognition of the income premium of a
post-secondary education. According to The National Center for Education
Statistics, the percentage of recent high school graduates who continued their
education after graduation increased from 53% in 1983 to 63% in 1993. The
Company believes that the income premium associated with a post-secondary
education has been a significant factor contributing to this trend. The Census
Bureau has reported that in 1995 a full-time male worker with an associate level
degree earned an average of 37% more per year than a comparable worker with only
a high school diploma, and a full-time male worker with a bachelor level degree
earned an average of 72% more per year than a comparable worker with only a high
school diploma. In addition, employment in technical occupations is expected to
increase over the next several years as the demand for technically-skilled labor
increases.
Strategy
The Company seeks to increase its market share in the expanding market for
post-secondary education and improve profitability by (i) acquiring additional
schools that have recorded strong profits under capable management, which
management will agree to remain under contract to the Company, (ii) promoting
internal growth at the Company's existing and newly acquired schools through
improved marketing and the development of new programs within such schools, and
(iii) enhancing operating efficiencies. Subject to the availability of adequate
financing (of which there can be no assurance), the Company intends to implement
the following strategies to achieve these goals:
Acquisition Strategy. According to the Department of Education, there were
approximately 2,355 accredited, proprietary post-secondary schools that
participated in federal financial student aid programs as of June 1996. The
ownership of these schools is highly-fragmented, such that the Company believes
no organization holds a significant national market share or owns or operates
more than 80 schools. The Company believes that the fragmentation of the
post-secondary education market provides significant opportunities to acquire
and consolidate existing independently-owned schools and reduce individual
school overhead through centralizing certain home office functions. The Company
seeks to acquire schools which demonstrate historical profitability, strong
management in place, superior compliance history with respect to federally
guaranteed or funded student loans, and established and marketable curricula.
The Company intends to concentrate its acquisition efforts on schools which
satisfy these acquisition criteria and which offer curricula in the fields of
study currently offered at the Company's schools.
5
<PAGE>
Internal Growth Strategy. The Company intends to increase student
enrollment (i) at its existing schools, (ii) at newly added campuses to existing
schools and (iii) at newly acquired schools by continuing to enhance local
marketing efforts and increasing the number and variety of program offerings at
its schools. The Company also intends to offer its existing programs at new
schools where such programs were not previously available and to apply for
licenses and accreditation in order to offer programs leading to the granting of
an associate level degree.
Operating Strategy. The Company will seek to provide certain administrative
services to all of its schools, which the Company believes can be performed most
efficiently and cost effectively in a centralized location. Such administrative
services may include marketing analysis, accounting, information systems and
regulatory compliance. However, the Company will continue to operate a
decentralized management structure in which local school management is empowered
to make most of the day-to-day operating decisions at each school and to be
primarily responsible for the profitability and growth of that school and
compliance with all regulatory requirements.
Programs of Study
The Company's programs are intended to provide students with the specific
knowledge and job skills required to prepare them for entry-level positions in a
chosen career field. The automotive and diesel programs at DADC are designed to
prepare students for occupations associated with the automotive and diesel
repair industries. The computer and medical programs at DPT train students in
computer programming and business computer applications (such as spreadsheets
and word processing) and medical office administration (such as medical
record-keeping and billing). DPT also offers English as a second language to
improve students' ability to communicate in English, thereby assisting the
student in completing his or her future course of study at the school. As of
August 1997, tuition and fees for an entire program for a new student entering
one of the DADC or DPT programs ranged from a high of $22,000 for a 30-month
program to a low of $4,500 for a seven and one-half-month program.
As of December 31, 1997, approximately 380 students were enrolled at DADC
and approximately 900 students were enrolled at DPT. All of the Company's
programs are designed to prepare graduates to perform effectively in a variety
of entry-level positions by providing the student with practical experience both
in the classroom and in the field.
DADC and DPT schedules vary depending on the programs offered by each
school. Generally, programs begin eight times a year with courses offered from 7
AM to 10 PM, five to six and one-half days a week year round.
The Company also has applied for licenses and accreditation in order to
offer programs leading to the granting of an associate's degree. See " -
Strategy."
6
<PAGE>
Marketing; Student Recruitment
The Company endeavors to recruit motivated students who have the ability to
complete the programs offered by the Company's schools and to secure entry-level
employment in the field for which their program is designed to prepare them. To
attract potential students, the Company engages in several activities to inform
them and their family about the Company's programs. Marketing efforts include
direct mailings to prospective students and to high schools (which often include
videotapes of the Company's schools), newspaper advertising, yellow pages
advertising and visits by Company personnel to area high schools. The Company's
advertising is tailored to the national as well as the local market in which the
school is located and is intended to create market interest and name
recognition. Responses to direct mail campaigns are received and followed up at
each school. The two schools each employ a director of admissions who is
responsible for, among other things, coordinating the efforts of the school to
recruit qualified students, determining recruiting policies and procedures and
setting standards for hiring and training admissions representatives.
Company representatives contact potential students who have indicated an
interest in the schools' programs and arrange for interviews which generally
take place at the school or at the prospective student's home. The interview is
designed to establish the student's qualifications, academic background and
employment goals. Prospective students are generally given a school catalogue
which describes the school's programs, a tour of the school and an explanation
of the programs offered and the types of employment opportunities typically
available to graduates of the school. The Company employs two DADC
representatives based in Denver and six East Coast School representatives based
at DPT's location. In addition, DADC employs three regional representatives, who
market in North Dakota, South Dakota, Washington and Alaska.
Admission, Retention and Graduate Placement
In order to apply for admission to any of the Company's programs, a
candidate is required to have a high school diploma, a recognized equivalent or
pass an admissions test specifically approved by the Department of Education. At
December 1997, substantially all of the students were high school graduates or
held recognized equivalent certification. Approximately 40% of enrolled students
were under 20 years of age and 70% of the students were men.
In an attempt to minimize student withdrawals prior to the completion of
their program, the schools provide staff and other resources to assist and
advise students regarding academic and financial matters and employment. The
schools also provide tutoring and encourage help sessions between individual
students and instructors when students are experiencing academic difficulties.
For those students who were scheduled to graduate in calendar year 1996,
approximately 75% completed their course of study. The Company is obligated to
provide refunds to those students who withdraw from school prior to completion
of the program based on formulas required by applicable accrediting agencies or
by state and federal regulations.
7
<PAGE>
The Company's schools employ placement personnel to provide placement
assistance services to students and graduates and to solicit appropriate
employment opportunities from employers. During the course of each program,
students receive instruction on job search and interviewing skills and have
available reference materials and assistance with the composition of resumes.
Based on data obtained by the Company from its students and their employers, the
Company believes that approximately 92% of DADC's and DPT's graduates obtained
employment in a field related to their program of study.
Faculty
Faculty members are hired locally in accordance with criteria established
by the school, applicable accreditation organizations and applicable state
regulatory authorities. Members of a school's faculty are hired based on
academic and vocational training background, prior educational experience and
prior work experience. A significant portion of the Company's faculty were
previously employed in fields related to their area of instruction. The Company
believes that such faculty members provide a "real world" perspective to its
students. As of December 31, 1997, DADC and DPT employed approximately 20 and 25
full-time faculty members, respectively (defined as those faculty members
spending at least 37 hours per week teaching classes at the Company's schools),
and 0 and 50 part-time faculty members, respectively.
Administration and Employees
The Company's two schools are each managed by a school director.
Additionally, the staff of each school includes a director of placement, a
financial aid administrator and a director or assistant director of admissions.
As of December 31, 1997, DADC and DPT employed approximately 40 and 120
full-time employees, respectively. The Company's employees are not represented
by a labor union or subject to a collective bargaining agreement. The Company
has never experienced a work stoppage and believes that its employee relations
are satisfactory.
Each of the Company's two schools handles its financial aid services,
oversees regulatory compliance, assists in the development and addition of
programs to existing curricula, conducts marketing, implements and supports
management information systems and provides accounting services and financial
resources.
Competition
The post-secondary education market is highly-fragmented and competitive
with no private or public institution having a significant market share. The
Company's schools compete for students with not-for-profit public and private
colleges and proprietary institutions which offer degree and/or non-degree
granting programs. Such proprietary institutions include vocational and
technical training schools, continuing education programs and commercial
training programs. Competition among educational institutions is based on the
quality of the program, perceived reputation of the institution, the cost of the
program, and the employability of graduates. Public and private colleges may
8
<PAGE>
offer programs similar to those offered by the Company's schools at lower
tuition costs due in part to government subsidies, foundation grants, tax
deductible contributions, or other financial resources not available to
proprietary institutions. Many of the Company's competitors in both the public
and private sector have greater financial and other resources than the Company.
Financial Aid and Regulation; Title IV Student Financial Assistance Programs
A substantial majority of the students attending the Company's schools
finance all or a part of their education through grants or loans under Title IV
Programs. Revenues from Title IV funding provide most of DADC's and DPT's
tuition revenues (aggregating approximately 69% of cash receipts in fiscal
1996). The maximum amount of a student's available Title IV program assistance
is generally based on the student's financial need. The Company determines a
student's financial need based on the national standard need analysis system
established by the HEA. If there is a difference between the amount of Title IV
program funding a student is entitled to receive (combined with other outside
assistance) and the student's tuition, the student is responsible for the
difference, which may be funded by loans from the Company directly to the
student. Such loans, if advanced, generally require the students to make
payments on the loan commencing when the loan is received.
Students at the Company's two schools may participate in the following
Title IV Programs:
Pell and FSEOG Grants. The Federal Pell Grant Program provides for grants
to help financially needy undergraduate students meet the costs of their
post-secondary education. The amount of an eligible student's Pell grant award
currently ranges from $400 to $2,470 annually, depending on the student's
financial need, as determined by a formula set by the HEA and the Regulations.
The HEA guarantees that all of the eligible students at a school receive Pell
grants in the amounts to which they are entitled. In 1997, the average Pell
award per student enrolled in DADC and DPT was approximately $2,204. Pell grants
to students represented approximately $2,184,258, or 22.5% of the Company's
revenues in 1997.
The Federal Supplemental Educational Opportunity Grant program ("FSEOG")
provides for awards to exceptionally needy undergraduate students. The amount of
an FSEOG award currently ranges from $100 to $4,000, depending upon the
student's financial need and the availability of funds. In fiscal 1996, the
average FSEOG award to students enrolled in the Company's two schools receiving
such grants was $400. The Company, or another outside source, is required to
make a 25% matching contribution for FSEOG program funds it disburses. The
Company made matching contributions of approximately $42,964 0in 1997. FSEOG
awards made to the Company's students (net of matching contributions) amounted
to approximately $128,802 and represented approximately 1-3% of the Company's
revenues in 1997.
Federal Family Education Loans and Federal Direct Student Loans. The
Federal Family Education Loan ("FFEL") programs include the Federal Stafford
Loan Program ("Stafford Loan"), and the Federal PLUS Program ("PLUS"), pursuant
to which private lenders make loans to enable a student or the student's parents
to pay the cost of attendance at a post-secondary school.
9
<PAGE>
The FFEL Program is administered through state and private nonprofit
guarantee agencies that insure loans directly, collect defaulted loans and
provide various services to lenders. The federal government provides interest
subsidies in some cases and reinsurance payments for borrower default, death,
disability and bankruptcy.
The Federal Direct Student Loan Program ("FDSLP") is substantially the same
as the FFEL program in providing Stafford and PLUS loans. Under the FDSLP,
however, funds are provided directly by the federal government to the students,
and the loans are administered through the school. For schools electing to
participate, the FDSLP replaces the FFEL program, although loans are made on the
same general terms and conditions.
Stafford Loan Program. Students may borrow an aggregate of $2,625 for their
first undergraduate academic year and $3,500 for their second academic year
under the FFEL Stafford Loan or FDSLP Stafford Loan program. If the student
qualifies for a subsidized loan, based on financial need,, the federal
government pays interest on the loan while the student is attending school and
during certain grace and deferment periods. If the student does not qualify for
a subsidized Stafford Loan, the interest accruing on the loans must be paid by
the student. In addition, independent students may qualify for an additional
$4,000 a year in unsubsidized Stafford loans.
Plus Loan Program. Parents of dependent students may receive loans under
the FFEL PLUS Program or the FDSLP PLUS Program on an academic year basis. The
maximum amount of any PLUS loan is the total cost of a student's education for
each relevant academic year less other financial aid received by the student
attributable to such year. PLUS loans carry a maximum interest rate of 9% and
are repayable commencing 60 days following the last disbursement made with
respect to the relevant academic year, with flexible payment schedules over a
ten-year period. The FFEL PLUS loans are made by lending institutions and
guaranteed by the federal government. The FDSLP PLUS Program provides PLUS loans
by the federal government on the same general terms as the FFEL PLUS loans.
There were no FDSLP PLUS or FFEL PLUS loans advanced to students in 1997.
Perkins Loans. Students who demonstrate financial need may borrow up to
$3,000 per academic year under the Federal Perkins Loan ("Perkins") program,
subject to the availability of Perkins funds at the institution. Repayment of
loans under the Perkins program is delayed until nine months after graduation or
the termination of studies. Funding for the Perkins program is made by the
Department of Education into a fund maintained by the participating school for
that purpose. The participating school is required to make a matching
contribution into the fund of 25% of the total loans made from the fund and to
deposit all repayments into the fund.
Federal Work-Study. Pursuant to the Federal Work-Study ("FWS") program,
federal funds are made available to provide part-time employment to eligible
students based on financial need. The Company's two schools may provide a
limited number of on-campus and off-campus jobs to eligible students
participating in the FWS program. The Company, or another outside source, is
required to pay 25% of the gross earnings of each participant in the FWS
program.
10
<PAGE>
Title IV Eligibility. To obtain and maintain eligibility to participate in
the programs described above, the Company's schools must comply with the rules
and regulations set forth in the HEA and the Regulations thereunder. An
institution must obtain certificate by the Department of Education as an
"eligible institution" to participate in Title IV Programs. Certification as an
"eligible institution" requires, among other things, that the institution be
authorized to offer its educational programs by the state in which it operates.
It must also be accredited by an accrediting agency recognized by the Department
of Education.
The HEA provides standards for institutional eligibility to participate in
the Title IV Programs. The standards are designed, among other things, to limit
dependence on Title IV funds, prevent schools with unacceptable student loan
default rates from participating in Title IV Programs and, in general, require
institutions to satisfy certain criteria intended to protect the integrity of
the federal programs, including criteria regarding administrative capability and
financial responsibility.
Generally, each school (a main campus and any additional locations for
purposes of the Regulations) is considered separately for compliance with the
Regulations. A school that has been certified as eligible to participate in the
Title IV Programs continues to remain eligible for the period of its
certificate, which is generally four years. A school must apply for a renewal of
its certification prior to its expiration and must demonstrate compliance with
the eligibility requirements in its application.
Under certain circumstances, the Department of Education may provisionally
certify a school to participate in Title IV programs. Provisional certification
may be imposed, when a school is reapplying for certification or when a school
undergoes a change of ownership resulting in a change in control if the school
(i) does not satisfy all of the financial responsibility standards, (ii) has a
Cohort Default Rate of 25% or more in any single fiscal year of the three most
recent federal fiscal years for which data is available, and (iii) under other
circumstances determined by the Secretary of Education. Provisional
certification may last no longer than three years and differs from certification
in that a provisionally certified school may be terminated from eligibility to
participate in the Title IV Programs without the same opportunity for a hearing
that is afforded to a fully certified school. Additionally, the Department of
Education may impose other conditions on a provisionally certified institution's
eligibility to continue participating in the Title IV Programs.
Student Loan Defaults. Under the HEA, an institution may lose its
eligibility to participate in some or all Title IV Programs if student defaults
on the repayment of federally guaranteed student loans exceed specified Cohort
Default Rates. Similar rules regarding default rates apply to Federal Direct
Loans made pursuant to the FDSLP, commencing with those loans entering into
repayment for the first time in the 12-month period ending September 30, 1995.
Under existing regulations these rates are based on the repayment history of
current and former students for loans provided under the Stafford Loan program
and the SLS program. A Cohort Default Rate is calculated for each school on a
federal fiscal year basis by determining the rate at which the school's students
entering repayment in that federal fiscal year default by the end of the
following federal fiscal year. Cohort Default Rates are subject to revision by
the Department of Education if new data becomes available and is subject to
appeal by schools contesting the accuracy of the data or the adequacy of the
servicing of the loans by the loan servicer.
11
<PAGE>
An institution whose Cohort Default Rate exceeds 40% for any single federal
fiscal year may have its eligibility to participate in all Title IV Programs
limited, suspended or terminated. If the Department of Education elects to take
such action due to a single-year Cohort Default rate in excess of the regulatory
level, it must afford the institution a hearing before an independent Department
of Education hearing officer and an opportunity to appeal any decision to the
Secretary of Education before the limitation, suspension or termination may take
effect. Except as indicated below, neither DADC nor DPT has had a Cohort Default
Rate in excess of 40%.
An institution whose Cohort Default Rate is 25% or more for the three most
recent federal fiscal years for which data is available is subject to immediate
loss of eligibility to participate in Title IV Programs, subject to an appeal
(on the bases stated in the next prior paragraph) of the determination,
including an appeal based on a claim of exemption from the Cohort Default Fate
requirements by virtue of exceptional mitigating circumstances. The loss of
eligibility lasts for the duration of the fiscal year in which the determination
of ineligibility is made, plus the two succeeding fiscal years. However, an
institution remains eligible for Title IV funding while the appeal is pending.
DPT has not had a Cohort Default Rates of 25% in any of the three
consecutive federal fiscal years ending 1994. DADC had default rates of 44% (in
1991), 31% (in 1992) and 26% (in 1993), and accordingly, lost its certification
to participate in the Stafford Loan program. DADC applied for recertification to
participate in the Stafford Loan program and its application has been approved.
Accordingly, DADC is now participating in the program. DADC's published Cohort
Default Rate for 1994 and preliminary published Cohort Default Rate for 1995 are
below regulatory requirements. The Company believes that neither of its two
schools is currently vulnerable to any other termination of Title IV eligibility
or programs based on three consecutive years of excess default rates.
The Regulations require that any school which experiences a Cohort Default
Rate in excess of 20% must establish a default management plan in compliance
with the federally mandated plan included in the Regulations. This plan includes
measures to reduce student withdrawal rates, improve student employment rates
and counseling of students on their responsibility to repay their loans. The
Company has default reduction programs in place in its two schools; however,
economic and other factors outside of the Company's control could adversely
affect default rates.
The 85/15 Rule. The "85/15" rule, which applies to for-profit institutions
such as DADC and DPT, became applicable to the Company's schools beginning with
the fiscal year ending March 31, 1996. The rule requires that no more than 85%
of the school's applicable cash receipts may be derived from Title IV Programs.
A school whose annual certified financial statement or Title IV compliance audit
report to the Department of Education does not reflect compliance with the 85/15
rule is subject to immediate termination of its Title IV eligibility. The
Company believes that DADC and DPT are in compliance with the 85/15 rule.
12
<PAGE>
Change in Control. Upon a change in ownership resulting in a change in
control of the Company or any of its schools as defined in the HEA and
Regulations, either the Company or its schools, as applicable, would lose its
eligibility to participate in Title IV Programs for an indeterminate period of
time during which it applies to regain eligibility. A change of control also
could have significant regulatory consequences for the Company at the state
level and could affect the accreditation of the Company's schools. If a
corporation is not publicly-traded, the Regulations provide that a change in
ownership resulting in a change of control occurs when a person's legal or
beneficial ownership either rises above or falls below 25% of the voting stock
of the corporation and that person gains or loses control of the corporation.
The Company's purchase of DPT constituted a change in control of DPT, and
accordingly, DPT has lost its eligibility and will be unable to participate in
Title IV Programs until it is recertified.
The Department of Education's regulations provide that after a company
becomes publicly-traded, a change in control occurs when a report on Form 8-K is
required to be filed with the Securities and Exchange Commission disclosing a
change in control. Most states and accrediting agencies have similar
requirements, but they do not provide a uniform definition of change in control.
If the Company were to lose its eligibility to participate in Title IV Programs
(by virtue of DPT purchase or otherwise) for a significant period of time
pending an application to retain eligibility,, or if it were determined not to
be eligible, its operations would be materially adversely affected. The possible
loss of Title IV eligibility resulting from a change in control may also
discourage or impede a tender offer, proxy contest or other similar transaction
involving control of the Company.
Administrative Capability. The Regulations set certain standards of
"administrative capability" which a school must satisfy to participate in the
Title IV Programs. These criteria require, among other things, that the school
comply with all applicable Title IV Regulations, have capable and sufficient
personnel to administer the Title IV Programs, have acceptable methods of
defining and measuring the satisfactory academic progress of its students,
provide financial aid counseling to its students, timely submit all reports and
financial statements required by the Regulations, and that the school's Cohort
Default Rate not equal or exceed 25% for any single fiscal year.
Failure to satisfy any of the criteria may lead the Department of Education
to determine that the school lacks the requisite administrative capability and
may subject the school to provisional certification when it seeks to renew its
certification as an eligible institution, or may subject it to a fine or to a
proceeding for the limitation, suspension or termination of its participation in
Title IV Programs. Proceedings to fine, limit, suspend or terminate an
institution are conducted before an independent hearing officer of the
Department of Education and are subject to appeal to the Secretary of Education,
prior to any sanction taking effect. Thereafter, judicial review may be sought
in the federal courts pursuant to the federal Administrative Procedures Act.
Financial Responsibility Requirements. The HEA and the Regulations
prescribe specific standards of financial responsibility which the Department of
Education must consider with respect to qualification for participation in the
Title IV Programs ("Financial Responsibility Standards"). These standards are
13
<PAGE>
generally applied on a consolidated school basis. However, there can be no
assurance that the Department of Education will not apply such standards on an
individual school basis. If the Department of Education determines that either
of the Company's schools fails to satisfy the Financial Responsibility
Standards, the Department may require that such school post an irrevocable
letter of credit (a "Financial Responsibility Bond") in favor of the Secretary
of Education in an amount equal to not less than one-half of Title IV Program
funds received by the school during the last complete award year or, in the
Department of Education's discretion, require some other less onerous
demonstration of financial responsibility (a "Demonstration of Financial
Responsibility"). Pursuant to the Regulations, the Company submits annual
audited consolidated financial statements to the Department of Education.
Among the principal Financial Responsibility Standards which a school must
satisfy are: (i) an "acid test" ratio (defined as the ratio of the total of
cash, cash equivalents and current accounts receivable to current liabilities)
of at least 1-to-1 at the end of the most recent fiscal year, (ii) a positive
tangible net worth, as defined by the applicable Regulations, at the end of the
most recent fiscal year (the "Tangible Net Worth Standard") and (iii) net
operating results for the two most recent fiscal years, excluding extraordinary
losses or losses from discontinued operations, which do not show an aggregate
net loss in excess of 10% of tangible net worth at the beginning of the two year
period. Primarily because a large portion of the Company's assets may consist of
goodwill and other intangibles related to school acquisitions, the Company may
have a negative tangible net worth on a consolidated basis in the future. No
assurance can be given that the Department of Education may not make a request
for the Company to post a Financial Responsibility Bond or otherwise make a
request for a Demonstration of Financial Responsibility. If such a request were
to be made, there is no assurance that the Company could secure the funds to
post the Financial Responsibility Bond which the Department of Education may
request, or that the Company would be successful in negotiating a more favorable
Demonstration of Financial Responsibility. If the Company were unable to post a
Financial Responsibility Bond or make a satisfactory Demonstration of Financial
Responsibility, it could become ineligible to receive Title IV funding in its
schools. Ineligibility for Title IV funding would have an immediate material
adverse effect on the Company's operations.
Incentive Compensation. Schools participating in Title IV Programs are
prohibited from providing any commission, bonus or other incentive payment based
directly or indirectly on success in securing enrollments or financial aid to
persons engaged in any student recruitment, admission or financial aid awarding
activity (the "Incentive Compensation Rule"). The Department of Education has
not provided specific regulations with respect to this requirement. If the
Department of Education were to determine that the Company's methods of
compensation do not comply with the Incentive Compensation Rule, the Company
could be required to modify its compensation system, repay certain previously
disbursed Title IV Program funds, pay administrative fines or lose its
eligibility to participate in Title IV Programs. The Company believes its
compensation policies do not violate the Incentive Compensation Rule.
Restrictions on Adding Locations and Educational Programs. Proprietary
educational institutions must be in full operation for two years before they can
be certified by the Department of Education to participate in Title IV Programs.
14
<PAGE>
However, an institution that is already qualified to participate in Title IV
Programs may establish, with approval of the Department of Education, an
additional location that immediately qualifies for participation in such
programs without satisfying the two-year requirement if such location satisfies
all other applicable requirements for institutional eligibility, including
approval of the additional location by the applicable accrediting agency and the
relevant state authorizing agency.
Generally, if a school which is eligible to participate in Title IV
Programs adds an educational program, it must apply to the Department of
Education to have such program designated as eligible. However, if it adds an
additional degree program or a program which prepares students for employment in
the same or related occupations as those which have previously been designated
as eligible, it is not obligated to obtain the Department of Education's
approval of such program. The Company does not believe that the Department of
Education requirements will hinder its ability to plan and add new degree and
diploma programs to its schools' curricula.
State Authorization and Accreditation. The Company's schools must be
authorized by the applicable agency or agencies of the state in which they are
located to operate. State authorization is also required for eligibility to
participate in Title IV Programs. The Company's two schools are authorized to
operate in their respective states.
Both of the Company's schools are accredited by at least one accrediting
body recognized by the Department of Education. Accreditation signifies that the
schools have been reviewed and determined to meet minimum criteria in terms of
administration, faculty, curriculum, physical plant, facilities and equipment,
and financial stability. Accreditation by an accrediting body recognized by the
Department of Education is a requirement for participation in Title IV Programs.
ITEM 2. DESCRIPTION OF PROPERTY
- -------------------------------
The Company leases 81,500 square feet for its DADC facilities from Paul T.
Siemann, its Chief Executive Officer and a director, for $13,000 per month
pursuant to a lease which expires in August 2000. The Company believes that the
terms of the lease are fair, reasonable and consistent with the terms of leases
which the Company could enter into with nonaffiliated third parties. DPT leases
an aggregate of approximately 23,000 square feet for office space and school
facilities for $18,630 per month under two leases which expire in October 1998
and April 2000.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not applicable.
15
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------
The Company's Common Stock trades on the Electronic Bulletin Board ("EBB")
under the symbol "SEDS". The following table sets forth for the quarters
indicated the range of high and low closing prices of the Company's Common Stock
on the EBB but does not include retail markup, markdown or commissions.
Closing Price
-------------------
By Quarter Ended: High Low
- ----------------- ---- ---
March 31, 1998..............................................$3.85 $3.68
December 31, 1997........................................... 3.82 3.82
September 30, 1997.......................................... None None
June 30, 1997............................................... None None
March 31, 1997.............................................. None None
December 31, 1996........................................... None None
September 30, 1996.......................................... None None
June 30, 1996............................................... None None
As of March 31, 1998, the Company had approximately 1,200 record and
beneficial stockholders.
Dividends
The Company has not paid dividends on its Common Stock since inception and
does not plan to pay dividends in the foreseeable future. Earnings, if any, will
be retained to finance growth.
16
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
December 31, 1997 as Compared to December 31, 1996
- --------------------------------------------------
During 1997, the Company's cash balance decreased $293,156 from the 1996
amounts. However, at December 31, 1997 current assets increased $685,065 over
1996 current assets, an increase of 57.4%. The increase in current assets is
largely due to an increase in short-term student accounts and notes receivable.
Compared to prior years, a substantial portion of the student accounts and notes
receivable are institutional and held by the school rather than being government
granted or based. This change occurred because the school lost its eligibility
for government Title IV funding and grants in 1996 because its previous owner
failed to comply with certain financial responsibility ratios. These Title IV
funding and grants have been restored in November 1997. Nevertheless, the 1997
receivables increased $913,560 over 1996. However, the allowance for
uncollectible receivables also increased by $130,996 and the bad debt expense
increased from $81,020 in 1996 to $138,353 in 1997. To insure future cash flow
and hedge against uncollectible student receivables, in addition to notes
receivable from a stockholder, the Company sold a number of student notes
receivable (long-term portion only) to another stockholder for $200,000. The
Company's President increased his borrowings from the Company by $156,300 over
1996. The total amount due from the President is payable within one year, of
which $60,000 was repaid in April 1998.
Property and equipment decreased $164,725 from 1996 due to depreciation expense
of $176,276 after purchases of property and equipment of $11,551. Also during
1997, the Company initiated the acquisition of another school in Philadelphia.
Downpayments, earnest money and other direct acquisition costs during 1997
amounted to $223,936. The acquisition closed on March 24, 1998. The total
purchase price was $8,959,564. The purchase of this school is part of
management's long-term plan to grow its business by acquisition of profitable
schools which fit the Company's overall acquisition strategy. Overall, total
assets increased $1,068,101 from 1996, an increase of 50%.
17
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
During 1997, the Company's accounts payable and accrued liabilities remained
relatively constant compared to 1996. However, total current liabilities
increased $604,570 over 1996 current liabilities, an increase of 53%. The
increase in current liabilities is largely due to the increase in deferred
tuition income and current maturities of long-term debt. Deferred tuition income
increased $153,538 over 1996 due to normal student enrollment and timing
fluctuations. Current and long-term maturities of debt increased $840,507 over
1996 due to reduced cash flow created by loss of the Title IV funding discussed
above. Notes payable to a stockholder decreased by $36,405. The Company incurred
a total liability of $123,936 in 1997 payable to the owner of the acquired
Philadelphia school, which consists of $61,968 directly payable in cash and
$61,968 to repurchase common stock. Finally, student refunds and credit balances
decreased $122,263 from 1996 due to normal fluctuations.
During 1997, the Company's current assets exceeded current liabilities by
$142,977, giving the Company a current ratio of 1.08:1.
Rent payable, a non-current liability, increased $132,902 over 1996 due to the
accrual of one year's rent less a payment of $22,000. This is based on an
agreement with the owner of the building, who is also the President of the
Company, to defer the payment of rent with interest until the school's cash flow
improves.
Common Stock increased $339,598 over 1996. This increase is due to the
reorganization of the Company in a reverse acquisition and the issuance of
additional stock on August 31, 1997. Additional paid-in capital decreased from
1996 from $618,646 to $88,706 because of the elimination of the accumulated
deficit against paid-in capital when the reorganization occurred.
Results of Operations
- ---------------------
1997 Compared to 1996
- ---------------------
Although, student receivable amounts increased during 1997 and despite a 12%
increase in tuition for new students in 1997, the tuition revenue decreased in
1997 reflecting a 5% decline in the number of students from approximately 335 in
1996 to 320 in 1997. The decline in tuition revenue and in students in 1997 was
18
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
also also a result of the unavailability beginning in 1996 of governmental
Stafford loans. With the restoration of Stafford loans in late 1997, and with
the 1997 tuition increase in place for new students, revenues are expected to
increase in 1998. College supply and cafeteria sales decreased from 1996 due to
a reduction in the number of text books required to be purchased by students and
a decrease in cafeteria sales. The related costs of these sales decreased as
well by $26,241. Contributed materials also decreased from 1996 since no
materials or vehicles were contributed in 1997. Other income increased $55,891
due primarily to increased interest income from student loans. Overall, total
revenues decreased $86,673 from 1996, a decreased of 3%.
Educational services and facilities expense decreased $82,436 from 1996 due to a
greater focus on controlling costs due to the cash shortages. Selling and
promotion decreased $70,637 from 1996 due to the same reason. However, general
and administrative expenses increased over 1996 by $81,960 due to additional
corporate costs of being a public company after the reverse acquisition
discussed above. Consequently, income from operations decreased $48,109 from
1996, a decrease of 46%.
Interest expense increased $65,789 due to the significant increase in borrowing
from banks and from the President of the Company described above. Overall, the
Company sustained a net loss in 1997 of $34,716 as opposed to a net income of
$79,182 in 1996.
ITEM 7. FINANCIAL STATEMENTS
- ----------------------------
19
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Independent Auditors' Report 1
Consolidated Balance sheets 2
Consolidated Statements of operations 3
Consolidated Statements of stockholders' (deficit) equity 4
Consolidated Statements of cash flows 5-6
Notes to financial statements 7-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Stockholders
Siemann Educational Systems, Inc.
Denver, Colorado
We have audited the accompanying balance sheets of Siemann Educational
Systems, Inc. and Subsidiary as of December 31, 1997 and 1996 and the
related statements of operations, stockholders' equity, and cash flows
for the years ended December 31, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Siemann
Educational Systems, Inc. as of December 31, 1997 and 1996, and the
results of operations and cash flows for the years ended December 31,
1997 and 1996 in conformity with generally accepted accounting
principles.
GORDON, HUGHES & BANKS, LLP
Englewood, Colorado
March 25, 1998
Page 1
<PAGE>
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
Assets
1997 1996
----------- -----------
Current assets:
<S> <C> <C>
Cash $ 18,830 $ 311,986
Student accounts receivable, less allowance for doubtful
accounts of $137,213 and $66,760 657,814 798,058
Students notes receivable, less allowance for doubtful
accounts of $60,543 and $-0- 746,693 0
Note receivable - stockholder 216,300 60,000
Note receivable - related party 200,000 0
Inventory 7,392 23,321
Prepaid and other 31,401 0
----------- -----------
Total current assets 1,878,430 1,193,365
Student accounts and notes receivable, long-term portion,
less allowance for doubtful accounts of $62,926 and $63,591 718,275 411,164
Property and equipment, net of accumulated depreciation 284,774 449,499
Investment in acquisition of business 223,936 0
Perkins matching funds 70,000 70,000
Other 25,597 8,883
----------- -----------
Total assets $ 3,201,012 $ 2,132,911
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 123,449 $ 117,463
Student refunds payable and credit balances 21,061 143,324
Payable to owner of business to be acquired 61,968 0
Accrued liabilities 133,321 108,935
Deferred tuition income 871,537 717,999
Common stock repurchase commitment 61,968 0
Current maturities of long-term debt 462,149 43,162
----------- -----------
Total current liabilities 1,735,453 1,130,883
Rent payable, related party 132,902 0
Long-term debt, net of current maturities 605,730 184,210
Note payable - stockholder 355,307 391,712
----------- -----------
Total liabilities 2,829,392 1,706,805
----------- -----------
Stockholders' equity:
Preferred stock, $.10 par value, 10,000,000 shares
authorized , none outstanding 0 0
Common stock, $.10 par value, 100,000,000 shares
authorized, 3,795,984 (1997) and 400,000 (1996)
shares issued and outstanding 379,598 40,000
Additional paid-in capital 88,706 618,646
Common stock repurchase commitment (61,968) 0
Accumulated (deficit) (34,716) (232,540)
----------- -----------
Total stockholders' equity 371,620 426,106
----------- -----------
Total liabilities and stockholders' equity $ 3,201,012 $ 2,132,911
=========== ===========
Page 2
</TABLE>
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
Revenue:
Tuition revenue $ 2,806,074 $ 2,831,440
College supply and cafeteria sales 164,339 204,384
Contributed materials 0 77,153
Other 139,932 84,041
----------- -----------
Total revenues 3,110,345 3,197,018
----------- -----------
Operating expenses:
Educational services and facilities 1,118,937 1,201,373
Cost of college supplies and cafeteria sales 180,679 206,920
Selling and promotion 524,756 595,393
General and administrative 906,898 824,938
Depreciation and amortization 184,347 182,890
Bad debt expense 138,353 81,020
----------- -----------
Total operation expenses 3,053,970 3,092,534
----------- -----------
Income from operations 56,375 104,484
Interest (expense) (91,091) (25,302)
----------- -----------
Net (loss) income
$ (34,716) $ 79,182
=========== ===========
Net (loss) income per common share
$ (0.02) $ 0.20
=========== ===========
Weighted number of common shares outstanding 2,185,600 400,000
=========== ===========
Page 3
<PAGE>
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Stock Total
Common Stock Repurchase Accumulated Stockholders'
Shares Amount Capital Commitment (Deficit) Equity
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 400,000 $ 40,000 $ 630,972 $ 0 $(311,722) $ 359,250
Net income 0 0 0 0 79,182 79,182
Distribution to owner 0 0 (12,326) 0 0 (12,326)
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1996 400,000 40,000 618,646 0 (232,540) 426,106
Distribution to owner 0 0 (216,520) 0 0 (216,520)
Sale of common stock to related party
($.001 per share) 2,250,000 225,000 (222,750) 0 0 2,250
Sale of common stock to related party
($.001 per share) 500,000 50,000 (49,500) 0 0 500
Sale of common stock and warrants
($2.00 per share) net commission of
$5,000 50,000 5,000 90,000 0 0 95,000
Reorganization of the Company at
8/31/97 500,000 50,000 (282,540) 0 232,540 0
Sale of common stock and warrants
($2.00 per share) net commission of
$5,000 50,000 5,000 90,000 0 0 95,000
Issuance of common stock for services to
consultant ($.267 per share) 15,000 1,500 2,500 0 0 4,000
Issuance of common stock ($2.00 per
share) to acquire business 30,984 3,098 58,870 0 0 61,968
Common stock repurchase commitment 0 0 0 (61,968) 0 (61,968)
Net (loss) 0 0 0 0 (34,716) (34,716)
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1997 3,795,984 $ 379,598 $ 88,706 $ (61,968) $ (34,716) $ 371,620
========= ========= ========= ========= ========= =========
Page 4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net (loss) income $ (34,716) $ 79,182
Cash provided (used) by operating activities:
Depreciation and amortization 184,347 182,890
Contributed materials 0 (77,153)
Issuance of stock for services 4,000 0
Change in operating assets and liabilities:
Students accounts and notes receivable (1,113,560) 178,813
Notes receivables from stockholders (156,300) 0
Inventory 15,929 11,943
Prepaid expenses and other assets (56,186) (219,556)
Accounts payable 5,986 (2,432)
Student refunds payable and credit balances (122,263) 86,126
Accrued liabilities 24,386 7,414
Rent payable, related party 132,902 0
Deferred tuition income 153,538 (265,701)
----------- -----------
Net cash (used) by operating activities (961,937) (18,474)
----------- -----------
Cash flows from investing activities:
Investment in acquisition of business (100,000) 0
Purchases of property and equipment (11,551) (35,657)
----------- -----------
Net cash (used) by investing activities (111,551) (35,657)
----------- -----------
(Continued on next page)
Page 5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(CONTINUED)
1997 1996
----------- -----------
Cash flows from financing activities:
<S> <C> <C>
Sale of common stock $ 202,750 $ 0
Commission paid for sale of stock (10,000) 0
Proceeds from debt 1,600,404 391,712
Payments of debt (759,897) (19,692)
Payments of related party debt (252,925) 0
Distribution to owner 0 (12,326)
----------- -----------
Net cash provided by financing activities 780,332 359,694
----------- -----------
Net (decrease) increase in cash (293,156) 305,563
Cash, beginning of period 311,986 6,423
=========== ===========
Cash, end of period $ 18,830 $ 311,986
=========== ===========
Supplemental disclosure of cash flow information:
Cash payments for interest $ 91,091 $ 25,302
=========== ===========
Non-cash transactions:
Note receivable - related party exchanged for student loans $ 200,000 $ 0
=========== ===========
Investment in acquisition of business exchanged for stock $ 61,968 $ 0
=========== ===========
Reorganization of Company $ 282,540 $ 0
=========== ===========
Distribution to owner converted to debt $ 216,520 $ 0
=========== ===========
Page 6
</TABLE>
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND NATURE OF BUSINESS
-----------------------------------
Siemann Educational Systems, Inc. (the "Company") was incorporated in
the State of Colorado on September 17, 1987. The Company, through its
wholly-owned subsidiary, Denver Automotive and Diesel College, Inc.,
(the "School") (formerly Siemann Educational Systems, Inc.) is engaged
in the business of operating a proprietary vocational college located
in Denver, Colorado. The majority of students are drawn from the
Denver metropolitan area, with the remainder drawn from various other
surrounding states.
A significant portion of the Company's revenues are provided by
students who participate in government financial aid programs. Of
total tuition revenue, revenue derived from governmental aid was
approximately $860,000, or 31% and $2,275,000, or 81% for the years
ended December 31, 1997 and 1996, respectively. In connection with
this participation, the Company is subject to rules and regulations
promulgated by the U.S. Department of Education. Failure to comply
with the terms and provisions of this participation could lead to
suspension or termination of the Company's ability to participate in
government financial aid programs and, consequently, could adversely
affect the Company's operations.
On September 12, 1996, the U.S. Department of Education notified the
School that it had lost its eligibility to continue its participation
in the Federal Family Education Loan ("FFEL") Programs authorized by
Title IV of the Higher Education Act of 1965, as amended. This was a
result of the School's cohort default rates from each of the fiscal
years, 1991 to 1993, exceeding the eligibility threshold of 25%. The
School made application with the U.S. Department of Education to
regain eligibility to participate in the FFEL Programs and has
received notification from the U.S. Department of Education that,
effective October 1, 1997, the School is again eligible to participate
in the FFEL programs.
On August 13, 1997, the School entered into an Agreement and Plan of
Reorganization with Chartwell Cable Fund, Inc., ("Chartwell"), a
public company. The reorganization was completed on August 31, 1997.
At a special meeting of the shareholders of Chartwell on September 18,
1997, Chartwell's name was changed to Siemann Educational Systems,
Inc.
CONSOLIDATION
-------------
The accompanying consolidated balance sheet at December 31, 1997
includes the accounts of the Company and its wholly-owned subsidiary,
Denver Automotive and Diesel College, Inc. All significant
intercompany transactions have been eliminated in consolidation.
Page 7
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
REVENUE RECOGNITION
-------------------
Revenue is derived primarily from courses taught at the School.
Textbook sales to students are recognized when the semester/school
year begins. Cafeteria and other miscellaneous revenues are recognized
as services are performed. Deferred tuition revenue represents amounts
billed for the current educational year, reduced for tuition revenue
recognized pro rata during the year. If a student withdraws, unearned
revenue is reduced by the amount of lost revenue and a refund due to
the student is recorded. Refunds are calculated in accordance with
federal, state and accrediting agency standards.
ACCOUNTS RECEIVABLE
-------------------
Accounts receivable represent outstanding tuition and fee balances due
from students. Allowances for doubtful accounts have been established
to record amounts deemed by management to be uncollectible.
CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS
------------------------------------------------------
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information About Financial Instruments with Off-Balance Sheet Risk
and Financial Instruments with Concentrations of Credit Risk",
requires disclosure of significant concentrations of credit risk
regardless of the degree of such risk. Financial instruments with
significant credit risk include cash, accounts and notes receivable.
The carrying amount of assets reasonably approximates their fair
value, as determined by the amount of cash or the collectibility of
receivables. The carrying value of the Company's debt obligations
reasonably approximates their fair value as the stated interest rate
approximates current market interest rates of debt with similar terms.
As of December 31, 1997, cash balances did not exceed $100,000 at any
one bank. As of December 31, 1996, the Company maintained cash
balances in excess of $100,000 at one bank. The Company's accounts at
this bank are insured by the Federal Deposit Insurance Corporation up
to $100,000. Accounts and notes receivable from students are unsecured
and subject to significant credit risk. For many of the student loans,
the Company employs a loan servicing company. The Company's policy is
to aggressively pursue the collection of any delinquent loans. The
notes receivable from stockholder are secured by the stockholder's
home. The note receivable from the related party is secured by student
notes receivable purchased by the related party and shares of the
Company's common stock. The fair market value of the receivables
approximates the amount of the note.
Page 8
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
ACCOUNTING ESTIMATES
--------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Significant estimates have been made to determine bad debt expense and
the related allowance for uncollectible accounts and notes receivable.
INVENTORY
---------
Inventories consist of books and automotive and diesel repair parts
and supplies which are consumed in the educational activities of the
Company. Inventories are stated at the lower of cost or market, cost
being determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
classes of property and equipment. Lives range from three to five
years. Depreciation was $176,276 and $172,341 for the years ended
December 31, 1997 and 1996, respectively.
PERKINS MATCHING FUNDS
----------------------
The Company and the Federal Government together deposit money in the
U.S. Department of Education Title IV Perkins Loan Program in a ratio
of 1 to 9, respectively. As loans are repaid, the amounts collected
are re-loaned to new students. Should the loan program in which the
School has invested be terminated, the Company will receive its
respective share of the resulting cash. The Company's approximate
share as of December 31, 1997 and 1996 is presented in the
accompanying balance sheets at $70,000.
Page 9
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
PREPAID EXPENSES
----------------
The Company prepaid a consulting firm $25,000 for services to be
rendered over a twelve month period, beginning September, 1997.
Accordingly, the Company is amortizing the prepayment on a straight
line basis over a twelve month period. Amortization expense was $4,795
for the year ended December 31, 1997.
INTANGIBLE ASSETS
-----------------
Intangible assets consist of the Company's organization costs, which
are being amortized over five years. Amortization expense was $3,276
and $10,549 for the years ended December 31, 1997 and 1996,
respectively. The intangible assets are fully amortized as of December
31, 1997.
STUDENT REFUNDS PAYABLE AND CREDIT BALANCES
-------------------------------------------
Student refunds payable in the accompanying balance sheets represent
refunds due and payable on behalf of students who withdrew in prior
periods. Student credit balances represent the excess of payments
received over current tuition billings for active students. Student
refunds and credit balances are combined in the accompanying balance
sheet where the credit balances comprise the majority of the amounts
displayed. Credit balances were $16,222 and $138,983 at December 31,
1997 and 1996, respectively.
CONTRIBUTED MATERIALS
---------------------
Periodically, automobile manufacturers and automobile local dealers
contribute tools and vehicles to the School that are restricted solely
for use in educational activities. These materials are consumed in the
educational process and ultimately scrapped. Once the materials are
contributed, the School has no obligation to return them to the
manufacturers or dealers.
Page 10
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
ADVERTISING COSTS
-----------------
Advertising costs are charged to operations when incurred and included
in selling and promotion expenses. Advertising expense amounted to
$149,331 and $133,112 for the years ended December 31, 1997 and 1996,
respectively.
INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
-----------------------------------------------------------
Income (loss) per share is the amount of earnings (loss) for the
period for each common stock share outstanding. Earnings is defined as
operating income (loss) less preferred stock dividends for the period.
The number of outstanding common shares is determined by the weighted
average of shares outstanding during the period. Diluted earnings per
share, if any, is the basic earnings per share for the period adjusted
for the assumed exercise or conversion of all stock options, warrants
or other securities convertible into common stock provided the
resulting earnings per share is not anti-dilutive. In years of net
loss, there is no diluted earnings per share since the result would be
anti-dilutive.
For 1996, net income per common share is computed based on the
weighted average number of common shares outstanding of 400,000
shares.
In February 1997 SFAS No. 128, "Earnings Per Share", was issued
effective for periods ending after December 15, 1997. There is no
impact on the Company's 1996 financial statements from adoption of
SFAS No. 128. The Company has adopted the provisions of SFAS No. 128
effective for the year ending December 31, 1997. Common shares owned
by the former sole shareholder of Siemann prior to the completion of
the merger with Chartwell are considered outstanding for all periods
presented. Shares outstanding for Chartwell prior to merger with
Siemann are considered outstanding beginning on August 31, 1997. Stock
warrants are not considered in the calculation of net loss per share
as their inclusion would be anti-dilutive. Shares that are subject to
repurchase are considered outstanding. Excluding the shares subject to
repurchase does not affect the loss per share. The weighted average
number of common shares outstanding for the year ended December 31,
1997 was 2,185,600.
STATEMENT OF CASH FLOWS
-----------------------
For the purposes of the statements of cash flows, the Company
considers investments and savings instruments with maturities of three
months or less to be cash equivalents.
Page 11
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to the December 31, 1996
financial statements to conform to the December 31, 1997 presentation.
New Accounting Standards:
STOCK-BASED COMPENSATION
------------------------
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), was issued in October,
1995 by the Financial Accounting Standards Board. SFAS No. 123
provides an alternative method of accounting for stock-based
compensation arrangements, based on fair value of the stock-based
compensation utilizing various assumptions regarding the underlying
attributes of the options and stock, rather than the existing method
of accounting for stock-based compensation which is provided in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). The Financial Accounting
Standards Board encourages entities to adopt the fair-value based
method but does not require adoption of this method. The Company will
continue its current accounting policy under APB No. 25 but has
adopted the disclosure-only provisions of SFAS No. 123 for any options
and warrants issued to employees, directors, or consultants. For 1997
and 1996 no expense has been recorded.
CAPITAL STRUCTURE
-----------------
In February 1997, the Financial Accounting Standards Board issued SFAS
No, 129, "Disclosure of Information about Capital Structure" ("SFAS
No. 129"), which requires companies to disclose all relevant
information regarding their capital structure. SFAS No. 129
presentation is required for reporting periods ending after December
15, 1997. Based on the capital structure disclosures presented in the
accompanying consolidated financial statements and notes thereto, the
Company does not believe that any additional disclosures are required
as a result of adopting this pronouncement.
Page 12
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
SEGMENT REPORTING
-----------------
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which amends the requirements for a
public enterprise to report financial and descriptive information
about its reportable operating segments. Operating segments, as
defined in the pronouncement, are components of an enterprise about
which separate financial information is available and that is
evaluated regularly by the Company in deciding how to allocate
resources and in assessing performance. The financial information is
required to be reported on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources
to segments. The disclosures required by SFAS No. 131 are effective
for all fiscal years beginning after December 15, 1997. The Company
adopted SFAS No. 131 in 1997. For both years ended December 31, 1996
and 1997, there is no impact on the financial statements or
disclosures.
COMPREHENSIVE INCOME
--------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
establishes standards for the reporting of comprehensive income. This
pronouncement requires that all items recognized under accounting
standards as components of comprehensive income, as defined in the
pronouncement, be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive
income includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. The
financial statement presentation required under SFAS No. 130 is
effective for all fiscal years beginning after December 15, 1997. The
Company has not adopted SFAS No. 130 in 1997 but will do so in 1998.
NOTE 2 - RECAPITALIZATION AS A RESULT OF REORGANIZATION
Pursuant to the Agreement and Plan of Reorganization effective August
31, 1997, Chartwell issued 400,000 shares of common stock to the sole
shareholder of Siemann in exchange for all of the issued and
outstanding common shares of the Siemann. In addition, on June 4,
1997, the former sole shareholder of Siemann purchased 2,250,000
common shares of Chartwell, resulting in a majority ownership of the
consolidated Company.
Page 13
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
For legal purposes, Chartwell has acquired Siemann and is the parent
company of Siemann following the merger. However, for accounting
purposes, Siemann is the acquiring company in a reverse acquisition of
Chartwell. As a result, the financial statements presented herein
prior to August 31, 1997 are those of Siemann except for the equity
section of the balance sheets, which utilizes the pre-merger capital
structure of Chartwell. In addition, the retained deficit of Siemann
and Chartwell (a subchapter S corporation) at August 31, 1997 have
been eliminated and charged to additional paid in capital. As a
result, the accumulated deficit at December 31, 1997 is equivalent to
the loss for the year since the date of acquisition. Prior to the
acquisition, Chartwell had been a shell corporation with no
operations.
The acquisition has been accounted for as a purchase and the results
of operations of the acquired business are included in the
consolidated financial statements from the date of acquisition. The
following represents the unaudited pro forma results of operations as
if the above-noted business combination had occurred at the beginning
of the respective year in which the company was acquired as well as at
the beginning of the immediately preceding year:
1997 1996
---- ----
Net sales $ 3,112,009 $ 3,000,087
Net income (loss) $ (41,541) $ 54,258
Earnings (loss) per share $ (.01) $ .01
NOTE 3 - NOTE RECEIVABLE - RELATED PARTY
The note receivable of $200,000 at December 31, 1997 from a related
party bears interest at 6% per annum, payable monthly. Principal is
due in full on August 28, 1998. The note represents consideration for
the sale of certain student loans and is secured by those loans and
50,000 shares of the common stock in the Company.
Page 14
<PAGE>
NOTE 4 - NOTES RECEIVABLE - STOCKHOLDER
Notes receivable - stockholder consisted of the following:
December 31,
1997 1996
------------------------
Note receivable from majority
stockholder, interest at 7%
per annum payable quarterly;
principal and accrued interest
due in full on December 31,
1998; secured by Deed of Trust
on real property of the
stockholder. $ 60,000 $ 60,000
Note receivable from majority
stockholder, interest at 7%
per annum payable quarterly;
principal and accrued interest
due in full on August 29,
1998; secured by Deed of Trust
on real property of the
stockholder. 88,300 --
Note receivable from majority
stockholder, interest at 7%
per annum payable quarterly;
principal and accrued interest
due in full on October 31,
1998, secured by Deed of Trust
on real property of the
stockholder. 20,000 --
Note receivable from majority
stockholder, interest at 7 %
per annum payable quarterly
principal and interest due in
full on December 31, 1998;
secured by real estate. 48,000 --
-------- --------
$216,300 $ 60,000
======== ========
NOTE 5 - PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
December 31,
1997 1996
----------------------
Furniture, equipment and vehicles $ 898,569 $ 887,018
Equipment under capital
leases 15,031 15,031
--------- ---------
913,600 902,049
Less accumulated depreciation
and amortization (628,826) (452,550)
--------- ---------
$ 284,774 $ 449,499
========= =========
Page 15
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
All furniture, equipment and vehicles are pledged as collateral for
the bank loan, with specific vehicles pledged as collateral to finance
companies.
The Company leased instructional equipment under capital leases during
part of 1996, after which time the Company purchased substantially all
of the leased equipment.
NOTE 6 - INVESTMENT IN ACQUISITION OF BUSINESS
During 1997 the Company entered into an agreement with the owner of
Data Processing Trainers, Inc. ("DPT") to acquire 100% of the stock of
DPT. As discussed in Note 14, the Company acquired DPT subsequent to
year end.
As of December 31, 1997, the Company's investment in the purchase of
DPT of $223,936 includes a cash deposit of $100,000, additional
accrued costs of $61,968 payable in cash and stock valued at $61,968.
NOTE 7 - DEBT
The Company owes the following debt:
December 31,
1997 1996
-----------------------
Note payable to bank, monthly
principal and interest
payments of $5,856, interest
at 9.5% per annum, due April,
2002, cross- collateralized by
accounts receivable, notes
receivable and equipment. $ 251,639 $ --
Note payable to bank, monthly
principal and interest
payments of $3,910, interest
at 10%, collateralized by
inventory, accounts receivable
and equipment. Entire
principal and interest paid in
1997. -- 183,406
Page 16
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Outstanding principal on
$500,000 revolving line of
credit from a bank, monthly
interest payments through
October 1998; beginning
November, 1998 monthly
principal and interest
payments of $16,049, interest
at 9.5% , due November, 2002,
collateralized by student
loans. 387,032 --
Outstanding principal on
$350,000 revolving line of
credit from a bank, monthly
interest payments at 9.5%,
remaining principal and
interest due April, 1998,
collateralized by equipment. 349,669 --
Note payable to finance
company, monthly principal and
interest payments of $465,
interest at 7.99% , due
February, 1999, collateralized
by security interest in
Company vehicle. 6,217 11,301
Note payable to finance
company, monthly principal and
interest payments of $1,358,
interest at 8.5% , due April,
2001, unsecured. 46,975 --
Note payable to finance
company, monthly principal and
interest payments of $261,
interest at 6.0%, due March,
1999, collateralized by
security interest in Company
vehicle. 3,752 6,584
Note payable to individual,
monthly principal and interest
payments of $266, interest at
10.5%, due May, 1999,
unsecured. 4,195 7,026
Note payable to individual,
interest at 10.5%, due in full
July, 1998, unsecured. 10,000 10,000
Page 17
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Capital lease with leasing
company, monthly principal and
interest payments of $342,
interest at 13%, due February,
2000. 8,400 9,055
--------- ---------
1,067,879 227,372
Less current portion (462,149) (43,162)
--------- ---------
$ 605,730 $ 184,210
========= =========
Aggregate maturities of long-term debt at December 31, 1997, are as
follows:
YEAR ENDING DECEMBER 31,
------------------------
1998 $ 462,149
1999 239,779
2000 256,263
2001 83,560
2002 and thereafter 26,128
------------
$ 1,067,879
============
NOTE 8 - NOTE PAYABLE TO STOCKHOLDER AND RELATED PARTY
The Company owes its majority stockholder and president $355,307 and
$391,712 in four notes as of December 31, 1997 and 1996, respectively.
The notes payable to the stockholder bear interest at 7% per annum.
The balance of principal and interest on the notes are due December
31, 1999. No periodic payments of principal or interest are due. The
note is unsecured.
NOTE 9 - STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorize the issuance of
10,000,000 shares of preferred stock with $.10 par value. The
preferred stock may be issued from time to time with such designation,
rights, preferences and limitations as the Board of Directors may
determine by resolution. As of December 31, 1997, no shares of
preferred stock have been issued.
In addition to common stock transactions described in Note 2, the
following transactions occurred during 1997. On August 29, 1997,
50,000 shares of stock and a warrant were sold for $100,000, less
commission costs of $5,000. The warrant permits the holder to buy
50,000 shares at a price of $4.00 per share. The warrant expires
August 29, 1998. Subsequent to the reorganization of the Company,
discussed in Note 2, an additional 50,000 shares of stock and a
warrant were sold on September 26, 1997 for $100,000, less commission
costs of $5,000. The warrant permits the holder to buy 50,000 shares
at a price of $4.00 per share. The warrant expires September 26, 1998.
On October 1, 1997, 15,000 shares valued at $4,000 were issued for
services performed by a consultant. This valuation is based on the
value of the services provided to the Company.
Page 18
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
On December 19, 1997 and as discussed in Note 14, the Company entered
into an agreement that modified the Letter of Intent to acquire Data
Processing Trainers, Inc. ("DPT"). Per the agreement, 30,984 shares
valued at $61,968 (issued and repurchasable at $2.00 per share) were
issued in December to the owner of DPT. As of December 31, 1997, the
amount representing these repurchasable shares, $61,968, has been
classified as a current liability with a corresponding reduction of
stockholders' equity. Subsequent to December 31, 1997, the Company
issued 38,580 additional shares of common stock to the owner of DPT.
All of these shares were repurchased by the Company on March 24, 1998
with the acquisition of DPT.
In July 1997, the subsidiary of the Company issued stock options to a
third party pursuant to an agreement, which has since been terminated
and the stock options extinguished.
NOTE 10 - OPERATING LEASE AND OTHER RELATED PARTY TRANSACTIONS
The Company leases its Denver school facility under an operating lease
from a company owned by the majority stockholder of the Company. The
net rental expense was $156,000 and $174,802 for the years ended
December 31, 1997 and 1996, respectively. The following is a schedule
by years of future net minimum rental payments required under the
operating lease which expires September 1, 2000:
YEAR ENDING DECEMBER 31,
------------------------
1998 $ 172,652
1999 169,736
2000 119,264
------------
$ 461,652
============
On December 31, 1996, the School entered into an agreement, as
amended, with its stockholder providing for the deferment of rent
payments. Rent deferrals commenced in January 1997, and bear interest
at 7% per annum payable quarterly, due in full on August 31, 2000.
Page 19
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
As discussed in Note 4, the Company holds notes receivable due from
its president and majority stockholder.
As discussed in Note 3, the Company holds a note receivable due from a
related party, who also provided consulting services.
As discussed in Note 8, the Company owes its majority stockholder
$355,307 and $391,712 at December 31, 1997 and 1996, respectively.
On April 28, 1997 the company entered management agreements with
related parties. Related consulting fees of $18,930 were paid in 1997.
A small amount of office space in a building owned by a company which
is owned by the majority stockholder is provided to the Company at no
cost. Due to the insignificance in total square footage, no cost is
assigned to the donated space.
NOTE 11 - INCOME TAXES
The Company's legal acquirer, Chartwell, has incurred cumulative net
operating losses since inception and, as a result, no provision for
income taxes is necessary for the year ended December 31, 1997 and no
deferred tax asset has been recorded because realization of the
benefit of the net operating losses is not assured. Prior to August
31, 1997, the school subsidiary elected, with the consent of its then
sole stockholder, to be taxed as a subchapter S corporation. The
income or loss of an S corporation is included in the income tax
return of the stockholder. Accordingly, the Company made no provision
for income taxes for the years ended December 31, 1997 and 1996. For
periods subsequent to December 31, 1997, the Company and its
subsidiary intend to file consolidated federal and state income tax
returns.
The net deferred tax asset at December 31, 1997 is as follows:
1997
---------
Net operating loss benefit carry-forward $ 675,063
Valuation allowance for deferred
tax assets (675,063)
---------
Net deferred tax asset $ --
---------
Page 20
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year end.
Deferred income tax assets are recorded to reflect the tax
consequences on future years of income tax carry-forward benefits,
reduced by benefit amounts not expected to be realized by the Company.
At December 31, 1997, the Company has approximately $1,658,603 of net
operating loss carry-forwards for tax purposes, primarily derived from
the predecessor Chartwell, available to offset future taxable income
which, if not utilized to reduce taxable income in future periods,
expire in the years 2007 to 2011.
NOTE 12 - EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution retirement (401K) plan for
its employees. All employees with twelve consecutive months of service
and 1,000 hours of service may participate. Eligible employees may
voluntarily contribute from 1% to 15%, but not more than the maximum
allowed by law (currently $9,500), of their compensation annually to
the plan. The Company may, at its election, make contributions to the
plan, which are equitably distributed to participant accounts.
Participants are fully vested for amounts that they contributed and
vest over six years in amounts contributed by the Company. The Company
has not made any contributions to the plan during any of the periods
presented in the accompanying statement of operations.
NOTE 13 - REGULATORY
The Company and its School are subject to extensive regulation by
federal and state governmental agencies and accrediting bodies. In
particular, the Higher Education Act of 1965, as amended (the "HEA"),
and the regulations promulgated thereunder by the U.S. Department of
Education ("DOE") subject the School to significant regulatory
scrutiny on the basis of numerous standards that schools must satisfy
in order to participate in the various student financial assistance
programs under Title IV of the HEA (the "Title IV Programs"). Under
the HEA and its implementing regulations, certain financial
responsibility and other regulatory standards must be complied with in
Page 21
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
order to qualify to participate in the Title IV Programs. Under such
standards, an institution must, among other things: (i) have an acid
test ratio (defined as the ratio of cash, cash equivalents, and
current accounts receivable to current liabilities) of at least 1:1 at
the end of each fiscal year, (ii) have a positive tangible net worth
at the end of each fiscal year, (iii) not have a cumulative net
operating loss during its two most recent fiscal years that results in
a decline of more than 10% of the institution's tangible net worth at
the beginning of that two-year period, (iv) collect 85% or less of its
education revenues from Title IV Program funds in any fiscal year, and
(v) not have cohort default rates on federally funded or federally
guaranteed student loans of 25% or greater for three consecutive
federal fiscal years. The DOE may measure the financial responsibility
standards on a school-by-school basis or on a corporate consolidated
basis. Any regulatory violation could be the basis for the initiation
of a suspension, limitation or termination proceeding against the
Company or its institution.
In November 1997, the DOE published new regulations regarding
financial responsibility to take effect in July 1998. The regulations
provide a transition year alternative which will permit institutions
to have their financial responsibility for the 1998 fiscal year
measured on the basis of either the new regulations or the current
regulations, whichever are more favorable. Under the new regulations,
the DOE will calculate three financial ratios for an institution, each
of which will be scored separately and which will then be combined to
determine the institution's financial responsibility. If an
institution's composite score is below the minimum requirement for
unconditional approval but above a designated threshold level, such
institution may take advantage of an alternative that allows it to
continue to participate in the Title IV Programs for up to three years
under additional monitoring and reporting procedures. If an
institution's composite score falls below this threshold level or is
between the minimum for unconditional approval and the threshold for
more than three consecutive years, the institution will be required to
post a letter of credit in favor of the DOE. The Company does not
believe that these new regulations will have a material effect on the
Company's compliance with the DOE's financial responsibility
standards.
The process of reauthorizing the HEA by the U.S. Congress, which takes
place approximately every five years, has begun and is expected to be
completed by 1998. It is not possible to predict the outcome of the
reauthorization process. Although there is no present indication that
the Congress will decline to reauthorize the Title IV Programs, there
can be no assurance that government funding for the Title IV Programs
will continue to be available or maintained at current levels, nor can
there be assurance that current requirements for student and
institutional participation in the Title IV Programs will be
unchanged. Thus, the reauthorization process could result in revisions
to the HEA that increase the compliance burden on the Company's
institutions. A reduction in funding levels for federal student
financial assistance programs could impact the Company's ability to
attract students.
Page 22
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
In order to operate and award degrees, diplomas and certificates and
to participate in the Title IV Programs, a campus must be licensed or
authorized to offer its programs of instruction by the relevant
agencies of the state in which such campus is located. The Company's
campus is licensed or authorized by the relevant agencies of the state
in which such campus is located. In addition, in order to participate
in the Title IV Programs, an institution must be accredited by an
accrediting agency recognized by the DOE.
With each acquisition of an institution that is eligible to
participate in the Title IV Programs, that institution undergoes a
change of ownership that results in a change of control, as defined in
the HEA and applicable regulations. In such event, that institution
becomes ineligible to participate in the Title IV Programs and may
receive and disburse only previously committed Title IV Program funds
to its students until it has applied for and received from the DOE
recertification under the institution's new ownership.
NOTE 14 - SUBSEQUENT EVENT
Subsequent to year end, the Company acquired DPT on March 24, 1998 for
a purchase price of $8,959,564. DPT, now a wholly-owned subsidiary of
the Company, is an accredited school offering a variety of vocational
and avocational training programs with two locations in Philadelphia,
Pennsylvania. The majority of students are drawn from the surrounding
metropolitan area.
The purchase price is comprised of: $3,869,564 in cash (including
$119,564 in repurchased common stock), which was paid, less a deposit
of $150,000, at the time of closing; a $4,340,000 promissory note; and
$750,000 in stock. The promissory note, dated March 24, 1998, requires
quarterly payments beginning in June, 1998 of $542,500 in principal
plus accrued interest at 7% per annum. The note is due March 24, 2000
and is secured by a Security Agreement-Stock Pledge and a Guaranty and
Security Agreement. Under the terms of the agreement, 59,782 shares of
the Company's common stock valued at $119,564 were repurchased at the
time of the closing by the Company for cash, leaving the balance of
$750,000 to be satisfied by the Company issuing on March 24, 1999 an
undetermined number of shares of non-registered common stock
equivalent to a value of $750,000 based on the ten day trailing
average market price at the time of the transfer.
Page 23
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
In order to fund the purchase price, the Company borrowed $2,000,000
from its president and majority stockholder and $2,900,000 from an
outside financing source. The debt of $2,000,000 to the president
bears 12% interest, interest only payable monthly, and is due on March
24, 2003. The president also received a warrant to purchase 732,360
shares of the Company's common stock for an aggregate price of $100
for the period ending March 24, 2003. The debt of $2,900,000 to the
outside source is payable interest only quarterly, bears 12% interest,
and is due on March 25, 2003. This lender received a warrant to
purchase 1,268,486 shares of the Company's common stock for a total
price of $100 through March 25, 2003.
Page 24
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
- --------------------------------------------------------------------------------
The name, age and term of office of each of the executive officers and
directors of the Company are set forth below:
Officer
or
Director
Name Position Held With the Company Age Since
- ---- ------------------------------ --- -----
Paul T. Siemann President, Chief Executive Officer 46 1997
and Director
Joseph R. Chalupa Vice President and Director 45 1997
Barbara S. Siemann Director 41 1997
Directors hold office for a period of one year from their election at the
annual meeting of shareholders or until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors. The Board of Directors has no audit, nominating or
compensation committee. CBAS, Inc., a principal stockholder of the Company,
currently receives a consulting fee of $3,000 per month for, among other things,
providing the consulting services of its principals to the Company.
Background
The following is a summary of the business experience of each officer and
director of the Company:
Paul T. Siemann has been the Chief Executive Officer and majority
stockholder of Institutional Financing Services, Inc. ("IFS") since 1977. IFS is
a Denver, Colorado based company engaged in fund-raising services for domestic
and international schools. He acquired DADC in 1993 and has been President of
DADC since that date. DADC is a wholly-owned subsidiary of the Company. Mr.
Siemann devotes approximately 80% of his time to the Company's affairs.
20
<PAGE>
Joseph R. Chalupa has been employed by DADC since 1976 and has been its
school director since 1991.
Barbara S. Siemann is Mr. Siemann's wife and devotes such time as is
necessary to the Company's affairs. She has been employed by IFS since 1977.
ITEM 10. EXECUTIVE COMPENSATION
- -------------------------------
Mr. Siemann, the Company's President, currently receives a salary of $7,000
per month and also receives rental payments for the Company's corporate office
and DADC facilities aggregating $13,000 per month. CBAS, Inc., a principal
stockholder of the Company, received a monthly consulting fee of $3,000 per
month in September, October, November and December 1997. No long term
compensation, stock options, bonuses, restricted stock awards or other
compensation has been awarded.
Compensation of the Company's Chief Executive Officer for each of the last
two years as set forth below:
Summary Compensation Table
Annual Compensation (1)
-----------------------
(a) (e) (f)
Name and Principal (b) (c) (d) Stock Other Annual
Position Year Salary($) Bonus($) Options Compensation($)
- ------------------ ---- --------- -------- ------- ---------------
Paul T. Siemann, 1997 28,000 0 0 0
President 1996 84,000 0 0 0
Joseph Chalupa, 1997 60,000 0 0 0
Vice President 1996 60,000 0 0 0
The Company's directors do not receive any cash compensation as directors,
although they are reimbursed for out-of-pocket expenses in attending Board of
Directors' meetings.
Stock Option Plan
The Company intends to adopt a stock option plan (the "Plan") which will
provide for the grant of options intended to qualify as "incentive stock
options" or "nonqualified stock options" within the meaning of Section 422 of
the United States Internal Revenue Code of 1986 (the "Code"). Incentive stock
options will be issuable only to eligible officers and key employees of the
Company.
The Company has not reserved any shares of Common Stock for issuance under
the Plan, which will be administered by its Board of Directors. Under the Plan,
the Board of Directors will determine which individuals shall receive options,
the time period during which the options may be partially or fully exercised,
the number of shares of Common Stock that may be purchased under each option and
the option price.
21
<PAGE>
The per share exercise price of the Common Stock will not be less than the
fair market value of the Common Stock on the date the option is granted. Subject
to certain exceptions, in the case of incentive stock options, the aggregate
fair market value (determined as of the date the option is granted) of the
Common Stock that any person may purchase in any calendar year pursuant to the
exercise of incentive stock options will not exceed $100,000. No person who
owns, directly or indirectly, at the time of the granting of an incentive stock
option, more than 10% of the total combined voting power of all classes of stock
of the Company will be eligible to receive incentive stock options under the
Plan unless the option price is at least 110% of the fair market value of the
Common Stock subject to the option on the date of grant. The stock options will
be subject to anti-dilution provisions in the event of stock splits, stock
dividends and the like.
No incentive stock options will be transferable by an optionee other than
by will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will only be exercisable by the optionee. The exercise date
of an option granted under the Plan will not be later than ten years from the
date of grant. Any options that expire unexercised or that terminate upon an
optionee's ceasing to be employed by the Company will become available once
again for issuance. Shares issued upon exercise of an option will rank equally
with other shares then outstanding.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Principal Stockholders
The following table sets forth the holdings of Common Stock by each person
who, as of March 31, 1997, holds of record or is known by the Company to hold
beneficially or of record, more than 5% of the Company's Common Stock, by each
officer and director, and by all officers and directors as a group. All shares
are owned beneficially and of record and the address of each person is in care
of the Company.
Name Amount of Ownership Percent of Class
- ---- ------------------- ----------------
Paul T. Siemann(1) 2,640,000 70.1
Joseph R. Chalupa 0 0.0
Barbara S. Siemann(1) 2,640,000 70.1
CBAS, Inc. 500,000 13.3
All officers and
directors as a
group (3 persons)(1) 2,640,000 70.1
(1) Paul T. Siemann and Barbara S. Siemann are husband and wife and hold in the
aggregate 2,640,000 shares.
22
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
In August 1997 the Company issued 2,250,000 shares of its Common Stock to
Paul T. Siemann ("Siemann") and 500,000 shares to CBAS, Inc. ("CBAS")for $.001
per share. Subsequently, the Company issued an additional 400,000 shares to
Siemann to acquire all of the outstanding capital stock of Siemann Educational
Systems, Inc., the owner of DADC and a company owned and controlled by Siemann.
CBAS acts as a consultant to the Company and receives a consulting fee of
$3,000 per month.
In July 1997 a subsidiary of the Company issued stock options to a third
party which have since expired.
The Company paid a consulting fee of $3,000 per month to CBAS for the
months of September, October, November and December 1997. See "Item 10 -
Executive Compensation".
In March 1998 in connection with the acquisition of DPT, Mr. Siemann loaned
the Company $2,000,000 evidenced by a promissory note bearing interest at 12%
per annum due March 25, 2003. As additional compensation for the loans, the
Company issued to Mr. Siemann warrants to purchase 732,360 shares of the
Company's Common Stock for a total of $100 until March 25, 2003. The warrants
also carry customary piggy back registration rights.
The Company has advanced loans to, and received loans from, Siemann. See
Notes 3, 4 and 8 to the Company's financial statements.
The Company leases its office and DADC facilities from Siemann. See "Item 2
- - Description of Property."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibits:
27.01 Financial Data Schedule
b. Three Reports on Form 8-K were filed during the last quarter of the
period covered by this Report. On September 8, 1997 a Report was filed
listing a change in control of the Company (Item 1), the execution by
the Company of an Agreement and Plan of Reorganization (Item 5) and an
undertaking to deliver the required financial statements in connection
with the Item 5 transaction described above (Item 7). On November 10,
1997 a Report was filed advising of a change in accountants (Item 4)
and a change in fiscal year (Item 8). Also on November 10, 1997 a
Report was filed providing the financial statements required in
connection with Item 5 of the September 8, 1997 Report.
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in Denver, Colorado, on April 10, 1998.
SIEMANN EDUCATIONAL
SYSTEMS, INC.
By
---------------------------------
Paul T. Siemann,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Paul T. Siemann
- ----------------------- President, Chief Executive April 10, 1998
Paul T. Siemann Chief Financial Officer
(Principal Accounting Officer)
and Director
/s/ Joseph R. Chalupa
- ----------------------- Vice-President and Director April 10, 1998
Joseph R. Chalupa
/s/ Barbara S. Siemann
- ----------------------- Secretary and Director April 10, 1998
Barbara S. Siemann
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 18,830 311,986
<SECURITIES> 0 0
<RECEIVABLES> 2,018,563 924,818
<ALLOWANCES> (197,756) (66,760)
<INVENTORY> 38,793 23,321
<CURRENT-ASSETS> 1,878,430 1,193,365
<PP&E> 913,600 902,049
<DEPRECIATION> (628,826) (452,550)
<TOTAL-ASSETS> 3,201,012 2,132,911
<CURRENT-LIABILITIES> 1,735,453 1,130,883
<BONDS> 1,093,939<F1> 575,922<F1>
0 0
0 0
<COMMON> 379,598 40,000
<OTHER-SE> (7,978) 386,106
<TOTAL-LIABILITY-AND-EQUITY> 3,201,012 2,132,911
<SALES> 2,970,413 3,035,824
<TOTAL-REVENUES> 3,110,345 3,197,018
<CGS> 1,299,616 1,408,293
<TOTAL-COSTS> 3,053,970 3,092,534
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 91,091 25,302
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (34,716) 79,182
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (34,716)<F2> 79,182<F2>
<EPS-PRIMARY> (.02) .20
<EPS-DILUTED> 0 0
<FN>
<F1> LONG TERM LIABILITIES
<F2> NET (LOSS) INCOME
</FN>
</TABLE>
