U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1943 (No Fee Required)
For the transition period from_______________________to_______________
Commission File number 33-18174-D
SIEMANN EDUCATIONAL SYSTEMS, INC.
- - --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Colorado 84-1067172
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
405 S. Platte River Drive, Suite 3A, Denver, Colorado 80223
-----------------------------------------------------------
(Address of principal executive offices)
303/733-9673
-------------------------------------
Issuer's telephone number
Check whether the issuer (1) filed all reports to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----------- -----------
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date.
3,765,000 shares of common stock were outstanding as of November 10, 1998.
- - --------------------------------------------------------------------------------
<PAGE>
Part One. FINANCIAL INFORMATION
Item 1. Financial Statements
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
September 30, December 31,
1998 1997
----------- ------------
(Unaudited) (Audited)
Current assets:
Cash $ 401,630 $ 18,830
Student accounts receivable 3,473,531 657,814
Student notes receivable 777,489 746,693
Note receivable - stockholder 68,002 216,300
Note receivable - related party 207,000 200,000
Inventory 84,711 7,392
Prepaid and other 42,475 31,401
Deferred stock offering costs 82,125 --
Deferred tax asset 54,325 --
----------- -----------
Total current assets 5,191,288 1,878,430
----------- -----------
Student accounts and notes receivable 781,972 718,275
Property and equipment, net of
accumulated depreciation 627,019 284,774
Investment in acquisition of business -- 223,936
Intangibles, net 8,765,187 --
Perkins matching funds 70,000 70,000
Other 32,995 25,597
----------- -----------
Total assets $15,468,461 $ 3,201,012
=========== ===========
2
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Liabilities and Stockholders' Equity
September 30, December 31,
1998 1997
---------- -------------
(Unaudited) (Audited)
Current liabilities:
Accounts payable $ 117,170 $ 123,449
Student refunds payable and credit balances 20,403 21,061
Payable to owner of business to be acquired -- 61,968
Accrued liabilities 713,608 133,321
Income taxes payable 20,117 --
Deferred tuition income 3,169,613 871,537
Common stock repurchase commitment -- 61,968
Note payable - stockholder 94,400 --
Current maturities of capital lease obligations 128,670 --
Current maturities of long-term debt 2,793,683 462,149
----------- -----------
Total current liabilities 7,057,664 1,735,453
----------- -----------
Rent payable, related party 132,902 132,902
Capital lease obligations 193,684 --
Long-term debt, net of current maturities
and discount 4,319,694 605,730
Deferred tax liability 34,208 --
Note payable - stockholder 2,115,966 355,307
----------- -----------
Total liabilities 13,854,118 2,829,392
----------- -----------
Redeemable warrants 211,863 --
----------- -----------
Stockholders' equity:
Common stock, $.10 par value,
100,000,000 shares authorized,
3,765,000 (1998) and 3,795,984 (1997)
shares issued and outstanding 376,500 379,598
Additional paid-in capital 948,278 88,706
Common stock repurchase commitment -- (61,968)
Retained earnings 77,702 (34,716)
----------- -----------
Total stockholders' equity 1,402,480 371,620
----------- -----------
Total liabilities and stockholders' equity $15,468,461 $ 3,201,012
=========== ===========
3
<PAGE>
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ----------- ----------- -----------
Revenue:
<S> <C> <C> <C> <C>
Tuition revenue $ 2,892,504 $ 815,610 $ 6,634,862 $ 2,133,454
College supply and cafeteria sales 110,358 33,904 241,605 122,871
Other 44,079 83,008 107,213 141,146
----------- ----------- ----------- -----------
Total revenues 3,046,941 932,522 6,983,680 2,397,471
Operating expenses:
Educational services and facilities 1,412,201 392,105 3,146,632 1,059,900
Cost of college supplies and cafeteria sales 99,866 39,878 260,536 131,774
Selling and promotion 307,210 151,954 725,514 425,612
General and administrative 661,209 113,428 1,723,176 317,320
Depreciation and amortization 155,965 46,648 360,663 136,594
Bad debt expense 24,844 109,126 102,287 166,942
----------- ----------- ----------- -----------
Total operating expenses 2,661,295 853,139 6,318,808 2,238,142
----------- ----------- ----------- -----------
Income from operations 385,646 79,383 664,872 159,329
Interest income 30,171 -- 63,322 --
Interest (expense) (270,442) (33,964) (615,776) (52,897)
----------- ----------- ----------- -----------
Income before provision for income taxes 145,375 45,419 112,418 106,432
Provision for income taxes:
Current -- -- -- --
Deferred -- -- -- --
----------- ----------- ----------- -----------
Total provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net income $ 145,375 $ 45,419 $ 112,418 $ 106,432
=========== =========== =========== ===========
Net income (loss) per common share
Basic $ 0.04 $ 0.01 $ 0.03 $ 0.06
=========== =========== =========== ===========
Fully diluted $ 0.02 $ 0.01 $ 0.02 $ 0.06
=========== =========== =========== ===========
Weighted number of common shares outstanding
Basic 3,765,000 3,335,870 3,776,583 1,651,282
=========== =========== =========== ===========
Fully diluted 6,265,846 3,335,870 5,517,098 1,651,282
=========== =========== =========== ===========
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
1998 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 112,418 $ 106,432
Cash provided (used) by operating activities:
Depreciation and amortization 360,663 136,594
Contributed assets (25,838) --
Contributed materials -- 25,718
Changes in operating assets and liabilities:
Student accounts and notes receivable (1,457,521) (1,176,576)
Inventory 538 --
Prepaid expenses and other assets 13,506 (4,926)
Deferred tax assets and liabilities (20,117) --
Accounts payable (68,696) (2,261)
Student refunds payable and credit balances (658) (94,699)
Accrued liabilities and income taxes 375,800 6,741
Rent payable, related party -- 142,683
Deferred tuition revenue 867,365 481,564
----------- -----------
Net cash provided (used) by operating activities 157,460 (378,730)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (80,369) (11,493)
Collections on loans to related parties 148,300 --
Loans to related parties (7,000) --
Acquisition of subsidiary, net of cash acquired (3,521,100) --
----------- -----------
Net cash provided (used) by investing activities (3,460,169) (11,493)
----------- -----------
Cash Flows from Financing Activities:
Loan fees and costs (8,751) --
Proceeds from debt 3,255,052 330,364
Proceeds from debt - related party 2,118,987 --
Payments of debt and capital leases (1,430,269) (6,405)
Cash received in merger -- 102,750
Distributions to stockholder -- (216,520)
Deferred stock offering costs (82,125) --
Payments of related party debt (167,385) --
----------- -----------
Net cash provided (used) by financing activities 3,685,509 210,189
----------- -----------
Net increase (decrease) in cash 382,800 (180,034)
Cash, beginning of period 18,830 311,986
=========== ===========
Cash, end of period $ 401,630 $ 131,952
=========== ===========
5
</TABLE>
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
Supplemental disclosure of cash flow information:
Cash payments for interest $ 470,992
===========
Non-cash investing and financing transactions:
Investment in subsidiary $ 9,052,532
Future stock to be issued in payments (750,000)
Note to prior owner (4,340,000)
Cash acquired with acquisition (341,432)
Earnest money from prior periods applied (100,000)
===========
Cash paid for subsidiary $ 3,521,100
===========
Loan fees and costs $ 174,916
Loan discounts (146,165)
Deposit from prior periods applied (20,000)
===========
Cash paid for loan fees/costs $ 8,751
===========
Warrants issued with financing $ 380,306
===========
Equipment acquired under capital lease $ 145,517
===========
6
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
1. BASIS OF PRESENTATION AND ORGANIZATION
--------------------------------------
The balance sheet as of September 30, 1998, the statements of operations for the
three months and nine months ended September 30, 1998 and 1997, and the
statements of cash flows for the nine months ended September 30, 1998 and 1997,
have been prepared by the Company. In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present fairly the
financial position, results of operations, and changes in cash flows at
September 30, 1998, and for all periods presented, have been made. The balance
sheet as of September 30, 1998, and the statements of operations and cash flows
for the nine months ended September 30, 1998, include additional officer
compensation expense and related accrued liabilities for the first and second
quarters of 1998 in the amounts of $36,000 and $45,000, respectively. The first
and second quarter 1998 financial statements will be amended accordingly to
include this additional expense and liability.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is recommended that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's December 31, 1997 10-KSB. The results of
operations for the nine months ending September 30, 1998 and 1997 are not
necessarily indicative of the operating results for the full year.
2. ACQUISITION OF SUBSIDIARY AND RELATED DEBT
------------------------------------------
The Company acquired Data Processing Trainers, Inc. ("DPT") on March 24, 1998,
for a purchase price of $9,030,624. DPT, now a wholly-owned subsidiary of the
Company, is an accredited school offering a variety of vocational 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: $3,940,624 in cash (including $119,564 in
repurchased common stock), which was paid, less a deposit of $100,000, 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 $119,654 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.
The acquisition is being accounted for as a purchase with a substantial portion
of the purchase price being allocated to goodwill. The goodwill is being
amortized over forty years. The following pro forma information is presented as
if the acquisition occurred at the beginning of each of the periods:
Nine Months Ended
September 30,
1998 1997
--------- -----------
Pro forma revenues $9,044,738 $7,481,801
Pro forma net income 222,920 257,984
Pro forma basic earnings per share $.01 $.16
Pro forma fully diluted earnings per share $.01 $.06
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 24, 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.
7
<PAGE>
The warrants were valued at approximately $380,000, which is presented on the
balance sheet as a discount from the debt and is being amortized over the life
of the term of the related notes payable. The costs of obtaining the financing
have been deferred and are also being amortized over the term of the notes
payable.
3. COMMITMENTS
-----------
In July, 1998, the Company signed a letter of intent with an underwriter to sell
approximately 1,857,000 shares of common stock at approximately $7 per share.
The sale has been temporarily suspended until 1999 due to current market
conditions.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial condition of
the Company should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto appearing elsewhere herein.
The discussion below contains certain forward-looking statements (as such term
is defined in Section 21E of the Securities Exchange Act of 1934) that are based
on the beliefs of the Company's management, as well as assumptions made by , and
information currently available to, the Company's management. The Company's
actual growth, results, performance and business prospects and opportunities in
1998 and beyond could differ materially from those expressed in, or implied by,
any such forward-looking statements. See "Special Note Regarding Forward-Looking
Statements" on page 12 for a discussion of risks and uncertainties that could
cause or contribute to such material differences.
Background and Overview
Siemann Educational Systems, Inc. ("SES") operates two private for-profit
post-secondary vocational schools: Denver Automotive and Diesel College ("DADC")
and Data Processing Trainers, Inc. ("DPT"). DADC, located in Denver, Colorado,
provides training in automotive and diesel mechanics; the school had 283
enrolled students as of September 30, 1998. The school is a "Master Certified
Automotive School" by the National Automotive Technicians Education Foundation,
and offers several associate degree and non-degree programs. DPT, acquired by
the Company on March 24, 1998 as more fully discussed below under
"Acquisitions", consists of two campuses in the Philadelphia, Pennsylvania, area
providing training in the areas of computer programming, business computer
applications, medical office administration, and English as a second language.
DPT's two campuses had enrollment of approximately 980 students on September 30,
1998. DADC's enrollment is slightly lower than on September 30, 1997, reflecting
the continuing low unemployment rate in the general economy; DPT's enrollment
has remained generally constant over the past year because it has reached the
limits of its current physical capacity. Both schools have long histories,
dating to 1963 (DADC) and 1987 (DPT). DADC has been operated by the Company
since August 31, 1997, and, as noted above, DPT was acquired by the Company in
March, 1998. For the period November, 1993 to August 31, 1997, DADC was operated
by an S corporation owned by the Company's current CEO and primary stockholder.
DPT's northeast Philadelphia campus has contracted for expansion space in a new
location; it is anticipated that the new facilities will be occupied by DPT in
January of 1999. The campus is occupying its current facility on a
month-to-month basis until the move. This expansion will result in the ability
to increase the student body at that campus from the current 700 to
approximately 1,400. The school expects to have an additional 120 students
enrolled by June of 1999. Current tuition revenue is approximately $900 per
month per student. Rent expense is expected to increase by approximately $9,500
per month at the new facility.
The Company's principal sources of revenues are tuition, related fees, and book
sale charges collected from its students. Both schools record tuition at the
start of each academic term as deferred tuition income, a current liability.
During the term, the applicable portion of deferred tuition income is recognized
as revenue each month based on aggregate number of credit hours taken by
students during the term. The year is divided into terms, which are determined
by start dates that vary by school and program. Payment of each term's tuition
may be made by full cash payment, financial aid, and/or an installment payment
plan. If a student withdraws from school prior to the completion of the term,
the Company refunds a portion of the tuition already paid which is attributable
to the uncompleted period of the term. The Company's campuses charge tuition at
varying amounts depending on both the school and the type of program and
curriculum. Each of the Company's campuses typically implements one or more
tuition increases annually; DADC's last increase was 5% in July of 1998, and DPT
is projecting a 6-7% increase in April of 1999. For both DADC and DPT, the
highest student body levels occur during the fall terms, beginning in
August/September.
The Company's expenses consist of educational and facilities costs, selling and
promotional expense, general and administrative expense, depreciation and
amortization, and bad debt expense.
Education costs generally consist of salaries and related expenses for faculty,
instructional support, academic administration, educational materials, and
related expenditures. Facility costs include leasing and maintenance of campus
facilities, and other building occupancy expenses.
Selling and promotional expenditures include the costs of advertising and
promotional materials, as well as salaries and benefits for recruitment and
marketing personnel.
9
<PAGE>
General and administrative expense includes salaries and benefits of accounting,
and school and corporate administration.
Depreciation and amortization consists of depreciation of purchased and
capital-leased computer equipment, automotive training equipment, and furniture
and fixtures. Amortization of intangible assets consists primarily of the costs
of goodwill acquired in the purchase of DPT, and loan fees associated with that
purchase.
Uncollectible student receivables are written off to bad debt expense on a
pro-rata basis through out the year. DADC experienced a period of ineligibility
for federal financial aid programs during 1996 and 1997; as a consequence, the
school substantially increased the level of tuition being financed by students
under installment payment plans. Bad debt expense has been approximately 4.2%
and 3.9% of DADC revenues in 1998 and 1997, respectively. As of February, 1998,
DADC has been reinstated in the federal student aid programs. DPT has
experienced bad debts of less than 1% of revenue in 1998 and 1997.
As a result of the S Corporation status of DADC until August 31, 1997, DADC was
not subject to federal and state income taxes until it was acquired by the
Company. The Company's operations from September 1, 1997 to December 31, 1997
resulted in a net operating loss carry-forward of approximately $152,700 as of
December 31, 1997. The tax benefit of the net operating loss was fully reserved
at December 31, 1997. It is expected that net profits generated by operations of
DPT from its date of acquisition will have consumed most of the loss
carry-forwards during the fourth quarter of 1998, and the Company expects to
record positive provisions for income taxes beginning with that quarter.
Acquisition
On March 24, 1998, the Company acquired all of the outstanding stock of DPT for
a purchase price of $9,030,624, and additional direct costs of acquisition of
approximately $21,900 were also capitalized; the acquisition was accounted for
as a purchase. The purchase price was determined through arms-length negotiation
with the independent third-party owner based on historical and projected future
cash flow and earnings. DPT had minimal tangible assets, and the difference
between the purchase price and the assets and liabilities assumed was recorded
as goodwill. None of the purchase price was allocated to identifiable intangible
assets such as leases, faculty and curriculum because little or no value was
attributable to these assets. The in-force lease on the facilities at one campus
terminated in October, 1998, and the facilities at the other campus have since
required expansion to fully meet the needs of the number of students and staff
even as of the date of acquisition. Acquired capital leases were all at market
rates.
The purchase price consisted of cash payments of $3,599,192 (net of cash
acquired), a $4,340,000 note payable to DPT's former owner, and $750,000 in
future stock to be issued. Funds used for the acquisition were borrowed from the
company's president (in the amount of $2,000,000) and a financing subsidiary of
a brokerage firm (in the amount of $2,900,000). Warrants to purchase 2,008,846
shares of the Company were issued in connection with this debt. Based on the
provisions of the warrant agreement, a substantial number of shares are expected
to be earned back by the Company; the remaining warrants were valued and
recorded at $380,306.
The acquisition of DPT resulted in the following balance sheet additions:
$1,452,689 to student accounts/notes receivable, $77,857 to book and materials
inventories, $308,206 to tangible fixed assets, $64,478 to prepaid and other
assets, $287,021 to accounts payable, $195,150 to capital lease obligations, and
$1,430,711 to deferred tuition liabilities. Cash of $341,432 was acquired, and
goodwill of $8,720,752 was recorded.
As a result of the acquisition, amortization expense is expected to be
approximately $218,000 annually. The loans from the shareholder and financing
subsidiary are due in five years, and interest expense at 12% will approximate
$588,000 annually until maturity. The note payable to the former owner of DPT
carries interest of 7%; interest expense will be approximately $200,000 in 1998
and $142,000 in 1999 on this note; the note is due in full two years from the
date of acquisition.
Liquidity and Capital Resources
September 30, 1998 as Compared to December 31, 1997
- - ---------------------------------------------------
The Company finances its operating activities and capital requirements,
including debt repayments, principally from cash provided by operating
activities and borrowings on lines of credit. The Company's cash balance
10
<PAGE>
increased $382,800 over the period ended December 31, 1997; the increase
resulted primarily from borrowings associated with the acquisition of DPT,
additional borrowings on lines of credit, and cash flows from the newly-acquired
operations of DPT.
Accounts receivable, net of the effects of the DPT acquisition discussed above,
increased by $609,616 (29%) at DADC and by $839,921 (58%) at DPT (from the date
of acquisition). The increase at DADC reflects the growth in installment credit
granted to students during the temporary Title IV ineligibility period arising
from the ownership change, and, primarily, normal fluctuations related to the
timing of start dates. Installment loans are payable by students over a period
ranging from one to five years from inception, while Title IV funds are
generally collected within the current academic year. DADC's Title IV
eligibility was restored as of the end of February, 1998. The receivable
increase at DPT is primarily attributable to normal start date fluctuations .
Deferred tuition liabilities, which represent the unearned portion of current
academic year receivables, increased by $501,170 at DADC (reflecting the
receivables and fall term student body increase), and by $366,195 at DPT (from
the date of acquisition). The DPT increase results from normal inter-period
start date timing fluctuations.
Capital expenditures unrelated to the acquisition during the period were
$80,369. The Company expects to incur approximately $400,000 in leasehold
improvements and other capital expenditures as a result of the planned January
1999 relocation of one of its Philadelphia campuses. A portion of the
improvements are being
Cash provided by operating activities of $157,460 for the nine-month period
ended September 30, 1998, primarily results from the addition of DPT operations
to the Company.
Results of Operations
September 30, 1998 as Compared to September 30, 1997
The following table summarizes the Company's operating results as a percentage
of net revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Educational services and facilities 46.3% 42.0% 45.1% 44.2%
Cost of college supplies/sales 3.3% 4.3% 3.7% 5.5%
Selling and promotion 10.1% 16.3% 10.4% 17.8%
General and administrative 21.7% 12.2% 24.7% 13.2%
Depreciation and amortization 5.1% 5.0% 5.2% 5.7%
Bad debt expense .8% 11.7% 1.5% 7.0%
-------------------------------------------------------
Income from operations 12.7% 8.5% 9.5% 6.6%
Interest expense - net 7.9% 3.6% 7.9% 2.2%
Provision for income taxes 0 0 0 0
=======================================================
Net income 4.8% 4.9% 1.6% 4.4%
=======================================================
</TABLE>
Total revenues. The Company's total revenues increased by $4,586,209 to
$6,983,680 for the nine months ended September 30, 1998, compared to the same
period of 1997. Revenues include $4,612,536 attributable to DPT's operations
from the date of acquisition to September 30. DADC's nine-month revenues
decreased $27,327 over the previous year due to a slight drop in student units.
Revenue for the three-month period ended September 30, 1998 increased by 5% over
the three-month period ended June 30, 1998.
Educational facilities and services. The educational services and facilities
cost increase of $2,086,732 in 1998 over the previous year's nine-month period
is all due to the inclusion of DPT's operations; DPT incurred $2,104,382 of such
costs in the period. These costs were relatively constant as a percent of
revenue over all periods.
Selling and promotion expense. Selling and promotion expense increased $299,902
over the previous year's nine-month period. Inclusion of DPT's expenses
accounted for all but $15,970 of the increase. As a percent of revenue, these
expenses decreased from 17.8% (reflecting DADC operations only) for the 1997
11
<PAGE>
period to 10.4% (based on both DADC and DPT operations) for the 1998 period;
DPT's expenses as a percent of revenue for 1998 year-to-date are 6%, while
DADC's are approximately 18%. DADC's selling and promotion expense increased 3%
for the 1998 period. The Company intends to focus on more effective utilization
of marketing resources in DADC operations.
General and administrative. General and administrative expenses increased by
$1,405,856 over the same period of 1997 as a result of indirect expenses
incurred in conjunction with the purchase of DPT, inclusion of DPT's general and
administrative expenses (accounting for $745,468 of the increase), and
continuing accounting and legal expenses associated with the Company's
transition to publicly-held status. These expenses as a percent of revenue
increased from 13.2% in the 1997 period to 24.7% in the 1998 period. The Company
expects these expenses as a percent of revenue to decrease slightly for the
remainder of 1998.
Depreciation and amortization. Amortization expenses, primarily goodwill
acquired in the DPT purchase, accounted for $141,940 of the $224,069 increase
for the 1998 period over the 1997 period. DPT's depreciation expense was $88,621
for the 1998 period, while DADC's expense was $130,102 for the 1998 period,
compared to $136,594 for the 1997 period.
Bad debt expense. Bad debt expense decreased $64,655 for the 1998 period over
the 1997 period; the decrease is due solely to DADC operations, and reflects the
lower percentage of student tuition funded through institutional financing in
the current year. The decrease as a percent of revenue from 7% to 1.5% is the
result of inclusion of DPT's lower bad debt rate.
Income from operations. Income from operations rose $505,543 over the 1997
period, reflecting the net increase from the inclusion of DPT in the Company's
operating results. DPT's pre-tax income from operations as a percent of revenue
was 26.9%; the Company believes the acquisition and expansion of DPT will
continue to favorably affect operating results, although the costs of moving and
expansion at DPT during the remainder of 1998 will amount to approximately
$275,000.
Interest expense. Interest expense increased $562,879 over the 1997 period,
attributable to acquisition and operations borrowings; the use of loan proceeds
to finance operations was required due to the period of temporary ineligibility
for Title IV funds associated with the ownership change during the first and a
portion of the second quarter.
Net income. Net income increased slightly, from $106,432 in the 1997 period to
$112,418 in the 1998 period. This period includes only six months of DPT
operations from the March 24, 1998, date of acquisition. DADC net income
decreased approximately $113,600 over the same period of 1997 due to lower
revenues and higher expenses in the selling/promotion and general and
administrative categories. Weighted number of shares outstanding reflects a
substantial increase from December 31, 1997, due to the issuances of shares in
connection with the conversion from privately-held to publicly-held status, and
issuances in conjunction with acquisition financing.
Year 2000. The Company is actively exploring with its current software providers
the extent and cost of any measures that may be required to address Year 2000
problems. The Company uses primarily off-the-shelf student record-keeping and
accounting software in its operations both these systems are currently under
review as to possible replacement within the next year. As a result, the Company
will have the opportunity to assure Year 2000 compliance for these systems prior
to purchase and installation. The Company intends to test its hardware systems
for Year 2000 recognition ability within the next six months.
Special Note Regarding Forward-Looking Statements. This Form 10Q contains
certain statements which reflect the Company's expectations regarding its future
growth, results of operations, performance, and business prospects and
opportunities. Wherever possible, words such as "anticipate", "believe", "plan",
"expect", and similar expressions have been used to identify these
"forward-looking" statements. These statements reflect the Company's current
beliefs and are based on information currently available to the Company.
Accordingly, these statements are subject to risks and uncertainties which could
cause the Company's actual growth, results, performance and business prospects
and opportunities to differ from those expressed in, or implied by, these
statements. These risks and uncertainties include implementation of the
Company's operating and growth strategy, risks inherent in operating private
for-profit post-secondary education institutions, risks associated with general
economic and business conditions, charges and costs related to acquisitions, and
the Company's ability to successfully integrate its acquired institutions,
attract and retain students at its institutions, meet regulatory and accrediting
agency requirements, compete with other institutions in its industry, and
attract and retain key employees and faculty. The Company is not obligated to
update or revise these forward-looking statements to reflect new events or
circumstances.
12
<PAGE>
PART II
Item 1. LEGAL PROCEEDINGS.
None.
Item 2. CHANGE IN SECURITIES
None.
Item 3. DEFAULTS ON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b). Reports on Form 8-K:
On April 8, 1998, the Company filed a Report on Form 8-K under
Item 2., "Acquisition or Disposition of Assets".
On June 9, 1998, the Company filed a Report on Form 8-K under Item
7., "Financial Statements and Exhibits" for DPT for the years
ended December 31, 1997 and 1996.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIEMANN EDUCATIONAL SYSTEMS, INC.
(Registrant)
By: /s/ PAUL T. SIEMANN
-------------------------------------
Paul T. Siemann, President and CEO
13
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 401,630
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211,863<F4>
0
<COMMON> 376,500
<OTHER-SE> 1,025,980
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