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 June 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 Identification No.)
incorporation or organization)
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 July 28, 1998.
- --------------------------------------------------------------------------------
<PAGE>
Part One. FINANCIAL INFORMATION
Item 1. Financial Statements
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
June 30, December 31,
1998 1997
----------- -----------
(Unaudited) (Audited)
Current assets:
Cash $ 249,717 $ 18,830
Student accounts receivable 3,286,433 657,814
Student notes receivable 765,365 746,693
Note receivable - stockholder 156,302 216,300
Note receivable - related party 200,000 200,000
Inventory 87,878 7,392
Prepaid and other 82,447 31,401
Deferred tax asset 20,117 --
----------- -----------
Total current assets 4,848,259 1,878,430
----------- -----------
Student accounts and notes receivable 807,559 718,275
Property and equipment, net of
accumulated depreciation 601,827 284,774
Investment in acquisition of business -- 223,936
Intangibles, net 8,829,028 --
Perkins matching funds 70,000 70,000
Other 31,120 25,597
----------- -----------
Total assets $15,187,793 $ 3,201,012
=========== ===========
2
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<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Liabilities and Stockholders' Equity
June 30, December 31,
1998 1997
----------- -----------
(Unaudited) (Audited)
Current liabilities:
<S> <C> <C>
Accounts payable $ 156,467 $ 123,449
Student refunds payable and credit balances 32,824 21,061
Payable to owner of business to be acquired -- 61,968
Accrued liabilities 508,346 133,321
Income taxes payable 20,117 --
Deferred tuition income 2,678,350 871,537
Common stock repurchase commitment -- 61,968
Note payable - stockholder 24,900 --
Current maturities of capital lease obligations 103,780 --
Current maturities of long-term debt 2,690,966 462,149
----------- -----------
Total current liabilities 6,215,750 1,735,453
----------- -----------
Rent payable, related party 135,228 132,902
Capital lease obligations 170,091 --
Long-term debt, net of current maturities and discount 4,908,405 605,730
Note payable - stockholder 2,208,351 355,307
----------- -----------
Total liabilities 13,637,825 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 13,327 (34,716)
----------- -----------
Total stockholders' equity 1,338,105 371,620
----------- -----------
Total liabilities and stockholders' equity $15,187,793 $ 3,201,012
=========== ===========
3
</TABLE>
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<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenue:
<S> <C> <C> <C> <C>
Tuition revenue $ 2,764,399 $ 610,537 $ 3,742,358 $ 1,317,844
College supply and cafeteria sales 83,080 46,123 131,247 88,969
Other 38,013 23,617 63,134 58,138
----------- ----------- ----------- -----------
Total revenues 2,885,492 680,277 3,936,739 1,464,951
Operating expenses:
Educational services and facilities 1,293,063 306,262 1,734,431 601,040
Cost of college supplies and cafeteria sales 117,422 48,291 160,670 91,896
Selling and promotion 268,356 116,169 418,304 248,520
General and administrative 663,436 130,710 980,967 299,064
Depreciation and amortization 149,512 40,458 204,698 86,670
Bad debt expense 38,937 27,916 77,443 57,816
----------- ----------- ----------- -----------
Total operating expenses 2,530,726 669,806 3,576,513 1,385,006
----------- ----------- ----------- -----------
Income from operations 354,766 10,471 360,226 79,945
Interest income 33,151 -- 33,151 --
Interest (expense) (279,465) (8,723) (345,334) (18,933)
----------- ----------- ----------- -----------
Income before provision for income taxes 108,452 1,748 48,043 61,012
Provision for income taxes:
Current -- -- -- --
Deferred -- -- -- --
----------- ----------- ----------- -----------
Total provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net income $ 108,452 $ 1,748 $ 48,043 $ 61,012
=========== =========== =========== ===========
Net income (loss) per common share
Primary $ 0.03 $ 0.00 $ 0.01 $ 0.15
=========== =========== =========== ===========
Fully diluted $ 0.02 $ 0.00 $ 0.01 $ 0.15
=========== =========== =========== ===========
Weighted number of common shares outstanding
Primary 3,765,000 400,000 3,782,470 400,000
=========== =========== =========== ===========
Fully diluted 6,095,463 400,000 5,044,267 400,000
=========== =========== =========== ===========
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
----------------------------------
1998 1997
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 48,043 $ 61,012
Cash provided (used) by operating activities:
Depreciation and amortization 204,698 86,670
Contributed assets (25,838) --
Changes in operating assets and liabilities:
Student accounts and notes receivable (1,261,235) (535,677)
Prepaid expenses and other assets (42,210) 441
Deferred tax assets and liabilities (20,117) --
Accounts payable (5,350) 80,960
Student refunds payable and credit balances 11,764 (131,777)
Accrued liabilities and income taxes 145,159 (4,559)
Rent payable, related party 2,326 94,150
Deferred tuition revenue 376,102 271,790
----------- -----------
Net cash provided (used) by operating activities (566,658) (76,990)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (22,976) (10,052)
Collections on loans to related parties 60,000 --
Loans to related parties -- (33,302)
Acquisition of subsidiary, net of cash acquired (3,529,851) --
----------- -----------
Net cash provided (used) by investing activities (3,492,827) (43,354)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from debt 5,183,835 56,832
Proceeds from debt - related party -- 10,464
Payments of debt and capital leases (831,493) (218,000)
Stock repurchase commitment (61,968) --
----------- -----------
Net cash provided (used) by financing activities 4,290,374 (150,704)
----------- -----------
Net increase (decrease) in cash 230,889 (271,048)
Cash, beginning of period 18,828 311,986
----------- -----------
Cash, end of period $ 249,717 $ 40,938
=========== ===========
(continued)
5
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
Supplemental disclosure of cash flow information:
Cash payments for interest $ 292,254 $ 18,933
=========== ===========
Non-cash investing and financing transactions:
Investment in subsidiary $ 9,061,283
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 $ 3,529,851
===========
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 $ 82,418
===========
6
</TABLE>
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
1. BASIS OF PRESENTATION AND ORGANIZATION
--------------------------------------
The balance sheet as of June 30, 1998, the statements of operations for the
three months and six months ended June 30, 1998 and 1997, and the statements of
cash flows for the six months ended June 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 June 30, 1998, and
for all periods presented, have been made.
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 six months ending June 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 $9,061,283. 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: $3,629,853 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 $119,654 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:
Six Months Ended June 30,
-----------------------------
1998 1997
------------- -------------
Pro forma revenues $ 5,997,794 $ 4,802,347
Pro forma net income 238,785 67,411
Pro forma primary earnings per share $ .06 $ .17
Pro forma fully diluted earnings per share $ .05 $ .02
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. SUBSEQUENT EVENTS
-----------------
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.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
June 30, 1998 as Compared to December 31, 1997
- ----------------------------------------------
The Company completed its planned acquisition of Data Processing Trainers, Inc.,
an accredited school with two locations in Philadelphia offering a variety of
vocational training programs, on March 24, 1998. The purchase of this school was
a first step in management's long-term plan to grow its business by acquisition
of profitable schools which fit within the Company's overall expansion strategy.
The acquisition was accounted for as a purchase. As a result of the acquisition,
the Company now owns and operates two vocational schools: Denver Automotive and
Diesel College ("DADC") and Data Processing Trainers, Inc. ("DPT").
The Company's cash balance increased $230,888 over the period ended December 31,
1997; the increase resulted primarily from borrowings associated with the
acquisition of DPT, additional borrowings on three commercial lines of credit,
restoration of DADC's eligibility to participate in Title IV funding and grants,
and cash flows from the newly acquired operations of DPT. Student accounts and
notes receivable increased $2,647,291 over December 31, 1997; $2,459,041of the
increase resulted from the inclusion of DPT's student receivables. DADC's
accounts and notes receivable increased $181,787, or approximately 13%, over
December 31, 1997, primarily due to continuation of institutional student
financing during the first quarter Title IV ineligibility period. Because of the
changes in ownership, the Company was temporarily ineligible to receive Title IV
funds until the Department of Education approved its re-applications to
participate in these programs. DPT's and DADC's Title IV funds were restored as
of the end of May and February, 1998, respectively. Deferred income tax assets
and liabilities have been recorded to recognize the tax effects of the 1997 net
operating loss carry-forward and the difference between book and tax
amortization expense.
DPT was acquired for $9,061,283, comprised of $3,629,853 cash (net of $341,432
acquired in the purchase), a $4,340,000 note payable to DPT's former owner, and
$750,000 stock. The purchase resulted in an increase to property and equipment
of $316,534; intangible assets in the amount of $8,890,886 were recorded in the
transaction, including $174,916 of loan acquisition costs related to new
borrowings in conjunction with the purchase. Goodwill resulted from the excess
of the price paid over the fair market value of the net assets purchased; as is
the nature of the vocational school industry, tangible assets represent a
relatively low fraction of the overall value associated with reputation, trained
staff, accredited programs, and job placement success. Loans to the Company's
president in the amount of $60,000 were repaid in April 1998. The balance of the
shareholder notes receivable is due within one year. Overall, assets of the
Company increased by $11,986,781 over December 31, 1997.
Accounts payable and accrued expenses increased by $377,956 over December 31,
1997. The inclusion of DPT's payables and accrued expenses accounted for
$352,091 of the increase, while DADC's accruals decreased nominally over
December 31; the parent company's accrued expenses increased by $32,725 due
primarily to accrued interest on acquisition loans. Deferred tuition liabilities
rose $1,806,813 over the period, of which $1,595,483 was attributable to the
inclusion of DPT. DADC's deferred tuition increase of $211,330 over December 31,
1997 resulted from normal student enrollment and timing fluctuations. In
connection with the purchase of DPT, the Company incurred debt to the following
parties: $4,340,000 to the seller, $2,900,000 to a financing subsidiary of a
brokerage firm, and $2,000,000 to the Company's president. Interest-only
payments are due on the latter two loans, which have five-year terms; the loan
to DPT's seller requires quarterly principal and interest payments, with the
remaining principal due two years from the date of purchase. The Company
believes it has sufficient resources to continue normal operations and debt
service. Overall, liabilities increased by $10,808,433 over December 31, 1997.
Warrants to purchase 2,008,846 shares of the Company were issued in connection
with the debts to the shareholder and the outside lender. Based on 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. Of this total, $211,863 appears on the balance sheet as redeemable
warrants, and $168,443 is included in additional paid-in capital. Additional
paid-in capital also increased by a further net amount of $691,130 as a result
of the DPT acquisition: a $750,000 increase was recorded for future stock to be
issued to the school's seller, while a net decrease of $58,870 was recorded when
stock issued to him in connection with the Letter of Intent was repurchased at
closing of the sale, as was contemplated by that agreement. Common stock
decreased by a net $3,098, also as a result of the closing repurchase
transaction.
9
<PAGE>
Results of Operations
- ---------------------
June 30, 1998 as Compared to June 30, 1997
- ------------------------------------------
The Company's total revenues increased by $2,471,788 to $3,936,739, for the six
months ended June 30, 1998, compared to the same period of 1997. Revenues
include $2,344,453 attributable to DPT's operations from the date of acquisition
to June 30. DADC's revenues increased $126,336 over the previous year's first
two quarters due to a slight increase in student units and higher tuition rates.
Revenue for the three month period ended June 30, 1998 was more than double
first quarter 1998 revenue, again primarily due to inclusion of DPT; the first
quarter results included DPT operations for only the six days from acquisition
to the end of the quarter. DPT's revenues for the second quarter of 1998 were
$2,186,296.
The educational services and facilities cost increase of $1,133,391 over the
previous year's first two quarters includes $1,040,568 related to DPT's
operations. The $851,695 increase from the first to the second quarter of 1998
is due to inclusion of a full quarter of DPT expenses; as discussed above, only
six days of DPT operations were included in first quarter results. DPT`s overall
operating expenses for the second quarter of 1998 were $1,562,359. General and
administrative costs increased by $681,903 over the same period of 1997 as a
result of indirect expenses incurred in conjunction with the purchase of DPT,
inclusion of DPT's G & A expenses for a full quarter, and continuing costs
associated with the Company's transition to publicly-held status. The interest
expense increase of approximately $326,401 over 1997 is attributable to
acquisition and operations borrowings; the use of loan proceeds to finance
operations was required due to first quarter 1998 temporary ineligibility for
Title IV funds. Expense increases for the second quarter of 1998 over the same
quarter of 1997 are associated with the same factors discussed with respect to
year-to-date changes. An income tax benefit was recorded due to a reduction in
the deferred tax asset valuation account against the 1997 net operating loss
carryover, which offset the current income tax expense accrued on earnings
through June 30, 1998. Overall, income was $48,043 for the first two quarters of
1998, compared to net income of $61,012 for the same period of 1997. DADC net
income decreased approximately $56,000 over the same period of 1997 due to
higher expenses in all categories. Net income per share and weighted number of
shares outstanding reflect 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, the reverse merger of August 31, 1997, and issuances in
conjunction with acquisition financing.
The Company is actively exploring with its current software vendors the extent
and cost of any measures that may be required to fix Year 2000 problems. The
Company primarily uses off-the-shelf student record-keeping and accounting
software in its operations; both these systems are currently under review as to
possible replacement. As a result, the Company would have the opportunity to
determine Year 2000 compliance prior to purchase.
PART II
Item 1. LEGAL PROCEEDINGS.
None.
Item 2. CHANGE IN SECURITIES
Per the Letter of Intent to purchase DPT, on March 24, 1998, the Company
repurchased $119,564 of stock issued to DPT's seller. The issuance and
repurchase were both at $2.00 per share.
Item 3. DEFAULTS ON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE>
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.
11
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 249,717
<SECURITIES> 0
<RECEIVABLES> 4,408,100<F1>
<ALLOWANCES> 0
<INVENTORY> 87,878
<CURRENT-ASSETS> 4,848,259
<PP&E> 601,827<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,187,793
<CURRENT-LIABILITIES> 6,215,750
<BONDS> 7,422,075<F3>
211,863<F4>
0
<COMMON> 376,500
<OTHER-SE> 961,605
<TOTAL-LIABILITY-AND-EQUITY> 15,187,793
<SALES> 3,936,739
<TOTAL-REVENUES> 0
<CGS> 1,895,101
<TOTAL-COSTS> 3,576,513
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 345,334
<INCOME-PRETAX> 48,043
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,043
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<FN>
<F1>NET OF ALLOWANCES
<F2>NET OF DEPRECIATION
<F3>LONG-TERM DEBT
<F4>REDEEMABLE WARRANTS
</FN>
</TABLE>
