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, 1999
( ) 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.
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(Name of small business issuer in its charter)
Colorado 84-1067172
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
405 S. Platte River Drive, Suite 3A, Denver, Colorado 80223
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(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
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State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date.
4,207,702 shares of common stock were outstanding as of August 14, 1999.
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<PAGE>
Part One. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
June 30, December 31,
1999 1998
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash $ 131,818 $ 1,035,920
Student accounts receivable, net 2,881,763 2,075,759
Student notes receivable 751,114 811,150
Inventory 148,239 105,634
Receivable, related party -- 12,149
Receivable, other -- 175,000
Prepaid and other 67,699 63,944
----------- -----------
Total Current Assets 3,980,633 4,279,556
Student accounts and notes receivable, long-term 662,358 704,026
Property and equipment, net of accumulated depreciation 1,215,462 794,534
Intangibles, net 8,188,801 8,316,398
Deferred financing costs, net 152,512 148,096
Perkins matching funds 70,000 70,000
Other 46,593 46,593
=========== ===========
Total assets $14,316,359 $14,359,203
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2
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SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
Liabilities and Stockholders' Equity
June 30, December 31,
1999 1998
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(Unaudited) (Audited)
Current liabilities:
Accounts payable $ 366,457 $ 427,502
Student refunds payable and credit balances 51,652 31,927
Accrued liabilities and income taxes 1,205,059 540,456
Deferred tuition income 2,139,942 2,056,196
Common stock repurchase commitment 518,751 415,000
Current maturities of capital leases 244,946 168,290
Current maturities of long-term debt 1,729,207 3,299,735
------------ ------------
Total current liabilities 6,256,014 6,939,106
Rent payable, related party 132,902 140,401
Capital leases, net of current maturities 486,415 218,229
Long-term debt, net of current maturities and discount 4,079,693 3,781,921
Note payable - stockholder, net of discount 2,537,678 2,178,676
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Total liabilities 13,492,702 13,258,333
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Redeemable warrants 443,722 361,635
Stockholders' equity:
Preferred stock, $.10 par value, 10,000,000 shares
authorized, none outstanding -- --
Common stock, $.10 par value, 100,000,000 shares
authorized, 4,207,702 (1999) and 3,868,750 (1998)
shares issued and outstanding 420,770 386,875
Common stock repurchase commitment (518,751) (415,000)
Additional paid-in capital 1,319,009 1,352,904
Retained earnings (deficit) (841,093) (585,544)
------------ ------------
Total stockholders' equity 379,935 739,235
------------ ------------
Total liabilities and stockholders' equity $ 14,316,359 $ 14,359,203
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3
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SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------------------------------------------------------------
(Restated) (Restated)
Revenue:
Tuition revenue $ 3,342,757 $ 2,764,399 $ 6,472,879 $ 3,742,358
College supply and cafeteria sales 75,355 83,080 187,980 131,247
Other 18,153 35,189 24,456 51,191
----------- ----------- ----------- -----------
Total revenue 3,436,265 2,882,668 6,685,315 3,924,796
Operating expenses:
Educational services and facilities 1,246,356 1,196,190 2,433,558 1,618,827
Cost of college supply and cafe sales 77,232 117,422 190,131 160,670
Selling and promotion 630,840 291,090 1,155,628 441,038
General and administrative 1,140,846 779,340 2,144,121 1,157,867
Depreciation and amortization 146,820 211,419 285,763 255,853
Bad debt expense 47,400 38,937 94,800 77,443
----------- ----------- ----------- -----------
Total operating expenses 3,289,494 2,634,398 6,304,001 3,711,698
----------- ----------- ----------- -----------
Income (loss) from operations 146,771 248,270 381,314 213,098
Other income (expense):
Interest income 17,165 31,802 37,613 38,748
Interest expense (328,691) (304,159) (636,017) (370,028)
----------- ----------- ----------- -----------
Income (loss) before income taxes (164,755) (24,087) (217,090) (118,182)
Provision for income taxes 30,959 38,523 38,459 40,449
----------- ----------- ----------- -----------
Net (loss) $ (195,714) $ (62,610) $ (255,549) $ (158,631)
=========== =========== =========== ===========
Net (loss) per common share
Basic and fully diluted $ (.05) $ (.02) $ (.06) $ (.04)
=========== =========== =========== ===========
Weighted number of common shares outstanding
Basic and fully diluted 4,207,702 3,765,000 4,052,271 3,782,470
=========== =========== =========== ===========
4
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SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
1999 1998
-------------------------------------
(Restated)
Cash flows from operating activities:
Net (loss) $ (255,549) $ (158,631)
Cash provided (used) by operating activities:
Depreciation and amortization 285,763 255,853
Amortization of discount on debt 46,020 23,010
Accretion of put liability 82,086 24,694
Contributed assets -- (25,838)
Changes in operating assets and liabilities:
Student accounts and notes receivable (517,151) (1,283,887)
Inventory (42,605) (2,629)
Prepaid expenses and other assets (28,401) (24,591)
Accounts payable (61,045) (12,811)
Student refunds payable and credit balances 19,725 11,763
Accrued liabilities 664,603 268,716
Rent payable, related party (7,499) 6,076
Deferred tuition revenue 83,746 376,102
----------- -----------
Net cash provided (used) by operating activities 269,693 (542,173)
----------- -----------
Cash flows from investing activities:
Investment in acquisition of business -- (3,521,100)
Collection on loans to related parties -- 60,000
Purchases of property and equipment (111,498) (38,248)
----------- -----------
Net cash (used) by investing activities (111,498) (3,499,348)
----------- -----------
Cash flows from financing activities:
Proceeds from debt 2,411,409 3,032,825
Payments of debt and capital leases (3,815,680) (873,109)
Proceeds from related party debt 341,974 2,121,443
Loan acquisition fees -- (8,751)
----------- -----------
Net cash (used) by financing activities: (1,062,297) 4,272,408
----------- -----------
Net (decrease) in cash (904,102) 230,887
Cash, beginning of period 1,035,920 18,830
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Cash, end of period $ 131,818 $ 249,717
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Supplemental disclosure of cash flow information:
Cash payments for interest $ 612,030 $ 358,285
=========== ===========
Cash payments for income taxes $ 2,000 $ 36,135
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5
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SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
Six Months Ended June 30,
1999 1998
---------------------------
Non-cash transactions:
Investment in acquisition of business exchanged for stock -- $ 61,968
-------- -----------
Acquisition of leased equipment $447,366 $ 70,322
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Non-cash investing and financing transactions
in connection with the acquisition of DPT:
Fair value of net assets acquired -- $ 9,052,532
Future stock issuance -- (750,000)
Note payable to prior owner -- (4,340,000)
Earnest money from prior periods applied -- (100,000)
Cash acquired with acquisition -- (341,432)
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Net cash paid to acquire subsidiary -- $ 3,521,100
======== ===========
Loan fees and costs -- $ 174,916
Loan discounts -- (146,165)
Deposit from prior periods applied -- (20,000)
======== ===========
Net cash paid for loan fees and costs -- $ 8,751
======== ===========
Value of warrants issued -- $ 460,195
======== ===========
6
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SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. BASIS OF PRESENTATION AND ORGANIZATION
The balance sheet as of June 30, 1999, the statements of operations for the
three and six months ended June 30, 1999 and 1998, and the statements of cash
flows for the six months ended June 30, 1999 and 1998, 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, 1999, and for all
periods presented, have been made. The balance sheet as of June 30, 1998 and the
statements of operations and cash flows for the three months ended June 30,
1998, have been restated to include additional expenses in the total amount of
$171,062. The restatements consist of the following elements: increase to
accrued officer compensation - $45,000; increase to amortization expense
resulting from a reclass of DPT acquisition intangible assets from goodwill to
categories with shorter lives - $77,000; accrual of interest expense associated
with the put options described below- $24,000; increase in the tax provision for
DPT's separate company state and local income tax - $25,000. The effect of this
change on the consolidated statement of operations for the three months ended
June 30, 1998 is a decrease from the originally reported net income of $108,452
to a net loss of ($62,610). The cumulative effect of the expense increases for
both the first quarter and the second quarter on the consolidated statement of
operations for the six months ended June 30, 1998, is to present a net loss of
$(158,631), rather than net income of $48,043.
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, 1998 10-KSB report. The results
of operations for the three months and six months ending June 30, 1999 and 1998
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 was comprised of: $3,940,624 in cash (including 59,782 shares
in repurchased common stock valued at $119,564 and $100,000 in earnest money
paid in 1997), a $4,340,000 promissory note, and $750,000 in future stock. The
promissory note, dated March 24, 1998, required quarterly payments beginning in
June, 1998, of $542,500 in principal plus accrued interest at 7% per annum. The
note was due March 24, 2000, and was secured by a Security Agreement-Stock
Pledge and a Guaranty and Security Agreement. As of May 4, 1999, the Company
obtained a bank loan, the proceeds of which have been used to pay off the
remaining note balance of $2,170,000. The new bank loan is for a period of two
7
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years, with monthly payments of $99,043 (including interest at 8.9% per annum)
commencing in June, 1999. The $750,000 stock payable in the transaction was
satisfied by the Company issuing on March 24, 1999, 338,952 shares of its
non-registered common stock.
The acquisition has been accounted for as a purchase with a substantial portion
of the purchase price being allocated to goodwill and other intangible assets.
The intangible assets are being amortized over various lives ranging from .75 to
40 years; the assets being amortized over 40 years constitute 93% of the total
assets recorded.
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, payable
monthly, and the full principal balance of the note is due on March 24, 2003.
The president also received a warrant to purchase 732,360 shares of the
Company's restricted common stock for an aggregate exercise 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, at 12% per annum, and the principal balance
and any remaining accrued interest is due on March 24, 2003. This lender
received a warrant to purchase 1,268,486 shares of the Company's restricted
common stock for a total exercise price of $100 beginning March 24, 2001 and
ending six years after the payment of all obligations pursuant to the debt.
The warrants were valued at issue at approximately $460,000, which is presented
on the balance sheet as a discount from the debt; the discount is being
amortized over 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. In accordance with an amendment to the warrant and debt
agreements, the warrants or any portion of shares obtained by exercise of these
warrants, will become subject to cash redemption at the discretion of the
warrant or share holder beginning January 31, 2003 if the Company does not
complete a public offering by January 31, 2000 (or immediately if control of the
Company or DPT is sold or transferred through the end of the exercise period).
To recognize the potential cash redemption, the Company has accreted
approximately $152,000 to the warrant liability. The potential maximum accretion
for the five-year period ending March 2003, based on current circumstances, is
approximately $1,773,500.
3. STOCK REPURCHASE AGREEMENT
The Company sold 103,750 shares of stock for $4 per share in December, 1998,
under an agreement containing a one-time "put right", exercisable on or before
December 24, 1999, at a price of $6 per share. The put liability is being
accreted on a straight-line basis over the twelve months beginning January 1,
1999.
4. SEGMENT AND RELATED INFORMATION
The Company's two operating business units have separate management teams and
infrastructures that offer related products and services. The business units
have been separated into two reportable segments (DADC and DPT) based on
geographical location.
DADC: Denver Automotive and Diesel College, Inc. is the sole business unit
reported in this segment. The principal markets for this segment include
the Denver, Colorado metropolitan areas and surrounding states.
8
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DPT: Data Processing Trainers Company, acquired in 1998, is the sole
business unit reported in this segment. The principal markets for this
segment include the Philadelphia, Pennsylvania metropolitan area and
surrounding states.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Corporate" column includes corporate-related
items, and income and expenses not allocated to reported segments.
<TABLE>
<CAPTION>
DADC DPT CORPORATE TOTAL
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<S> <C> <C> <C> <C>
Six months ended
June 30, 1999
Revenues $1,621,850 $5,063,465 - $6,685,315
Segment profit (loss) (171,128) 50,099 (134,520) (255,549)
Total assets 3,165,262 2,799,098 8,351,999 14,316,359
Six months ended
June 30, 1998 (Restated)
Revenues 1,577,690 2,344,453 2,653 3,924,796
Segment profit (loss) (1,938) 254,844 (411,537) (158,631)
Total assets 2,988,886 3,288,815 8,846,628 15,124,329
</TABLE>
DADC and DPT segment revenues and assets as a per cent of total revenues and
assets are generally comparable to those for the year ended December 31, 1998.
Interest, amortization, and general and administrative expenses allocated to DPT
for the first two quarters of the current fiscal year by the parent company
exceed such allocations in the same periods of the previous year by
approximately $110,000. Consequently, DPT segment net is significantly lower in
the current period, and, conversely, corporate segment net is higher, than in
the prior year's period.
5. CONTINGENCIES
The company is a defendant in an arbitration claim filed by a firm it contracted
with to locate equity and debt funding sources. The claim asks for damages of
$287,000. The company believes the claim is completely without merit and intends
to vigorously defend its position.
6. SUBSEQUENT EVENTS
The Company is currently negotiating with its primary shareholder regarding the
issuance of new warrants to him in connection with additional funds he has
loaned the Company in 1999, as well as new leases and bank loans for which he
has signed with the Company as co-maker or guarantor. The warrants will likely
be issued at an exercise price equivalent to the stock bid price as of August
20, 1999, which was $.25 per share. The issuance of these warrants should not
result in a charge to earnings. The number of warrants to be issued and the
length of the option period have yet to be determined.
9
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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
1999 and beyond could differ materially from those expressed in, or implied by,
any such forward-looking statements. See "Special Note Regarding Forward-Looking
Statements" 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 278
enrolled students as of June 30, 1999. The school has been designated 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 1,109 students on June 30,
1999. DADC's enrollment is slightly higher than it was on June 30, 1998,
reflecting the continuing low unemployment rate in the general economy of the
area. DPT's enrollment has increased by approximately 215 students from June 30,
1998 due to the expansion of the Northeast Philadelphia campus (further
discussed below). 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 moved to a new, larger facility as of
February, 1999. This expansion will result in the ability to increase the
student body at that campus from the current 638 to approximately 1,400. Current
tuition revenue is approximately $900 per month per student. Rent expense for
the new facility (including shared costs) is approximately $16,000 per month
higher than at the old 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
10
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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 will increase tuition by an average of 6.2% as
of July 1, 1999, and DPT implemented an approximate 6.5% increase as of June 1,
1999. For both DADC and DPT, the highest student body levels generally 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.
General and administrative expense includes salaries and benefits of accounting,
and school and corporate administrative personnel.
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.
The corporate parent allocates direct expenses incurred on behalf of the
individual schools to those business segments.
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%-6%
of DADC revenues in 1999 and 1998. DPT has experienced bad debts of less than 1%
of revenue in 1999 and 1998.
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 its acquisition 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 $118,000, of
which approximately $104,000 was utilized in 1998. Although the Company incurred
a net loss in 1998, the acquisition of DPT was structured as a stock purchase,
and, consequently, amortization of the intangible assets acquired in the
purchase is not deductible for federal and state income tax purposes. DPT is
subject on an individual company basis to state and city income and business
privilege taxes.
11
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Acquisition
On March 24, 1998, the Company acquired all of the outstanding stock of DPT for
a purchase price of $9,030,624; 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
primarily as goodwill (82%) and trade name (11%); the balance was attributed to
student contracts, curriculum and non-compete covenant.
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 2,000,846
shares of the Company were issued in connection with this debt; the warrants
were valued and recorded at $460,195. The warrants issued to the financing
source are subject to a cash redemption requirement more fully discussed in the
Company's 10-KSB at December 31, 1998.
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 and other intangible assets of $8,720,752 were recorded.
As a result of the acquisition, amortization expense is expected to be
approximately $255,000 annually for the years 1999 through 2002, and
approximately $215,000 thereafter through the 40-year goodwill amortization
period. 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. Additionally, amortization of the debt discount associated with
issuance of warrants in the transaction is expected to be approximately $100,000
per year, and accretion of the financing subsidiary put option will impact
interest expense by about $160,000 annually through 2002. The note payable to
the former owner of DPT was paid off via bank debt refinancing in May, 1999; the
new bank debt carries an interest rate of 8.9% over a term of 24 months.
Interest on this loan will be approximately $100,000 in 1999; principal payments
required during the remainder of 1999 will be approximately $593,000, or
$1,034,000 less than would have been required under the note to the former
owner.
Liquidity and Capital Resources
- -------------------------------
June 30, 1999 as Compared to December 31, 1998
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
decreased by $904,102 over December 31, 1998, primarily due to debt principal
payments to the former owner of DPT, which were $1,085,000 during the first
quarter of 1999. As discussed below, DPT generally experiences a slowing of
accounts receivable collections as their agency customers approach their fiscal
year-ends on June 30, which results in abnormally low cash collections during
12
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the period from late May through approximately July. This period of slower than
normal cash collections coincides with the lowest enrollment periods of the
year. However, this is a temporary situation which should reverse by
August/September. DPT's cash balances at June 30, 1999 were $64,589, compared to
$551,517 at December 31, 1998. DADC's cash balances at June 30, 1999 were
generally at the same level as at December 31, 1998. Cash provided by operating
activities of $269,693 for the period ended June 30, 1999 compares to $542,173
cash used by operating activities for the period ended June 30, 1998.
Student accounts and installment notes receivable increased by $704,300 over
December 31, 1998 balances; on a segment basis, the increases were 19% for DADC
and 21% for DPT. The timing of start dates significantly affects comparability
of accounts receivable levels at any point in time, since a substantial portion
of Title IV funds are collected early in each academic year. Consequently, when
start dates occur shortly before the end of a quarter, receivables will be
higher than they would be if the quarter ended right before the culmination of
an academic period. Approximately 25% of DPT's revenue derives from state and
local agency student placements at the school. These agencies generally have
fiscal years ending June 30, and DPT has found that as the agencies approach
their year-end, their payments temporarily tail off significantly, which results
in higher than normal accounts receivable balances from the end of May to the
end of July or early August. Title IV funds, which account for more than half of
all revenue sources at both DADC and DPT are also slightly affected by the
fiscal year-end payment slow-down, to the extent that payments generally reach
the schools approximately a week later than normal during the month of June. By
October or November, the state and local agencies have usually caught up their
late payments in full. Deferred tuition liabilities, which represent the
unearned portion of current academic year receivables, increased by $83,748; the
change results from normal inter-period start date timing fluctuations.
Capital expenditures unrelated to the acquisition were approximately $111,500
and $38,000 in the first six months of 1999 and 1998, respectively. An
additional $447,366 in capital lease obligations were also incurred during the
period. During 1999, the Company expects to incur approximately $900,000 of
leasehold improvement expenditures, capital expenditures and lease obligations
as a result of the relocation of one of its Philadelphia campuses. DADC replaced
much of its computer and instructional equipment in May 1999 via new capital
leases of approximately $277,000. Principal payments on capital lease
obligations were $102,523 during the period.
Accrued liabilities and income taxes increased from $540,456 at December 31,
1998 to $1,205,059 at June 30, 1999. The increase was greatest at DPT, where
liabilities rose to $490,202 at June 30 from approximately $136,000 at December
31. The combination of increased expenses associated with DPT's move and
expansion in Philadelphia and upcoming opening of a Denver branch, normal
seasonal reductions in the size of the student body, and the cash flow issues
described above were the primary causation factors for the overall liability
increase. Management expects the Company's cash position and level of current
liabilities to improve markedly by October, concurrent with the highest
enrollment periods of the year, and the resumption of normal payment patterns by
agency customers.
The Company has substantially reduced its long-term debt during the twelve
months ended June 30, 1999 by $1,520,651, from $9,867,229 at June 30, 1998 to
$8,346,578 at June 30, 1999. (The debt amounts are inclusive of debt to
shareholders.) During the current period, net principal payments were $959,773.
As previously noted, principal payments of $1,085,000 were made to the former
owner of DPT.
13
<PAGE>
A stock repurchase commitment of $415,000 was recorded in December, 1998 in
conjunction with a stock sale that included a put option back to the Company at
a price in excess of the issue price. The additional repurchase liability is
being accreted evenly over the twelve months ending December, 1999, at which
time the put option is exercisable. The liability accretion was $103,750 for the
current period; $51,875 will be recorded each remaining quarter of 1999.
Results of Operations
- ---------------------
June 30, 1999 as Compared to June 30, 1998
The following table summarizes the Company's operating results as a percentage
of net revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months
June 30, Ended June 30,
1999 1998 1999 1998
--------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues 100.0 100.0 100.0 100.0
Educational services and facilities (36.2) (41.5) (36.4) (41.2)
Cost of college supplies/sales (2.2) (4.1) (2.8) (4.1)
Selling and promotion (18.4) (10.1) (17.3) (11.2)
General and administrative (33.2) (27.0) (32.1) (29.6)
Depreciation and amortization (4.3) (7.3) (4.3) (6.5)
Bad debt expense (1.4) (1.4) (1.4) (2.0)
---------------------------------------------------
Income from operations 4.3 8.6 5.7 5.4
Interest expense - net (9.1) (9.5) (8.9) (8.4)
Provision for income taxes (.9) (1.3) (.6) (1.0)
===================================================
Net income (5.7) (2.2) (3.8) (4.0)
===================================================
</TABLE>
Total revenues. The Company's total revenues increased by $2,760,519 to
$6,685,315 for the six months ended June 30, 1999 over the same period of 1998.
Revenues include $5,063,465 attributable to DPT's operations. (For the 1998
quarters, DPT operations are included for only the period March 24 to June 30.)
DADC's revenues increased slightly by $44,160 over the previous year's first six
months, commensurate with a modest student enrollment increase. DPT revenues for
the second quarter of 1999 exceeded those for the first quarter by approximately
$376,000; the effects of the expansion of the Northeast facility began to
produce results in this quarter. The student population at DPT rose from
approximately 980 at December 31, 1998 to 1,109 by June 30, 1999.
Educational facilities and services. Educational services and facilities costs
were constant at approximately 36% of revenue for both the first and second
quarters of 1999. They are somewhat lower as a percent of revenue from the prior
year due partially to the fact that DADC's expenses per student are higher than
DPT's (the prior year includes DPT's operations from only March 24 to June 30).
DPT's expenses constituted 34% of revenue, while DADC's were approximately 43%
of revenue.
14
<PAGE>
Selling and promotion expense. Selling and promotion expense as a percent of
revenue increased significantly over the previous year, from 11.2% of revenue to
17.3% of revenue. DADC is continuing to struggle to attract students in the low
unemployment environment Denver has been experiencing for some time. To begin to
address the problem, four new national recruiters were hired approximately a
year ago, which has resulted in approximately $172,000 of higher marketing
expenses for the period ended June 30, 1999 than for the same period in 1998.
These expenditures are the sole cause of the increased loss for DADC for this
year compared to last year. Because such national marketing efforts to attract
out-of-area students generally require a period of two years to produce results,
the expenditures have not yet led to any measurable student population or
revenue increases. Because of the level of up-front recruiting expense
management believes is necessary to produce any significant improvement in
DADC's prospects, the Company is actively searching for investors to assist in
funding this effort, and has had concrete discussions with several potential
sources. DPT has also significantly increased expenditures in this area in
conjunction with its Northeast Philadelphia campus move and expansion, which it
must now attract enough students to operate at full capacity. Although local
recruiting efforts produce faster results than national campaigns, the
expenditures still occur somewhat in advance of revenues. Admissions salaries
and related expenses at DPT were $107,000 for the second quarter of 1999 (and
$215,000 for the first two quarters), compared to approximately $25,000 for the
same quarter of 1998. Note that admissions salaries for the first quarter of
1999 and 1998 have been reclassified from general and administrative expense to
their correct classification in these financial statements.
General and administrative. DADC's general and administrative expenses have
increased from approximately $151,000 in the 1998 period to $211,000 for the
current year; print shop expenses, administrative salaries, student services
expenses and property taxes have all increased, among other miscellaneous
categories. DPT's increase to $864,000 from $449,000 for the same period is
related to the campus move and expansion noted above. The majority of the
increase is in student services salaries and related expenses (placement,
student relations, financial aid) associated with gearing up to handle the
larger student population which will result from the expansion; again, such
expenses are incurred in advance of the revenue associated with them. DPT is
also in the process of opening a small Denver branch; Department of Education
approvals were finalized in August, and a class of 17 students was enrolled as
of August 16. Approximately $30,000 of start-up costs related to this branch is
included in current quarter expenses.
Depreciation and amortization. Amortization expenses, primarily for goodwill and
other intangible assets acquired in the DPT purchase, decreased by 34% over
1998; the student contracts acquired with DPT were fully amortized as the end of
1998.
Bad debt expense. Bad debt expense has remained relatively constant at a blended
rate of approximately 1.4% since the acquisition of DPT.
Income from operations. Income from operations for the quarter ended June 30,
1999 decreased by approximately $100,000 from the same quarter of 1998; however,
without the increased marketing expenses at DADC, income from operations would
have been approximately $70,000 higher than the prior year's second quarter. The
increases in selling and promotion, and general and administrative expenses were
the primary factors in the decrease. DADC's loss from operations for the six
months ended June 30, 1999 was approximately $171,000, compared to a loss of
$2,000 for the prior year period; selling and promotion expense increases of
$172,000 (more fully discussed above) were the exclusive reason for the
difference.
15
<PAGE>
Interest expense. Interest expense has remained at a fairly constant percent of
revenue since the acquisition of DPT; interest on acquisition indebtedness
accounts for approximately 80% of total interest expense for the Company.
Net loss. The Company's net loss of $(255,549), compared to $(158,631) for the
first six months of the prior year, has resulted from the increased marketing
and G&A expenses discussed above.
Year 2000. The Company relies on internal computer systems for accounting and
student record-keeping purposes, and, in the case of DPT, for provision of
training to students. DADC has installed new computer hardware that has been
determined to be Year 2000 compliant by the vendor; the replacement would have
been necessary without Year 2000 issues, and the cost is consequently not
directly related to Year 2000 compliance. Its student record-keeping system
software has been upgraded by the vendor to Year 2000 compliance, and has been
installed on the new hardware. The accounting system will also be upgraded
during 1999; however, the system is off-the-shelf, inexpensive, and readily
available, and will not require significant advance time or cost for
installation or conversion. DPT's MIS managers and programmers regularly update
the software and hardware utilized for student training, and believe the systems
are currently Year 2000 compliant. DPT primarily uses standard off-the-shelf
spreadsheet software for student record-keeping purposes, and will purchase a
newer version at minor cost shortly if the current version is determined not to
be reliable. DPT has recently purchased and installed accounting software that
the vendor has confirmed is Year 2000 compliant.
The Company has initiated formal communications with all of its significant
systems providers to determine the extent to which the Company is vulnerable to
third parties' failure to remediate their Year 2000 issues. The primary
third-party computer systems on which the Company relies are student loan
processing and record-keeping, payroll processing, and banking. All of the
Company's service providers in those areas have been contacted, and, with the
exception of a required upgrade in payroll processing software which the Company
will implement in the next three months, all have responded with written
documentation to the Company that the systems they are using externally or have
provided to the Company are Year 2000 compliant.
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.
16
<PAGE>
PART II
Item 1. LEGAL PROCEEDINGS.
None.
Item 2. CHANGE IN SECURITIES
Per the DPT purchase agreement, 338,952 shares, representing a value of
$750,000, were issued to the seller of DPT on March 24, 1999.
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:
None
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
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 131818
<SECURITIES> 0
<RECEIVABLES> 3632877<F1>
<ALLOWANCES> 0
<INVENTORY> 148239
<CURRENT-ASSETS> 3980633
<PP&E> 1215462<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 14316359
<CURRENT-LIABILITIES> 6256014
<BONDS> 6617371<F3>
443722<F4>
0
<COMMON> 420770
<OTHER-SE> (40835)
<TOTAL-LIABILITY-AND-EQUITY> 14316359
<SALES> 6685315
<TOTAL-REVENUES> 0
<CGS> 2623689
<TOTAL-COSTS> 6304001
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 636017
<INCOME-PRETAX> (217,090)
<INCOME-TAX> 38459
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (255549)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
<FN>
<F1>Net of Allowances
<F2>Net of Depreciation
<F3>Long-term Debt
<F4>Redeemable Warrants
</FN>
</TABLE>
