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 March 31, 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
- ------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation 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
----- -----
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 May 7, 1999.
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<PAGE>
Part One. FINANCIAL INFORMATION
Item 1. Financial Statements
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
March 31, December 31,
1999 1998
----------- ------------
(Unaudited) (Audited)
Current assets:
Cash $ 117,408 $ 1,035,920
Student accounts receivable, net 3,153,563 2,075,759
Student notes receivable 802,129 811,150
Inventory 127,482 105,634
Receivable, related party -- 12,149
Receivable, other -- 175,000
Prepaid and other 84,306 63,944
----------- -----------
Total Current Assets 4,284,888 4,279,556
Student accounts and notes receivable,
long-term 694,700 704,026
Property and equipment, net of
accumulated depreciation 923,745 794,534
Intangibles, net 8,252,599 8,316,398
Deferred financing costs, net 139,350 148,096
Perkins matching funds 70,000 70,000
Other 46,593 46,593
----------- -----------
Total assets $14,411,875 $14,359,203
=========== ===========
2
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SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
Liabilities and Stockholders' Equity
March 31, December 31,
1999 1998
------------ -------------
(Unaudited) Audited
Current liabilities:
Accounts payable $ 245,605 $ 427,500
Student refunds payable and
credit balances 44,462 31,928
Accrued liabilities 819,253 540,456
Deferred tuition income 2,949,095 2,056,194
Common stock repurchase commitment 466,875 415,000
Current maturities of capital leases 194,737 168,290
Current maturities of long-term debt 1,973,131 3,521,630
------------ ------------
Total current liabilities 6,693,158 7,160,998
Rent payable, related party 133,527 140,404
Capital leases, net of current maturities 279,722 218,229
Long-term debt, net of current maturitie
and discount 3,957,108 3,415,297
Note payable - stockholder, net of discount 2,319,165 2,323,405
------------ ------------
Total liabilities 13,382,680 13,258,333
------------ ------------
Redeemable warrants 401,671 361,635
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 (466,875) (415,000)
Additional paid-in capital 1,319,008 1,352,904
Retained earnings (deficit) (645,379) (585,544)
------------ ------------
Total stockholders' equity 627,524 739,235
------------ ------------
Total liabilities and stockholders' equity $ 14,411,875 $ 14,359,203
============ ============
3
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SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1999 1998
----------- -----------
(Restated)
Revenue:
Tuition revenue $ 3,130,123 $ 977,959
College supply and cafeteria sales 112,625 48,167
Other 6,303 16,002
----------- -----------
Total revenue 3,249,051 1,042,128
Operating expenses:
Educational services and facilities 1,187,202 447,633
Cost of college supply and cafeteria sales 112,899 43,248
Selling and promotion 417,015 149,948
General and administrative 1,111,049 353,531
Depreciation and amortization 138,943 44,434
Bad debt expense 47,400 38,506
----------- -----------
Total operating expenses 3,014,508 1,077,300
----------- -----------
Income (loss) from operations 234,543 (35,172)
Other income (expense):
Interest income 20,448 6,946
Interest expense (307,326) (65,869)
----------- -----------
Income (loss) before income taxes (52,335) (94,095)
Provision for income taxes 7,500 1,926
----------- -----------
Net (loss) $ (59,835) $ (96,021)
=========== ===========
Net (loss) per common share
Basic and fully diluted $ (.02) $ (.03)
=========== ===========
Weighted number of common shares outstanding
Basic and fully diluted 3,895,113 3,807,357
=========== ===========
4
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1999 1998
----------- -----------
(Restated)
Cash flows from operating activities:
Net income $ (59,835) $ (96,021)
Cash provided (used) by operating activities:
Depreciation and amortization 138,943 44,434
Amortization of discount on debt 23,010 --
Accretion of put liability 40,036 --
Changes in operating assets and liabilities:
Student accounts and notes receivable (872,308) (293,799)
Inventory (21,848) --
Prepaid expenses and other assets (20,362) (6,230)
Accounts payable (181,898) (17,137)
Student refunds payable and credit balances 12,535 1,003
Accrued liabilities 278,797 186,514
Rent payable, related party (6,874) 4,201
Deferred tuition revenue 892,899 157,176
----------- -----------
Net cash provided (used) by
operating activities 223,095 (19,859)
----------- -----------
Cash flows from investing activities:
Investment in acquisition of business -- (3,521,100)
Purchases of property and equipment (38,819) (14,032)
----------- -----------
Net cash (used) by investing activities (38,819) (3,535,132)
----------- -----------
Cash flows from financing activities:
Proceeds from debt 227,100 3,032,825
Payments of debt and capital leases (1,461,862) (118,427)
Proceeds from related party debt 131,974 1,998,000
Loan acquisition fees -- (8,751)
----------- -----------
Net cash (used) by financing activities: (1,102,788) 4,903,647
----------- -----------
Net (decrease) in cash (918,512) 1,348,656
Cash, beginning of period 1,035,920 18,830
----------- -----------
Cash, end of period $ 117,408 $ 1,367,486
=========== ===========
Supplemental disclosure of cash flow information:
Cash payments for interest $ 318,911 $ 43,585
=========== ===========
Cash payments for income taxes -- --
=========== ===========
5
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
Three Months Ended March 31,
1999 1998
----------------------------
Non-cash transactions:
Investment in acquisition of
business exchanged for stock -- $ 61,968
------- -----------
Acquisition of leased equipment 156,790 8,242
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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
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. BASIS OF PRESENTATION AND ORGANIZATION
The balance sheet as of March 31, 1999, the statements of operations for the
three months ended March 31, 1999 and 1998, and the statements of cash flows for
the three months ended March 31, 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 March 31, 1999, and for all
periods presented, have been made. The balance sheet as of March 31, 1998 and
the statements of operations and cash flows for the three months ended March 31,
1998, have been restated to include additional expenses in the total amount of
$35,612. The effect of this change on the consolidated statement of operations
for March 31, 1998 is an increase in the net loss, from the ($60,409) originally
reported to ($96,021).
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 ending March 31, 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, 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. As of May 4, 1999, the Company has
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
years, with monthly payments of $98,887 (including interest at 8.75% 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.
7
<PAGE>
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 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 $110,000 to the warrant liability. The potential maximum accretion
for the five-year period ending March 2003, based on current circumstances, is
approximately $2,100,000.
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.
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.
8
<PAGE>
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
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Three months ended
March 31, 1999
Revenues 905,239 2,343,812 - 3,249,051
Segment profit (loss) 25,597 (49,790) (35,642) (59,835)
Total assets 3,142,511 3,057,860 8,211,504 14,411,875
Three months ended
March 31, 1998
Revenues 881,318 158,157 2,653 1,042,128
Segment profit (loss) 54,169 43,556 (193,746) (96,021)
Total assets 2,970,351 2,535,809 9,876,341 15,382,501
</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
this quarter by the parent company are approximately $68,000 in excess of the
average 1998 quarterly expense allocations.
5. SUBSEQUENT EVENT
As discussed in Note 2, in May 1999 the Company refinanced the remaining
principal amount on the promissory note to the former owner of DPT. The terms of
the new bank loan extend the payment period of the remaining $2,170,000
principal from one year to twenty-seven months; accordingly, as of March 31,
1999, $858,435 has been reclassified as long-term debt.
9
<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
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 311enrolled
students as of March 31, 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 1,105 students on March 31,
1999. DADC's enrollment is slightly higher than it was on March 31, 1998,
reflecting the continuing low unemployment rate in the general economy of the
area. DPT's enrollment has also remained generally constant over the past year
because it had reached the limits of its current physical capacity until the
February 1999 expansion 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. The campus occupied its former 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 613 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 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
10
<PAGE>
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 June 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.
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%-5%
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 $63,000 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
<PAGE>
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. The note payable to the former owner of DPT carries interest of 7%;
interest expense was approximately $203,000 in 1998 on this note. Principal and
interest payments were being made quarterly through March, 1999; however, the
Company obtained an 8.75% interest-rate bank loan in May, 1999 with a two-year
term, and used the proceeds to retire the note payable to the former owner.
Liquidity and Capital Resources
- -------------------------------
March 31, 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 $918,512 over December 31, 1998, primarily due to debt principal
payments to the former owner of DPT, which were $1,085,000 during the current
quarter.
Student accounts and installment notes receivable increased by $1,059,457 over
December 31, 1998 balances; 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.
12
<PAGE>
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. Deferred tuition liabilities, which represent the
unearned portion of current academic year receivables, increased by $892,901,
commensurate with the increase in receivables. Again, the change results from
normal inter-period start date timing fluctuations.
Capital expenditures unrelated to the acquisition were approximately $39,000 and
$14,000 in the first quarters of 1999 and 1998, respectively. The Company
expects to incur approximately $900,000 during 1999 in leasehold improvements
and other capital expenditures as a result of the February relocation of one of
its Philadelphia campuses, and DADC is in the process of negotiating an
equipment lease consisting of approximately $260,000 in assets.
The Company has substantially reduced its long-term debt during the twelve
months ended March 31, 1999 by $2,326,261, from $10,575,665 at March 31, 1998 to
$8,249,404 at March 31, 1999. (The debt amounts are inclusive of debt to
shareholders.) During the current quarter, net principal reductions were
$1,393,013. As previously noted, principal payments of $1,085,000 were made to
the former owner of DPT in the period ended March 31, 1999; total principal
payments on this debt in the twelve months ended March 31, 1999 were $2,170,000.
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 $51,875 for the
current quarter, and the same amount will be recorded each subsequent quarter of
1999.
Cash provided by operating activities of $223,095 for the period ended March 31,
1999, primarily results from the addition of DPT operations to the Company; cash
used by operations was $(19,859) in the first quarter of 1998. As noted above in
"Acquisitions", DPT was acquired late in the first quarter of 1998 (March 24,
1998).
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<PAGE>
Results of Operations
- ---------------------
March 31, 1999 as Compared to March 31, 1998
The following table summarizes the Company's operating results as a percentage
of net revenue for the periods indicated:
Three Months Ended March 31,
1999 1998
-------------------------------
Net revenues 100.0 100.0
Educational services and facilities (36.5) (42.9)
Cost of college supplies/sales (3.5) (4.2)
Selling and promotion (12.8) (14.4)
General and administrative (34.2) (33.9)
Depreciation and amortization (4.3) (4.3)
Bad debt expense (1.5) (3.7)
------------------------------
Income from operations 7.2 (3.4)
Interest expense - net (8.8) (5.7)
Provision for income taxes (.2) (.2)
------------------------------
Net income (1.8) (9.3)
==============================
Total revenues. The Company's total revenues (exclusive of interest income)
increased by $2,206,923 to $3,249,051 for the three months ended March 31, 1999
over the same period of 1998. Revenues include $2,343,811 attributable to DPT's
operations. DADC's revenues decreased slightly by $23,291 over the previous
year's first quarter.
Educational facilities and services. The educational services and facilities
cost increase of $739,569 is primarily due to the inclusion of DPT's operations
for a full three months in 1999, compared to only six days of operation during
the first quarter of 1998. (The acquisition of DPT occurred on March 24, 1998.)
DPT incurred $830,640 of such costs in the period. DADC's expenses decreased
minimally by $1,994.
Selling and promotion expense. Selling and promotion expense increased $267,067
over the previous year. Inclusion of DPT's expenses for a full quarter accounted
for $186,173 of the increase, while DADC's expenses increased by $80,894 (60%).
As a percent of revenue, these expenses decreased from 14.4% (reflecting DADC
operations only) for the first quarter of 1998 to 12.8% (based on both DADC and
DPT operations) for the 1999 period; DPT's expenses as a percent of revenue for
1999 are 8.7%, while DADC's are approximately 23%. The Company intends to focus
on more effective utilization of marketing resources in DADC operations.
General and administrative. General and administrative expenses increased by
$765,018 as a result of indirect expenses incurred in conjunction with the
purchase of DPT, inclusion of DPT's general and administrative expenses, and
continuing accounting and legal expenses associated with the Company's
transition to publicly-held status. These expenses as a percent of revenue
increased slightly from 33.9% in 1998's first quarter to 34.4% in 1999.
14
<PAGE>
Depreciation and amortization. Amortization expenses, primarily for goodwill and
other intangible assets acquired in the DPT purchase, accounted for $72,545 of
the $94,509 increase. DPT's depreciation expense was $49,952, while DADC's
current quarter expense was $16,466, compared to $34,021 for the first quarter
of 1998.
Bad debt expense. Bad debt expense increased slightly, by $8,894. The decrease
as a percent of revenue from 3.7% to 1.5% is the result of inclusion of DPT's
lower bad debt rate in the average.
Income from operations. Income from operations increased by $269,715, to
$234,543, over the first quarter of 1998, reflecting the positive effects of
inclusion of a full quarter of DPT's operations. The Company believes the
acquisition and expansion of DPT will continue to favorably affect future
operating results, although the costs of moving and expansion at DPT during 1999
will hamper this to some extent.
Interest expense. Interest expense increased $241,457 for this quarter,
attributable primarily to acquisition borrowings and amortization of the debt
discount.
Net loss. The Company's net loss for the first quarter of $59,835 reflects the
substantial interest and amortization costs associated with the acquisition of
DPT, which was financed primarily with debt, and which involved a cost
substantially in excess of the tangible assets purchased.
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 is in the process of installing 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 will be 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 six 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 10K 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",
15
<PAGE>
"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
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<PERIOD-END> MAR-31-1999
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