SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year ended December 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from _______________ to ________________
Commission File No. 33-18174
SIEMANN EDUCATIONAL SYSTEMS, INC.
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(Name of Small Business Issuer in its Charter)
Colorado 84-1067172
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
405 South Platte River Drive
Denver, Colorado 80203
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 733-9673
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.10 Par Value Common Stock
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(Title of Class)
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Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
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As of March 31, 1999, 4,207,702 shares of the Registrant's no par value
Common Stock were outstanding. As of March 31, 1999, the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$2,155,404 based upon a closing bid price of $2.00 per share of Common Stock on
the Electronic Bulletin Board ("EBB").
Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10- KSB or any amendment to
this Form 10-KSB. [ X ]
The Registrant's revenues for its most recent fiscal year were $10,080,201.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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The following is a summary of certain information contained in this Report
and is qualified in its entirety by the detailed information and financial
statements that appear elsewhere herein. Except for the historical information
contained herein, the matters set forth in this Report include forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to risks and uncertainties that may cause actual results to differ
materially. These risks and uncertainties are detailed throughout the Report and
will be further discussed from time to time in the Company's periodic reports
filed with the Commission. The forward-looking statements included in the Report
speak only as of the date hereof.
Introduction
Since August 1997 the Company has owned and operated the Denver Automotive
& Diesel College ("DADC"), a for-profit, post-secondary education college which
trains its students to be automotive and diesel mechanics and technicians. In
March 1998, the Company acquired Data Processing Training Co., ("DPT") for
$9,036,624 comprised of $3,599,102 (net of cash acquired) in cash, a promissory
note in the amount of $4,340,000 bearing interest at 7% per annum payable in
installments through April 15, 2000, and the balance of $750,000 in Common Stock
of the Company issued and valued as of March 24, 1999. DPT provides
post-secondary education in computer programming, business computer
applications, medical office administration and English as a second language.
Unless otherwise indicated, the description of the Company's business and
operations throughout this Report refers to the combined operations of DADC and
DPT.
The Company annually provides diversified career-oriented, post-secondary
education to approximately 1,780 students through DADC (training approximately
400 students) and DPT (training approximately 1,380 students). The Company's
schools offer programs designed to provide students with the knowledge and
skills necessary to qualify them for entry level employment in the fields of
automotive and diesel mechanics, computer programming and applications and
medical office administration.
History of the Company
The Company was incorporated in the state of Colorado in 1987 under the
name Chartwell Cable Fund, Inc. to acquire, develop and operate cable television
systems. The Company conducted an initial public offering of its securities in
January 1988, which resulted in net proceeds of approximately $800,000. In 1994,
after suffering continuing losses from operations, the Company sold its
remaining assets for nominal consideration and ceased operations. In August 1997
the Company issued 2,250,000 shares of its Common Stock to Paul T. Siemann
("Siemann") and 500,000 shares to CBAS, Inc. ("CBAS") for $.001 per share and
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subsequently issued an additional 400,000 shares to acquire all of the
outstanding stock of Siemann Educational Systems, Inc. ("SES"), the owner of
DADC, a company owned and controlled by Siemann. In September 1997 the Company
changed its name to Siemann Educational Systems, Inc., and a new Board of
Directors was elected comprised of Siemann, Joseph R. Chalupa, the school
director of DADC, and Barbara S. Siemann. In August and September 1997, the
Company sold an aggregate of 100,000 shares for $2.00 per share, and in December
1998, the Company sold an aggregate of 103,750 shares for $4.00 per share. See
"Management."
History of DADC and DPT
DADC was founded in 1963 as a private vocational school providing
instruction in automotive repair and body, fender and paint. In 1968 it adopted
the Denver Automotive and Diesel College trade name and offered courses in
automotive and diesel repair, body, fender and paint programs. In September
1987, DADC was approved to offer Associate of Occupational Studies Degree
programs for Master Technician, Automotive Technology and Diesel Technology. In
May 1991 DADC received certification as a "Master Certified Automotive School"
by the National Automotive Technicians Education Foundation ("NATEF"), a
division of the Automotive Service Excellence ("ASE") organization. Following a
1992 Chapter 11 bankruptcy filing, DADC was purchased out of the bankruptcy
proceedings by SES. In August 1995 the school was approved to offer Associate of
Applied Science Degree Programs for Master Technician, Automotive and Diesel
Technology.
DPT was founded in 1987 and trains its students in computer programming,
business computer applications, medical office administration and English as a
second language. DPT is licensed by the Pennsylvania State Board of Private
Licensed Schools and is accredited by the Accrediting Council for Continuing
Education and Training.
Industry Overview
The Company believes the demand for post-secondary, career-oriented
education will increase over the next several years as a result of a number of
recognized trends, including (i) a projected 21% growth in the number of new
high school graduates from approximately 2.5 million in 1993-94 to approximately
3.0 million in 2005-6, (ii) the increasing enrollment of students over the age
of 24 in post-secondary education institutions as they seek to enhance their
skills or retrain for new technologies, and (iii) the increasing recognition of
the income premium attributable to higher technical education certifications,
with individuals holding such certifications earning substantially more income
during their lifetimes than individuals holding only high school diplomas.
According to the National Center for Education Statistics, education is the
second largest sector of the U.S. economy, accounting for approximately 9% of
gross domestic product in 1994, or over $600 billion. The Company's schools are
part of the education management organization ("EMO") sector of the
post-secondary education market, which accounts for approximately one-third of
the total education sector, or $200 billion annually. Of the approximately 6,000
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post-secondary schools that are eligible to participate in federally-funded
Title IV Programs, approximately 500 are proprietary degree-granting
institutions, and the balance are certified technical or vocational training
programs such as the Company. The U.S. Department of Education estimates that by
the year 2005 the number of students enrolled in post-secondary education
institutions will increase by more than 1.5 million to over 16 million students.
The U.S. Department of Education estimates that, over the next five years,
initial enrollments in post-secondary education institutions by working adults
will increase more rapidly than initial enrollments of recent high school
graduates. The post-secondary education industry is also expected to benefit
from the public's increased recognition of the income premium of a
post-secondary education. According to The National Center for Education
Statistics, the percentage of recent high school graduates who continued their
education after graduation increased from 53% in 1983 to 63% in 1993. The
Company believes that the income premium associated with a post-secondary
education has been a significant factor contributing to this trend. The Census
Bureau has reported that in 1995 a full-time male worker with an associate level
degree earned an average of 37% more per year than a comparable worker with only
a high school diploma, and a full-time male worker with a bachelor level degree
earned an average of 72% more per year than a comparable worker with only a high
school diploma. In addition, employment in technical occupations is expected to
increase over the next several years as the demand for technically-skilled labor
increases.
Strategy
The Company seeks to increase its market share in the expanding market for
post-secondary education and improve profitability by (i) acquiring additional
schools that have recorded strong profits under capable management, which
management will agree to remain under contract to the Company, (ii) promoting
internal growth at the Company's existing and newly acquired schools through
improved marketing and the development of new programs within such schools, and
(iii) enhancing operating efficiencies. Subject to the availability of adequate
financing (of which there can be no assurance), the Company intends to implement
the following strategies to achieve these goals:
Acquisition Strategy. According to the Department of Education, there were
approximately 2,355 accredited, proprietary post-secondary schools that
participated in federal financial student aid programs as of June 1996. The
ownership of these schools is highly-fragmented, such that the Company believes
no organization holds a significant national market share or owns or operates
more than 80 schools. The Company believes that the fragmentation of the
post-secondary education market provides significant opportunities to acquire
and consolidate existing independently-owned schools and reduce individual
school overhead through centralizing certain home office functions. The Company
seeks to acquire schools which demonstrate historical profitability, strong
management in place, superior compliance history with respect to federally
guaranteed or funded student loans, and established and marketable curricula.
The Company intends to concentrate its acquisition efforts on schools which
satisfy these acquisition criteria and which offer curricula in the fields of
study currently offered at the Company's schools.
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Internal Growth Strategy. The Company intends to increase student
enrollment (i) at its existing schools, (ii) at newly added campuses to existing
schools and (iii) at newly acquired schools by continuing to enhance local
marketing efforts and increasing the number and variety of program offerings at
its schools. The Company also intends to offer its existing programs at new
schools where such programs were not previously available and to apply for
licenses and accreditation in order to offer programs leading to the granting of
an associate level degree.
Operating Strategy. The Company will seek to provide certain administrative
services to all of its schools, which the Company believes can be performed most
efficiently and cost effectively in a centralized location. Such administrative
services may include marketing analysis, accounting, information systems and
regulatory compliance. However, the Company will continue to operate a
decentralized management structure in which local school management is empowered
to make most of the day-to-day operating decisions at each school and to be
primarily responsible for the profitability and growth of that school and
compliance with all regulatory requirements.
Programs of Study
The Company's programs are intended to provide students with the specific
knowledge and job skills required to prepare them for entry-level positions in a
chosen career field. The automotive and diesel programs at DADC are designed to
prepare students for occupations associated with the automotive and diesel
repair industries. The computer and medical programs at DPT train students in
computer programming and business computer applications (such as spreadsheets
and word processing) and medical office administration (such as medical
record-keeping and billing). DPT also offers English as a second language to
improve students' ability to communicate in English, thereby assisting the
student in completing his or her future course of study at the school. As of
August 1997, tuition and fees for an entire program for a new student entering
one of the DADC or DPT programs ranged from a high of $22,000 for a 30-month
program to a low of $2,950 for a seven and one-half-month program.
As of December 31, 1998, approximately 316 students were enrolled at DADC
and approximately 980 students were enrolled at DPT. All of the Company's
programs are designed to prepare graduates to perform effectively in a variety
of entry-level positions by providing the student with practical experience both
in the classroom and in the field.
DADC and DPT schedules vary depending on the programs offered by each
school. Generally, programs begin eight times a year with courses offered from 7
AM to 10 PM, five to six and one-half days a week year round.
The Company also has applied for licenses and accreditation in order to
offer programs leading to the granting of an associate's degree. See " -
Strategy."
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Marketing; Student Recruitment
The Company endeavors to recruit motivated students who have the ability to
complete the programs offered by the Company's schools and to secure entry-level
employment in the field for which their program is designed to prepare them. To
attract potential students, the Company engages in several activities to inform
them and their family about the Company's programs. Marketing efforts include
direct mailings to prospective students and to high schools (which often include
videotapes of the Company's schools), newspaper advertising, yellow pages
advertising and visits by Company personnel to area high schools. The Company's
advertising is tailored to the national as well as the local market in which the
school is located and is intended to create market interest and name
recognition. Responses to direct mail campaigns are received and followed up at
each school. The two schools each employ a director of admissions who is
responsible for, among other things, coordinating the efforts of the school to
recruit qualified students, determining recruiting policies and procedures and
setting standards for hiring and training admissions representatives.
Company representatives contact potential students who have indicated an
interest in the schools' programs and arrange for interviews which generally
take place at the school or at the prospective student's home. The interview is
designed to establish the student's qualifications, academic background and
employment goals. Prospective students are generally given a school catalogue
which describes the school's programs, a tour of the school and an explanation
of the programs offered and the types of employment opportunities typically
available to graduates of the school. The Company employs two DADC
representatives based in Denver and six East Coast School representatives based
at DPT's location. In addition, DADC employs three regional representatives, who
market in North Dakota, South Dakota, Washington and Alaska.
Admission, Retention and Graduate Placement
In order to apply for admission to any of the Company's programs, a
candidate is required to have a high school diploma, a recognized equivalent or
pass an admissions test specifically approved by the Department of Education. At
December 1998, substantially all of the students were high school graduates or
held recognized equivalent certification. Approximately 40% of enrolled students
were under 20 years of age and 70% of the students were men.
In an attempt to minimize student withdrawals prior to the completion of
their program, the schools provide staff and other resources to assist and
advise students regarding academic and financial matters and employment. The
schools also provide tutoring and encourage help sessions between individual
students and instructors when students are experiencing academic difficulties.
For those students who were scheduled to graduate in calendar year 1997,
approximately 80% completed their course of study. The Company is obligated to
provide refunds to those students who withdraw from school prior to completion
of the program based on formulas required by applicable accrediting agencies or
by state and federal regulations.
The Company's schools employ placement personnel to provide placement
assistance services to students and graduates and to solicit appropriate
employment opportunities from employers. During the course of each program,
students receive instruction on job search and interviewing skills and have
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available reference materials and assistance with the composition of resumes.
Based on data obtained by the Company from its students and their employers, the
Company believes that approximately 92% of DADC's and DPT's graduates obtained
employment in a field related to their program of study.
Faculty
Faculty members are hired locally in accordance with criteria established
by the school, applicable accreditation organizations and applicable state
regulatory authorities. Members of a school's faculty are hired based on
academic and vocational training background, prior educational experience and
prior work experience. A significant portion of the Company's faculty were
previously employed in fields related to their area of instruction. The Company
believes that such faculty members provide a "real world" perspective to its
students. As of December 31, 1997, DADC and DPT employed approximately 20 and 25
full-time faculty members, respectively (defined as those faculty members
spending at least 37 hours per week teaching classes at the Company's schools),
and 0 and 72 part-time faculty members, respectively.
Administration and Employees
The Company's two schools are each managed by a school director.
Additionally, the staff of each school includes a director of placement, a
financial aid administrator and a director or assistant director of admissions.
As of December 31, 1998, DADC and DPT employed approximately 49 and 98 full-time
employees, respectively. The Company's employees are not represented by a labor
union or subject to a collective bargaining agreement. The Company has never
experienced a work stoppage and believes that its employee relations are
satisfactory.
Each of the Company's two schools handles its financial aid services,
oversees regulatory compliance, assists in the development and addition of
programs to existing curricula, conducts marketing, implements and supports
management information systems and provides accounting services and financial
resources.
Competition
The post-secondary education market is highly-fragmented and competitive
with no private or public institution having a significant market share. The
Company's schools compete for students with not-for-profit public and private
colleges and proprietary institutions which offer degree and/or non-degree
granting programs. Such proprietary institutions include vocational and
technical training schools, continuing education programs and commercial
training programs. Competition among educational institutions is based on the
quality of the program, perceived reputation of the institution, the cost of the
program, and the employability of graduates. Public and private colleges may
offer programs similar to those offered by the Company's schools at lower
tuition costs due in part to government subsidies, foundation grants, tax
deductible contributions, or other financial resources not available to
proprietary institutions. Many of the Company's competitors in both the public
and private sector have greater financial and other resources than the Company.
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Financial Aid and Regulation; Title IV Student Financial Assistance Programs
A substantial majority of the students attending the Company's schools
finance all or a part of their education through grants or loans under Title IV
Programs. Revenues from Title IV funding provide most of DADC's and DPT's
tuition revenues (aggregating approximately 63% of cash receipts in fiscal
1998). The maximum amount of a student's available Title IV program assistance
is generally based on the student's financial need. The Company determines a
student's financial need based on the national standard need analysis system
established by the HEA. If there is a difference between the amount of Title IV
program funding a student is entitled to receive (combined with other outside
assistance) and the student's tuition, the student is responsible for the
difference, which may be funded by loans from the Company directly to the
student. Such loans, if advanced, generally require the students to make
payments on the loan commencing when the loan is received.
Students at the Company's two schools may participate in the following
Title IV Programs:
Pell and FSEOG Grants. The Federal Pell Grant Program provides for grants
to help financially needy undergraduate students meet the costs of their
post-secondary education. The amount of an eligible student's Pell grant award
currently ranges from $400 to $3,000 annually, depending on the student's
financial need, as determined by a formula set by the HEA and the Regulations.
The HEA guarantees that all of the eligible students at a school receive Pell
grants in the amounts to which they are entitled. In 1998, the average Pell
award per student enrolled in DADC and DPT was approximately $2,204. Pell grants
to students represented approximately $2,995,252, or 30.9% of the Company's
revenues in 1998.
The Federal Supplemental Educational Opportunity Grant program ("FSEOG")
provides for awards to exceptionally needy undergraduate students. The amount of
an FSEOG award currently ranges from $100 to $4,000, depending upon the
student's financial need and the availability of funds. In fiscal 1996, the
average FSEOG award to students enrolled in the Company's two schools receiving
such grants was $400. The Company, or another outside source, is required to
make a 25% matching contribution for FSEOG program funds it disburses. The
Company made matching contributions of approximately $42,964 in 1997. FSEOG
awards made to the Company's students (net of matching contributions) amounted
to approximately $128,802 and represented approximately 1-3% of the Company's
revenues in 1997.
Federal Family Education Loans and Federal Direct Student Loans. The
Federal Family Education Loan ("FFEL") programs include the Federal Stafford
Loan Program ("Stafford Loan"), and the Federal PLUS Program ("PLUS"), pursuant
to which private lenders make loans to enable a student or the student's parents
to pay the cost of attendance at a post-secondary school.
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The FFEL Program is administered through state and private nonprofit
guarantee agencies that insure loans directly, collect defaulted loans and
provide various services to lenders. The federal government provides interest
subsidies in some cases and reinsurance payments for borrower default, death,
disability and bankruptcy.
The Federal Direct Student Loan Program ("FDSLP") is substantially the same
as the FFEL program in providing Stafford and PLUS loans. Under the FDSLP,
however, funds are provided directly by the federal government to the students,
and the loans are administered through the school. For schools electing to
participate, the FDSLP replaces the FFEL program, although loans are made on the
same general terms and conditions.
Stafford Loan Program. Students may borrow an aggregate of $2,625 for their
first undergraduate academic year and $3,500 for their second academic year
under the FFEL Stafford Loan or FDSLP Stafford Loan program. If the student
qualifies for a subsidized loan, based on financial need,, the federal
government pays interest on the loan while the student is attending school and
during certain grace and deferment periods. If the student does not qualify for
a subsidized Stafford Loan, the interest accruing on the loans must be paid by
the student. In addition, independent students may qualify for an additional
$4,000 a year in unsubsidized Stafford loans.
Plus Loan Program. Parents of dependent students may receive loans under
the FFEL PLUS Program or the FDSLP PLUS Program on an academic year basis. The
maximum amount of any PLUS loan is the total cost of a student's education for
each relevant academic year less other financial aid received by the student
attributable to such year. PLUS loans carry a maximum interest rate of 9% and
are repayable commencing 60 days following the last disbursement made with
respect to the relevant academic year, with flexible payment schedules over a
ten-year period. The FFEL PLUS loans are made by lending institutions and
guaranteed by the federal government. The FDSLP PLUS Program provides PLUS loans
by the federal government on the same general terms as the FFEL PLUS loans.
There were no FDSLP PLUS or FFEL PLUS loans advanced to students in 1997.
Perkins Loans. Students who demonstrate financial need may borrow up to
$3,000 per academic year under the Federal Perkins Loan ("Perkins") program,
subject to the availability of Perkins funds at the institution. Repayment of
loans under the Perkins program is delayed until nine months after graduation or
the termination of studies. Funding for the Perkins program is made by the
Department of Education into a fund maintained by the participating school for
that purpose. The participating school is required to make a matching
contribution into the fund of 25% of the total loans made from the fund and to
deposit all repayments into the fund.
Federal Work-Study. Pursuant to the Federal Work-Study ("FWS") program,
federal funds are made available to provide part-time employment to eligible
students based on financial need. The Company's two schools may provide a
limited number of on-campus and off-campus jobs to eligible students
participating in the FWS program. The Company, or another outside source, is
required to pay 25% of the gross earnings of each participant in the FWS
program.
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Title IV Eligibility. To obtain and maintain eligibility to participate in
the programs described above, the Company's schools must comply with the rules
and regulations set forth in the HEA and the Regulations thereunder. An
institution must obtain certificate by the Department of Education as an
"eligible institution" to participate in Title IV Programs. Certification as an
"eligible institution" requires, among other things, that the institution be
authorized to offer its educational programs by the state in which it operates.
It must also be accredited by an accrediting agency recognized by the Department
of Education.
The HEA provides standards for institutional eligibility to participate in
the Title IV Programs. The standards are designed, among other things, to limit
dependence on Title IV funds, prevent schools with unacceptable student loan
default rates from participating in Title IV Programs and, in general, require
institutions to satisfy certain criteria intended to protect the integrity of
the federal programs, including criteria regarding administrative capability and
financial responsibility.
Generally, each school (a main campus and any additional locations for
purposes of the Regulations) is considered separately for compliance with the
Regulations. A school that has been certified as eligible to participate in the
Title IV Programs continues to remain eligible for the period of its
certificate, which is generally four years. A school must apply for a renewal of
its certification prior to its expiration and must demonstrate compliance with
the eligibility requirements in its application.
Under certain circumstances, the Department of Education may provisionally
certify a school to participate in Title IV programs. Provisional certification
may be imposed, when a school is reapplying for certification or when a school
undergoes a change of ownership resulting in a change in control if the school
(i) does not satisfy all of the financial responsibility standards, (ii) has a
Cohort Default Rate of 25% or more in any single fiscal year of the three most
recent federal fiscal years for which data is available, and (iii) under other
circumstances determined by the Secretary of Education. Provisional
certification may last no longer than three years and differs from certification
in that a provisionally certified school may be terminated from eligibility to
participate in the Title IV Programs without the same opportunity for a hearing
that is afforded to a fully certified school. Additionally, the Department of
Education may impose other conditions on a provisionally certified institution's
eligibility to continue participating in the Title IV Programs.
Student Loan Defaults. Under the HEA, an institution may lose its
eligibility to participate in some or all Title IV Programs if student defaults
on the repayment of federally guaranteed student loans exceed specified Cohort
Default Rates. Similar rules regarding default rates apply to Federal Direct
Loans made pursuant to the FDSLP, commencing with those loans entering into
repayment for the first time in the 12-month period ending September 30, 1995.
Under existing regulations these rates are based on the repayment history of
current and former students for loans provided under the Stafford Loan program
and the SLS program. A Cohort Default Rate is calculated for each school on a
federal fiscal year basis by determining the rate at which the school's students
entering repayment in that federal fiscal year default by the end of the
following federal fiscal year. Cohort Default Rates are subject to revision by
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the Department of Education if new data becomes available and is subject to
appeal by schools contesting the accuracy of the data or the adequacy of the
servicing of the loans by the loan servicer.
An institution whose Cohort Default Rate exceeds 40% for any single federal
fiscal year may have its eligibility to participate in all Title IV Programs
limited, suspended or terminated. If the Department of Education elects to take
such action due to a single-year Cohort Default rate in excess of the regulatory
level, it must afford the institution a hearing before an independent Department
of Education hearing officer and an opportunity to appeal any decision to the
Secretary of Education before the limitation, suspension or termination may take
effect. Except as indicated below, neither DADC nor DPT has had a Cohort Default
Rate in excess of 40%.
An institution whose Cohort Default Rate is 25% or more for the three most
recent federal fiscal years for which data is available is subject to immediate
loss of eligibility to participate in Title IV Programs, subject to an appeal
(on the bases stated in the next prior paragraph) of the determination,
including an appeal based on a claim of exemption from the Cohort Default Fate
requirements by virtue of exceptional mitigating circumstances. The loss of
eligibility lasts for the duration of the fiscal year in which the determination
of ineligibility is made, plus the two succeeding fiscal years. However, an
institution remains eligible for Title IV funding while the appeal is pending.
DPT has not had a Cohort Default Rates of 25% in any of the three
consecutive federal fiscal years ending 1994. DADC had default rates of 44% (in
1991), 31% (in 1992) and 26% (in 1993), and accordingly, lost its certification
to participate in the Stafford Loan program. DADC applied for recertification to
participate in the Stafford Loan program and its application has been approved.
Accordingly, DADC is now participating in the program. DADC's published Cohort
Default Rate for 1995 and preliminary published Cohort Default Rate for 1996 are
below regulatory requirements. The Company believes that neither of its two
schools is currently vulnerable to any other termination of Title IV eligibility
or programs based on three consecutive years of excess default rates.
The Regulations require that any school which experiences a Cohort Default
Rate in excess of 20% must establish a default management plan in compliance
with the federally mandated plan included in the Regulations. This plan includes
measures to reduce student withdrawal rates, improve student employment rates
and counseling of students on their responsibility to repay their loans. The
Company has default reduction programs in place in its two schools; however,
economic and other factors outside of the Company's control could adversely
affect default rates.
The 90/10 Rule. The "90/10" rule, which applies to for-profit institutions
such as DADC and DPT, became applicable to the Company's schools beginning with
the fiscal year ending March 31, 1996. The rule requires that no more than 90%
of the school's applicable cash receipts may be derived from Title IV Programs.
A school whose annual certified financial statement or Title IV compliance audit
report to the Department of Education does not reflect compliance with the 90/10
rule is subject to immediate termination of its Title IV eligibility. The
Company believes that DADC and DPT are in compliance with the 90/10 rule.
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Change in Control. Upon a change in ownership resulting in a change in
control of the Company or any of its schools as defined in the HEA and
Regulations, either the Company or its schools, as applicable, would lose its
eligibility to participate in Title IV Programs for an indeterminate period of
time during which it applies to regain eligibility. A change of control also
could have significant regulatory consequences for the Company at the state
level and could affect the accreditation of the Company's schools. If the
corporation is not publicly-traded, the Regulations provide that a change in
ownership resulting in a change of control occurs when a person's legal or
beneficial ownership either rises above or falls below 25% of the voting stock
of the corporation and that person gains or loses control of the corporation.
The Company's purchase of DPT constituted a change in control of DPT, and
accordingly, DPT has lost its eligibility and will be unable to participate in
Title IV Programs until it is recertified.
The Department of Education's regulations provide that after a company
becomes publicly-traded, a change in control occurs when a report on Form 8-K is
required to be filed with the Securities and Exchange Commission disclosing a
change in control. Most states and accrediting agencies have similar
requirements, but they do not provide a uniform definition of change in control.
If the Company were to lose its eligibility to participate in Title IV Programs
(by virtue of DPT purchase or otherwise) for a significant period of time
pending an application to retain eligibility,, or if it were determined not to
be eligible, its operations would be materially adversely affected. The possible
loss of Title IV eligibility resulting from a change in control may also
discourage or impede a tender offer, proxy contest or other similar transaction
involving control of the Company.
Administrative Capability. The Regulations set certain standards of
"administrative capability" which a school must satisfy to participate in the
Title IV Programs. These criteria require, among other things, that the school
comply with all applicable Title IV Regulations, have capable and sufficient
personnel to administer the Title IV Programs, have acceptable methods of
defining and measuring the satisfactory academic progress of its students,
provide financial aid counseling to its students, timely submit all reports and
financial statements required by the Regulations, and that the school's Cohort
Default Rate not equal or exceed 25% for any single fiscal year.
Failure to satisfy any of the criteria may lead the Department of Education
to determine that the school lacks the requisite administrative capability and
may subject the school to provisional certification when it seeks to renew its
certification as an eligible institution, or may subject it to a fine or to a
proceeding for the limitation, suspension or termination of its participation in
Title IV Programs. Proceedings to fine, limit, suspend or terminate an
institution are conducted before an independent hearing officer of the
Department of Education and are subject to appeal to the Secretary of Education,
prior to any sanction taking effect. Thereafter, judicial review may be sought
in the federal courts pursuant to the federal Administrative Procedures Act.
Financial Responsibility Requirements. The HEA and the Regulations
prescribe specific standards of financial responsibility which the Department of
Education must consider with respect to qualification for participation in the
Title IV Programs ("Financial Responsibility Standards"). These standards are
generally applied on a consolidated school basis. However, there can be no
13
<PAGE>
assurance that the Department of Education will not apply such standards on an
individual school basis. If the Department of Education determines that either
of the Company's schools fails to satisfy the Financial Responsibility
Standards, the Department may require that such school post an irrevocable
letter of credit (a "Financial Responsibility Bond") in favor of the Secretary
of Education in an amount equal to not less than one-half of Title IV Program
funds received by the school during the last complete award year or, in the
Department of Education's discretion, require some other less onerous
demonstration of financial responsibility (a "Demonstration of Financial
Responsibility"). Pursuant to the Regulations, the Company submits annual
audited consolidated financial statements to the Department of Education.
All institutions participating in the Title IV Programs must satisfy a
series of specific standards of financial responsibility. Institutions are
evaluated for compliance with those requirements in several circumstances,
including as part of the DOE's recertification process and also annually as each
institution submits its audited financial statements to the DOE. Under standards
in effect prior to July 1, 1998, each institution was required to demonstrate an
acid test ratio (defined as the ratio of cash, cash equivalents and current
accounts receivable to current liabilities) of at least 1:1 at the end of each
fiscal year. Another standard required that each institution have a positive
tangible net worth at the end of each fiscal year. A third standard prohibited
any institution from having a cumulative net operating loss during its two most
recent fiscal years that resulted in a decline of more than 10% of that
institution's tangible net worth as measured at the beginning of that two-year
period. The DOE may measure an institution's financial responsibility on the
basis of the financial statements of the institution itself or the financial
statements of the institution's parent company and may also consider the
financial condition of any other entity related to the institution.
In November 1997, the DOE published new regulations regarding financial
responsibility that took effect on July 1, 1998. The regulations provide a
transition year alternative which will permit institutions to have their
financial responsibility for the 1998 fiscal year measured on the basis of
either the new regulations or the previous regulations, whichever are more
favorable to the Company. Under the new regulations, the DOE will calculate
three financial ratios for an institution, an equity ratio, a primary reserve
ratio, and a net income ratio, each of which will be scored separately and which
will then be combined to determine the institution's financial responsibility.
If an institution's composite score is below the minimum requirement for
unconditional approval (which is a score of 1.5) but above a designated
threshold level (the "Intermediate Zone", which is 1.0 to 1.4), such institution
may take advantage of an alternative that allows it to continue to participate
in the Title IV Programs for up to three years under additional monitoring and
reporting procedures. If an institution's composite score falls below the
minimum threshold level of 1.0 or is in the Intermediate Zone for more than
three consecutive years, the institution will be required to post a letter of
credit in favor of the DOE. The Company does not believe that these new
regulations will have a material effect on the Company's compliance with the
DOE's financial responsibility standards.
An institution that is determined by the DOE not to meet any one of the
standards of financial responsibility is nonetheless entitled to participate in
the Title IV Programs if it can demonstrate to the DOE that it is financially
responsible on an alternative basis. An institution may do so by posting surety
either in an amount equal to 50% (or greater, as the DOE may require) of the
14
<PAGE>
total Title IV Program funds received by students enrolled at such institution
during the prior year or in an amount equal to 10% (or greater, as the DOE may
require) of such prior year's funds if the institution also agrees to
provisional certification and to transfer to the reimbursement or cash
monitoring system of payment for its Title IV Program funds. The DOE has
interpreted this surety condition to require the posting of an irrevocable
letter of credit in favor of the DOE. Alternatively, an institution may
demonstrate, with the support of a statement from a certified public accountant
and other information specified in the regulations, that it was previously in
compliance with the numeric standards and that its continued operation is not
jeopardized by its financial condition.
Incentive Compensation. Schools participating in Title IV Programs are
prohibited from providing any commission, bonus or other incentive payment based
directly or indirectly on success in securing enrollments or financial aid to
persons engaged in any student recruitment, admission or financial aid awarding
activity (the "Incentive Compensation Rule"). The Department of Education has
not provided specific regulations with respect to this requirement. If the
Department of Education were to determine that the Company's methods of
compensation do not comply with the Incentive Compensation Rule, the Company
could be required to modify its compensation system, repay certain previously
disbursed Title IV Program funds, pay administrative fines or lose its
eligibility to participate in Title IV Programs. The Company believes its
compensation policies do not violate the Incentive Compensation Rule.
Restrictions on Adding Locations and Educational Programs. Proprietary
educational institutions must be in full operation for two years before they can
be certified by the Department of Education to participate in Title IV Programs.
However, an institution that is already qualified to participate in Title IV
Programs may establish, with approval of the Department of Education, an
additional location that immediately qualifies for participation in such
programs without satisfying the two-year requirement if such location satisfies
all other applicable requirements for institutional eligibility, including
approval of the additional location by the applicable accrediting agency and the
relevant state authorizing agency.
Generally, if a school which is eligible to participate in Title IV
Programs adds an educational program, it must apply to the Department of
Education to have such program designated as eligible. However, if it adds an
additional degree program or a program which prepares students for employment in
the same or related occupations as those which have previously been designated
as eligible, it is not obligated to obtain the Department of Education's
approval of such program. The Company does not believe that the Department of
Education requirements will hinder its ability to plan and add new degree and
diploma programs to its schools' curricula.
State Authorization and Accreditation. The Company's schools must be
authorized by the applicable agency or agencies of the state in which they are
located to operate. State authorization is also required for eligibility to
participate in Title IV Programs. The Company's two schools are authorized to
operate in their respective states.
15
<PAGE>
Both of the Company's schools are accredited by at least one accrediting
body recognized by the Department of Education. Accreditation signifies that the
schools have been reviewed and determined to meet minimum criteria in terms of
administration, faculty, curriculum, physical plant, facilities and equipment,
and financial stability. Accreditation by an accrediting body recognized by the
Department of Education is a requirement for participation in Title IV Programs.
ITEM 2. DESCRIPTION OF PROPERTY
- -------------------------------
The Company leases 81,500 square feet for its DADC facilities from Paul T.
Siemann, its Chief Executive Officer and a director, for $15,000 per month
pursuant to a lease which expires in August 2000. The Company believes that the
terms of the two leases are fair, reasonable and consistent with the terms of
leases which the Company could enter into with nonaffiliated third parties. DPT
leases an aggregate of approximately 51,300 square feet for office space and
school facilities for $42,580 per month under two leases which expire in
December 2003 and in May 2009.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------
The Company's Common Stock trades on the Electronic Bulletin Board
("EBB") under the symbol "SEDS". The following table sets forth for the quarters
indicated the range of high and low closing prices of the Company's Common Stock
on the EBB but does not include retail markup, markdown or commissions.
Closing Price
-----------------
By Quarter Ended: High Low
- ----------------- ---- ---
December 31, 1998............................................ 3.75 .71
September 30, 1998............................................3.50 1.50
June 30, 1998.................................................4.50 1.88
March 31, 1998............................................... 3.85 2.75
December 31, 1997.............................................3.82 2.25
September 30, 1997............................................None None
June 30, 1997.................................................None None
March 31, 1997................................................None None
16
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As of March 31, 1998, the Company had approximately 1,200 record and
beneficial stockholders.
Dividends
The Company has not paid dividends on its Common Stock since inception and
does not plan to pay dividends in the foreseeable future. Earnings, if any, will
be retained to finance growth.
17
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the results of operations and financial condition of
the Company should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto appearing elsewhere herein.
The discussion below contains certain forward-looking statements (as such term
is defined in Section 21E of the Securities Exchange Act of 1934) that are based
on the beliefs of the Company's management, as well as assumptions made by , and
information currently available to, the Company's management. The Company's
actual growth, results, performance and business prospects and opportunities in
1998 and beyond could differ materially from those expressed in, or implied by,
any such forward-looking statements. See "Special Note Regarding Forward-Looking
Statements" 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 316
enrolled students as of December 31, 1998. The school is a "Master Certified
Automotive School" by the National Automotive Technicians Education Foundation,
and offers several associate degree and non-degree programs. DPT, acquired by
the Company on March 24, 1998 as more fully discussed below under
"Acquisitions", consists of two campuses in the Philadelphia, Pennsylvania, area
providing training in the areas of computer programming, business computer
applications, medical office administration, and English as a second language.
DPT's two campuses had enrollment of approximately 980 students on December 31,
1998. DADC's enrollment is slightly higher than on December 31, 1997, 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 January 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 has contracted for expansion space in a new
location; the new facilities were occupied by DPT in January of 1999. The campus
was occupying its current facility on a month-to-month basis until the move.
This expansion will result in the ability to increase the student body at that
campus from the current 700 to approximately 1,400. The school expects to have
an additional 120 students enrolled by June of 1999. Current tuition revenue is
approximately $900 per month per student. Rent expense will increase by
approximately $9,500 per month at the new facility after April of 1999.
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
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students during the term. The year is divided into terms, which are determined
by start dates that vary by school and program. Payment of each term's tuition
may be made by full cash payment, financial aid, and/or an installment payment
plan. If a student withdraws from school prior to the completion of the term,
the Company refunds a portion of the tuition already paid which is attributable
to the uncompleted period of the term. The Company's campuses charge tuition at
varying amounts depending on both the school and the type of program and
curriculum. Each of the Company's campuses typically implements one or more
tuition increases annually; DADC's last increase was 5% in July of 1998, and DPT
is projecting a 6-7% increase in April of 1999. For both DADC and DPT, the
highest student body levels occur during the fall terms, beginning in
August/September.
The Company's expenses consist of educational and facilities costs, selling and
promotional expense, general and administrative expense, depreciation and
amortization, and bad debt expense.
Education costs generally consist of salaries and related expenses for faculty,
instructional support, academic administration, educational materials, and
related expenditures. Facility costs include leasing and maintenance of campus
facilities, and other building occupancy expenses.
Selling and promotional expenditures include the costs of advertising and
promotional materials, as well as salaries and benefits for recruitment and
marketing personnel.
General and administrative expense includes salaries and benefits of accounting,
and school and corporate administration.
Depreciation and amortization consists of depreciation of purchased and
capital-leased computer equipment, automotive training equipment, and furniture
and fixtures. Amortization of intangible assets consists primarily of the costs
of goodwill acquired in the purchase of DPT, and loan fees associated with that
purchase.
Uncollectible student receivables are written off to bad debt expense on a
pro-rata basis through out the year. DADC experienced a period of ineligibility
for federal financial aid programs during 1996 and 1997; as a consequence, the
school substantially increased the level of tuition being financed by students
under installment payment plans. Bad debt expense has been approximately 4% of
DADC revenues in 1998 and 1997. DPT has experienced bad debts of less than 1% of
revenue in 1998 and 1997.
As a result of the S Corporation status of DADC until August 31, 1997, DADC was
not subject to federal and state income taxes until it was acquired by the
Company. The Company's operations from September 1, 1997 to December 31, 1997
resulted in a net operating loss carry-forward of approximately $118,000 as of
December 31, 1997. The tax benefit of the net operating loss was fully reserved
at December 31, 1997. DPT is subject on an individual company basis to state and
city income and business privilege taxes.
Acquisition
On March 24, 1998, the Company acquired all of the outstanding stock of DPT for
a purchase price of $9,030,624, and additional direct costs of acquisition of
approximately $21,900 were also capitalized; the acquisition was accounted for
as a purchase. The purchase price was determined through arms-length negotiation
with the independent third-party owner based on historical and projected future
19
<PAGE>
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 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. The note payable to the former owner of DPT carries interest of 7%;
interest expense was approximately $203,000 in 1998 and will be approximately
$142,000 in 1999 on this note. Principal payments are being made quarterly
through March 24, 2000 to retire the debt.
Liquidity and Capital Resources
- -------------------------------
December 31, 1998 as Compared to December 31, 1997
The Company finances its operating activities and capital requirements,
including debt repayments, principally from cash provided by operating
activities and borrowings on lines of credit. The Company's cash balance
increased $1,017,090 over the year ended December 31, 1997; the increase
resulted primarily from borrowings associated with the acquisition of DPT,
additional borrowings on lines of credit, and cash flows from the newly-acquired
operations of DPT.
Accounts and installment notes receivable, net of the effects of the DPT
acquisition discussed above, decreased slightly by $36,000 at DADC, and
increased slightly by approximately $51,000 at DPT (from the date of
acquisition); both reflect the relatively insignificant change in size of the
student body over the year. 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, decreased by $118,961 at DADC, and by $127,093 at DPT (from the
date of acquisition). The changes result from normal inter-period start date
timing fluctuations.
Capital expenditures unrelated to the acquisition during the year were
approximately $400,000. The Company expects to incur approximately $900,000 in
leasehold improvements and other capital expenditures as a result of the January
1999 relocation of one of its Philadelphia campuses.
20
<PAGE>
Cash provided by operating activities of $365,000 for the year ended December
31, 1998, primarily results from the addition of DPT operations to the Company;
cash used by operations was $(961,937) in 1997.
December 31, 1997 as Compared to December 31, 1996
In 1997, the Company operated only DADC, and, consequently, the discussion below
is abbreviated, and differs in format from that presented for the current
period.
During 1997, the Company's cash balance decreased $293,156 from the 1996
amounts. However, at December 31, 1997, current assets increased $685,065 over
1996 current assets, an increase of 57.4%. The increase in current assets was
largely due to an increase in short-term student accounts and notes receivable.
Compared to prior years, a substantial portion of the student accounts and notes
receivable were institutional and held by the school rather than being
government granted or based. This change occurred because DADC lost its
eligibility for government Title IV funding and grants in 1996 due to the
previous owner's failure to comply with certain financial responsibility ratios.
The Title IV funding and grants were restored in November 1997. Nevertheless,
the 1997 receivables increased $913,560 over 1996. However, the allowance for
uncollectible receivables also increased by $130,331 and the bad debt expense
increased from $81,020 in 1996 to $138,353 in 1997. To insure future cash and
hedge against uncollectible student receivables, in addition to notes receivable
from a stockholder, the Company sold a number of student notes receivable
(long-term portion only) to another stockholder for $200,000. (In 1998, those
receivables were sold to an unrelated party). The Company's president increased
his borrowings from the Company by $156,300 over 1996. The total amount due from
the President was payable within one year, and was fully repaid by the end of
1998.
Property and equipment decreased $164,725 from 1996 due to depreciation expense
of $176,276 after purchases of property and equipment of $11,551. Also during
1997, the Company initiated the acquisition of DPT, which is more fully
discussed above. Overall, total assets increased $1,068,101, or 50%, from 1996.
During 1997, the Company's accounts payable and accrued liabilities remained
relatively constant compared to 1996. However, total current liabilities
increased $604,570 over 1996 current liabilities, an increase of 53%. The
increase in current liabilities is largely due to the increase in deferred
tuition income and current maturities of long-term debt. Deferred tuition income
increased $153,538 over 1996 due to normal student enrollment and timing
fluctuations. Current and long-term maturities of debt increased $840,507 over
1996 due to reduced cash flow created by the loss of Title IV funding discussed
above. Notes payable to a stockholder decreased by $36,405. The Company incurred
a total liability of $123,936 in 1997 payable to the owner of DPT, which
consisted of $61,968 directly payable in cash and $61,968 to repurchase common
stock. Finally, student refunds and credit balances decreased $122,263 from 1996
due to normal fluctuations.
During 1997, the Company's current assets exceeded current liabilities by
$142,977, giving the Company a current ratio of 1.08:1.
Rent payable, a non-current liability, increased $132,902 over 1996 due to the
accrual of one year's rent less a payment of $22,000. This was based on an
agreement with the owner of the building, who is also the President of the
Company, to defer the payment of rent with interest until the school's cash flow
improves. This liability, plus additional accrued interest, remained on the
books at the end of 1998.
21
<PAGE>
Common stock increased $339,598 over 1996, due to the reorganization of the
Company in a reverse acquisition and the issuance of additional stock on August
31, 1997. Additional paid-in capital decreased from $618,646 to $88,706 in 1997
because of the elimination of the accumulated deficit against paid-in capital
when the reorganization occurred.
Results of Operations
- ---------------------
1998 as Compared to 1997
The following table summarizes the Company's operating results as a percentage
of net revenue for the periods indicated:
Twelve Months Ended December 31,
1998 1997
--------------------------------
Net revenues 100.0 100.0
Educational services and facilities (48.7) (35.6)
Cost of college supplies/sales (3.9) (5.9)
Selling and promotion (11.8) (17.2)
General and administrative (23.2) (29.7)
Depreciation and amortization (6.7) (6.0)
Bad debt expense (1.6) (4.5)
-------------------------------
Income from operations 4.1 1.1
Interest expense - net (8.5) (2.2)
Provision for income taxes (1.0) --
-------------------------------
Net income (5.4) (1.1)
================================
Total revenues. The Company's total revenues (exclusive of interest income)
increased by $7,029,367 to $10,080,291 for the year ended December 31, 1998
over the year ended December 31, 1997. Revenues include $6,902,272
attributable to DPT's operations from the date of acquisition to December
31, 1998. DADC's revenues increased $110,522 over the previous year due to
a slight increase in student units.
Educational facilities and services. The educational services and facilities
cost increase of $3,825,306 in 1998 over the previous year is primarily due to
the inclusion of DPT's operations; DPT incurred $3,693,044 of such costs in the
period. DADC's expenses increased by $132,261, or 12.2%, for 1998 over 1997.
Selling and promotion expense. Selling and promotion expense increased $665,243
over the previous year. Inclusion of DPT's expenses accounted for $551,356 of
the increase, while DADC's expenses increased by $113,887 (22%). As a percent of
revenue, these expenses decreased from 17.2% (reflecting DADC operations only)
for 1997 to 11.8% (based on both DADC and DPT operations) for the 1998 period;
DPT's expenses as a percent of revenue for 1998 are 8%, while DADC's are
approximately 20%. The Company intends to focus on more effective utilization of
marketing resources in DADC operations.
22
<PAGE>
General and administrative. General and administrative expenses increased by
$1,437,751 over 1997 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 decreased from 29.7% in 1997 to 23.2% in 1998. The Company expects these
expenses as a percent of revenue to decrease in 1999.
Depreciation and amortization. Amortization expenses, primarily goodwill and
other intangible assets acquired in the DPT purchase, accounted for $405,396 of
the $487,820 increase for 1998 over 1997. DPT's depreciation expense was
$126,012 for 1998, while DADC's 1998 expense was $103,522, compared to $184,347
for 1997.
Bad debt expense. Bad debt expense increased $19,796 for 1998 over 1997;
inclusion of DPT's amounts accounted for all but $7,781 of the increase. The
decrease as a percent of revenue from 4.4% to 1.6% is the result of inclusion of
DPT's lower bad debt rate in the average.
Income from operations. Income from operations increased by $383,724 over 1997.
DPT's income from operations of $419,198 as a percent of revenue was
approximately 6%, while DADC's was approximately 1%; the Company believes the
acquisition and expansion of DPT will 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 $850,626 over 1997, attributable
primarily to acquisition borrowings.
Net loss. The Company's net loss for 1998 of $550,828 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. Weighted number of shares outstanding
reflects a substantial increase from December 1997, due to the issuances of
shares in connection with the conversion from privately-held to publicly-held
status, and issuances in conjunction with acquisition financing.
Year 2000. The Company 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
23
<PAGE>
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.
1997 as Compared to 1996
Although student receivable amounts increased during 1997, and despite a 12%
increase in tuition in 1997, tuition revenue decreased in 1997. The decrease
reflected a 5% decline in the number of students from approximately 335 in 1996
to 320 in 1997. The decline in tuition revenue and students in 1997 was also a
result of the unavailability of Stafford loans, which began in 1996. College
supply and cafeteria sales decreased from 1996 due to a reduction in the number
of textbooks required to be purchased by students, and a decrease in cafeteria
sales. The related costs of these sales decreased as well by $26,241.
Contributed materials also decreased from 1996, since no materials or vehicles
were contributed in 1997. Other income increased $55,891 due primarily to
increased interest income from institutional student loans. Overall, total
revenues decreased $86,673 (3%) from 1996.
Educational services and facilities expense decreased $82,436 from 1996 due to a
greater focus on controlling costs. Selling and promotion decreased $70,637 from
1996 for the same reason. However, general and administrative expenses increased
over 1996 by $81,960 due to additional corporate costs of being a public company
following the reverse acquisition discussed above. Consequently, income from
operations decreased $48,109 (46%) from 1996.
Interest expense increased $65,789 due to the significant rise in debt. Overall,
the Company sustained a net loss in 1997 of $34,716, as opposed to net income of
$79,182 in 1996.
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",
"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.
24
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- ----------------------------
25
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Independent Auditors' Report 1
Consolidated Balance Sheets 2 - 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6 - 8
Notes to Financial Statements 9 - 40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Stockholders
Siemann Educational Systems, Inc. and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Siemann
Educational Systems, Inc. and Subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Siemann
Educational Systems, Inc. and Subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of operations and cash flows for the years ended
December 31, 1998 and 1997 in conformity with generally accepted accounting
principles.
GORDON, HUGHES & BANKS, LLP
Englewood, Colorado
March 26, 1999
1
<PAGE>
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
Assets
1998 1997
----------- ----------
<S> <C> <C>
Current assets:
Cash $ 1,035,920 $ 18,830
Student accounts receivable, less allowance for doubtful
accounts of $57,474 and $137,213 2,075,759 657,814
Students notes receivable, less allowance for doubtful
accounts of $65,769 and $60,543 811,150 746,693
Receivable - related party 12,149 --
Note receivable - stockholder (Note 4) -- 216,300
Receivable - other (Note 3) 175,000 --
Inventory 105,634 7,392
Prepaid and other 63,944 31,401
----------- -----------
Total current assets 4,279,556 1,678,430
Student accounts and notes receivable, long-term portion,
less allowance for doubtful accounts of $55,370 and $62,926 704,026 718,275
Note receivable - related party (Note 3) -- 200,000
Property and equipment, net of accumulated depreciation 794,534 284,774
Intangible assets, net of accumulated amortization (Note 1) 8,316,398 --
Investment in acquisition of business (Note 2) -- 223,936
Deferred financing costs, net of accumulated
amortization of $26,820 and $-0- 148,096 --
Perkins matching funds 70,000 70,000
Other 46,593 25,597
----------- -----------
Total assets $14,359,203 $ 3,201,012
=========== ===========
See notes to financial statements Page 2
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(CONTINUED)
Liabilities and Stockholders' Equity
1998 1997
------------ ------------
Current liabilities:
Accounts payable $ 427,502 $ 123,449
Student refunds payable and credit balances 31,927 21,061
Payable to owner of business to be acquired -- 61,968
Accrued liabilities 472,022 133,321
Income taxes payable (Note 12) 68,434 --
Deferred tuition income 2,056,196 871,537
Common stock repurchase commitment 415,000 61,968
Current maturities of capital leases 168,290 3,600
Current maturities of long-term debt, net of discount 3,299,735 458,549
------------ ------------
Total current liabilities 6,939,106 1,735,453
Rent payable, related party (Note 10) 140,401 132,902
Capital leases, net of current maturities 218,229 4,800
Long-term debt, net of current maturities & discount (Note 6) 3,781,921 600,930
Note payable - stockholder, net of discount (Note7) 2,178,676 355,307
------------ ------------
Total liabilities 13,258,333 2,829,392
------------ ------------
Redeemable warrant (Note 9) 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, 3,868,750 (1998) and 3,795,984
(1997) shares issued and outstanding 386,875 379,598
Additional paid-in capital 1,352,904 88,706
Common stock repurchase commitment (415,000) (61,968)
Accumulated (deficit) (585,544) (34,716)
------------ ------------
Total stockholders' equity 739,235 371,620
------------ ------------
Total liabilities and stockholders' equity $ 14,359,203 $ 3,201,012
============ ============
See notes to financial statements Page 3
</TABLE>
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
Revenue:
Tuition and fee revenue, net
of refunds $ 9,684,294 $ 2,771,522
College supply and cafeteria sales 286,514 164,339
Other 109,483 115,063
------------ ------------
Total revenues 10,080,291 3,050,924
------------ ------------
Operating expenses:
Educational services and facilities 4,909,691 1,084,385
Cost of college supplies and
cafeteria sales 390,405 180,679
Selling and promotion 1,189,999 524,756
General and administrative 2,344,650 906,898
Depreciation and amortization 672,167 184,347
Bad debt expense 158,149 138,353
------------ ------------
Total operating expenses 9,665,061 3,019,418
------------ ------------
Income from operations 415,230 31,506
Other income (expense)
Interest income 80,228 24,869
Interest (expense) (941,717) (91,091)
------------ ------------
(Loss) before income taxes (446,259) (34,716)
Provision for income taxes 104,569 --
------------ ------------
Net (loss) $ (550,828) $ (34,716)
============ ============
Net (loss) per common share
Basic and fully diluted $ (0.15) $ (0.02)
============ ============
Weighted number of common shares outstanding
Basic and fully diluted 3,769,684 2,185,600
============ ============
See notes to financial statements Page 4
<PAGE>
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Additional Stock Total
Common Stock Paid-In Repurchase Accumulated Stockholders'
Shares Amount Capital Commitment (Deficit) Equity
------ ------ ------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 400,000 $ 40,000 $ 618,646 $ -- $ (232,540) $ 426,106
Distribution to owner -- -- (216,520) -- -- (216,520)
Sale of common stock to related party
($.001 per share) 2,250,000 225,000 (222,750) -- -- 2,250
Sale of common stock to related party
($.001 per share) 500,000 50,000 (49,500) -- -- 500
Sale of common stock and warrants ($2.00
per share) net of commission of $5,000 50,000 5,000 95,000 -- -- 95,000
Reorganization of the Company at 8/31/97 500,000 50,000 (282,540) -- 232,540 --
Sale of common stock and warrants ($2.00
per share) net of commission of $5,000 50,000 5,000 85,000 -- -- 95,000
Issuance of common stock for services to
consultant ($.267 per share) 15,000 1,500 2,500 -- -- 4,000
Issuance of common stock ($2.00
per share) to acquire business 30,984 3,098 58,870 -- -- 61,968
Common stock repurchase commitment -- -- -- (61,968) -- (61,968)
Net (loss) -- -- -- -- (34,716) (34,716)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1997 3,795,984 379,598 88,706 (61,968) (34,716) 371,620
Issuance of common stock ($2.00
per share) to acquire business 17,204 1,720 32,688 (34,408) -- --
Redemption of stock (48,188) (4,818) (91,558) 96,376 -- --
Issuance of warrants to president and
majority stockholder -- -- 168,443 -- -- 168,443
Sale of common stock ($4.00 per share) 103,750 10,375 404,625 -- -- 415,000
Common stock repurchase commitment -- -- -- (415,000) -- (415,000)
Common stock to be issued -- -- 750,000 -- -- 750,000
Net (loss) -- -- -- -- (550,828) (550,828)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1998 3,868,750 $ 386,875 $ 1,352,904 $ (415,000) $ (585,544) $ 739,235
=========== =========== =========== =========== =========== ===========
See notes to financial statements Page 5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (550,828) $ (34,716)
Cash provided (used) by operating activities:
Depreciation and amortization 672,167 184,347
Contributed materials (53,071) --
Loss on sale of assets 332 --
Amortization of discount on debt 69,029 --
Accretion of put liability 69,883 --
Issuance of stock for services -- 4,000
Change in operating assets and liabilities:
Students accounts and notes receivable (15,464) (1,113,560)
Notes receivable - student loans -- (156,300)
Receivable - other 25,000 --
Inventory (20,385) 15,929
Prepaid expenses and other assets (31,633) (56,186)
Accounts payable 241,636 5,986
Student refunds payable and credit balances 10,866 (122,263)
Accrued liabilities 117,589 24,386
Income tax liability 68,434 --
Rent payable, related party 7,499 132,902
Deferred tuition income (246,054) 153,538
----------- -----------
Net cash provided (used) by operating activities 365,000 (961,937)
----------- -----------
Cash flows from investing activities:
Investment in acquisition of business (3,521,100) (100,000)
Payment of related party note receivable 60,000 --
Purchases of property and equipment (102,381) (11,551)
----------- -----------
Net cash (used) by investing activities (3,563,481) (111,551)
----------- -----------
(Continued on next page)
See notes to financial statements Page 6
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(CONTINUED)
1998 1997
----------- -----------
Cash flows from financing activities:
Sale of common stock $ 415,000 $ 202,750
Commission paid for sale of stock -- (10,000)
Loan acquisition fees (8,751) --
Proceeds from debt 3,800,479 1,600,404
Payments of debt (1,945,073) (757,691)
Proceeds from related party debt 2,127,500 --
Payments of related party debt (75,000) (252,925)
Payments of capital leases (98,584) (2,206)
----------- -----------
Net cash provided by financing activities 4,215,571 780,332
----------- -----------
Net increase (decrease) in cash 1,017,090 (293,156)
Cash, beginning of period 18,830 311,986
----------- -----------
Cash, end of period $ 1,035,920 $ 18,830
=========== ===========
Supplemental disclosure of cash flow information:
Cash payments for interest $ 645,354 $ 91,091
=========== ===========
Cash payments for income taxes $ 36,135 $ --
=========== ===========
See notes to financial statements Page 7
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(CONTINUED)
1998 1997
----------- ----------
Non-cash transactions:
Note receivable - related party exchanged for student loans $ (200,000) $ 200,000
=========== ===========
Investment in acquisition of business exchanged for stock $ (61,968) $ 61,968
=========== ===========
Reorganization of Company $ -- $ 282,540
=========== ===========
Distribution to owner converted to debt $ -- $ 216,520
=========== ===========
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)
-----------
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 warrents issued $ 460,195
===========
Equipment acquired under capital lease $ 281,553
===========
See notes to financial statements Page 8
</TABLE>
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTS TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
------------------
Siemann Educational Systems, Inc. (the "Company" or "Siemann") was
incorporated in the State of Colorado on September 17, 1987. The Company,
through its wholly-owned subsidiaries, Denver Automotive and Diesel
College, Inc. ("DADC") and Data Processing Trainers Co., ("DPT") is engaged
in the business of operating proprietary vocational schools located in
Denver, Colorado and Philadelphia, Pennsylvania, respectively. The majority
of students are drawn from each of the school's respective metropolitan
areas, with the remainder drawn from other surrounding states.
Students who participate in government financial aid programs provide a
significant portion of the Company's revenues. Of total tuition revenue,
revenue derived from governmental aid was approximately $6,251,000, or 63%,
and $860,000, or 31% for the years ended December 31, 1998 and 1997,
respectively. In connection with this participation, the Company is subject
to rules and regulations promulgated by the U.S. Department of Education.
Failure to comply with the terms and provisions of this participation could
lead to suspension or termination of the Company's ability to participate
in government financial aid programs and, consequently, could adversely
affect the Company's operations.
On September 12, 1996, the U.S. Department of Education notified DADC that
it had lost its eligibility to continue its participation in the Federal
Family Education Loan ("FFEL") Programs authorized by Title IV of the
Higher Education Act of 1965, as amended. This was a result of the DADC's
cohort default rates from each of the fiscal years, 1991 to 1993, exceeding
the eligibility threshold of 25%. DADC made application with the U.S.
Department of Education to regain eligibility to participate in the FFEL
Programs and received notification from the U.S. Department of Education
that, effective October 1, 1997, DADC was again eligible to participate in
the FFEL programs.
The Company has incurred net losses of $(550,828) and $(34,716) for the
years ended December 31, 1998 and 1997, respectively. In addition, current
liabilities exceed current assets at December 31, 1998 and 1997. The
Company has substantial amounts of current debt becoming due in the next
twelve months. Management has budgeted and forecast cash generated from
operations of approximately $2,800,000. In addition, the Company expects to
close on a private placement in the near term for approximately $300,000.
Lastly, management has negotiated with its primary bank to finance the
payment of substantial portions of its current debt.
Page 9
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
ORGANIZATION OF COMPANY
-----------------------
Chartwell Cable Fund, Inc., ("Chartwell"), a public company, was
incorporated in 1987. After completing a public offering, Chartwell entered
the cable television business. In 1993, Chartwell entered the golf product
manufacturing business. In 1994, Chartwell completed the divestiture of the
cable television and golf product businesses. From 1995 to 1997, Chartwell
had nominal assets and no operations. On June 4, 1997 and in contemplation
of a reorganization of Chartwell, the sole shareholder of Denver Automotive
and Diesel College, Inc. ("DADC") purchased 2,250,000 shares of common
stock of Chartwell, resulting in a majority ownership of Chartwell by that
individual. On August 13, 1997, DADC entered into an Agreement and Plan of
Reorganization with Chartwell whereby Chartwell would acquire all of the
outstanding shares of DADC. Chartwell acquired DADC on August 31, 1997 and
issued 400,000 shares of common stock to the former sole shareholder of
DADC in exchange for all of the issued and outstanding common shares of the
DADC.
For legal purposes, Chartwell acquired DADC and was the parent company of
DADC following the reorganization. However, for accounting purposes, DADC
was treated as the acquiring company in a "reverse acquisition" of
Chartwell. As a consequence, the financial statements for the year ended
December 31, 1997 presented herein are those of DADC, except for the common
stock structure which remains that of Chartwell, i.e. the common stock par
value and shares of common stock authorized and outstanding. In conjunction
with the reorganization, the retained deficit of DADC (formerly a
subchapter S corporation) and of Chartwell at August 31, 1997 have been
eliminated and transferred to additional paid-in capital. As a result, the
accumulated deficits at December 31, 1997 and since August 31, 1997 are a
result of the operations of the reorganized company. At a special meeting
of the shareholders of Chartwell on September 18, 1997, Chartwell's name
was changed to Siemann Educational Systems, Inc.
On March 24, 1998, the Company acquired 100% of the common stock of Data
Processing Trainers Co. ("DPT") located in Philadelphia, Pennsylvania. As a
result, the assets and liabilities of the Company as of December 31, 1998
include those of DPT and the operations of DPT are included in the
operations of the Company since March 24, 1998.
CONSOLIDATION
-------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary in 1997 and subsidiaries in
1998. All significant intercompany transactions have been eliminated in
consolidation.
Page 10
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
REVENUE RECOGNITION
-------------------
Revenue is derived primarily from courses taught at the schools. Textbook
sales to students are recognized when such sales occur, which happens when
the semester/school year begins. Cafeteria and other miscellaneous revenues
are recognized as services are performed. Deferred tuition revenue
represents amounts billed for the current educational year, reduced for
tuition revenue recognized pro rata during the year. If a student
withdraws, unearned revenue is reduced by the amount of lost revenue and a
refund due to the student is recorded. Refunds are calculated in accordance
with federal, state and accrediting agency standards.
ACCOUNTS RECEIVABLE
-------------------
Accounts receivable represent outstanding tuition and fee balances due from
students. Allowances for doubtful accounts have been established to record
amounts deemed by management to be uncollectible.
CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS
------------------------------------------------------
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information About Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk", requires
disclosure of significant concentrations of credit risk regardless of the
degree of such risk. Financial instruments with significant credit risk
include cash, accounts and notes receivable. The carrying amount of these
assets reasonably approximates their fair value, as determined by the
amount of cash or the collectibility of receivables. The carrying value of
the Company's debt obligations reasonably approximates their fair value as
the stated interest rate approximates current market interest rates of debt
with similar terms. The Company's accounts are insured by the Federal
Deposit Insurance Corporation up to $100,000. As of December 31, 1998, cash
balances exceeded $100,000 at three banks. As of December 31, 1997, cash
balances did not exceed $100,000 at any one bank. Accounts and notes
receivable from students are unsecured and subject to significant credit
risk. For many of the student loans, the Company employs a loan servicing
company. The Company's policy is to aggressively pursue the collection of
any delinquent loans. The note receivable from the related party is secured
by student notes receivable purchased by the related party. This note was
cancelled when the holder returned the student notes underlying the note.
The fair market value of the receivables (collateral) approximates the
amount of the note.
Page 11
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
ACCOUNTING ESTIMATES
--------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates. Significant
estimates have been made to determine bad debt expense and the related
allowance for uncollectible student accounts and notes receivable, the
amortization life of goodwill and other intangible assets and the valuation
of warrants.
INVENTORY
---------
Inventories consist of books and automotive and diesel repair parts and
supplies which are consumed in the educational activities of the Company.
Inventories are stated at the lower of cost or market, cost being
determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at cost. Depreciation is provided using
the straight-line and accelerated methods over the estimated useful lives
of the classes of property and equipment. Lives range from three to ten
years. Management believes that the depreciation methods and lives
approximate the economic usefulness of the assets to which they are
applied. DADC depreciates many training vehicles and engines at ten years
since they are used in training programs. Depreciation expense was $259,983
and $176,276 for the years ended December 31, 1998 and 1997, respectively.
PERKINS MATCHING FUNDS
----------------------
DADC and the Federal Government together deposit money in the U.S.
Department of Education Title IV Perkins Loan Program in a ratio of 1 to 9,
respectively. As loans are repaid, the amounts collected are re-loaned to
new students. Should the loan program in which the school has invested be
terminated, the Company will receive its respective share of the resulting
cash. The Company's approximate share as of December 31, 1998 and 1997 is
presented in the accompanying balance sheets at $70,000.
PREPAID EXPENSES
----------------
The Company prepaid a consulting firm $25,000 for services to be rendered
over a twelve month period, beginning September 1997. Accordingly, the
Company is amortizing the prepayment on a straight-line basis over a
twelve-month period. Amortization expense was $20,205 and $4,795 for the
years ended December 31, 1998 and 1997, respectively. The prepaid expense
is fully amortized as of December 31, 1998.
Page 12
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
GOODWILL AND OTHER INTANGIBLE ASSETS
------------------------------------
Intangible assets include the excess of cost over fair market value of
identifiable assets acquired through the purchase of DPT. Deferred
financing costs include costs of borrowing the cash to purchase DPT and are
being expensed on a straight-line basis over five years. Goodwill and other
intangible items are being amortized on a straight-line basis over their
estimated useful life. As of December 31, 1998 and 1997, the cost basis and
useful lives of intangible assets consist of the following:
December 31, Estimated
1998 1997 Lives
-------------------------------------
Goodwill $7,127,794 $ - 40 years
Trade name 1,000,000 - 40 years
Curriculum 180,000 - 15 years
Non-compete covenant 200,000 - 5 years
Student contracts 214,000 - .75 years
---------------------
8,721,794 -
Less - Accumulated amortization (405,396) -
---------------------
$8,316,398 $ -
=====================
On an ongoing basis, the Company reviews intangible assets and other
long-lived assets for impairment whenever events or circumstances indicate
that carrying amounts may not be recoverable. To date, no such events or
circumstances have occurred. If such events or changes in circumstances
occur, the Company will recognize an impairment loss if the discounted
future cash flows expected to be generated by the assets (or acquired
business) are less than the carrying value of the related assets. The
impairment loss would adjust the assets to its fair value. Amortization
expense was $405,396 and $0 for the years ended December 31, 1998 and 1997,
respectively.
STUDENT REFUNDS PAYABLE AND CREDIT BALANCES
-------------------------------------------
Student refunds payable in the accompanying balance sheets represent
refunds due and payable on behalf of students who withdrew in prior
periods. Student credit balances represent the excess of payments received
over current tuition billings for active students. Student refunds and
credit balances are combined in the accompanying balance sheets where the
credit balances comprise the majority of the amounts displayed. Credit
balances were $31,927 and $16,222 at December 31, 1998 and 1998,
respectively.
Page 13
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONTRIBUTED MATERIALS
---------------------
Periodically, automobile manufacturers and automobile local dealers
contribute tools and vehicles to DADC that are restricted solely for use in
educational activities. These materials are consumed in the educational
process and ultimately scrapped. Once the materials are contributed, DADC
has no obligation to return them to the manufacturers or dealers. The
contributed items are valued at estimated used equipment replacement cost.
DEFERRED FINANCING COSTS
------------------------
Costs incurred in connection with obtaining financing are capitalized and
amortized to over the maturity period of the debt. The Company is
amortizing the deferred financing costs over five years on a straight line
basis because the debt is payable interest only (i.e. level payments) until
maturity. Amortization amounted to $26,820 and $0 for the years ended
December 31, 1998 and 1997, respectively.
ADVERTISING COSTS
-----------------
Advertising costs are charged to operations when incurred and included in
selling and promotion expenses. Advertising expense amounted to $653,358
and $149,331 for the years ended December 31, 1998 and 1997, respectively.
EARNINGS PER SHARE
------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share", which was issued effective for periods ending after December 15,
1997. SFAS No. 128 changed the methodology of calculating earnings per
share and renamed the two calculations basic earnings per share and diluted
earnings per share. The calculations differ by eliminating any common stock
equivalents (such as stock options, warrants, and convertible preferred
stock) from basic earnings per share. SFAS No. 128 changes certain
calculations when computing diluted earnings per share. The Company adopted
SFAS No. 128 for the year ended December 31, 1997.
The following is a reconciliation of the numerators and denominators used
in the calculations of basic and diluted earnings (loss) per share for the
years ended December 31, 1998, and 1997:
Page 14
<PAGE>
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1998
------------------------------------------
Per
Net Share
(Loss) Shares Amount
------ ------ ------
<S> <C> <C> <C>
Basic Earnings per share:
Net income (loss)
and share amounts $(550,828) 3,769,684 $(.15)
Dilutive securities:
Stock warrants - - -
Repurchased shares - - -
------------------------------------------
Diluted earnings per share:
Net (loss) and assumed share conversion
$(550,828) 3,769,684 $(.15)
==========================================
1997
-----------------------------------------
Per
Net Share
(Loss) Shares Amount
------ ------ ------
Basic Earnings per share:
Net income (loss)
and share amounts $(34,716) 2,185,600 $(.02)
Dilutive securities:
Stock warrants - - -
Repurchased shares - - -
-----------------------------------------
Diluted earnings per share:
Net (loss) and assumed share conversion
$(34,716) 2,185,600 $(.02)
=========================================
</TABLE>
Common shares owned by the former sole shareholder of DADC prior to the
reorganization with Chartwell on August 31, 1997 are considered outstanding
for all periods prior to the reorganization. Shares outstanding for
Chartwell prior to the reorganization with DADC are considered outstanding
beginning on August 31, 1997. Stock options of 50,000 and 0 and warrants of
2,000,846 and 100,000 outstanding during 1998 and 1997, respectively, are
not considered in the calculation of fully diluted net income or (loss) per
share as their inclusion would be anti-dilutive since the Company has
incurred losses for 1998 and 1997. Shares that are subject to repurchase at
December 31, 1998 and 1997 are considered outstanding in calculating
earnings per share. If the shares subject to repurchase were excluded, the
amount of income or (loss) per share would not be affected.
Page 15
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
STATEMENT OF CASH FLOWS
-----------------------
For the purpose of the statements of cash flows, the Company considers
investments and savings instruments purchased with maturities of three
months or less to be cash equivalents. There were no cash equivalents at
December 31, 1998 and 1997.
RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to the December 31, 1997 financial
statements to conform to the December 31, 1998 presentation.
STOCK-BASED COMPENSATION
------------------------
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), was issued in October 1995 by
the Financial Accounting Standards Board. SFAS No. 123 provides an
alternative method of accounting for stock-based compensation arrangements,
based on fair value of the stock-based compensation utilizing various
assumptions regarding the underlying attributes of the options and stock,
rather than the existing method of accounting for stock-based compensation
which is provided in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). The Financial
Accounting Standards Board encourages entities to adopt the fair-value
based method but does not require adoption of this method. The Company will
continue its current accounting policy under APB No. 25 but has adopted the
disclosure-only provisions of SFAS No. 123 for any options and warrants
issued to non-employees, directors or consultants. During 1998, options to
purchased 50,000 shares of common stock were issued to one key employee.
For 1998 and 1997 no expense has been recorded. The adoption of SFAS No.
123 has had no effect on net loss.
IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of." Under this method, the
Company is required to review for impairment the long-lived assets and
certain identifiable intangibles to be held and used whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. All long-lived assets to be disposed of will be
reported at the lower of carrying amount or fair value less cost to sell.
Page 16
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CAPITAL STRUCTURE
-----------------
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"),
which requires companies to disclose all relevant information regarding
their capital structure. The Company adopted SFAS No. 129 in 1997. For both
years ended December 31, 1998 and 1997, there is no impact on the financial
statements or disclosures as a result of adopting SFAS No. 129.
COMPREHENSIVE INCOME
--------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), which establishes
standards for the reporting of comprehensive income. This pronouncement
requires that all items recognized under accounting standards as components
of comprehensive income, as defined in the pronouncement, be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. The Company has adopted SFAS No. 130 in 1998 and
has determined there is no impact on any of the periods presented.
SEGMENT REPORTING
-----------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"), which amends the requirements for a public enterprise to report
financial and descriptive information about its reportable operating
segments. Operating segments, as defined in the pronouncement, are
components of an enterprise about which separate financial information is
available and that is evaluated regularly by the Company in deciding how to
allocate resources and in assessing performance. The financial information
is required to be reported on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. The Company adopted SFAS No. 131 in 1997. For both years ended
December 31, 1998 and 1997, there is no impact on the financial statements
or disclosures as a result adopting SFAS No. 131.
Page 17
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
PENSION AND OTHER POST RETIREMENT BENEFITS
------------------------------------------
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pension and Other Post Retirement Benefits" is effective
for financial statements with fiscal years beginning after December 31,
1997. Earlier application is permitted. The new standard revises employers'
disclosures about pension and other post retirement benefit plans but does
not change the measurement or recognition of those plans. SFAS No. 132
standardizes the disclosure requirements for pensions and other post
retirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of the
plan assets that will facilitate financial analysis, and eliminates certain
disclosures previously required when no longer useful. The Company adopted
SFAS No. 132 in 1998, with no material impact on its results of operations.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
---------------------------------------------
The FASB has recently issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). SFAS No. 133 established standards for recognizing all
derivative instruments including those for hedging activities as either
assets or liabilities in the statement of financial position and measuring
those instruments at fair value. This Statement is effective for fiscal
years beginning after June 30, 1999. The Company will adopt SFAS No. 133 in
the year 2000 and believes that there will be no impact on its consolidated
financial statements.
MORTGAGE BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE
LOANS HELD BY MORTGAGE BANKING ENTERPRISES
---------------------------------------------------------------------------
The FASB recently issued Statement of Financial Accounting Standards No.
134, "Accounting for Mortgage Backed Securities Retained after the
Securitization of Mortgage Loans Held by Mortgage Banking Enterprises"
("SFAS No. 134"). SFAS No. 134 establishes new reporting standards for
certain activities of mortgage banking enterprises. This statement is
effective for the fiscal quarter beginning after December 15, 1998.
Management believes the adoption of this statement will have no impact on
the Company's consolidated financial statements.
NOTE 2 - ACQUISITION OF BUSINESS
During 1997, the Company entered into an agreement with the owner of Data
Processing Trainers Co. ("DPT") to acquire 100% of the stock of DPT. As of
December 31, 1997, the Company's investment in the purchase of DPT of
$223,936 includes a cash deposit of $100,000, additional accrued costs of
$61,968 payable in cash and stock valued at $61,968. Subsequently on March
24, 1998, the Company acquired DPT for a purchase price of $9,030,624. DPT,
Page 18
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 purchase price at closing 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. The $750,000 in the Company's
common stock was satisfied by the Company issuing on March 24, 1999 338,952
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 issuance.
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 is payable
interest only monthly, at 12% per annum, with principal and accrued
interest 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 financing source is payable interest only
quarterly, at 12% per annum, with principal and accrued interest 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. In addition, this lender received a put
option.
The acquisition has been accounted for as a purchase and the results of
operations of the acquired business are included in the consolidated
financial statements from the date of acquisition. The capitalized cost of
the acquisition also includes additional legal costs directly related to
the acquisition in the amount of $21,908. For accounting purposes, the
purchase price has been allocated to DPT's assets at their book value since
book value approximates fair value. The excess of purchase price over net
assets has been recorded as goodwill.
The following unaudited pro forma information presents a summary of the
Company's consolidated results of operations and those of DPT as if the
acquisition had occurred on January 1, 1997.
Page 19
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
For the year-ended
December 31,
-------------------------
1998 1997
-------------------------
Pro forma revenues $12,218,031 $9,889,452
Pro forma net income (loss) $(524,119) $(397,418)
Pro forma basic earnings (loss) per share $(.17) $(.18)
Pro forma fully diluted earnings (loss)
per share $(.17) $(.18)
These unaudited pro forma results have been prepared for comparison
purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred
on the date indicated, or which may result in the future. For 1998 and
1997, the basic and fully diluted earnings per share are the same because
the fully diluted amount, if calculated, would be anti-dilutive due the pro
forma loss.
NOTE 3 - NOTE RECEIVABLE - RELATED PARTY AND SUBSEQUENT DISPOSITION
In August 1997, the Company sold certain student loans to the owner of
Christian Business Advisory Services, Inc. ("CBAS") which is a significant
stockholder of the Company and which provides consulting services to the
Company. The Company received a note for $200,000 in exchange. The student
loans were sold at a discount of $18,000 from face value, which was
recorded as a loss at the time of the sale. The note was secured by those
loans and 50,000 shares of the common stock in the Company. The amount of
the note receivable was $-0- and $200,000 at December 31, 1998 and December
31, 1997, respectively. The note bore interest at 6% per annum, payable
monthly. Principal was due in full on August 28, 1998. On August 28, 1998,
the Company and the related party agreed to extend the due date of the
note. The student loans were returned to DADC on December 31, 1998. During
the term of the note, DADC earned $16,000 in interest from the related
party and the debtor earned approximately $5,000 in interest on the student
loans.
As of December 31, 1998, DADC resold the student loans to an unrelated
party for $200,000, the net present value of the loans. DADC received
$25,000 in December 1998 as a down payment and received the balance of
$175,000 on March 31, 1999. Under the purchase agreement, the loan
repayment cash flow will be collected by DADC and remitted to the investor.
The agreement further obligates the school to replace any loans that become
uncollectible with those that are collectible and also guarantees the
investor a minimum of 15% return on the investment. The investor's
investment basis must at all times remain at an amount equal to 81.64% of
the gross amount of the student loans. The investment is further guaranteed
personally by the Company's president.
Page 20
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - NOTES RECEIVABLE - STOCKHOLDER
Notes receivable from the Company's president and majority stockholder
consist of the following:
December 31, December 31,
1998 1997
---------- ------------
Note receivable from majority stockholder,
interest at 7% per annum payable quarterly,
principal and accrued interest due in full on
December 31, 1998, secured by Deed of Trust
on real property of the stockholder, repaid
April 1998. $ - $ 60,000
Note receivable from majority stockholder,
interest at 7% per annum payable quarterly;
principal and accrued interest due in full on
August 29, 1998, secured by Deed of Trust on
real property of the stockholder. - 88,300
Note receivable from majority stockholder,
interest at 7% per annum payable quarterly;
principal and accrued interest due in full on
October 31, 1998, secured by Deed of Trust on
real property of the stockholder. - 20,000
Note receivable from majority stockholder,
interest at 7 % per annum payable quarterly,
principal and interest due in full on
December 31, 1998, secured by real estate. - 48,000
-------- ---------
$ - $ 216,300
======== =========
During 1998, the stockholder repaid $60,000 in cash and approved the offset
of $156,300 against notes payable owed by the Company to him.
Page 21
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5 - PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
December 31, December 31,
1998 1997
---------- ---------
Furniture, equipment and vehicles $1,436,841 $ 898,569
Equipment under capital leases 532,161 15,031
---------- ---------
1,969,002 913,600
Less accumulated depreciation
and amortization (1,174,468) (628,826)
---------- ---------
$ 794,534 $ 284,774
========== =========
All furniture, equipment and vehicles are pledged as collateral for the
bank loan, with specific vehicles pledged as collateral to finance
companies.
NOTE 6 - DEBT
The Company owes the following debt:
December 31, December 31,
1998 1997
------------ ------------
Note payable to bank, monthly principal and
interest payments of $5,856, interest at 9.5%
per annum, due April 2002,
cross-collateralized by accounts receivable,
notes receivable and equipment. President and
majority stockholder is jointly and severally
liable for this note. $ 204,582 $ 251,639
Note payable to bank, monthly principal and
interest payments of $15,992, interest at
9.5% per annum, due January 2001,
collateralized by student loans. President
and majority stockholder is jointly and
severally liable for this note. 360,470 387,032
Page 22
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Outstanding principal on $350,000 revolving
line of credit from a bank, monthly interest
payments at 9.5% per annum, remaining
principal and interest due May 1999,
collateralized by equipment. President and
majority stockholder is jointly and severally
liable for this note. 349,881 349,669
Note payable to finance company, monthly
principal and interest payments of $465,
interest at 7.99% per annum, due February
1999, collateralized by security interest in
Company vehicle. - 6,217
Note payable to finance company, monthly
principal and interest payments of $1,358,
interest at 8.5% per annum, due April 2001,
unsecured. April, 2001, unsecured. 33,048 46,975
Note payable to finance company, monthly
principal and interest payments of $261,
interest at 6.0% per annum, due March 1999,
collateralized by security interest in
Company vehicle. - 3,752
Note payable to individual, monthly principal
and interest payments of $266, interest at
10.5% per annum, due May 1999, unsecured. 1,296 4,195
Note payable to individual, interest at 10%
per annum, principal and any accrued interest
due July 2003, unsecured. 30,000 10,000
Page 23
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note payable to bank, monthly interest
payments through October 1998, beginning
November 1998 monthly principal and interest
payments of $6,415, interest at 1% above
prime rate, due October 2001, collateralized
by accounts receivable. President and
majority stockholder is jointly and severally
liable for this note. 193,813 -
Senior Subordinated Secured Note payable to
third-party funding source, monthly interest
payments at 12% per annum commencing July
1998, remaining principal and interest due
March 2003, collateralized by all assets of
the Company and stock of the Company. 2,900,000 -
Note payable to former owner of DPT,
quarterly principal payments of $542,500,
plus interest at 7% per annum, due March
2000, secured by all assets of the Company
and stock of DPT. 3,255,000 -
------------ ----------
7,328,090 1,059,479
Less current portion (3,357,720) (458,549)
------------ ----------
$ 3,970,370 $ 600,930
============ ==========
Aggregate maturities of long-term debt at December 31, 1998 are as follows:
YEAR ENDING DECEMBER 31, Amount Due Discount Net of Discount
------------------------ ---------- --------- ---------------
1999 $3,357,720 $(57,985) $3,299,735
2000 932,150 (57,985) 874,165
2001 83,035 (57,985) 25,050
2002 25,185 (57,985) (32,800)
2003 and thereafter 2,930,000 (14,494) 2,915,506
-------------------------------------------
$7,328,090 $(246,434) $7,081,656
===========================================
Page 24
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 1998 and 1997, the weighted average interest rate on the
above outstanding borrowings is 10.7% and 10.6%, respectively.
The Senior Subordinated Secured Note above contains certain covenants.
These covenants include certain minimum financial ratios, restrictions on
the types and amounts of certain disbursements and restriction on the
amount of additional debt allowed. As described in Note 9, the Company
issued a warrant with the note. The note has a prepayment penalty of 5% if
repaid within one year and penalties that reduce by one percentage point in
each succeeding year. Prepayment can also be triggered by certain events
such as sale of the Company or other significant changes in control.
The individual with a note balance of $10,000 at December 31,1997, loaned
the Company an additional $16,500 at 10% per annum in 1998. In addition,
the accrued interest payable for the original loan was capitalized. The
loan balance at December 31, 1998 is $30,000, due, along with accrued
interest, in July 2003.
NOTE 7 - NOTE PAYABLE TO STOCKHOLDER AND RELATED PARTY
The Company owes its majority stockholder and president $2,178,676, net of
unamortized discount of $144,731, as of December 31, 1998 and $355,307 as
of December 31, 1997. A 12% per annum $2,000,000 note was incurred in
conjunction with the acquisition by the Company of DPT in March 1998, as
more fully discussed in Note 2. The unamortized discount on this note of
$144,731 at December 31, 1998 is associated with the issuance of warrants
to the stockholder. All assets of the Company secure this note.
Additionally, the Company borrowed $98,000 from the stockholder in the
first quarter of 1998, which is being repaid at $15,000 monthly. The unpaid
balance was $74,600 at December 31, 1998. One other unsecured note, in the
amount of $247,007, bears interest at 7% per annum. The balance of
principal and interest on the note is due December 31, 1999 and requires no
periodic payments of principal or interest and no collateral. During 1998,
the Company reduced the note payable at December 31, 1997 of $355,307 by
applying three notes receivable from the president in the aggregate amount
of $156,300 as a reduction of the note.
The five year maturities for the debt are as follows:
YEAR ENDING DECEMBER 31, Amount Due Discount Net of Discount
------------------------ ---------- --------- ---------------
1999 $293,405 $(34,054) $259,351
2000 30,002 (34,054) (4,052)
2001 - (34,054) (34,054)
2002 - (34,054) (34.054)
2003 and thereafter 2,000,000 (8,515) 1,991,485
------------------------------------------
$2,323,407 $(144,731) $2,178,676
==========================================
Page 25
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorize the issuance of
10,000,000 shares of preferred stock with $.10 par value. The preferred
stock may be issued from time to time with such designation, rights,
preferences and limitations as the Board of Directors may determine by
resolution. As of December 31, 1998 and 1997, no shares of preferred stock
have been issued.
In June 1997, Chartwell, a predecessor to the Company, sold 2,250,000
shares of common stock at $.001 per share to the then-owner of DADC and
current president of the Company. Also at that time, CBAS, then a
consultant to the owner of DADC and currently a consultant to the Company,
purchased 500,000 shares of the Company's common stock at $.001 per share.
Prior to the acquisition of Chartwell on August 31, 1997, the Company was a
Subchapter S corporation and had distributed $216,520 to its then sole
owner.
In addition to common stock transactions described in Note 1, the following
transactions occurred during 1997. On August 29, 1997, 50,000 shares of
stock and a warrant were sold for $100,000, less commission costs of
$5,000. The warrant permits the holder to buy 50,000 shares at a price of
$4.00 per share. The warrant expired August 29, 1998 without exercise.
Subsequent to the reorganization of the Company, discussed in Note 1, an
additional 50,000 shares of stock and a warrant were sold on September 26,
1997 for $100,000, less commission costs of $5,000. The warrant permits the
holder to buy 50,000 shares at a price of $4.00 per share. The warrant
expired September 26, 1998 without exercise. On October 1, 1997, 15,000
shares valued at $4,000 were issued for services performed by a consultant.
This valuation was based on the value of the services provided to the
Company.
On December 19, 1997, the Company entered into an agreement that modified
the Letter of Intent to acquire Data Processing Trainers, Inc. ("DPT"). Per
the agreement, 30,984 shares valued at $61,968 (issued and repurchasable at
$2.00 per share) were issued in December to the owner of DPT. As of
December 31, 1997, the amount representing these repurchasable shares,
$61,968, had been classified as a current liability with a corresponding
reduction of stockholders' equity. Subsequent to December 31, 1997, the
Company issued 17,204 additional shares of common stock to the owner of
DPT. The Company repurchased all of these shares on March 24, 1998 with the
acquisition of DPT.
Page 26
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As part of the purchase price, the Company agreed to issue $750,000 of
common stock to the seller of DPT on March 24, 1999. The number of shares
to be issued will be determined by dividing $750,000 by the then-market
price of the shares. On March 24, 1999, the Company issued 338,952 shares
of stock to the seller priced at $2.21 per share. Also in connection with
the purchase of DPT, the Company issued warrants to the lenders of cash
borrowed to purchase DPT. The warrants can be exercised for a nominal price
to purchase an aggregate of 2,000,846 shares of the Company's common stock.
On December 24, 1998, the Company sold 103,750 shares of common stock at a
price of $4.00 per share to a group of individual investors. The investors
have a one-time "Put Right", exercisable on or before December 24, 1999.
The put right allows the investors to ask the Company to repurchase some or
all of their shares for $6.00 per share. Should the Company decline to
purchase the shares, the Company's president is obligated to purchase the
shares for $6.00 per share.
NOTE 9 - OPTIONS AND WARRANTS
OPTIONS
-------
In 1998, the Company adopted a stock option plan (the "Plan") which
provides for the grant of options intended to qualify as "incentive stock
options" or "nonqualified stock options" within the meaning of Section 422
of the United States Internal Revenue Code of 1986 (the "Code"). Incentive
stock options are issuable only to eligible officers and key employees of
the Company.
The Company has reserved 250,000 shares of Common Stock for issuance under
the Plan, which is administered by its Board of Directors. Under the Plan,
the Board of Directors determines which individuals will receive options,
the time period during which the options may be partially or fully
exercised, the number of shares of Common Stock that may be purchased under
each option and the option price.
The per share exercise price of the Common Stock must not be less than the
fair market value of the Common Stock on the date the option is granted.
Subject to certain exceptions, in the case of incentive stock options, the
aggregate fair market value (determined as of the date the option is
granted) of the common stock that any person may purchase in any calendar
year pursuant to the exercise of incentive stock options must not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option, more than 10% of the total combined
voting power of all classes of stock of the Company is eligible to receive
incentive stock options under the Plan unless the option price is at least
110% of the fair market value of the common stock subject to the option on
the date of grant. The stock options are subject to anti-dilution
provisions in the event of stock splits and stock dividends.
Page 27
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
No incentive stock options are transferable by an optionee other than by
will or the laws of descent and distribution. During the lifetime of an
optionee, the option is only exercisable by the optionee. The exercise date
of an option granted under the Plan must not be later than ten years from
the date of grant. Any options that expire unexercised or that terminate
upon an optionee's employment termination will become available once again
for issuance.
Weighted
Average
Exercise
Shares Price Range Price
------ ----------- -----
Outstanding as of January 1, 1997 - $ - $ -
Granted None None None
Outstanding as of December 31, 1997 - - -
Granted during 1998 50,000 $2.50 $2.50
Outstanding as of December 31, 1998 50,000 $2.50 $2.50
Stock options exercisable at
December 31, 1997 - - -
December 31, 1998 50,000 - -
The following table summarizes information about all stock options
outstanding as of December 31, 1998 (none were outstanding at December 31,
1997):
Page 28
<PAGE>
<TABLE>
<CAPTION>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------
Number Weighted Number
Outstanding Weighted Average Exercisable Weighted
as of Average Remaining at Average
Exercise Price December Exercise Contractual December Exercise
Ranges 31,1998 Price Life 31, 1998 Price
------ ------- ----- ---- -------- -----
<S> <C> <C> <C> <C> <C>
$2.50 50,000 $2.50 10 years - -
-------------------------------------------- ----------------------------
50,000 $2.50 10 years - -
============================================ ============================
</TABLE>
The following table represents pro forma net (loss) and pro forma (loss)
per share had the Company elected to account for equity awards using the
fair-value-based method beginning with all equity award grants commencing
on January 1, 1997. In estimating the pro forma compensation expense for
each equity award granted during the years ended December 31, 1998 and
1997, the Company used the Black Scholes option pricing model, a risk-free
interest rate of 8.5%, expected dividend yield of zero, expected option
lives of 10 years and expected volatility of 119.96%. The estimated pro
forma compensation cost resulting in the pro forma net (loss) and (loss)
per share may not be representative of actual results had the Company
accounted for the equity awards using the fair-value-based method.
(Unaudited)
1998 1997
--------- --------
Net (loss) as reported $(550,828) $(34,716)
Pro forma net (loss) $(671,142) $(34,716)
Basic and fully diluted EPS as reported $(.15) $(.02)
Pro forma basic and fully diluted EPS $(.18) $(.02)
REDEEMABLE WARRANTS
-------------------
In connection with incurring debt of $2,900,000 to an unrelated party, the
proceeds of which were used in the acquisition of DPT, the Company issued
warrants exercisable into a maximum of 1,268,486 shares of the Company's
restricted common stock at an aggregate exercise price of $100. The
warrants are exercisable beginning March 24, 2001 and ending six years
after the payment of all obligations pursuant to the debt. The number of
warrants exercisable is subject to reduction based on certain earnback
provisions, primary of which is the internal rate of return of the
creditor's investment (interest paid by the Company on the note plus any
prepayment penalties) calculated at the later of the date of debt repayment
or of certain other events. The number of earnback shares varies on a
sliding scale of return from 30% to 40%. The maximum number of 347,340
shares are subject to earnback if an internal rate of return equals 40% or
more while no shares can be earned back if the rate of return is less than
30%.
The Company assigned a value to these warrants (based on the relative fair
market value of the warrants) of $291,752. The fair market value of the
warrants was determined with reference to the exercise price of the
warrants, the number of warrants expected to be exercised (including the
Page 29
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
earn-back shares), the fair market value of the Company's common stock at
the date the warrants were issued (including consideration of a recent sale
to a third party) and the period over which the warrants can be exercised.
At December 31, 1998, none of the redeemable warrants were outstanding and
exercisable. The average fair value of the redeemable warrants issued in
1998 was approximately $290,000. At December 31, 1998, the remaining
contractual life of these warrants was approximately eleven years.
In accordance with an amendment to the warrant and debt agreements, these
warrants, or any portion of shares obtained by exercise of these warrants,
will become subject to cash redemption ("put" provision) 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. The redemption price of these warrants or shares, as
provided by the warrant agreement, will be based on specified formulas and
the valuation of the Company at the time of redemption.
To recognize the potential put, the Company has accreted approximately
$70,000, thereby increasing the liability for the put and expensing
accreted amounts. The potential maximum accretion for the five year period
ending March 2003, based on current circumstances, is approximately
$1,500,000.
NON-REDEEMABLE WARRANTS
-----------------------
In connection with incurring debt of $2,000,000 to the Company's President
in order to acquire DPT, the Company issued warrants to the president
exercisable into 732,360 shares of the Company's restricted common stock at
an aggregate exercise price of $100. The warrants are exercisable from the
present through March 24, 2003.
The Company assigned a value to these warrants (based on the relative fair
market value of the warrants) of $168,443. The fair market value of the
warrants was determined with reference to the exercise price of the
warrants, the fair market value of the Company's common stock at the date
the warrants were issued (including consideration of a recent sale between
third parties) and the period over which the warrants can be exercised.
At December 31, 1998, 732,360 non-redeemable warrants were outstanding and
exercisable. The average fair value of these warrants issued in 1998 was
approximately $170,000. At December 31, 1998, the remaining contractual
life of these warrants was approximately eleven years.
Page 30
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Shares under Warrant
--------------------
Class A
Common Stock
Shares Price
-------------------------
Outstanding as of January 1, 1997 - $ -
Issued 100,000 4.00
-------------------------
Outstanding as of December 31, 1997 100,000 4.00
Expired (100,000) (4.00)
Issued 2,000,846 $200
-------------------------
Outstanding as of December 31, 1998 2,000,846 $200
=========================
Warrants exercisable at December 31, 1997 100,000 4.00
=========================
Warrants exercisable at December 31, 1998 732,360 $200
=========================
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company leases its Denver school facility under an operating lease from
a company owned by the majority stockholder of the Company. The net rental
expense was $172,650 and $154,902 for the years ended December 31, 1998 and
1997, respectively. The following is a schedule by years of future net
minimum rental payments required under the operating lease, which expires
September 1, 2000:
YEAR ENDING DECEMBER 31,
------------------------
1999 $169,733
2000 119,267
--------
$289,000
========
On December 31, 1996, DADC had entered into an agreement, as amended, with
its then sole stockholder providing for the deferral of rent payments. Rent
payment deferrals commenced in January 1997 and were accrued as a liability
through December 1997, after which time monthly rent payments were resumed.
The deferred rent liability bears interest at 7% per annum and is payable
quarterly, with the total liability plus accrued interest payable in full
on August 31, 2000. During 1998, DADC underpaid its rent by $7,499. As of
December 31, 1998 and 1997 rent payable was $140,401 and $132,902,
respectively.
Page 31
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As discussed in Notes 3, 4, 6 and 7, at December 31, 1998 and 1997, various
note receivables and payables were due to and from related parties. At
December 31, 1998 and 1997, interest due to related parties was $113,688
and $-0-, respectively. At December 31, 1998 and 1997, interest due from
related parties was $10,992 and $7,175, respectively. For the years ended
December 31, 1998 and 1997, interest income from the related parties was
$20,872 and $11,175, respectively. For the years ended December 31, 1998
and 1997, interest expense for debt to related parties was $426,462 and
$33,293, respectively.
As discussed in Note 7, the Company owes its majority stockholder
$2,178,676, net of discount, and $355,307 at December 31, 1998 and 1997,
respectively.
After the reorganization of the Company, CBAS, which had been providing
business-consulting services to the Company's president on a personal
basis, verbally agreed to provide some consulting time to the Company while
continuing to provide services to the president as well. Prior to the
reorganization of the Company, CBAS had purchased 500,000 shares of the
Company's common stock and the owner of CBAS had personally purchased a
portfolio of student loans from the DADC in exchange for a note payable to
the school for $200,000. Fees charged to the Company by CBAS for the four
months ended December 31, 1997 were approximately $5,000 per month. After
the activity connected with the acquisition with DPT significantly
increased in January 1998, CBAS began providing full time services to the
Company at a rate of $15,000 per month. The Company's agreement with the
consultant is verbal and no set term over which the consulting services
will be provided has been established. CBAS's consulting fees were $172,000
and $20,430 for the year ended December 31, 1998 and the four months ended
December 31, 1997, respectively.
The Company has provided various benefits to its management, paying for
meals, travel and entertainment, including occasional amounts for inclusion
of spouses in such events. Management believes that these expenditures
further the business interests of the Company. The aggregate amount each
year for 1998 and 1997 does not exceed $15,000.
As described in Note 6, the Company owes the former owner of DPT
$3,255,000. In addition, as described in Note 16, subsequent to year-end
the former owner of DPT received 338,952 shares of common stock.
Page 32
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As described in Note 6, the president and majority stockholder of the
Company is jointly and severally liable to a bank for three notes payable
and one revolving line of credit with an aggregate balance of $1,108,746.
As described in Note 8, the president and majority stockholder of the
Company has personally guaranteed the "Put" agreement issued with the sale
of the Company's common stock.
As described in Note 16, the president and majority stockholder has
personally guaranteed a capital lease signed subsequent to year-end.
During 1998, the Company paid the former owner of DPT $70,607 for
consulting services provided to DPT.
A small amount of office space in a building owned by a company that is
owned by the president and majority stockholder is provided to the Company
at no cost. Due to the insignificance in total square footage, no cost is
assigned to the donated space. The value of the contributed space is less
than $4,000.
NOTE 11 - LEASES
The Company leases computer, copier, and cafeteria equipment under capital
leases expiring in various years through 2003. The assets and liabilities
under capital leases are recorded at the lower of the present value of the
minimum lease payments or the fair value of the asset. The assets are
depreciated over the lower of their related lease terms or their estimated
productive lives. Depreciation of assets under capital leases is included
in depreciation expense for the years ended December 31, 1998 and 1997.
The Company leases its Philadelphia school facilities under operating
leases that are five and ten years in length. The Company leases its Denver
school facilities from its President (See Note 10.)
Minimum future lease payments under capital and operating leases (excluding
related party leases) as of December 31, 1998 for each of the next five
years and in the aggregate are:
Capital Operating
Year ending December 31, Leases Leases Total
------- --------- ---------
1999 $209,295 $ 506,070 $ 715,365
2000 166,847 506,070 672,917
2001 63,847 506,070 569,917
2002 5,334 506,070 511,404
2003 and thereafter 4,446 1,870,920 1,875,366
--------- ---------- ----------
Total minimum lease payments 449,769 $3,895,200 4,344,969
========== ==========
Page 33
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Less: amount representing
interest and executory costs (63,250)
-------
Present value of net minimum
lease payments 386,519
Current portion 168,290
--------
Long-term lease obligations $218,229
========
NOTE 12 - INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1998 and 1997, respectively, consists of the following:
For the Years Ended
December 31,
-----------------------------------------
1998 1997
---------------- -------------------
Current
Federal $ - $ -
State and local 104,569 -
---------------- -------------------
Total current 104,569 -
---------------- -------------------
Deferred-
Federal - -
State and local - -
---------------- -------------------
Total deferred - -
---------------- -------------------
Total provision (benefit)
for income taxes $ 104,569 $ -
================ ===================
A reconciliation of the statutory U.S. federal income tax rate to the
effective income tax rate for the years ended December 31, 1998 and 1997,
respectively, is as follows:
Years Ended
December 31,
-----------------------------------
1998 1997
----------------- --------------
Statutory U.S. Federal income tax rate (34%) (34%)
State income taxes, net of Federal benefit (18%) (4%)
Permanent differences and other (1%) (1%)
Net operating loss carry forward 39% 39%
----------------- --------------
Effective income tax rate 14% 0%
================= ==============
Page 34
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company, when it was a privately owned entity, had elected Sub Chapter
S status, which it maintained during 1996 and through August 31, 1997. The
income or loss of an S corporation is included in the income tax return of
the stockholder. Accordingly, the Company made no provision for income
taxes for the eight months ended August 31, 1997 and the year ended 1996.
Upon reorganization on August 31, 1997, the Company became a C corporation,
after which time the Company became subject to Federal and State corporate
income taxes. For periods subsequent to August 31, 1997, the Company and
its subsidiaries have elected to file consolidated Federal and State income
tax returns. The Company incurred a net loss for the four months ended
December 31, 1997 and, as a result, no tax expense was incurred or reported
for that period. For the year ended, December 31, 1998, the Company
incurred a net loss for federal income tax purposes, but its Pennsylvania
subsidiary incurred a net income before tax of $557,272 and has accrued
additional Pennsylvania corporate tax of $68,434.
Deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax basis of assets and liabilities
and their financial reporting amounts at each year-end. Deferred income tax
assets are recorded to reflect the tax consequences on future years of
income tax carry-forward benefits, reduced by benefit amounts not expected
to be realized by the Company.
The net deferred tax asset and deferred tax liability are comprised of the
following at December 31, 1998 and 1997:
Years Ended
December 31
1998 1997
Deferred tax asset:
Net operating loss benefit carry
forward $ 636,904 $ 675,063
Amortization of intangibles 158,104 -
Other temporary differences 89,082 -
Valuation allowance for deferred
tax assets (884,090) (675,063)
-------------- ------------
Deferred tax asset - -
Deferred tax liability - -
Net deferred tax asset $ - $ -
============== ============
Page 35
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 1998 and 1997, the Company had $1,633,087 and $1,730,931 of
net operating loss carry-forwards (NOLs), respectively: however, $1,578,231
of these NOLs derive from Chartwell Cable, which was predecessor to the
current Company. The Chartwell NOLs are not likely to be utilized and have
been totally reserved as a valuation allowance.
Of the total NOLs at December 31, 1998, $54,856 is derived from current
(Siemann) operations since August 31, 1997. The Company utilized $63,752 of
NOLs to offset 1998 taxable income.
The Chartwell NOLs will expire from 2002 through 2012, and are not usable
unless the Company enters a business similar to the former businesses of
Chartwell. The Siemann NOLs will begin to expire in 2012. Under recent tax
legislation, the carry-forward period has been changed to twenty years for
NOLs incurred in 1998 and after.
NOTE 13 - EMPLOYEE BENEFIT PLAN
The Company sponsors defined contribution 401(k) savings and profit-sharing
plans for its employees at DADC and DPT, respectively.
Under the DADC 401(k) plan, all employees with twelve consecutive months of
service and 1,000 hours of service may participate. Eligible employees may
voluntarily contribute from 1% to 15%, but not more than the maximum
allowed by law (currently $10,000), of their compensation annually to the
plan. The Company, as of January 1, 1998, began matching employee
contributions at a rate of 25% up to 6% of eligible compensation.
Participants are fully vested for amounts that they contributed, and vest
over six years in amounts contributed by the Company.
The Company sponsors a defined contribution profit-sharing plan for DPT
employees, whereby the Company contributes six percent (6%) of eligible
employees' base compensation as defined under the terms of the plan.
The contribution expense for the plans was $97,080 for the year ended
December 31, 1998, and none for all other periods.
Page 36
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14 - REGULATORY
The Company and its Schools are subject to extensive regulation by federal
and state governmental agencies and accrediting bodies. In particular, the
Higher Education Act of 1965, as amended (the "HEA"), and the regulations
promulgated thereunder by the U.S. Department of Education ("DOE") subject
the Company and its schools to significant regulatory scrutiny on the basis
of numerous standards that schools must satisfy in order to participate in
the various student financial assistance programs under Title IV of the HEA
(the "Title IV Programs"). Under the HEA and its implementing regulations,
certain financial responsibility and other regulatory standards must be
complied with in order to qualify to participate in the Title IV Programs.
Under such standards, an institution must, among other things: (i) have an
acid test ratio (defined as the ratio of cash, cash equivalents, and
current accounts receivable to current liabilities) of at least 1:1 at the
end of each fiscal year, (ii) have a positive tangible net worth at the end
of each fiscal year, (iii) not have a cumulative net operating loss during
its two most recent fiscal years that results in a decline of more than 10%
of the institution's tangible net worth at the beginning of that two-year
period, (iv) collect 85% or less of its education revenues from Title IV
Program funds in any fiscal year, and (v) not have cohort default rates on
federally funded or federally guaranteed student loans of 25% or greater
for three consecutive federal fiscal years. The DOE may measure the
financial responsibility standards on a school-by-school basis or on a
corporate consolidated basis. Any regulatory violation could be the basis
for the initiation of a suspension, limitation or termination proceeding
against the Company or its institution.
In November 1997, the DOE published new regulations regarding financial
responsibility to take effect in July 1998. The regulations provide a
transition year alternative which will permit institutions to have their
financial responsibility for the 1998 fiscal year measured on the basis of
either the new regulations or the current regulations, whichever are more
favorable. Under the new regulations, the DOE will calculate three
financial ratios for an institution, each of which will be scored
separately and which will then be combined to determine the institution's
financial responsibility. If an institution's composite score is below the
minimum requirement for unconditional approval but above a designated
threshold level, such institution may take advantage of an alternative that
allows it to continue to participate in the Title IV Programs for up to
three years under additional monitoring and reporting procedures. If an
institution's composite score falls below this threshold level or is
between the minimum for unconditional approval and the threshold for more
than three consecutive years, the institution will be required to post a
letter of credit in favor of the DOE. The Company does not believe that
these new regulations will have a material effect on its schools'
compliance with the DOE's financial responsibility standards.
Page 37
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The process of reauthorizing the HEA by the U.S. Congress, which takes
place approximately every five years, has begun and is expected to be
completed during 1998. It is not possible to predict the outcome of the
reauthorization process. Although there is no present indication that
Congress will decline to reauthorize the Title IV Programs, there can be no
assurance that government funding for the Title IV Programs will continue
to be available or maintained at current levels, nor can there be assurance
that current requirements for student and institutional participation in
the Title IV Programs will be unchanged. Thus, the reauthorization process
could result in revisions to the HEA that increase the compliance burden on
the Company's institutions. A reduction in funding levels for federal
student financial assistance programs could impact the Company's ability to
attract students.
In order to operate and award degrees, diplomas and certificates and to
participate in the Title IV Programs, a campus must be licensed or
authorized to offer its programs of instruction by the relevant agencies of
the State in which such campuses are located. The Company's campuses are
fully licensed or authorized by the relevant agencies of the State in which
each such campus is located. In addition, in order to participate in the
Title IV Programs, an institution must be accredited by an accrediting
agency recognized by the DOE. The Company's schools are properly
accredited.
With each acquisition of an institution that is eligible to participate in
the Title IV Programs, that institution undergoes a change of ownership
that results in a change of control, as defined in the HEA and applicable
regulations. In such event, that institution becomes ineligible to
participate in the Title IV Programs and may receive and disburse only
previously committed Title IV Program funds to its students until it has
applied for and received recertification from the DOE under the
institution's new ownership.
NOTE 15 - SEGMENT AND RELATED INFORMATION
The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in 1998 which changes the way the
Company reports information about its operating segments. There is no
change to the 1997 information to conform to the 1998 presentation.
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.
Page 38
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DADC: Denver Automotive and Diesel College, Inc. is the sole business
unit reported in this segment. They operate a proprietary vocational
school focused on the education of automotive and diesel mechanics.
The principal markets for this segment include the Denver, Colorado
metropolitan areas and surrounding States.
DPT: Data Processing Trainers Company, acquired in 1998 (Note 2) is
the sole business unit reported in this segment. They operate a
proprietary vocational school focused on the education and training of
individuals in specific computer oriented industry fields. The
principal markets for this segment include the Philadelphia,
Pennsylvania metropolitan area and surrounding states.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based on income
(loss) before income taxes and interest income and (expense).
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column includes
corporate related items and, as it relates to segment profit (loss), income
and expenses not allocated to reported segments.
<TABLE>
<CAPTION>
DADC DPT Other Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the year ended
December 31, 1998
Revenues $3,241,990 $6,903,847 $1,173,195 $10,080,291
Segment profit (loss) 32,815 322,815 (906,460) (550,828)
Total assets 2,737,190 2,676,877 10,281,565 14,359,203
Capital expenditures 46,652 335,248 - 381,900
Interest expense 134,201 - 807,516 941,717
Depreciation and
Amortization 103,523 126,011 442,633 672,167
Income tax expense - 104,569 - 104,569
For the year ended
December 31, 1997
Revenues $3,042,629 $ - $8,295 $3,050,924
Segment profit (loss) 38,531 - (73,247) (34,716)
Total assets 2,890,104 - 1,428,694 3,201,012
Capital expenditures 11,551 - - 11,551
Interest expense 90,702 389 91,091
Depreciation and
Amortization 179,552 - 4,795 184,347
Page 39
</TABLE>
<PAGE>
SIEMANN EDUCATIONAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table presents the details of "Other" segment profit (loss).
1998 1997
-----------------------------
Revenue affiliated $ 1,158,513 $ -
Corporate expenses (1,272,139) (81,153)
Interest expense (807,516) (389)
Other 14,682 8,295
-----------------------------
Total $ (906,460) $( 73,247)
=============================
NOTE 16 - SUBSEQUENT EVENT
Subsequent to year-end, the Company entered into a capital lease agreement
for a computer, security and phone system. The value of the capital lease
is approximately $260,000. The monthly payment for this lease is $5,855.
The payment of the lease obligation has been personally guaranteed by the
president of the Company.
Subsequent to year-end, the former owner of DPT received 338,952 shares of
Company common stock. The issuance of common stock was in accordance with
the DPT sales agreement.
Page 40
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -----------------------------------------------------------------------
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- ---------------------------------------------------------------------
The name, age and term of office of each of the executive officers and
directors of the Company are set forth below:
Officer
or
Director
Name Position Held With the Company Age Since
- ---- ------------------------------ --- -----
Paul T. Siemann President, Chief Executive Officer 47 1997
and Director
Joseph R. Chalupa Vice President and Director 46 1997
Barbara S. Siemann Director 42 1997
Directors hold office for a period of one year from their election at the
annual meeting of shareholders or until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors. The Board of Directors has no audit, nominating or
compensation committee. CBAS, Inc., a principal stockholder of the Company,
currently receives a consulting fee of $15,000 per month for, among other
things, providing the consulting services of its principals to the Company.
Background
The following is a summary of the business experience of each officer and
director of the Company:
Paul T. Siemann has been the Chief Executive Officer and majority
stockholder of Institutional Financing Services, Inc. ("IFS") since 1977. IFS is
a Denver, Colorado based company engaged in fund-raising services for domestic
and international schools. He acquired DADC in 1993 and has been President of
DADC since that date. DADC is a wholly-owned subsidiary of the Company. Mr.
Siemann devotes approximately 80% of his time to the Company's affairs.
26
<PAGE>
Joseph R. Chalupa has been employed by DADC since 1976 and has been its
school director since 1991.
Barbara S. Siemann is Mr. Siemann's wife and devotes such time as is
necessary to the Company's affairs. She has been employed by IFS since 1977.
ITEM 10. EXECUTIVE COMPENSATION
- -------------------------------
Mr. Siemann, the Company's President, currently receives a salary of
$15,000 per month and also receives rental payments for the Company's corporate
office and DADC facilities aggregating $15,000 per month. CBAS, Inc., a
principal stockholder of the Company, received a monthly consulting fee of
$12,000 per month in January, February and March 1998 and $15,000 per month
thereafter. No long term compensation, stock options, bonuses, restricted stock
awards or other compensation has been awarded.
Compensation of the Company's Chief Executive Officer for each of the last
two years as set forth below:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation (1)
-----------------------
(a) (e) (f)
Name and Principal (b) (c) (d) Stock Other Annual
Position Year Salary($) Bonus($) Options Compensation($)
-------- ---- --------- -------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Paul T. Siemann, 1998 180,000 0 0 0
President 1997 28,000 0 0 0
Joseph Chalupa, 1998 60,000 0 0 0
Vice President 1997 60,000 0 0 0
</TABLE>
The Company's directors do not receive any cash compensation as directors,
although they are reimbursed for out-of-pocket expenses in attending Board of
Directors' meetings.
Stock Option Plan
The Company has adopted a stock option plan (the "Plan") which provides for
the grant of options intended to qualify as "incentive stock options" or
"nonqualified stock options" within the meaning of Section 422 of the United
States Internal Revenue Code of 1986 (the "Code"). Incentive stock options will
be issuable only to eligible officers and key employees of the Company.
The Company has not as yet reserved any shares of Common Stock for issuance
under the Plan, which will be administered by its Board of Directors. Under the
Plan, the Board of Directors will determine which individuals shall receive
options, the time period during which the options may be partially or fully
exercised, the number of shares of Common Stock that may be purchased under each
option and the option price.
27
<PAGE>
The per share exercise price of the Common Stock will not be less than the
fair market value of the Common Stock on the date the option is granted. Subject
to certain exceptions, in the case of incentive stock options, the aggregate
fair market value (determined as of the date the option is granted) of the
Common Stock that any person may purchase in any calendar year pursuant to the
exercise of incentive stock options will not exceed $100,000. No person who
owns, directly or indirectly, at the time of the granting of an incentive stock
option, more than 10% of the total combined voting power of all classes of stock
of the Company will be eligible to receive incentive stock options under the
Plan unless the option price is at least 110% of the fair market value of the
Common Stock subject to the option on the date of grant. The stock options will
be subject to anti-dilution provisions in the event of stock splits, stock
dividends and the like.
No incentive stock options will be transferable by an optionee other than
by will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will only be exercisable by the optionee. The exercise date
of an option granted under the Plan will not be later than ten years from the
date of grant. Any options that expire unexercised or that terminate upon an
optionee's ceasing to be employed by the Company will become available once
again for issuance. Shares issued upon exercise of an option will rank equally
with other shares then outstanding.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Principal Stockholders
The following table sets forth the holdings of Common Stock by each person
who, as of March 31, 1999, holds of record or is known by the Company to hold
beneficially or of record, more than 5% of the Company's Common Stock, by each
officer and director, and by all officers and directors as a group. All shares
are owned beneficially and of record and the address of each person is in care
of the Company. Ownership amounts include options and warrants exercisable
within 60 days from March 31, 1999.
28
<PAGE>
Name Amount of Ownership Percent of Class
- ---- ------------------- ----------------
Paul T. Siemann(1) 3,179,110 64.4
Joseph R. Chalupa 0 0.0
Barbara S. Siemann(1) 3,179,110 64.4
CBAS, Inc. 473,733 11.3
Hanifen Imhoff Mezzanine
Fund, L.P. (2) 1,268,486 23.1
All officers and
directors as a
group (3 persons)(1) 3,179,110 64.4
(1) Paul T. Siemann and Barbara S. Siemann are husband and wife and hold in the
aggregate 2,446,750 shares of Common Stock and common stock purchase
warrants to acquire an additional 733,360 shares.
(2) Represents 1,268,486 common stock purchase warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
In August 1997 the Company issued 2,250,000 shares of its Common Stock to
Paul T. Siemann ("Siemann") and 500,000 shares to CBAS, Inc. ("CBAS")for $.001
per share. Subsequently, the Company issued an additional 400,000 shares to
Siemann to acquire all of the outstanding capital stock of Siemann Educational
Systems, Inc., the owner of DADC and a company owned and controlled by Siemann.
CBAS acts as a consultant to the Company and receives a consulting fee of
$15,000 per month.
In July 1997 a subsidiary of the Company issued stock options to a third
party which have since expired.
The Company paid a consulting fee of $12,000 per month to CBAS, a principal
stockholder, for the months of January, February and March 1998. Subsequently,
CBAS received a consulting fee of $15,000 per month. See "Item 10 - Executive
Compensation."
In March 1998 in connection with the acquisition of DPT, Mr. Siemann loaned
the Company $2,000,000 evidenced by a promissory note bearing interest at 12%
per annum due March 25, 2003. As additional compensation for the loans, the
Company issued to Mr. Siemann warrants to purchase 732,360 shares of the
Company's Common Stock for a total of $100 until March 25, 2003. The warrants
also carry customary piggy back registration rights.
29
<PAGE>
The Company has advanced loans to, and received loans from, Siemann. See
Notes 3, 4 and 8 to the Company's financial statements.
The Company leases its office and DADC facilities from Siemann. See "Item 2
- - Description of Property."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibits: None
b. Reports on Form 8-K: None.
30
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in Denver, Colorado, on April 15, 1999.
SIEMANN EDUCATIONAL
SYSTEMS, INC.
By /s/ Paul T. Siemann
----------------------------------
Paul T. Siemann,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Paul T. Siemann President, Chief Executive April 15, 1999
- ------------------------ Chief Financial Officer
Paul T. Siemann (Principal Accounting Officer)
and Director
/s/ Joseph R. Chalupa Vice-President and Director April 15, 1999
- ------------------------
Joseph R. Chalupa
/s/ Barbara s. Siemann Secretary and Director April 15, 1999
- ------------------------
Barbara S. Siemann
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the 10-KSB
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,035,920 18,830
<SECURITIES> 0 0
<RECEIVABLES> 4,109,978 1,639,637
<ALLOWANCES> (123,243) (197,756)
<INVENTORY> 105,634 7,392
<CURRENT-ASSETS> 4,279,556 1,678,430
<PP&E> 1,969,002 913,600
<DEPRECIATION> (1,174,468) (628,826)
<TOTAL-ASSETS> 14,359,203 3,201,012
<CURRENT-LIABILITIES> 6,939,106 1,735,453
<BONDS> 6,319,227 1,093,939
0 0
0 0
<COMMON> 386,875 379,598
<OTHER-SE> 352,360 (7,708)
<TOTAL-LIABILITY-AND-EQUITY> 14,359,203 3,201,012
<SALES> 9,684,294 2,771,522
<TOTAL-REVENUES> 10,080,291 3,050,924
<CGS> 5,300,096 1,265,074
<TOTAL-COSTS> 9,665,061 3,019,418
<OTHER-EXPENSES> 80,228<F1> 24,869
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 941,719 91,719
<INCOME-PRETAX> (446,259)<F2> (34,716)
<INCOME-TAX> 104,569 0
<INCOME-CONTINUING> (550,828)<F2> (34,716)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (550,828)<F2> (34,716)
<EPS-PRIMARY> (.15)<F2> (.02)
<EPS-DILUTED> (.15) (.02)
<FN>
<F1>Interest income
<F2>(Loss)
</FN>
</TABLE>
