U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended March 31, 1996
-----------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______________ to _______________
Commission File Number 000-19828
Sayett Group, Inc.
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(Exact name of small business issuer as specified in its charter)
New York 16-1363082
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8-C Commercial Blvd., Novato, CA 94949-6125
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(Address of principal executive offices)
(415) 883-1693
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 6,353,191 shares of common
stock as of May 9, 1996.
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SAYETT GROUP, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-QSB
For the Quarter Ended March 31, 1996
Table of Contents
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets dated 3
March 31, 1996 and December 31, 1995
(unaudited)
Consolidated Statements of Operations 4
for the Three Months ended
March 31, 1996 and 1995 (unaudited)
Consolidated Statements of Cash Flows 5
for the Three Months Ended March 31, 1996
and 1995 (unaudited)
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 9
of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6 (A) Exhibits and Reports on Form 8-K 13
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SAYETT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
MARCH 31, DECEMBER 31,
1996 1995
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 568,610 $ 678,300
Note receivable - current 43,003 81,451
Prepaid expenses and other 24,838 5,804
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Total current assets 636,451 765,555
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Property and equipment, net 47,410 51,795
Note receivable - noncurrent 206,997 218,549
Other assets 10,144
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$ 901,002 $ 1,035,899
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accrued expenses and other current liabilities $ 82,697 $ 52,108
Deferred revenue 11,250
----------- -----------
Total current liabilities 93,947 52,108
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Stockholders' equity:
Common stock, $.01 par value.
20,000,000 shares authorized; 6,353,191
shares issued and outstanding at
March 31, 1996
and December 31, 1995 63,532 63,532
Additional paid-in capital 7,205,602 7,205,602
Accumulated deficit (6,462,079) (6,285,343)
----------- -----------
Total stockholders' equity 807,055 983,791
----------- -----------
Total liabilities and stockholders' equity $ 901,002 $ 1,035,899
========== ===========
See accompanying notes to consolidated financial statements.
3
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SAYETT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
1996 1995
Net sales $ - $ 58,000
---------
Selling, general and administrative expenses 137,789 257,317
Research and development expenses 52,479 91,189
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Operating loss (190,268) (290,506)
Other (expense) income:
Interest income 15,109 15,131
Amortization of excess purchase price over
fair market value of assets acquired (57,538)
Loss in investee companies (193,728)
Investment income (loss) 6,668
Other income (expense), net 1,269 (9,609)
--------- ---------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (173,890) (529,582)
INCOME TAX EXPENSE 2,846 813
--------- ---------
LOSS FROM CONTINUING OPERATIONS (176,736) (530,395)
DISCONTINUED OPERATIONS:
Income from operations of discontinued subsidiaries,
net of income taxes 44,072
NET LOSS $ (176,736) $ (486,323)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
From continuing operations $ (.03) $ (.09)
From operations of discontinued subsidiaries .01
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NET LOSS $ (.03) $ (.08)
=========== ===========
Weighted average shares used in computing
net income (loss) per common share 6,353,191 6,203,695
=========== ==========
See accompanying notes to consolidated financial statements.
4
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SAYETT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
1996 1995
Cash flows from operating activities:
Net loss $ (176,736) $ (486,323)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 4,385 175,593
Amortization of excess purchase price over value
of net assets acquired 57,538
Equity in losses in investee companies 193,728
Changes in assets and liabilities:
Marketable investment securities 571,714
Trade and other receivables, net (93,283)
Inventories (99,114)
Prepaid expenses and other assets (29,178) (59,191)
Accrued expenses and other liabilities 30,589 306,726
Other 11,250 14,746
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Net cash provided (used) by operating
activities (159,690) 582,134
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Cash flows from investing activities
Capital expenditures (263,500)
Payable to investee (375,000)
Collection on notes receivable 50,000
Cash balance of investee upon purchase 49,264
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Net cash provided (used) by investing
activities 50,000 (589,236)
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Cash flows from financing activities 0 0
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Net decrease in cash and cash equivalents (109,690) (7,102)
Cash at beginning of period 678,300 1,138,031
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Cash at end of period $ 568,610 $1,130,929
========== ==========
See accompanying notes to consolidated financial statements.
5
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SAYETT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
1996 1995
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 97 $ -
======== ========
Income taxes $ 2,846 $ 1,613
======== ========
Non-cash investing and financing activities:
On January 1, 1995, the Company converted its debentures in WAH-III Technology
Corporation ("WAH-III") valued at $466,105 for common stock in WAH-III. On
February 7, 1995, the Company issued 354,543 shares of common stock with an
approximate value of $797,722 in conjunction with its investment in WAH-III
Technology, Inc.
See accompanying notes to consolidated financial statements.
6
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SAYETT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and therefore
do not include all information and footnotes necessary for a fair
presentation of financial condition, results of operations and cash flows
in conformity with generally accepted accounting principles. In the
opinion of management of Sayett Group, Inc. (the "Company"), the interim
consolidated financial statements included herewith contain all
adjustments (consisting of normal recurring accruals and adjustments)
necessary for a fair presentation of the Company's financial condition as
of March 31, 1996 and the results of its operations for the three months
ended March 31, 1996 and 1995. The unaudited interim consolidated
financial statements should be read in conjunction with the Company's 1995
Annual Report on Form 10-KSB, which contains the audited financial
statements and notes thereto, together with Management's Discussion and
Analysis as of and for the years ended December 31, 1995 and 1994.
The consolidated statement of operations for the three months ended March
31, 1995 presented herein has been restated to reflect the operations of
Sayett Technology, Inc. (sold on December 29, 1995) and Surmotech, Inc.
(sold on July 1, 1995) as "Discontinued Operations."
(2) Going Concern Uncertainty
-------------------------
The accompanying unaudited consolidated financial statements have been
prepared on a going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company incurred significant operating losses in each of the
last five fiscal years, incurred a net loss in fiscal 1995 of $4,655,383,
and incurred a net loss of $176,736 in the first quarter of 1996.
Additionally, at March 31, 1996, the Company's accumulated deficit totaled
$6,462,079, its stockholders' equity balance declined to $807,055 at March
31, 1996 from $983,791 as of December 31, 1995, and its total cash and
cash equivalents totaled $568,610 at March 31, 1996, a decline of $109,690
from December 31, 1995. The Company's primary business activity is being
conducted by WAH-III Technology Corporation ("WAH-III), its majority-owned
subsidiary. The successful completion of the Company's development program
and, ultimately, the attainment of profitable operations is dependent on
future events, including obtaining adequate financing to fulfill its
development activities, successful launching of the commercial production
and distribution of its products and achieving a level of sales adequate
to support the Company's cost structure. These factors among others may
indicate that the Company will be unable to continue as a going concern
for a reasonable period of time. The consolidated financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification
of liabilities that might be necessary should the Company be unable to
continue as a going concern.
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In an effort to improve operating performance, the Company has been and
will be implementing certain programs and strategies in 1996. These
strategies include:
. Raising of additional capital: a private placement and issuance of
convertible preferred stock are currently being contemplated.
. Outsourcing of all manufacturing activities with high volume
manufacturing specialist that will be monitored by Company
manufacturing/quality control engineering staff.
. Developing strategic arrangements with potential customers to share
developments costs.
. Combining of marketing and sales activities of a small in-house sales
engineering staff with commissioned representatives.
(3) Loss in Investee Companies
--------------------------
On March 26, 1994, the Company acquired 40% of the common stock of
InterVision Systems, Inc. ("ISI"), a newly formed Delaware Corporation
that produces head-mounted displays utilizing a wearable computer, for
$1,350,000. The Company accounted for this investment using the equity
method of accounting which required that the original investment be
recorded at cost and adjusted by the Company's share of undistributed
earnings or losses of ISI. ISI generated a loss of approximately $925,286
for the period ended December 31, 1994. The Company lost an additional
$193,728 for the three months ended March 31, 1995, indicating that the
Company's investment was and continued to be significantly impaired. The
Company measured the impairment of its investment by recording 100% of the
loss generated by ISI in the consolidated financial statements since the
Company essentially provided 100% of ISI's capitalization and, therefore,
had all the capital-at-risk. The Company recorded losses until its
investment in ISI was written down to zero as of September 30, 1995.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
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GOING CONCERN UNCERTAINTY
-------------------------
The accompanying unaudited consolidated financial statements have been
prepared on a going concern basis which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. See Note 2
to the Consolidated Financial Statements for further discussion and a summary of
management's plans.
RESULTS OF OPERATIONS
---------------------
Sayett Group, Inc. reported no sales from its continuing operations for
the three months ended March 31, 1996. Net sales for the three months ended
March 31, 1995 were $58,000 and represented sales of "Spatial Light Modulators"
(SLM) by the WAH-III Technology Corporation subsidiary (WAH-III). The Company
believes that a significant increase in sales of its Spatial Light Modulator
product will be required in order for the entity to continue as a going concern.
The lack of significant sales improvement will have a material adverse affect
upon the financial condition of the Company.
Selling, general and administrative expenses declined by $119,528 or
46.5% when comparing the three months ended March 31, 1996 with the three months
ended March 31, 1995. This reduction reflected payroll and administrative
expense reductions implemented by the Company during the fourth quarter of 1995
which are expected to result in lower selling, general and administrative
expenses for all of 1996.
Research and development expenses recorded for the three months ended
March 31, 1996 decreased $38,710 or 42.4% from the three months ended March 31,
1995 from $91,189 to $52,479. While the Company believes that it can complete
the development and commercialization of the WAH-III SLM, additional,
significant expenditures for research and development may be required. The
inability of the Company to achieve full commercialization of the WAH-III
product and the lack of sufficient financial resources to adequately fund
development efforts could have a material adverse impact upon the financial
condition of the Company.
Other (non-operating) income and expenses combined to an aggregate
non-operating income of $16,378 for the three months ended March 31, 1996. This
compares with an aggregate net non-operating expense of $239,076 for the same
period in the prior year. This significant change is primarily due to two
factors.
The first factor which negatively impacted non-operating performance
for 1995 related to the purchase by Sayett of an 80.3% interest in WAH-III
Technology Corporation which was completed during the first quarter of 1995. The
purchase required amortization of the excess purchase price over the fair market
value of WAH-III assets acquired (goodwill) which resulted in a charge of
$57,538 for the first quarter of 1995. This charge did not exist for the 1996
period as the goodwill was written off
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during the fourth quarter of 1995 due to impairment. (See Note 4 to the
Consolidated Financial Statements in the Company's 1995 Annual Report on Form
10-KSB for further discussion).
The second factor related to non-operating performance related to an
investment made by the Company in InterVision Systems, Inc. ("ISI") at the end
of the first quarter of 1994. This investment which totaled $1,350,000
represented, essentially, 100% of ISI's capitalization. Because of the continued
losses from ISI, the Company concluded that its investment in ISI had been
impaired. As a measurement of the impairment, the Company recorded a 100% of the
loss generated by ISI for the three months ended March 31, 1995 which totaled
$193,728. The Company recorded losses until its investment in ISI was written
down to zero as of September 30, 1995.
Interest income recorded for the two periods being compared was
relatively constant. It is anticipated that interest income will continue to
decline until such time as the Company can secure additional financing.
INCOME TAXES
------------
Income tax expense represents minimum tax liabilities resulting from
the Company's operations in California and New York State. No federal income tax
benefit has been recorded because of the uncertainty of realizing the net
operating loss carryforwards. While the Company has in excess of $4,000,000 of
net operating loss carryforwards to be applied against future tax liabilities,
the potential tax benefit associated with these items has been offset by a 100%
valuation allowance due to the Company's limited operating history and recurring
operating losses.
LOSS FROM CONTINUING OPERATIONS
-------------------------------
As a result of the above factors, the Company recorded a loss from
continuing operations of $173,890 for the three months ended March 31, 1996.
During the same period in 1995, the Company recorded a loss from continuing
operations of $529,582. Substantial operating performance improvements will be
needed in the near term in order for the Company to continue as a going concern.
DISCONTINUED OPERATIONS
-----------------------
On July 1, 1995, the Company sold Surmotech, Inc., a manufacturer of
populated circuit boards. The Company also completed the sale of its Sayett
Technology, Inc. subsidiary on December 29, 1995. As a result of these two
sales, the net operating results for the two entities have been combined and
reported as "income from operations of discontinued subsidiaries, net of income
taxes." Although the aggregate income totaled $44,072 for the three months ended
March 31, 1995, the consistent, recurring losses sustained by both companies
prompted the Company to sell these entities in order to focus on its LCD
manufacturing venture, WAH-III Technology Corporation.
NET LOSS
--------
As a result of the above factors the Company recorded a net loss of
$176,736 for the three month period ending March 31, 1996. The loss represented
$0.03 per share for the first quarter 1996. During the same period in 1995, the
Company recorded a net loss of $486,323, representing $0.08 per
10
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share. While the Company is taking steps to improve its operating and
non-operating performance, there can be no assurance that the attempts by
management at development of the product will be successful. Any delay in
effecting operational performance improvement by the Company or in the further
development of the SLM by WAH-III may have a material adverse impact upon the
financial condition of the Company.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
Net cash used by operating activities totaled $159,690 for the three
months ended March 31, 1996 as a result of spending on selling, general and
administrative expenses and research and development expenses. During the first
quarter of 1996, the Company received a $50,000 payment on its note receivable
related to the sale of one of its subsidiaries. The balance of the note
($250,000 as of March 31, 1996) is due in equal monthly installments of
principal and interest of $5,069 extending through April 2001. The operating and
investing activities identified above resulted in a net decrease in cash and
cash equivalents of $109,690 for the first quarter of 1996. While the Company
has implemented specific programs in order to address its operating performance
and has shed previously unprofitable operations, there can be no assurance that
the Company will be able to reverse its historical trend of declining cash and
investment balances.
LIQUIDITY
---------
As of March 31, 1996, the Company had $568,610 in cash and cash
equivalents. Net working capital approximated $542,000. Management does not
believe that it currently has sufficient liquid assets in order to operate the
Company through 1996 at the level necessary to develop and exploit the WAH-III
technology. It is believed, therefore, that raising additional financing for the
Company will be critical to its ultimate survival and will be required prior to
the end of the third quarter of 1996.
CAPITAL RESOURCES
-----------------
During the first quarter of 1996, the Company did not make any capital
expenditures. Additional, substantial investments in capital equipment may be
required for the Company to bring its WAH-III subsidiary closer to commercial
production of a small liquid crystal display, also known as a spatial light
modulator. The Company is currently seeking outside sources of capital to effect
such funding. To this date, however, the Company has not been successful in
securing such financing and any lack thereof will have a material adverse impact
on the further development efforts at WAH-III and the financial viability of the
Company.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Surmotech, Inc. has been sued in North Carolina relating to a lease for
real property which was executed, but the space was never completed or occupied.
The Company is vigorously defending this claim. The Company is not a party to
any other currently pending legal proceedings, or contemplated governmental
authority proceeding of which the Company is aware.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: None
(b) Reports on Form 8-k: None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 1996
Sayett Group, Inc.
By: /s/ William E. Hollis
----------------------
William E. Hollis
President and Chief Executive Officer
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