Chuck, my friend, you were all too kind <g> in your review of the 10KSB. This is by far the worst done 10K that I have ever seen - and I've seen plenty! I have NEVER seen so many inconsistencies, errors, missing information, broken sentences, missing or erroneous Note references, and unexplained differences from one statement to the next, in a 10K that was ACTUALLY SUBMITTED TO THE SEC! This looks like a rough draft or an Accounting 101 botched effort at trying to impress the teacher; or worse yet, like the work of a non-accountant after some major "editing, just to make it look better" (All of this, of course, just being MHO, coming from a guy who never made it past his BBA, Summa Cum Laude, Analytical Geometry and Calculus II, and 30+ years of business experience - so what do I know! <g>
I can sure see why Ken Walther would not have confidence in this document and, I'm VERY GLAD that he has immediately arranged to have the financials redone. THANK YOU VERY MUCH!
BEFORE I TEAR INTO ALL THE PROBLEMS WITH THIS THING THOUGH, I do want to say that the are certainly some bits of GOOD information in it, as well! (more of that, later.)
Even if much of the data in the new report, yet to come out, is similar, I, for one, will have a great deal more confidence when it is professionally done and free of errors. Hopefully it will be filed electronically so that we can all access it on EDGAR, or at least posted on the beautiful SEI Web Site!
OK, NOW, THIS MAY GET TO BE A LONG ONE, SO IF YOU NON-NUMBER-CRUNCHER TYPES GET BORED, JUST SCAN OVER THE REST OF THIS AND CHECK OUT THE CLOSING COMMENTS.
I'll run through my notes in order, page by page, so that those of you with copies (now or later) can follow along.
pg1 - As of Aug. 31, 1996 (which just so happens to coincide with the end of the 2ND quarter) the were 63,973,428 shares outstanding. 54,233,840 of which were owned by "non affiliates of the Company", leaving 9,740,588 owned by "affiliates?". We are never given a breakdown of this number (who had how many).
pf4 - (Lots of blanks in here!) Although the language is pretty torturous, there is an explanation of the settlement with the former Dental software affiliates which resulted in SEI RETAINING A 40% INTEREST IN THE INCOME FROM THE OLD, BUT CONTINUING, DENTAL SOFTWARE BUSINESS. (Good news, not adequately explained IMHO.)
Then, on the same page, an interesting comment about "an active ownership and MANAGEMENT CONTROL" of the company (caps are mine). But, no explanation of what that might mean???
Then we have the explanation of the ICMX buyout (YEAH!), which is great except for the use of the word "common" which one might read to mean that there COULD have been some OTHER class of stock left outstanding. SURELY NOT, but surely not sufficiently clear and certain. And then the closing comment acknowledging another $750,000 of liabilities "included in the consolidated financial statements. ONLY THING IS, IT IS NOT LISTED AS A LIABILITY ANYWHERE IN THE BALANCE SHEET!
I'll skip the following pages of narratives (for now) and stick with the financial data, except to point out on pg7 the "Projections of $41 million in gross revenues" (as Chuck noted). Also, there's a comment that the increase in operating expenses was "caused by an increase in development expenditures and administrative costs". (Administrative costs actually decreased by over 7%.) The "development expenditures" turn out to be $4,496,209 for Consulting (no final judgment on this until I get copies of the S-8s), but it equals over 80% of Total Operating Expenses. IMHO that is not very helpful language to explain the reality of what was going on (rightly or wrongly)! It goes on to say "Significant monies were spent to equip the offices, hire personnel and market the technologies." Well, not so as to be reflected in the Income Statement! The big expense was to "Consultants", and SHOULD HAVE BEEN STATED AS SUCH!
WELL, I CAN SEE THAT THIS ITEM BY ITEM REVIEW IS GOING TO BE FAR TOO LONG FOR MOST OF YOU TO WANT TO KEEP READING, (if anyone wants all the rest of my blow-by-blow review, I'll be happy to comply), so I'll just comment on some of the points Chuck has already made, and expand on a few.
The 10K revenues do appear to be all from royalties from the dental business, and are just about 40% (as would be expected) of the previous years' royalties. Also, I would presume it reasonable to expect a similar amount during this fiscal year (since there was no Note to the contrary).
The explanation on pg22 about the company recognizing revenue when "products are shipped" may actually work to defend the comment by Dick Yoder from the July 2nd Conference Call, in that what he said didn't use the terms "shipped" or "revenue", but that they had "booked orders" (4M from the Government and a total aggregate of 6.4M). We'll have to wait until we see the 2nd Quarter 10Q to see what actually got shipped and therefore counted as revenue.
Another inconsistency in the 10k is shown in the Note 4 on pg23 where reference is made to the "Federal operating loss carryforward of $9,194,088, yet the Balance Sheet on pg17 shows an Accumulated deficit of $8,734,574, but then, what the hey, its only a discrepancy of about a half million dollars!!
As to the accountants, I'm not sure "who was brought in by Meyerson", but I wouldn't think it was Michaelson & Co. since they had been doing SEI's financials "for the last two years" - long before this mess all started going. We don't want to cast aspersion around where they might not be deserved (goodness knows there are plenty enough justifiable ones). I feel it important that we not brand anyone without some pretty clear info about their actions.
Interesting to note that the reference on pg10 to those salaries for Charles and Maria failed to note the called for information of what POSITION the payment was for (Director, Officer, or ???).
Mr. Huttoe's statement in the July 2 Conference call that there were "40M shares outstanding, 22M are restricted" is clearly refuted by the 10Q which states that as of May 31st (more than a month prior to the CC) there were 49.7M shares outstanding (almost 25% more!). And Chuck's info about only 15.7M shares being restricted as of now (I'm still trying to verify that myself) would shows Huttoe's statement to be doubly wrong.
Another interesting observation of Chuck's was the increases in the number of Authorized shares, firstly from the 21M of 2-28-95, to the 47M of 2-28-96, to the ??M which would allow 65.7 (or more) shares to be outstanding now. It raises the question of what the Articles of Incorporation and By-Laws provisions are for how to make changes in the number of Authorized shares AND WHO GETS TO VOTE ON SUCH CHANGES!!! I think we'd like to know the answer to that! AND, if those provisions were NOT followed properly, what affect would it have on, what might be, improperly issued shares???
Oh, and one last thing for this posting, about that 3M Notes Payable in the 10Q on pg3. Even if it does include the 1.7M "owed to the CEO" for "consulting services provided throughout the fiscal year... ending February 28, 1995 (that's from Mar 94 thru Feb 95, and I certainly hope that it has not been paid) WHAT IS THE ADDITIONAL 1.3M FOR, AND PAYABLE TO WHOM!?!?! Actually, the more that is owed to Huttoe, the more there is to potentially cancel!
OK! For those of you who stuck it out this long to read all of this (whether or not you're interested in all the other "discrepancies" AND PROS & CONS that I found in the financials - JUST LET ME KNOW, the question comes down to WHAT DOES ALL THIS MEAN? It means that these Financial Statements are (IMHO) so poorly done that we should be very happy that someone at SEI had the sense NOT TO SUBMIT THESE THINGS TO NASDA for listing approval!!! This would have been huge against SEI when (and at this time, admittedly, "if") the time comes to really make submission for NASDAQ/BB listing. (Always looking for the silver lining <g>)
Also, I think we should be able to absolutely count on squeaky clean financials from Feldman, Radin, & Co. (how's that for a high pressure assignment)! I'll be looking forward to immediately reviewing them, as soon as they are done!!!
SEDONA John (Resting in Paradise while awaiting new financials to dissect!)
PS Still working on the new Board of Directors rumor... |
