SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-20271
SCRIPTEL HOLDING, INC.
(Exact name of Registrant as specified in its charter)
Delaware 31-1069865
(State or jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
4153 Arlingate Plaza
Columbus, Ohio 43228
(Address of principal executive offices) (Zip Code)
(614) 276-8402
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed
by Section 13 or 15(d) of the Securities and 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
The number of common shares outstanding at June 14, 1996 was 23,562,134.
SCRIPTEL HOLDING, INC.
Amended items to Form 10-Q for the quarter ended March 31, 1996.
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1996
3
(unaudited) and December 31, 1995
Consolidated Statements of Operations for the three
4
months ended March 31, 1996 and 1995, unaudited
Consolidated Statements of Cash Flows for the three
5-6
months ended March 31, 1996 and 1995, unaudited
Notes to Consolidated Financial Statements, unaudited
7-20
Item 2. Management's Discussion and Analysis of Financial
21-26
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
27
Item 2. Changes in the rights of the company's security holders
27
Item 3. Defaults upon senior securities
27
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
28
Item 6. Exhibits and reports on Form 8-K
28
SIGNATURES
29
Exhibits: 10(w) - May 30, 1996 investment banking relationship
30-33
agreement with Everest Securities, Inc.
27 - Financial Data Schedule
Scriptel Holding, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS March 31,1996 December 31,
(Unaudited) 1995
Assets
- - --------------- -----------------
Current assets:
Cash and cash equivalents $
30,000 $ 51,000
Trade accounts receivable, net of allowance for
doubtful accounts of $3,000 in 1996 and 1995 45,000
65,000
Inventories
1,000 2,000
Assets held for sale
168,000 ---
Other current assets
2,000 2,000
--------------- -----------------
Total current assets
246,000 120,000
Property and equipment, net
481,000 947,000
Patents, net
166,000 184,000
Deposits
--- 122,000
Other assets
63,000 88,000
---------------- ----------------
Total assets $
956,000 $ 1,461,000
========= ==========
Liabilities and Stockholder's Deficit
Current liabilities:
Notes payable, short-term and current portion $ 5,309,000 $
4,741,000
Accounts payable
1,596,000 1,681,000
Accrued interest
1,146,000 855,000
Accrued loss on discontinued operations 450,000
470,000
Other accrued liabilities
4,229,000 2,777,000
--------------- --------------
Total current liabilities
12,730,000 10,524,000
Notes payable, long-term
1,000,000 1,000,000
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.10 par value, 50,000,000 shares authorized:
22,842,634 shares and 21,058,217 shares issued and
outstanding at March 31, 1996 and December 31,
1995, respectively
2,284,000 2,106,000
Additional paid in capital
39,584,000 38,529,000
Accumulated deficit
(54,502,000) (50,558,000)
Notes receivable - stockholders
(140,000) (140,000)
---------------- ----------------
Total stockholders' deficit
(12,774,000) (10,063,000)
-------------- ---------------
Total liabilities and stockholders' deficit $ 956,000
$ 1,461,000
========= =========
The accompanying notes are an integral part of the financial statements.
Scriptel Holding, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended March 31,
1996 1995
(Unaudited) (Unaudited)
----------------- ---------------
Revenues
$ 60,000 $ 121,000
Costs and expenses:
Cost of sales
46,000 102,000
General and administrative
1,494,000 1,069,000
Sales and marketing
62,000 52,000
Research and development
1,029,000 1,601,000
---------------- ---------------
Total costs and expenses
2,631,000 2,824,000
----------------- ---------------
Loss from operations
(2,571,000) (2,703,000)
Other expense (income):
Interest expense
389,000 172,000
Finance charge
670,000 ---
Other expense, net
--- (13,000)
Loss on disposition of assets
314,000 ---
Minority interest
--- (65,000)
---------------- ---------------
Total other expense
1,373,000 94,000
---------------- ---------------
Loss from continuing operations
(3,944,000) (2,797,000)
Discontinued operations:
Loss from operations of Ampsco
--- (27,000)
----------------- ----------------
Total loss from discontinued operations
--- (27,000)
----------------- -----------------
Net loss
$ (3,944,000) $ (2,824,000)
========== ==========
Loss per share of common stock:
Continuing operations
$ (0.18) $ (0.18)
Discontinued operations
--- ---
--------------- ---------------
Net loss per share
$ (0.18) $ (0.18)
========== ==========
Weighted average number of common shares
used in computing net loss per share
21,365,240 15,556,891
========== ==========
The accompanying notes are an integral part of the financial statements.
Scriptel Holding, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31
1996 1995
(Unaudited) (Unaudited)
--------------- ---------------
Net cash used in operating activities $
(1,104,000) $ (1,226,000)
Cash flows from investing activities:
Purchase of property and equipment
(97,000) (220,000)
Disposal of assets held for sale
--- 353,000
Purchase of patents
--- (32,000)
------------- ---------------
Net cash provided by (used in) investing activities
(97,000) 101,000
Cash flows from financing activities:
Proceeds from notes payable
707,000 528,000
Repayment of notes payable
(155,000) (290,000)
Proceeds from the issuance of stock
628,000 857,000
------------ -------------
Net cash provided by financing activities
1,180,000 1,095,000
------------- ------------
Increase (decrease) in cash and cash equivalents
(21,000) (30,000)
Cash and cash equivalents, at the beginning of the year 51,000
31,000
------------- --------------
Cash and cash equivalents, at the end of the period $ 30,000
$ 1,000
========= =========
The accompanying notes are an integral part of the financial statements.
continued
Scriptel Holding, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Three months ended March 31
1996 1995
(Unaudited) (Unaudited)
--------------- ---------------
Supplemental disclosures of cash flow information:
Cash paid for interest
$ 21,000 $ 35,000
========== =========
Supplemental schedule for non-cash financing and investing activities:
Record receivable for convertible debenture:
Increase in subscription receivable
$ 1,000,000
Increase in notes payable
(1,000,000)
Debt conversion and use of debt to exercise options and warrants:
Decrease in notes payable
$ 142,000
Decrease in accrued interest
20,000
Increase in common stock
(12,000)
Increase in additional paid-in-capital
(150,000)
----------------
Net effect on cash
$ 0
==========
In the first quarter of 1995, the Company issued stock options as follows:
7,000 options
on debt financings (value of $3,000 treated as interest expense in the
quarter), and 2,240,950
options as compensation to officers, directors, employees and consultants
(value of $44,000 and
$425,000 treated as administrative and research and development expense,
respectively, in the
quarter).
In the first quarter of 1996, the Company had these non-cash charges
relating to stock,
stock options and convertible debt: issued 100,000 shares and 100,250 stock
options, net, to
officers, directors, employees and consultants (value of $137,000 treated as
administrative
expense in the quarter); repriced and extended a total of 4,274,500 stock
options and warrants
(value of $392,000 treated as a finance charge in the quarter); repriced
certain convertible debt
(value of $78,000 treated as a finance charge in the quarter).
The accompanying notes are an integral part of the financial statements.
Scriptel Holding, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
March 31, 1996 (Unaudited)
1. CONSOLIDATION:
The consolidated information presented for March 31, 1996 and 1995, and
for the periods
then ended, is unaudited, but includes all adjustments (which consist only of
normal recurring
adjustments) which the Company's management believes to be necessary for the
fair presentation
of results for the periods presented. Certain information and footnote
disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities
and Exchange Commission. The results for the interim periods are not
necessarily indicative of
results to be expected for the year. The consolidated balance sheet data at
December 31, 1995
was derived from the audited consolidated financial statements. These
consolidated financial
statements should be read in conjunction with the Company's audited financial
statements for the
year ended December 31, 1995, which were included as part of the Company's Form
10-K/A (file
No. 0-20271).
The consolidated financial statements include the accounts of Scriptel
Holding, Inc. and its
wholly-owned subsidiaries, Scriptel Corporation ("Scriptel") and Scriptel
Communications Corp.,
and its majority-owned subsidiary Coloray Display Corporation ("Coloray")
(collectively known
as "the Company"). Another wholly-owned subsidiary, Ampsco Corporation
("Ampsco") has
been reported as a discontinued operation, and was sold in April 1996. All
significant
intercompany transactions have been eliminated.
In early 1996, the Company committed to shutting down Coloray. If this
effort is
successful, it will enable the Company to focus on its core Scriptel technology
and Scriptel
products.
2. GOING CONCERN BASIS OF PRESENTATION:
The accompanying 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. Scriptel Holding, Inc. and each of its subsidiaries
have incurred
recurring losses from operations and resulting cash flow problems since
inception. Management's
plan for meeting obligations as they come due is summarized below. If the
Company is unable to
obtain additional funding, and meet or restructure its debt obligations as they
come due, there
would be a substantial likelihood that it could not proceed as a going concern.
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.
The Company must generate significant and sufficient additional working
capital and
restructure its debt obligations in order to continue as a going concern.
Management is seeking
additional financing through other public or private placements of debt,
convertible debt and or
common stock to fund its activities. There can be no assurance that the
Company will be able to
obtain such funds, that such funds obtained will be sufficient, or that the
Company will be able to
meet or restructure its debt obligations as they come due. If the funds are
not received,
management plans to cut back further on its planned research and development
and capital
expenditures, which could jeopardize the timing and ultimate completion of
certain critical
projects. Completion of these projects and further market development for
Scriptel's products are
necessary for the Company to achieve profitable operations.
At March 31, 1996, the Company was in default on approximately $2.7
million of its notes
payable, of which approximately $500,000 have been demanded, and in arrears
over 60 days on
trade accounts payable totaling approximately $1.4 million. In addition,
$2,519,000 of notes
payable were represented by demand cognovit notes at March 31, 1996. At March
31, 1996 the
Company had a reported deficit in equity of $12,774,000. The Company is
currently attempting
to negotiate new terms with certain debt holders, as well as to seek the
execution of conversion
privileges on convertible notes.
At March 31, 1996, the Company was a party to legal proceedings brought by
several
creditors. (See Note 4 for a summary of litigation issues.) Subsequent to
March 31, 1996,
several additional creditors took or threatened legal action against the
Company to collect
amounts due and payable. The Company has successfully deferred, for the
present, legal action
by other creditors and has made some partial payments on the amounts due.
There can be no
assurance, however, that the creditors will not hereafter seek other legal
remedies.
3. RISK OF LIQUIDATION:
Due to the Company's history of operating losses and immediate need for
additional
capital, there is a risk that the Company will have to liquidate.
Substantially all of the Company's
assets, including patents, are pledged as collateral on certain of the
Company's debt instruments.
If the Company were forced into liquidation, it is likely that all of the
assets would be attached to
settle the claims of secured creditors and none, except possibly the value of
the patents, would be
available to other security holders. If the Company were to liquidate,
management estimates that
the realizable value of the Company's property and equipment would be
substantially less than the
carrying values of those assets at March 31, 1996, and the realizable value of
the Company's other
assets, except patents, would be less, but would not be materially different
than the reported
values for those assets at March 31, 1996. It is also management's estimate
that the value of the
Company's patents would be higher than their recorded value at March 31, 1996.
The valuation
of assets necessarily requires many estimates and assumptions. The actual
value of assets if
liquidation were to occur would depend on a variety of factors, including
finding interested
buyers, the timing of any sales, sales commissions and selling costs, operating
losses incurred to
the date of any sale, and the forced nature of the sale. Management considered
these factors in
developing its estimate of realizable values if liquidation were to occur. The
Company has not
had a current outside appraisal of the assets made because it is management's
intention to continue
to operate the Company on a going-concern basis. Management's estimate of
realizable value on
liquidation of current assets is approximately $200,000, compared to a carrying
value at March
31, 1996 of $246,000. Management's estimate of realizable value on liquidation
of property and
equipment is approximately $200,000, compared to a carrying value at March 31,
1996 of
$481,000. Excluding patents, for which an appraisal is not available and
management is otherwise
unable to reasonably estimate value, management's estimates of realizable value
on liquidation of
all assets is approximately $500,000, compared to a carrying value of all
assets of $956,000 at
March 31, 1996. At that date, the Company's recorded liabilities totaled
approximately
$13,730,000. The Company also has other contractual commitments.
If the Company could continue as a going concern and achieve profits, the
Company could
realize substantial savings from the use of its net operating loss
carryforwards to offset future
taxable income. If the Company were liquidated, it is unlikely that any
benefit would be realized
from these tax loss carryforwards.
4. LITIGATION
The Company is a defendant in several legal actions brought by creditors
to collect
amounts due, or brought by others.
On September 6, 1995, a promissory note holder filed suit in the Circuit
Court of Cook
County, Illinois, entitled Stimsonite Corporation vs. Scriptel Holding, Inc.,
for collection of
principal, interest and other charges on a note. The total sought is
approximately $450,000. The
promissory note holder received a judgement against the Company in Illinois in
November 1995,
and domesticated the judgement against the Company in Ohio in February 1996.
The Company is
attempting to negotiate a resolution with the creditor.
A former officer and director of the Company filed a suit against the
Company in January
1996 in U. S. District Court for the Southern District of Ohio, entitled
Nicholas G. Venetis vs.
Scriptel Corporation and Scriptel Holding, Inc. The individual alleges common
fraud; securities
fraud; non-payment of payroll, severance, director bonus, and expenses;
improper handling of
COBRA benefits and disclosures; and other matters. He claims damages of
approximately
$100,000 and requests specified grants of options and punitive damages of
$250,000. The
Company has filed a response to the suit denying the allegations and attempting
to collect
amounts due the Company from the individual. The Company may work with the
individual in an
attempt to settle the suit.
Three former officers of Coloray Display Corporation, a majority-owned
subsidiary of the
Company, filed an action against Coloray and the Company on February 23, 1996
in Alameda
County Superior Court, Hayward, California, entitled Michael W. Blas, M. Kathy
Vieth, and
Daniel J. Devine vs. Coloray Display Corporation and Scriptel Holding, Inc.,
alleging non-
payment of amounts due them for payroll, severance, expense reports and other
matters, and
seeking damages totaling approximately $680,000. These individuals also sought
and obtained in
connection with this action an ex parte Temporary Protective Order prohibiting
the transfer of the
assets of Coloray and the assets of the Company located in California.
Following a hearing on
March 28, 1996, the California court denied the plaintiffs' application for
Writ of Attachment or
Temporary Protective Order. The Company intends to vigorously pursue this
action, including
the possibility of an action by the Company against each of the individuals.
These individuals
have also taken administrative action against Coloray through the California
Labor Board.
A creditor filed suit against the Company in February 1996 in the Court of
Common Pleas,
Franklin County, Ohio, entitled Financetech, Inc. vs. Scriptel Holding, Inc.,
for collection of a
debt and accrued interest of approximately $580,000. The Company has filed a
counterclaim
against the creditor for amounts of royalty that the Company feels is due it
from the creditor, and
has requested the court to offset the note payable by the amount of royalty
due. This action is
pending.
Several other creditors have filed suit against the Company and its
subsidiaries, in various
courts in Ohio and California, for payment of amounts due them. In addition,
the Company has
been informed that several other creditors may take such actions in the near
future. The amount
currently under suit in these actions totals less than $150,000.
The landlord of Coloray has threatened to start eviction proceedings due
to non-payment
of rents totaling approximately $84,000.
In January 1996 the State of Ohio issued a final claim against the Company
for unpaid
sales and use taxes of $41,000. These taxes are included in the Company's
liabilities at December
31, 1994 and for all subsequent periods.
The Internal Revenue Service has filed a payroll tax levy against the
assets of Coloray
Display Corporation. In February 1996, the IRS attached $42,000 of funds held
on deposit in
Coloray's bank account, and obtained those funds. Several other payments have
been made and
Coloray still owes approximately $95,000 of federal payroll tax liabilities.
Coloray has also received a personal property tax lien from Alameda
County, California in
the amount of approximately $23,000. In addition, Coloray has unpaid withheld
state income
taxes of approximately $25,000 which are subject to levy at any time.
The Company has unpaid personal property, franchise, capital stock, workers
compensation, and other taxes aggregating approximately $190,000. Such amounts
may be
subject to levy against Company assets. The Company intends to pay these taxes
as funds
become available.
Demands for payment have been made by several cognovit note holders, for
loans and
costs totaling approximately $500,000. A cognovit note allows the holder to
obtain immediate
judgement against the Company if the note is presented in court. To date, the
cognovit note
holders have not exercised this right.
There can be no assurance that creditors will not hereafter seek other
legal remedies.
5. INVENTORIES
Inventories are valued at the lower of costs (first-in, first-out method)
or market.
Management conducts a general review of the adequacy of excess and obsolete
inventory reserves
on a quarterly basis. Reported inventories are mainly raw materials.
6. NOTES PAYABLE AND DEBENTURES:
Notes payable and debentures as of March 31, 1996 and December 31, 1995
consist of the
following:
1996 1995
--------------- ---------------
Convertible notes to individuals and stockholders
at prime rate plus 2% to 4%, principal and
interest convertible to common shares at $0.55
to $3.50 per share; in default $
1,520,000 $ 1,156,000
Convertible debenture, 8%, due in November 1998 1,000,000
1,000,000
Demand notes payable to related parties, at rates ranging
from 10% to prime plus 4%, in default
48,000 53,000
Notes payable to a corporation, $250,000 at 10% and $250,000
at 8%, quarterly principal and interest payments ranging from
$8,423 to $10,495 due through November 1996, and the unpaid
balance due December 1996; in default
500,000 500,000
Demand notes payable to a major stockholder at 10% per
annum to 40% of principal on demand
2,219,000 2,021,000
Cognovit promissory notes payable, at prime rate; in default 569,000
569,000
Note payable on machinery purchase, monthly payments 115,000
104,000
Demand notes payable to suppliers, 18%; in default 38,000
38,000
Demand secured cognovit convertible promissory note, 10% 300,000
300,000
------------ ------------
6,309,000 5,741,000
Less current portion
5,309,000 4,741,000
------------- ------------
$ 1,000,000 $ 1,000,000
======== =========
The prime interest rate was 8.5% at March 31, 1996. Substantially all
assets of the
Company are pledged as collateral for certain of the notes.
7. COMMON STOCK AND COMMON STOCK COMMITMENTS
The Company entered into the following significant common stock
transactions and made
the following common stock commitments for the three months ended March 31,
1996 and
subsequently:
* The Company issued 100,000 shares in January 1996 to a founder, director,
and officer of
the Company as additional compensation for his service since the Company was
founded. The
value of this stock, $75,000, was expensed in January 1996 when it was issued.
In a related
action, the Board of Directors authorized cancellation of all the notes and
advances receivable
from this individual. These receivables approximated $91,000, most of which
had been fully
reserved at December 31, 1994. All remaining amounts were expensed in December
1995.
* Options and warrant holders exercised existing options and warrants at
$0.55 per share for
a total of 46,917 common shares. Net cash proceeds from these exercises
totaled $26,000. There
was no change in total committed shares as a result of these exercises.
* The Company entered into two letter agreements between the Company,
Standard Energy
Company, and Gerald S. Jacobs, an individual, which agreements are dated
September 21, 1995
as amended February 29, 1996 (the "September Agreement"), and dated February
29, 1996 (the
"February Agreement"). The Company entered into a further agreement between
the same
parties, dated March 29, 1996 (the "March Agreement") which supersedes the
September and
February Agreements. The March Agreement was ratified by the Company's Board
of Directors
on April 4, 1996. The September and February Agreements were included as
exhibits to a Form
8-K Current Report dated September 21, 1995 and filed in March 1996. The March
Agreement
was included as an exhibit to a Form 8-K Current Report dated April 4, 1996 and
filed in April
1996. Standard Energy Company and Gerald S. Jacobs are both major creditors
and shareholders
of the Company. Mr. Jacobs is the sole owner of Standard Energy Company.
The Agreements, as amended in March 1996, compensate Mr. Jacobs as an
individual for
his help personally or through companies he owns or is affiliated with in
providing debt financing
to the Company over the last several years, patience in not demanding repayment
of those loans
and cooperation with other matters, and for relinquishing up to 1,000,000
currently owned
options or warrants for cancellation so that the Company could use those
authorized shares in its
current financings. The Company will issue to Mr. Jacobs, or his nominee,
warrants to purchase
3,600,000 common shares at a price of $0.75 per share, and which will expire
six years after
issuance. The Company will issue to Sonata Investment Company, Ltd. (the
holder of the
$300,000 convertible notes - see Note 6) warrants to purchase 2,400,000 common
shares at a
price of $0.50 per share, and which will expire six years after issuance. The
warrants to Mr.
Jacobs and Sonata are contingent upon the Company having available authorized
shares, which
authorized shares shall be obtained from the first-expiring options or warrants
or through
approval by the Company's shareholders of additional authorized shares at any
time in sufficient
amount to cover this commitment, or both. The Company has agreed to use its
best efforts to
obtain the requisite shares.
Mr. Jacobs has agreed to surrender up to a total of 1,000,000 options or
warrants he
currently owns, if the Company needs additional authorized shares to issue in
its current
financings. This is subject to the requirement that the Company must reissue
those options or
warrants when, as and if authorized shares are first available as set forth
above. The new
warrants would be exercisable at a price of $0.75 per share and would expire
six years after
issuance under these provisions. In March 1996, the Company used 853,125
options of the
1,000,000 offered to provide part of the authorized shares on new issuances
under the provisions
of Regulation S (see below).
This agreement also specifies that all options and warrants currently
owned by Mr. Jacobs,
and by Donna L. Sanger, a vice president of Standard Energy Company, will be
reissued with a
new expiration date of October 1, 2001 and with a new price of $1.00 per share.
At December
31, 1995, Mr. Jacobs owned 2,190,000 warrants and 1,956,000 options at prices
ranging from
$1.51 to $2.62 per share and which expire at various dates through October 29,
2000. At
December 31, 1995, Ms. Sanger owned 65,000 warrants and 63,500 options at
prices ranging
from $1.51 to $2.50 per share and which expire at various dates through July
12, 2000. Mr.
Jacobs reported the effects of the September Agreement in his Form 4 filed for
the month of
September 1995. The options and warrants were repriced and reissued as of
February 29, 1996.
The Company recorded the $392,000 estimated value of these transactions as a
finance charge in
the first quarter.
Management estimates the value of the 3,600,000 warrants to be issued to
Mr. Jacobs as
approximately $2,272,000 if issued now and assuming current market prices;
because of the
uncertainties relating to the requirement for available authorized shares, the
actual value to be
recorded is not known, and will be recorded only when these contingencies are
resolved and the
warrants are actually issued. Management estimates the value of the 2,400,000
warrants to be
issued to Sonata Investment Company, Ltd. as approximately $1,545,000 if issued
now and
assuming current market prices; because of the uncertainties relating to the
requirement for
available authorized shares, the actual value to be recorded is not known, and
will be recorded
only when these contingencies are resolved and the warrants are actually issued.
* In March and April 1996, the Company entered into several agreements with
foreign
investors to purchase shares at $0.40 per share under the provisions of
Regulation S promulgated
by the Securities and Exchange Commission. A total of 2,357,000 shares were
issued under these
agreements. The market price of the Company's common stock on the dates of
issuance was
approximately $0.75 to $1.12. Cash proceeds were $943,000, less a total of
$130,000 paid as
finders fees and expenses. These proceeds were used to fund payrolls, audit
and legal costs, and
other operating expenses. In addition to the cash costs of closing, the
Company committed to
issue warrants to purchase common shares equal to 5% of the shares issued, at a
price of $0.48,
and which will expire five years after issuance. A total of 117,850 warrants
have been committed.
Mr. Jacobs relinquished 853,125 of his options, (see above), Mr. Walter Krumm,
another major
creditor and shareholder relinquished 800,000 of his options with an exercise
price of $1.69 to
$1.70 per share and expiring in 1988, and Mr. James W. France, Jr., the
Company's Chairman
relinquished 800,000 of his options with an exercise price of $1.74 per share
and expiring in July
2000, so that the Company would have enough authorized shares available to
issue the new
shares and warrants. As part of the agreements with these individuals, the
Company agreed to
reissue the surrendered instruments as warrants when, as and if Scriptel is
first able to do so, but
in no event later than when Scriptel shareholders approve an increase in the
amount of authorized
shares, at a price of $0.75 per share, and with an expiration date of six years
after the date of any
reissue under these provisions. Scriptel also committed to use its best
efforts to obtain
shareholder approval of an increase in authorized shares. Kevin Woodbridge, a
director, also
relinquished 500,000 options (see below). If all of these are subsequently
reissued, management
estimates the incremental value of the reissued options or warrants as
approximately $200,000,
assuming current market prices; because of the uncertainties relating to the
availability of
authorized shares, the actual value to be recorded is not known, and will be
recorded only when
this contingency is resolved.
* In April 1996, the Company was successful in obtaining a one-year
extension on four
convertible notes payable totaling $71,000. The Company agreed to modify the
conversion price
from $1.69 per share to $0.55 per share. This transaction increased the
authorized shares
committed for conversion by 87,358 shares. The estimated value of these
additional shares of
$78,000 was expensed as a finance charge in the first quarter.
* In April 1996, the Board of Directors ratified the Company's prior
agreement to issue
15,000 shares to a consultant for services rendered on a financing concluded in
November 1995.
These shares had been included in committed shares as of December 31, 1995.
* The Company issued 100,000 options in January 1996 to Bernard Eckstein, a
director, as
compensation for his services in helping with year end activities. The options
are exercisable at a
price of $0.75 per share (the market price at the date of grant), and expire in
January 2001. The
estimated value of $62,000 was charged to administrative expense in the first
quarter.
* The Board of Directors approved in April 1996 a repricing and reissuance
of all the
options owned by Kevin Woodbridge, a director. This is additional compensation
for his
continuing to operate under a consulting contract with the Company without
receiving his retainer
fee for eight months, relinquishing part of his retainer and part of his stock
options to obtain a
release of a 1995 judgment against the Company on a cognovit note, and
relinquishing 500,000
currently owned options for cancellation so that the Company could use those
authorized shares
in its current financings. At March 31, 1996, Mr. Woodbridge owned 870,797
options with
exercise prices ranging from $1.43 to $2.00 per share and with expiration dates
of 1996 to 2000.
All of his options will be reissued with a new expiration date of April 1, 2000
and with a new
exercise price of $0.50 per share. Mr. Woodbridge also has rights to immediate
registration of his
options through an S-8 filing. The Company has agreed to reissue the
relinquished options at
such time as the shareholders approve the authorization of additional shares.
Management estimates the value of the reissuance of currently existing
options with new
pricing and expiration dates as approximately $161,000. This will be recorded
in the second
quarter of 1996, which is when the Directors of the Company (excluding Mr.
France and Mr.
Woodbridge, who abstained) approved the transaction.
* In April 1996, the Board also extended relinquishment and reissue
privileges (reissue at an
exercise price of $0.75 per share and expiring six years after reissue) to
employees and directors,
and to CommTech International Management Corp., a major shareholder and option
holder.
Exercise prices on options owned by these holders generally range from $2.00 to
$3.00 per share.
* In May 1996 the Company engaged Everest Securities, Inc. of Minneapolis,
Minnesota in
an exclusive investment banking relationship. Everest will advise and consult
with the Company,
and will use its best efforts to obtain commitments for financings using debt,
convertible debt or
stock. As part of the agreement, the Company sold to Everest for a nominal
amount a warrant to
purchase 350,000 shares of common stock at a price of $0.60 per share. The
Company also
granted Everest an additional warrant to purchase 350,000 shares of common
stock at $0.60 per
share for services under a prior consulting agreement. Both warrants expire in
December 1999.
The estimated value of these warrants, $132,000, will be expensed as a finance
charge in the
second quarter.
The agreement also contains the following provisions. The minimum term is
one year,
cancelable by either party with ninety days written notice. Upon completion of
at least
$1,000,000 in funding in any form, the Company will pay $20,000 monthly to
Everest for the
term of the agreement. Everest will have the right to appoint two (2)
directors to the Board of
Directors for a minimum period of three years. Everest will get cash placement
fees on any
financing the Company receives; such fees range from 2% on any financing which
Everest does
not manage, to 13% on equity funds raised by Everest. In addition, Everest
will receive warrants
for 10% of any shares tendered on the financings. Generally, such fees are
payable on any
financings from a source introduced to the Company by Everest, during the term
of the agreement
and for 60 months thereafter.
* In June 1996, Mr. Krumm loaned $30,000 to the Company under a demand
cognovit
promissory note at 18% per annum interest. In consideration for the loan, and
for Mr. Krumm's
forbearance in not demanding repayment of other notes, the Company reduced the
price of
1,020,000 warrants held by Mr. Krumm from $1.69 per share to $0.40 per share,
and extended
the warrants from 1997 to March 2001. The estimated value of the repricing and
extension,
$340,000, will be expensed as a finance charge in the second quarter.
* In June 1996, Sonata Investment Company loaned $45,000 to the Company
under a
demand cognovit note. On demand, $10,000 of interest will also be due. In
consideration for the
loan, and for Sonata's forbearance in not demanding repayment of another note,
the Company
agreed to issue to Sonata warrants to purchase 500,000 common shares at $0.50
per share and
which would expire six years after issuance. Such warrants are contingent upon
having available
authorized shares from the Company's first-expiring unexercised options or
warrants, or from
approval by the Company's shareholders of an increase in authorized shares. If
issued now, and
assuming current market prices, management estimates the value of the warrants
at $216,000:
because of the uncertainties relating to the requirement for available
authorized shares, the actual
value to be recorded is not known, and will be recorded only when these
contingencies are
resolved and the warrants are actually issued.
* In May 1996, James W. France, Jr., the Company's former Chairman,
President and Chief
Executive Officer retired and resigned his positions as an officer and director
of the Company.
Mr. France received a severance package of: continuation of his salary through
September 1996,
issuance of warrants to purchase 1,500,000 shares at $0.68 per share and which
expire in May
1999 (value of $303,000 to be expensed in the second quarter), severance pay of
$150,000, and
cancellation of all of the Company's notes receivable (approximately $150,000)
and advances
receivable (approximately $100,000) from Mr. France. The Company has engaged
Mr. France to
act as a consultant in arranging financings for the Company. If these efforts
are successful, Mr.
France will receive in cash 9% of the amount raised (which will first be used
to pay the severance
costs outlined above) plus an additional $150,000 if more than $5 million is
raised by year end.
Bernard Eckstein, a director of the Company since 1992, has been appointed as
the Company's
Chairman and Chief Executive Officer. J. Vance Holloway, President and Chief
Operating Officer
of Scriptel Corporation, has been appointed as President and Chief Operating
Officer of Scriptel
Holding, Inc.
* The Company did not have the funds to pay its employees in April, May and
June 1996.
To recognize the sacrifices made by the employees during this period, and to
partially compensate
them for their continued dedication and service, in June 1996 the Company
reduced the exercise
price to $0.40 per share on 1,805,700 options and 255,337 warrants owned by the
employees.
Expiration dates were not changed. Formerly, such options and warrants carried
exercise prices
ranging from $0.75 per share to $4.00 per share. In addition, the Company
issued a total of
60,000 options at $0.40 per share to employees who did not already own options.
The estimated
value of the repricing ($228,000) and issuance ($13,000) will be expensed in
the second quarter.
* The Company also agreed in February 1996 to issue a one time stock grant
to employees
of Scriptel equal in value to twice each employee's monthly salary, and valued
at $0.91 per share.
This grant approximates 265,000 shares. A charge of $240,000 has been recorded
in the first
quarter.
* In May 1996, the Company issued 60,000 shares and a cognovit note for
$115,000 in
return for title to certain assets leased by Coloray and for settlement of
$70,000 of recorded but
unpaid lease payments. The Company recorded the $38,000 value of the shares
and the $45,000
difference in lease costs in the first quarter as an adjustment of the
estimated costs of closure of
Coloray (see below).
Considering the outstanding common stock and commitments at December 31,
1995, the
aforementioned changes arising subsequent to that date and the current market
price of the
common stock, the Company has fully used its 50,000,000 share authorization.
The Company
has also committed to issue an additional 11,060,000 shares if and when
authorized shares first
become available. Management will seek shareholder approval to increase the
authorized shares
at the next annual shareholders meeting.
8. CALCULATION OF LOSS PER SHARE OF COMMON STOCK
Net loss per common share is based on the weighted average number of
common shares
outstanding during the period. The effect on net loss per common share of the
assumed exercise
of stock options and warrants and conversions of convertible notes has not been
considered as the
effect would be antidilutive.
9. RELATED PARTY TRANSACTIONS, SUBSEQUENT EVENTS
In addition to several items described above, the Company had the
following events occur
subsequent to December 31, 1995.
* The Company borrowed a total of $672,000 in five separate transactions
with two major
creditors and shareholders. The loans are payable on demand, and bear interest
at stated amounts
up to 41% of principal. The Company repaid $141,000 to one of the creditors
through the end of
March 1996. One of the new loans requires payment from first proceeds
available from a large
financing transaction.
* As of May 21, 1996, the Company agreed to amend all amounts owed to Mr.
Jacobs or
his affiliates to bear interest at 18% per annum from that date.
* The Company has received unofficial information indicating that the
Company's charter
may be revoked by the State of Delaware for non-payment of corporate franchise
taxes. The
Company intends to pay such taxes and file a Certificate for Renewal and
Revival to reinstate its
charter.
* In June 1996, several option and warrant holders offered to exercise their
holdings at a
reduced price of $0.546 per share. Through June 17, 1996, the Company accepted
offers totaling
approximately 250,000 shares. About half of the total exercise price is
expected to be realized in
cash, and the Company expects to convert debt for the remaining part of the
total exercise price.
This transaction is in process.
10. CLOSURE OF COLORAY
In March 1996, the Company determined that it could no longer support the
operations of
Coloray and announced plans to close that operation. Expected additional costs
to close Coloray
are approximately $400,000 including rental payments through the end of
Coloray's lease in
November 1996, environmental shutdown, severance, and equipment
decommissioning. This
was expensed in the first quarter. In the first quarter the Company also
expensed the net book
value of the leasehold improvements made by Coloray which will be surrendered
to the landlord
at the end of the lease, and reduced the remaining property and equipment down
to the $168,000
received as proceeds from sale of the property and equipment at auction in May
1996; the
Company recognized a loss of $314,000 on these transactions. In addition,
Coloray has
contractual research and development obligations continuing through 1997, of
which
approximately $2,200,000 have not been recorded at March 31, 1996. The
Company, Coloray
and SRI International, Inc. (SRI) have entered into a letter of intent to
arrange a consortium to
continue Coloray and SRI's field emission display technology research. No
definitive consortium
documents have been signed. The proposal requires Coloray to contribute its
patents and
technology to the consortium in return for one-time royalty payments by
consortium members and
cancellation of the existing research agreement with SRI. The Company has the
right but not the
obligation to enter the consortium as a member to obtain the benefits of future
research. The
amounts, if any, to be received from the consortium are not currently estimable
but will probably
not be sufficient to meet all of Coloray's obligations. Coloray's liabilities
and obligations include
the following approximate amounts at March 31, 1996:
Accounts payable
$600,000
Accrued expenses
600,000
Accounts payable
3,300,000
CRADAs and existing SRI research agreement:
Accrued through March 31, 1996
2,000,000
To be accrued through 1997
2,200,000
Additional estimated total costs of closure
400,000
-------------
$9,100,000
========
Coloray has also signed, with Scriptel, approximately $2,000,000 of
cognovit notes
payable to Mr. Jacobs and Standard Energy Company. These liabilities are
recorded at Scriptel.
Coloray's assets approximated $330,000 at March 31, 1996, including the
$168,000
auction proceeds identified as assets held for sale on the accompanying balance
sheet. The
auction proceeds were delivered to Mr. Jacobs, the holder of secured debt
signed by Coloray, and
used to reduce that debt. Coloray's assets also include patents with an
amortized value of
$148,000. The Company expects to contribute these patents to the proposed
consortium in
return for one-time royalty payments at least equal to the recorded value.
The Company will attempt to obtain the release of Coloray from its CRADA
commitments
as part of the closure and will attempt to obtain the release of Coloray from
its SRI commitments
through the proposed consortium. If the Company is unable to negotiate
releases of the SRI
and/or CRADA obligations, these obligations would be recorded by Coloray at
full value.
The Company is not currently able to estimate or quantify the effects of
the proposed
consortium; the reduction, if any, in Coloray's CRADA commitments; or the
ultimate resolution
of the closure. However, if sufficient proceeds are not received to meet
Coloray's liabilities and
obligations, it is likely that Coloray will have to liquidate.
11. NEW ACCOUNTING PRONOUNCEMENT
In late 1995, the Financial Accounting Standards Board adopted Statement
of Financial
Accounting Standards No. 123, "Accounting for Stock Compensation" (SFAS-123).
The
Company adopted this statement in 1996. SFAS-123 requires a substantial change
in the
calculation of the value of options granted to directors, officers and
employees. Had the
Company used the provisions of SFAS-123 to calculate the value of options
granted in 1995,
management estimates that the reported net loss of the Company for the year
ended December 31,
1995 would have increased by approximately $4,746,000, or $0.27 per share.
12. DISCONTINUED OPERATIONS - SALE OF AMPSCO:
Ampsco has had continuing losses from operations since acquisition, and at
December 31,
1995 had an accumulated deficit in shareholders' equity of approximately $2.2
million. To cut the
ongoing losses and to focus the Company on the computer peripheral segment, in
April 1996 the
Company sold all of the common stock of Ampsco. No appraisal of Ampsco was
made in
connection with this transaction.
The buyer was 1896, Inc., a corporation headed by Thomas J. Leukart, a
director of the
Company at the time of sale. Dennis J. Leukart, president of Ampsco at the
time of the sale is a
brother of Thomas Leukart and the father-in-law of James W. France, Jr., the
Company's former
Chairman, President, and CEO. As part of the agreement of sale, both Thomas
Leukart and
Dennis Leukart resigned from their positions with the Company and cancelled
their employment
agreements. Thomas Leukart also resigned as Director of the Company.
The buyer issued a Promissory Note (the "Note") to the Company in partial
payment of
the purchase price. The Note is for $650,000, and bears interest at 5%.
Interest is payable
monthly, with the entire principal balance due on April 1, 1999. The Company
has endorsed this
Note to Mr. Jacobs, who had a security interest in the Ampsco shares which were
sold. The
Company has not recorded any amount of the Note as proceeds on the sale of
Ampsco because
management estimates that collection of the Note is improbable. Ampsco made
small,
contractual, payments on the note for April and May, which were transferred to
Mr. Jacobs and
used to offset notes payable to him. In June 1996, the Company sold the Ampsco
note to Mr.
Jacobs in return for a $100,000 reduction in notes and interest payable to him.
The Company will
record these transactions as income in the second quarter. If the Note is
repaid to Mr. Jacobs,
Mr. Jacobs has agreed to release Ampsco from any further obligation it may have
as endorser of
several notes the Company has with Mr. Jacobs or his affiliates.
The remaining payments of the purchase price are in the form of monthly
royalties at 2%
of Ampsco's collected sales for a ten-year period. These payments are subject
to a maximum of
$100,000 per year. (Ampsco's sales in 1995 were $1,827,000, which would have
resulted in a
royalty payment of approximately $37,000 had the agreement then been in
effect.) The buyer
received from Mr. Jacobs an option until March 31, 1999 to purchase for
$375,000 the land and
buildings Ampsco occupies, which is also subject to full payment on the Note.
If the Note were
paid and the option exercised, no further royalty payments would be required.
The Company has
not recorded any amount of the royalties as proceeds on the sale of Ampsco
because management
estimates that long-term cash realization is improbable and because of the
significant contingency
with respect to the termination of the royalty payments. The Company will
record cash payments,
if any, as income when received.
The buyer has pledged Ampsco stock to Mr. Jacobs.
The Company has treated the sale of Ampsco as a discontinued operation.
Consequently,
Ampsco's results are excluded from the accompanying consolidated balance sheet
at December
31, 1995 and March 31, 1996, and from the loss from continuing operations shown
on the
accompanying statements of operations for the three months ended March 31, 1996
and 1995.
The Company is contractually obligated on Ampsco's notes payable to
Stimsonite
Corporation (see Note 4 - Litigation). Stimsonite has obtained a judgment
against the Company
on this debt. Management estimates that it is improbable that Ampsco could pay
the creditor or
repay Scriptel if Scriptel is forced to pay the creditor. The Company has
recorded a loss on
disposal of Ampsco of $450,000 to recognize the full contractual obligation to
Stimsonite. The
Company is also negotiating with the creditor to settle the debt for a reduced
amount. As part of
the agreement to sell the common stock of Ampsco, the Company contributed its
$2.2 million
intercompany receivable from Ampsco to the capital of Ampsco. This resulted in
almost complete
liquidation of Ampsco's shareholders deficit, and the buyer assumed the
remaining net liabilities of
Ampsco. The Company also recorded in 1995 the loss from operations of Ampsco
until the
disposal date in April.
Ampsco's sales were $494,000 and $390,000 for the three months ended March
31, 1996
and 1995, respectively.
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SCRIPTEL HOLDING, INC. AND SUBSIDIARIES
OVERVIEW
The Company has been in the research, development, and ultimately the
licensing business
of pen-based computing products for over ten years, through its wholly owned
subsidiary,
Scriptel. However, the marketplace has only recently begun focusing on and
identifying broad
based applications for pen-based computers, an area in which the Company views
its proprietary
technology as critical and in which management considers Scriptel primarily an
early stage
company. As the market continues to develop and pen-based applications become
more common,
Scriptel's focus is expected to shift from one principally based on the
development of pen-based
computer components to commercialization of these products. Based on current
marketing
forecasts of original equipment manufacturers ("OEM") and licensee shipments
and, in part, upon
the growth forecasted by industry experts for the pen-based computer markets,
management
believes Scriptel will experience revenue growth associated with its pen-based
operating activities
commencing in late 1996. Due to the anticipated cost associated with the
completion of the
research and development of the Company's products, management cannot predict
when the
Company will achieve profitable operations on a consolidated basis.
Management believes that Scriptel's electrostatic system is the most
viable technology
currently available for electronic ink applications. All the other known
technologies have either
functionality or cost penalties that render them non-competitive versus
Scriptel's patented
electrostatic coupling technology. There are some approaches that could result
in a next
generation system, but they are in the early stages of research and
development. Scriptel is aware
of these and is currently spending research and development money to develop a
next generation
replacement for its current technology. It is estimated that the current
electrostatic system will be
highly competitive for the next four to five years.
As the pen-based computer market experiences its anticipated growth, it is
anticipated that
revenues from royalties and direct sales to OEM's will be the principal source
of total revenue of
the Company. Additionally, Scriptel anticipates its development of proprietary
products for the
mobile communications markets will generate some future revenues.
Scriptel's ability to meet its revenue projections and be a major player
in the pen-based
computer market will depend on the success of the cordless digital pen
development effort. This
system, currently being jointly developed by Scriptel, Symbios Logic, and
Samsung Display
Devices has incurred technical delays. At this time, the problems that caused
the delays appear to
be solved. The integrated circuit that is the heart of the system has been
fabricated and is
currently being tested. The Company must continue to expend significant
resources to bring this
technology to market to produce revenues. Although further delays are not
expected and
anticipated resources are expected to be available to bring the technology to
market, no assurance
can be given.
In 1994 the Company acquired a majority of the outstanding shares of
Coloray, a
company engaged principally in researching and developing flat-panel field
emission displays
(FEDs) for use in conjunction with computers and other sophisticated electronic
applications.
Although management believes expanded growth of Coloray is desirable, it
believes that the
Company cannot continue to fund research and development for Coloray, and
overall returns to
shareholders will be higher by concentrating its limited financial resources on
the pen computer
market. This is one of the reasons that in March 1996, the Company decided to
close down its
Coloray operation. This is more fully described in the notes in the
accompanying consolidated
financial statements.
During 1995 and 1996, management reevaluated the cost structure of Ampsco.
Certain
aspects of Ampsco's business activities require significant capital, labor and
management
commitment to compete effectively. In 1994, the Company decided that it would
no longer
supply the capital needed for Ampsco's highway contracting division. This
division was sold in
April 1994. Ampsco requires some major repairs and maintenance to its roof and
equipment, and
has a need for additional equipment in order to remain competitive and become
profitable. In late
1995, the Company determined that it could not fund the required repairs and
capital
improvements. Because of this, and to cut the ongoing losses of Ampsco, the
Company sold the
remaining machining division of Ampsco on April 4, 1996. Ampsco has been
reported as a
discontinued operation in the accompanying financial statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
1995
1996 1995
Revenues
$ 60,000 $ 121,000
The Company operates as a single business segment, providing computer
peripheral
equipment to OEMs. The decline in revenues in this segment was primarily a
result of delays by a
supplier in shipping glass panels for Scriptel's pen-based computer. Also,
management expects
computer peripheral revenues to remain at relatively low levels until the
fourth quarter of 1996 or
first quarter of 1997 when shipments to large OEM customers are expected to
increase.
Development fees in 1996 from partial funding of Coloray development efforts by
outside
companies were $23,000 lower than in 1995.
1996 1995
Cost of Sales $
46,000 $ 102,000
The year-to-year fluctuations in cost of sales generally follow the change
in revenues.
Since Scriptel's activities have been principally oriented to research and
development,
gross margins have remained relatively low due to the unabsorbed burden caused
by the minimal
level of manufacturing volume and the direct costs of excess capacity.
1996 1995
General and administrative expenses $ 1,494,000
$ 1,069,000
Sales and marketing expenses
62,000 52,000
Research and development expenses 1,029,000
1,601,000
Certain members of management, employees and certain outside consultants
received
stock or compensatory stock options to attract them to the Company or to pay
for their services.
The fair value of the stock or options at the date of issuance, $302,000 in
1996 and $44,000 in
1995, was expensed when all restrictions had lapsed. The 1996 administrative
expenses also
include $400,000 of anticipated costs on the closure of Coloray. The Company
lowered its
general and administrative expenses in late 1995 by reducing staff at Coloray
and Scriptel, and
reducing use of consultants.
Sales and marketing expenses have not changed significantly.
Research and development expenses have increased significantly. The
Company expanded
its development efforts in pen-based computer technologies and, with the
Coloray acquisition,
entered FED research. Management anticipates that such costs will continue for
Scriptel.
Research and development expenses also include unfunded costs of research
agreements with
Xetron (by Scriptel) and SRI (by Coloray), and Cooperative Research and
Development
Agreements (by Coloray). Cash payments on research and development will
increase, as the
Company funds these research agreement obligations. In 1995, the Company
expensed $425,000
of fair value of stock options issued to research and development consultants.
1996 1995
Other expenses $
1,373,000 $ 94,000
Other expenses include interest expense of $389,000 and $172,000 in 1996
and 1995,
respectively. Other expense also includes finance costs of $670,000 in 1996.
Interest expense
increased due to higher levels of debt financing and, in 1995, included $3,000,
related to the value
of options transferred to noteholders as an inducement for them to loan funds
to the Company or
as additional interest compensation. Interest expense in 1996 included stated
interest of $242,000
on new demand notes totaling $672,000 of principal. Finance expenses in 1996
related principally
to $644,000 in value of stock warrants surrendered as compensation on new
financing.
Income from minority interest of $65,000 in 1995 represents the portion of
the net loss of
Coloray that is allocable to the minority shareholders of Coloray. Early in
1995, minority interest
was reduced to zero; therefore, during the remainder of 1995 and going forward,
the Company
will incur 100% of the losses of Coloray in its consolidated income statement.
In 1996 the Company sold Coloray's property and equipment at auction, and
eliminated its
leasehold improvements, resulting in a loss from disposition of assets of
$314,000.
1996 1995
Discontinued operations; loss from operation
of Ampsco
$ --- $ (27,000)
Ampsco has had continuing losses from operations since acquisition, and at
December 31,
1995 had an accumulated deficit in shareholders equity of approximately $2.2
million. The
Company determined that it could not fund the required repairs and capital
improvements needed
for Ampsco to remain competitive and become profitable. Because of this, and
to cut the ongoing
losses and to focus the Company on the computer peripheral segment, in April
1996 the Company
sold all of the common stock of Ampsco to a related party. See notes to the
accompanying
consolidated financial statements for a more complete description of the
transaction.
The Company has treated the sale as a discontinued operation.
Consequently, Ampsco's
results are excluded from the accompanying balance sheets at December 31, 1995
and March 31,
1996 and from the loss from continuing operations shown on the accompanying
statements of
operations for the three months ended March 31, 1996 and 1995.
Ampsco's sales were $494,000 in 1996 and $390,000 in 1995.
The Company recorded Ampsco's operating loss for the first quarter of 1996
as of
December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition, the risk of liquidation if its current
financing efforts are
unsuccessful, and its severe liquidity problems are outlined in the
accompanying notes to the
consolidated financial statements. The Company has funded its operations
primarily through the
sale of common stock, the issuance of debt instruments with common stock
conversion features,
and private, institutional and bank financing. As of March 31, 1996, the
Company's stockholders
had paid or surrendered in value $41,728,000 (which is net of $140,000 of notes
receivable from
stockholders) to acquire 22,842,634 shares of common stock. In addition,
$6,309,000 of notes
payable and debentures were outstanding as of March 31, 1996, and accrued
interest on notes
was $1,146,000 at that date. From inception of the Company through March 31,
1996, the
Company has incurred an accumulated deficit of $54,502,000.
The Company had current liabilities in excess of current assets of
approximately
$12,484,000 at March 31, 1996. This has occurred due to cumulative operating
losses being
financed by the issuance of notes payable and lines of credit.
Several debt and equity transactions have occurred to date in 1996. (See
notes to the
consolidated financial statements). Management believes that these recently
concluded private
placements of debt and equity securities are not sufficient to finance the
Company's planned
operating, development and capital expenditures for 1996 and to repay defaulted
indebtedness.
Management has cut back on operating and development activities, and
anticipates further
reductions. Management also intends to seek additional financing through other
private
placements of debt, convertible debt and / or common stock to fund such
activities. Efforts are
underway to close Coloray and form a consortium to continue Coloray's research.
The Company's total committed shares exceeded by approximately 11,060,000
the total
authorized shares of the Company at March 31, 1996 (see Note 7). Management
intends to seek
approval from the stockholders, at the next stockholders meeting, for a
substantial increase in the
authorized shares.
There can be no assurance that the stockholders will approve an increase
in the authorized
shares, nor that such shares could be sold if authorized, nor that the proceeds
from such sales or
other financing activities will be sufficient to fund operating activities and
repayment of defaulted
indebtedness. If funds received are insufficient, then the Company's ability
to continue as a going
concern could be adversely affected, and the Company may have to liquidate.
Management believes that Scriptel will experience revenue growth
associated with its pen-
based operating activities commencing in late 1996 or early 1997, and
anticipates that this revenue
growth will provide for Scriptel's working capital needs on an ongoing basis
after 1996.
The Company's independent accountants have included a paragraph in their
report, stating
that the Company's financial statements as of December 31, 1995 and for the
periods then ended
have been prepared assuming that the Company will continue as a going concern
and that the
Company's recurring losses from operations, net working capital deficiency and
need for
immediate financing to fund operations raise substantial doubt about its
ability to continue as a
going concern.
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 123,
"Accounting for
Stock Compensation." The Company adopted this statement in 1996.
INFLATION AND ECONOMIC CONDITIONS
Management believes that the effect of inflation on the Company's
operations is not
material. The Company does not have long-term contracts requiring performance
at fixed rates.
Accordingly, management believes it will be able to pass through to its
customers most cost
increases resulting from inflation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 "Litigation" to the accompanying consolidated financial
statements.
ITEM 2. CHANGES IN SECURITIES
See Note 7 "Common Stock and Common Stock Commitments" to the accompanying
consolidated financial statements for a discussion on common stock commitments
which exceed
the Company's authorized shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) The Company and its subsidiaries are in default on the payment of
principal and
interest on several notes. The table below summarizes principal and interest
in default at March
31, 1996:
Principal Interest
Cognovit promissory notes payable, due in
December 1994 $
569,000 $ 71,000
Convertible promissory notes payable to
investors, due at various dates
929,000 305,000
Convertible promissory notes payable to major
stockholders, due at various dates
591,000 275,000
Notes payable to a corporation, in default
as of December 1, 1994
500,000 95,000
Notes payable to trade creditors, due at
various dates in 1994
38,000 6,000
Notes payable to related parties, due at various
dates in 1994
48,000 5,000
-------------- -----------------
Total in default
$ 2,675,000 $ 757,000
The Company is continuing its efforts to restructure its defaulted
indebtedness. The
Company has negotiated short extensions for payment of various notes that were
in default and
the Company continues to negotiate new terms with certain debt holders, as well
as seeking the
exercise of conversion privileges of convertible promissory notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
See Note 10 "Closure of Coloray" to the accompanying consolidated
financial statements
for a discussion on the sale or disposition of substantially all the property
and equipment of
Coloray.
See Note 7 "Common Stock and Common Stock Commitments" to the accompanying
consolidated financial statements for a discussion on the ability of Everest
Securities, Inc. to
appoint two directors to the Company's Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10(w) - May 30, 1996 investment banking relationship agreement with
Everest Securities,
Inc.
27- Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed an 8-K dated January 11, 1996 relating to the engagement
of Norman,
Jones, Enlow & Co. as its independent accountants.
In March 1996, the Company filed an 8-K dated September 21, 1995 relating
to the
signing of letter agreements between the Company, Standard Energy Company, and
Gerald S.
Jacobs, an individual. These agreements reprice and extend options and
warrants owned by Mr.
Jacobs and another individual, and provide for the issuance of 6,000,000 new
warrants to Mr.
Jacobs subject to available authorized shares.
Also, although not filed in the first quarter, the Company filed an 8-K
dated April 4, 1996
relating to the sale of Ampsco Corporation, the closure of Coloray Display
Corporation, a
revision to the letter agreements with Mr. Jacobs noted above, repricing and
reissuance of stock
options owned by Kevin Woodbridge (a director of the Company), and
relinquishment and
reissuance of several other options and warrants.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SCRIPTEL HOLDING, INC.
(Registrant)
Date: June 19, 1996 /s/ Bernard H. Eckstein
Bernard H. Eckstein
Chairman and Chief
Executive Officer
Date: June 19, 1996 /s/ Frederick A. Niebauer
Frederick A. Niebauer
Treasurer (principal
financial and accounting officer)
EXHIBIT 10 (w)
EVEREST SECURITIES, INC.
Member NASD & SIPC
2930 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402-4100
BUS (612) 338-1097
FAX (612) 338-1197
May 30, 1996
Mr. Bernard Eckstein, Chairman/CEO
Scriptel Holding, Inc.
4145 Arlingate Plaza
Columbus, OH 43228
Dear Mr. Eckstein:
This letter sets forth our mutual understanding and agreement regarding the
establishment of an
exclusive investment banking relationship between Scriptel Holding, Inc. (the
"Company"), and
Everest Securities, Inc., a Minnesota corporation ("Everest"). Everest agrees
to assist the
Company in connection with a review of future financings on the following terms
and conditions:
1.0 Engagement. The Company hereby hires Everest as the Company's
exclusive
investment banker to assist the Company with various financing
arrangements. In
connection with any such engagement, Everest will use its best efforts to
review proposals
and advise the Company with respect to such proposals. In addition,
Everest shall be
ready to meet with officers or directors of the Company upon reasonable
notice to consult
on any financial matters or any items related to any issue of financing.
1.1 Best Efforts. Everest will use its best efforts to obtain
commitments for various
financings of $1.0 million to $18.0 million, or such other amounts as
shall be mutually
agreed to by the parties. These financings may include the placement of
one or more of
the following items:
a. Senior, secured revolving credit.
b. Senior, secured term loan.
c. Subordinated debentures.
d. Convertible and/or redeemable preferred stock.
e. Common stock.
The debt instruments may or may not have warrants attached to acquire
common stock of
the Company. Lenders may require closing or commitment fees to apply for
loans, all of a
lender's legal expenses, recording and filing fees and other direct,
out-of-pocket costs
incident to closing will be for the account of the Company.
2. Retainer. The Company shall sell Everest a warrant, for $50, for
350,000 shares of the
Company's common stock (at a $0.60/share exercise price) with the signing
of this letter.
Upon the completion of raising at least $1,000,000 in any form (debt,
equity, or
any combination thereof), the Company further agrees to pay Everest an
on-going monthly
consulting retainer of $20,000 per month for the term of this agreement.
In addition to
the payment of the monthly retainer hereunder, the Company shall pay
Everest and its
representatives for any reasonable out-of-pocket expenses incurred which
includes travel
and lodging taken in performance of this Agreement at the request of the
Company.
3. Right of First Refusal. Everest shall have a right of first refusal,
for a period of five (5)
years after execution of this document, for any financings contemplated by
the Company
or any of its affiliates during such period.
4. Board of Directors. Everest will receive the right to appoint up to
two (2) directors to
the Board of Directors, for a minimum period of three (3) years.
5. Exclusivity. As stated in the first paragraph of this agreement,
Everest's engagement as
the Company's investment banker is exclusive. Accordingly, during the
term of this
agreement neither the Company, its officers, directors, shareholders, or
agents shall
engage any other entity to secure financings contemplated hereunder, nor
shall the
Company, its officers, directors, shareholders, or agents initiate or
pursue discussion with
potential financing sources for the purpose of obtaining loans on equity
funds for
financings contemplated under section 1 hereof, except in conjunction with
and after
acknowledgment by Everest, which "cooperative effort" shall not modify or
reduce the
obligation of the Company to pay Everest the placement fees set forth in
section 6 of this
agreement.
6. Placement Fees & Raises of Capital. The fees for any raises of
capital will be as
follows:
a) 2% of any financing which Everest does not manage for the next 3
years.
b) 3% nonaccountable expenses of all raises.
c) 10% underwriters commission on all funds raised for equity or
convertible debt.
d) A warrant for 10% of the shares tendered at cost.
e) 5% fee on any M&A (merger and acquisition) or sale based on value.
f) 5% fee on any non-convertible debt.
These fees shall apply to any source (or source or contact of a
source) introduced
to the Company by Everest during the term of this contract and 60 months
thereafter.
7. Obligation to Pay Fees. If, and only if, Everest shall have produced
a commitment
from a lender or investor which the Company shall have accepted in writing
("accepted
commitment"), then Everest shall be deemed to have earned the applicable
placement
fee(s) (placement fees) as set forth above. The Company shall pay such
fee(s) to Everest
in cash on (i) the date it shall have received the proceeds of such loan
or investment
("funding date") or (ii) if the Company shall, for any reason whatsoever
fail to accept
funding against an accepted commitment, on the expiration date of the
accepted
commitment. If a funding against an accepted commitment shall not have
occurred as a
result of withdrawal by a lender or investor, then the Company shall have
no obligation to
pay the respective placement fee.
8. Specific Financing Arrangements. The Company shall have the right, to
retain Everest
to act as investment banker and broker-dealer and assist the Company in
obtaining any
specific financing proposed by the Company. Any such arrangement shall be
on such
terms and conditions as outlined in paragraph 5.
9. Leads Resulting from Offering. All investor leads resulting from the
offering
contemplated herein shall be referred to Everest.
10. Termination. This Agreement is terminable by either party on ninety
(90) day notice
beginning twelve (12) months from the date hereof, by written notice from
either party.
Address for notice:
Mr. Bernard Eckstein Mr. Richard A. Andolshek
Scriptel Holding, Inc. Everest Securities, Inc.
4145 Arlingate Plaza 2930 Norwest Center
Columbus, OH 43228 90 S. Seventh St.
Minneapolis, MN 55402
11. Indemnification. The Company will indemnify and hold Everest
harmless, including
its partners, agents, employees and controlling persons within the meaning
of Section 15
of the Securities Act of 1933, or Section 20 of the Securities Exchange
Act of 1934, from
and against all claims, liabilities, losses, damages and expenses
incurred, including fees and
disbursements of counsel, related to and/or arising out of this engagement.
12. General. This Agreement may not be modified except in writing. This
Agreement
represents the entire understanding between the Company and Everest and
all prior
discussions and negotiations and all prior engagement letters are merged
into it.
13. Survival. This Agreement shall be governed and construed in
accordance with the
laws of the State of Minnesota. Any dispute or controversy arising out of
this Agreement
shall be determined by arbitration in accordance with the rules of the
National Association
of Securities Dealers, Inc. as then in effect. Any arbitration award
shall be final and
binding upon the Company and Everest and judgement upon the award may be
entered in
any court having jurisdiction. Compensation, reimbursement, indemnity and
contribution
obligations of the Company under this Agreement shall survive any
assignment of this
Agreement and shall be binding upon and entered into the benefit of any
successors,
assigns, heirs and personal representatives of the Company and Everest.
Please confirm that the foregoing correctly and completely states your
understanding by
signing and returning to us the enclosed duplicate of this Engagement Agreement.
EVEREST SECURITIES, INC.
By: /s/ Richard A. Andolshek
Richard A. Andolshek
Chairman
ACCEPTED THIS 1st DAY OF June, 1996
Scriptel Holding, Inc.
By: /s/ Bernard H. Eckstein
Bernard H. Eckstein
Chairman/CEO
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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