SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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. 0-20938
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 July 31, 1996 was 24,003,887.
SCRIPTEL HOLDING, INC.
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1996
3
(unaudited) and December 31, 1995
Consolidated Statements of Operations for the three
4
months ended June 30, 1996 and 1995, unaudited
Consolidated Statements of Operations for the six
5
months ended June 30, 1996 and 1995, unaudited
Consolidated Statements of Cash Flows for the six
6-7
months ended June 30, 1996 and 1995, unaudited
Notes to Consolidated Financial Statements, unaudited
8-22
Item 2. Management's Discussion and Analysis of Financial
23-29
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal proceedings
30
Item 2. Changes in the rights of the company's security holders
30
Item 3. Defaults upon senior securities
30
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
31
Item 6. Exhibits and reports on Form 8-K
31
SIGNATURES
32
Exhibits: 27 - Financial Data Schedule
32-33
Scriptel Holding, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS June 30,1996 December 31,
(Unaudited) 1995
Assets
- - --------------- -----------------
Current assets:
Cash and cash equivalents $
125,000 $ 51,000
Trade accounts receivable, net of allowance for
doubtful accounts of $3,000 in 1996 and 1995 82,000
65,000
Inventories
6,000 2,000
Other current assets
2,000 2,000
--------------- -----------------
Total current assets
215,000 120,000
Property and equipment, net
475,000 947,000
Patents, net
148,000 184,000
Deposits
--- 122,000
Other assets
54,000 88,000
---------------- ----------------
Total assets $
892,000 $ 1,461,000
========= ==========
Liabilities and Stockholder's Deficit
Current liabilities:
Notes payable, short-term and current portion $ 5,033,000 $
4,741,000
Accounts payable
1,864,000 1,681,000
Accrued interest
1,205,000 855,000
Accrued loss on discontinued operations 450,000
470,000
Other accrued liabilities
6,770,000 2,777,000
--------------- --------------
Total current liabilities
15,322,000 10,524,000
Notes payable, long-term
1,350,000 1,000,000
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.10 par value, 50,000,000 shares authorized:
24,003,887 shares and 21,058,217 shares issued and
outstanding at June 30, 1996 and December 31,
1995, respectively
2,400,000 2,106,000
Additional paid in capital
41,256,000 38,529,000
Accumulated deficit
(59,428,000) (50,558,000)
Notes receivable - stockholders
(8,000) (140,000)
---------------- ----------------
Total stockholders' deficit
(15,780,000) (10,063,000)
-------------- ---------------
Total liabilities and stockholders' deficit $ 892,000
$ 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 June 30,
1996 1995
(Unaudited) (Unaudited)
----------------- ---------------
Revenues
$ 117,000 $ 140,000
Costs and expenses:
Cost of sales
101,000 73,000
General and administrative
1,096,000 1,207,000
Sales and marketing
57,000 68,000
Research and development
2,277,000 1,185,000
---------------- ---------------
Total costs and expenses
3,531,000 2,533,000
----------------- ---------------
Loss from operations
(3,414,000) (2,393,000)
Other expense (income):
Interest expense
106,000 517,000
Finance charge
1,512,000 ---
Other expense, net
(1,000) (26,000)
(Income)loss on disposition of assets
(105,000) 350,000
---------------- ---------------
Total other expense
1,512,000 841,000
---------------- ---------------
Loss from continuing operations
(4,926,000) (3,234,000)
Discontinued operations:
Loss from operations of Ampsco
--- (312,000)
----------------- ----------------
Total loss from discontinued operations
--- (312,000)
----------------- -----------------
Net loss
$ (4,926,000) $ (3,546,000)
========== ==========
Loss per share of common stock:
Continuing operations
$ (0.21) $ (0.20)
Discontinued operations
--- (0.02)
--------------- ---------------
Net loss per share
$ (0.21) $ (0.22)
========== ==========
Weighted average number of common shares
used in computing net loss per share
23,534,009 16,200,926
========== ==========
The accompanying notes are an integral part of the financial statements.
Scriptel Holding, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS Six months ended June 30,
1996 1995
(Unaudited) (Unaudited)
----------------- ---------------
Revenues
$ 177,000 $ 261,000
Costs and expenses:
Cost of sales
147,000 175,000
General and administrative
2,590,000 2,276,000
Sales and marketing
119,000 120,000
Research and development
3,306,000 2,786,000
---------------- ---------------
Total costs and expenses
6,162,000 5,357,000
----------------- ---------------
Loss from operations
(5,985,000) (5,096,000)
Other expense (income):
Interest expense
495,000 689,000
Finance charge
2,182,000 ---
Other expense, net
(1,000) (39,000)
Loss on disposition of assets
209,000 350,000
Minority interest
--- (65,000)
---------------- ---------------
Total other expense
2,885,000 935,000
---------------- ---------------
Loss from continuing operations
(8,870,000) (6,031,000)
Discontinued operations:
Loss from operations of Ampsco
--- (339,000)
----------------- ----------------
Total loss from discontinued operations
--- (339,000)
----------------- -----------------
Net loss
$ (8,870,000) $ (6,370,000)
========== ==========
Loss per share of common stock:
Continuing operations
$ (0.40) $ (0.38)
Discontinued operations
--- (0.02)
--------------- ---------------
Net loss per share
$ (0.40) $ (0.40)
========== ==========
Weighted average number of common shares
used in computing net loss per share
22,449,624 15,880,687
========== ==========
The accompanying notes are an integral part of the financial statements.
Scriptel Holding, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
1996 1995
(Unaudited) (Unaudited)
--------------- ---------------
Net cash used in operating activities $
(1,637,000) $ (3,440,000)
Cash flows from investing activities:
Notes and advances receivable
--- (7,000)
Purchase of property and equipment
(125,000) (279,000)
Sale of property and equipment
168,000 ---
Disposal of assets held for sale
--- 455,000
Purchase of patents
--- (28,000)
------------- ---------------
Net cash provided by (used in) investing activities
43,000 141,000
Cash flows from financing activities:
Proceeds from notes and debentures payable 1,132,000
2,999,000
Repayment of notes payable
(304,000) (590,000)
Proceeds from the issuance of stock
840,000 913,000
------------ -------------
Net cash provided by financing activities
1,668,000 3,322,000
------------- ------------
Increase (decrease) in cash and cash equivalents
74,000 23,000
Cash and cash equivalents, at the beginning of the year 51,000
31,000
------------- --------------
Cash and cash equivalents, at the end of the period $ 125,000
$ 54,000
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest
$ 40,000 $ 77,000
========== =========
Debt conversion and use of debt to exercise options and warrants:
Decrease in notes payable
$ 115,000 $ 613,000
Decrease in accounts payable
35,000 28,000
Decrease in accrued interest
37,000 49,000
Increase in common stock
(36,000) (48,000)
Increase in additional paid-in-capital
(151,000) (642,000)
-------------- ---------------
Net effect on cash
$ 0 $ 0
========= =========
The accompanying notes are an integral part of the financial statements.
continued
Scriptel Holding, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Six months ended June 30, 1996 and 1995 (Unaudited)
Supplemental disclosures of cash flow information:
In the first six months of 1995, the Company issued compensatory stock
options as follows:
7,000 options on debt financings (value of $3,000 treated as interest expense
in the six months),
and 2,420,950 options as compensation to officers, directors, employees and
consultants (values
of $130,000 and $425,000 treated as administrative and research and development
expense,
respectively, in the six months). The Company also issued 94,610 warrants used
in payment of an
account payable to a consultant (value of $44,000 treated as administrative
expense in the six
months), 348,722 warrants on debt financings (value of $160,000 treated as
interest expense in
the six months), and 700,000 warrants on sale of real estate (value of $350,000
treated as loss on
sale of property in the six months).
In the first six months of 1996, the Company had these non-cash
transactions relating to stock,
stock options and convertible debt: issued 175,000 shares and 1,273,219 stock
options, net, to
officers, directors, employees and consultants; repriced and extended a total
of 8,228,334 stock
options and warrants; and repriced certain convertible debt. The Company
recorded the
combined value of these transactions as administrative expense ($283,000);
finance charges
($1,334,000); and loss on sale of assets ($34,000). The Company also entered
into transactions in
the first six months wherein option and warrant holders relinquished their
rights to exercise
3,953,125 combined options and warrants so the Company could use the freed up
authorized
shares in its current financings. The Company entered into agreements to issue
a total of
11,016,000 options or warrants subject to availability of authorized shares.
If issued, the
Company expects to record a charge of approximately $4,500,000 as the value of
these options
and warrants.
As part of a separation agreement with the Company's former Chairman, in 1996
the Company
cancelled all notes receivable (approximately $150,000) and advances receivable
(approximately
$100,000) from the individual.
In Aptil 1996, the Company sold its subsidiary, Ampsco Corporation. The
transaction is outlined
in Note 12 to the consolidated financial statements. In June 1996, the Company
sold to a creditor
its note receivable from the buyer of Ampsco and sold its right to a 10-year
royalty stream from
Ampsco, all for a $100,000 reduction in notes and accrued interest payable to
the creditor.
The accompanying notes are an integral part of the financial statements.
Scriptel Holding, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
June 30, 1996 (Unaudited)
1. CONSOLIDATION:
The consolidated information presented for June 30, 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.
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 June 30, 1996, the Company was in default on approximately $3.4 million
of its notes and
interest payable, of which approximately $0.7 million have been demanded, and
in arrears over 60
days on trade accounts payable totaling approximately $1.8 million. In
addition, approximately
$2.5 million of notes payable were represented by demand cognovit notes at June
30, 1996. At
June 30, 1996 the Company had a reported deficit in equity of approximately
$15.8 million. 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 June 30, 1996, the Company was a party to legal proceedings brought by
several
creditors. (See Note 4 for a summary of litigation issues.) Subsequent to
June 30, 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 June 30, 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 June 30, 1996. It is also management's estimate
that the value of the
Company's patents would be higher than their recorded value at June 30, 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 June 30,
1996 of $215,000. Management's estimate of realizable value on liquidation of
property and
equipment is approximately $200,000, compared to a carrying value at June 30,
1996 of
$475,000. 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 $892,000 at
June 30, 1996. At that date, the Company's recorded liabilities totaled
approximately
$16,672,000. 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.
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. This suit was settled on June
26, 1996. Scriptel
has entered into a consulting agreement with Mr. Venetis. Mr. Venetis will
provide services as
required in various areas of financing, marketing, and business development.
The initial term of
the agreement will be twelve months.
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.
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
a 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 a 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 proceedings due to
non-payment of rents
totaling approximately $100,000.
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 were 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 $210,000. 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 $700,000. 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 June 30, 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 $
1,485,000 $ 1,156,000
Convertible debenture, 8%, due in November 1998 1,000,000
1,000,000
Convertible debenture, 6%, due in June 1999 350,000
---
Demand notes payable to related parties, at rates ranging
from 10% to 18%, in default
123,000 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 18% per
annum
2,130,000 2,021,000
Cognovit promissory notes payable, at prime rate; in default 491,000
569,000
Note payable on machinery purchase, due August 1996 115,000
104,000
Demand notes payable to suppliers, 18%; in default 38,000
38,000
Demand secured cognovit convertible promissory note, 10% 151,000
300,000
------------ ------------
6,383,000 5,741,000
Less current portion
5,033,000 4,741,000
------------- ------------
$ 1,350,000 $ 1,000,000
======== =========
The prime interest rate was 8.25% at June 30, 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 six months ended June 30, 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.
* The Company issued 15,000 shares to a consultant for services rendered on
a financing
concluded in November 1995. The value of this stock, $11,000, was expensed as
a finance
charge.
* Options and warrant holders exercised existing options and warrants, at a
price per share
lower than the stated exercise price, for a total of 573,091 common shares.
Net cash proceeds
from these exercises totaled $135,000, and holders also used $152,000 of
Company debt in
payment of the reduced exercise price. The Company issued 43,080 shares in
settlement of
payables totaling $35,000.
* 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 $151,000
of convertible notes, and an affiliate of Mr. Jacobs) 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 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 for them 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. The Company was delayed in filing
certain of its
reports to the Securities and Exchange Commission for the year ended December
31, 1995 and
the quarter ended March 31, 1996. Because of this, the Company was forced to
rescind certain of
these stock transactions, and the Company repurchased 302,500 shares from the
foreign investors
at their then-current market price of $230,000. The net proceeds after the
rescission 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 (the estimated value of $39,000 was
expensed in the
second quarter as a finance charge). 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 former 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 at the time, 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.
* 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 were reissued with a new expiration date of April 1, 2000
and with a new
exercise price of $0.50 per share. The Company recorded in the second quarter
the estimated
$161,000 value of the reissuance of currently existing options with new pricing
and expiration
dates. Mr. Woodbridge also has rights to immediate registration of his options
through an S-8
filing. The Company has agreed to reissue the 500,000 relinquished options at
such time as the
shareholders approve the authorization of additional shares.
* 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, was 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, was 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,
cancellation of all old options (a total of 1,425,467 options, including the
800,000 he relinquished
as outlined above) held by Mr. France and issuance of new options to purchase
1,500,000 shares
at $0.68 per share and which expire in May 1999, 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 issued to a consultant options to purchase 70,000 shares of
common stock at
$1.00 per share and which expire in 2001. The $20,000 value was expensed in
the second
quarter.
* The Company entered into an agreement with a consultant to issue the
consultant, as partial
payment for services rendered, options to purchase 500,000 shares of common
stock at $0.55 per
share. Such options are contingent on the availability of authorized shares.
The value (estimated
at $160,000 if issued now) will be expensed when the options are issued.
* The Company did not have the funds to pay its employees on time for
several months in 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
122,000 options at $0.40 per share to employees. The estimated value of the
repricing
($228,000) and issuance ($33,000) was expensed in the second quarter.
* The Company agreed to issue a one-time stock grant to employees of
Scriptel at June 1,
1996, equal in value to twice each employee's monthly salary, and valued at
$0.75 per share. This
grant approximates 244,000 shares. The Company will also pay the employees'
taxes on the stock
grant, subject to availability of cash. A charge of $311,000 has been recorded
as the value of the
grant plus taxes.
* 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).
* In July 1996, three months after the sale of Ampsco and the closure of
Coloray (see notes
below), a total of 1,314,000 options issued to employees of Ampsco and Coloray
under the
provisions of the 1993 Stock Option Plan expired. In July, the Company also
entered into
agreements with Mr. Jacobs, Mr. Krumm, Mr. France, and several officers to the
effect that,
despite prior agreements, the Company could use in its current financings up to
850,000 of the
authorized shares freed up by the expiration of these options. The remaining
464,000 options will
be issued to Mr. Jacobs under his March 29, 1996 agreement, The $20,000 net
value of the
expiration and reissuance of these options was expensed in the second quarter.
* In June 1996, the Company committed to issue to Mr. Bernard Eckstein, the
Company's
Chairman and Chief Executive Officer, as part of his employment negotiations,
options to
purchase 500,000 shares of Common Stock at an exercise price of $0.40 per share
and which will
expire five years after issuance. Issuance of these options is contingent on
the availability of
authorized shares. The value of the options (estimated at $167,000 if issued
now) will be
expensed when they are issued. The Board of Directors also set the
compensation of Mr.
Eckstein at an annual base salary of $150,000 beginning on May 16, 1996.
* In July 1996, the Company entered into several agreements with its
officers, eight employees,
and two consultants. Under these agreements, the individuals agreed to let the
Company use in
its current financings the authorized shares represented by a total of
2,616,147 options and
warrants held by these individuals. All of such released authorized shares
were used. Further, the
individuals have agreed not to exercise their options and warrants until such
time as authorized
shares become available (e.g., from an increase in authorized shares approved
by shareholders).
The Company also agreed to issue an additional option to each individual for
each of the
2,616,147 authorized shares used, as soon as authorized shares become
available. The additional
options will have an exercise price of $0.40 per share and will expire five
years after their
issuance. The estimated value of $882,000 for the release, subsequent use, and
subsequent
issuance of the additional options will be expensed when the authorized shares
become available
and the new options are issued.
* In May 1996, certain of the Company's officers and employees agreed to
defer that part of
their annual compensation which exceeded $85,000 until such time as the
Company's cash
situation improved. As part of the agreements with these individuals
(including officers Bernard
Eckstein, J. Vance Holloway, Edward Palmer, and Frederick A. Niebauer), the
Company agreed
to pay interest at 10% per annum on the amounts deferred, and agreed to issue
an option to
purchase one share of common stock at an exercise price of $0.40 per share and
with an
expiration date of five years after issuance (which options are subject to the
availability of
authorized shares) for each dollar of salary deferred. These would total
195,000 options if such
deferral continued for a year, and similar amounts annually thereafter.
* In June and July 1996, the Company entered into agreements to issue 6%,
3-year debentures
to foreign investors. Such debentures are convertible into common stock of the
Company under
the provisions of Regulation S promulgated by the Securities and Exchange
Commission. The
conversion price is 60% of the market price of the stock, as defined, on the
day of conversion
subject to a minimum conversion price of $0.375 per share and a maximum
conversion price of
$1.50 per share. The Company agreed to pay a cash commission to the agent of
13% of the funds
received, plus warrants equal to 10% of the shares issued upon conversion.
Such warrants are to
be priced at 120% of the conversion price, will expire five years after
issuance, and bear
piggyback registration rights.
On June 28, 1996, the Company issued $350,000 of these debentures, paid the
agent's
commission of $46,000, and reserved authorized shares for the conversion and
the warrants to be
issued to the agent. This debenture and accrued interest was converted into
885,858 shares of
common stock in August 1996. Of these shares, 880,503 were unrestricted and
immediately
tradeable under the provisions of Regulation S. The Company issued warrants to
the agent to
purchase 88,586 shares of common stock; the value of $29,000 was expensed as a
finance charge
in the second quarter.
In July, the Company issued $305,000 of these debentures, paid the agent's
commission of
$40,000, and reserved 895,000 authorized shares for the assumed conversion of
the debentures
and the warrants to be issued to the agent. Proceeds of all debentures were
used for operating
costs.
The market price of the Company's common stock was about $0.75 on the date of
issuance of
each debenture. The Company recorded a finance charge of $350,000 in the
second quarter of
1996, and will record a finance charge of $305,000 in the third quarter of
1996, equal to the
difference between fair value of the common stock on the dates the debentures
were issued and
the minimum conversion price of the debenture.
* 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 reserve approximately 16,300,000 of additional authorized
shares to satisfy
the commitments outlined above, 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 Mr. Jacobs and
Mr. Krumm, both 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 Mr. Jacobs
through the end of June 1996. A $200,000 loan from Mr. Krumm 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. This affected
loans totaling
approximately $3,000,000. The loans had previously accrued interest at stated
amounts or at per
annum rates of 10% to 12%.
* 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.
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 $2,036,000 had not been recorded at March 31, 1996. All of these
obligations
under research and development agreements were recorded in the second quarter
of 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 June
30, 1996:
Accounts payable
$ 700,000
Accrued expenses
600,000
Accounts payable intercompany to Scriptel 3,300,000
CRADAs and existing SRI research agreement 4,100,000
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.
The $168,000 of proceeds from the auction sale of Coloray's assets in May 1996
were used to
reduce these loans. Mr. Jacobs has a perfected security interest on all assets
of Coloray and the
Company.
Coloray's reported assets approximated $140,000 at June 30, 1996. This is
the amortized
value of Coloray's patents. 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.
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 was for $650,000, with interest at 5%. Interest
was payable
monthly, with the entire principal balance due on April 1, 1999. The Company
endorsed this
Note to Mr. Jacobs, who had a security interest in the Ampsco shares which were
sold. The
Company did not record 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
recorded 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 were to be in the form of
monthly royalties at
2% of Ampsco's collected sales for a ten-year period. These payments were
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 Company sold its right to royalty payments to Mr. Jacobs as part of the
$100,000 reduction
of debt noted above.
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 June 30, 1996, and from the loss from continuing operations shown
on the
accompanying statements of operations for the three- and six-month periods
ended June 30, 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. 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 for the three months ended March 31, 1996,
and $868,000 for
the six months ended June 30, 1995. No information is available on Ampsco's
sales for the
second quarter of 1996.
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 JUNE 30, 1996 AND
1995
1996 1995
Revenues
$ 117,000 $ 140,000
The Company operates as a single business segment, providing computer
peripheral
equipment to OEMs. Development fees in 1996 from partial funding of Coloray
development
efforts by outside companies were $92,000 lower than in 1995. Scriptel's
revenues in this
segment have increased due to a higher demand for Scriptel's glass panels for
pen-based
computers.
1996 1995
Cost of sales
$ 101,000 $ 73,000
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 $ 1,096,000
$ 1,207,000
Sales and marketing expenses
57,000 68,000
Research and development expenses 2,277,000
1,185,000
Certain members of management, employees and certain outside consultants
received
stock, compensatory stock options, or repriced 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, $146,000
in 1996 and $130,000 in 1995, was expensed when all restrictions had lapsed.
The 1996
administrative expenses also include $353,000 of severance costs, and $160,000
of legal fees or
settlement costs of lawsuits against the Company. 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 1996, the Company
recorded the
remaining $2,036,000 of costs relating to Coloray's research committments.
1996 1995
Other expenses $
1,512,000 $ 841,000
Other expenses include interest expense of $106,000 and $517,000 in 1996
and 1995,
respectively. Other expense also includes finance costs of $1,512,000 in 1996.
Interest expense
increased due to higher levels of debt financing and, in 1995, included
$160,000, 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. Finance expenses in 1996
related principally
to $864,000 in value of stock warrants surrendered or repriced as compensation
on new
financing, a loss of $350,000 on convertible debentures issued in June 1996,
and cash costs of
new financing.
In 1996 the Company realized a gain of $105,000 from sale of its Ampsco
subsidiary. In
1995, the Company realized a $350,000 loss on disposition of assets, from
warrants granted as
part of the transaction to sell Ampsco's land and buildings (see below).
1996 1995
Discontinued operations; loss from operation
of Ampsco
$ --- $ (312,000)
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 loss in 1995 included a loss of $286,000 from sale of Ampsco's land
and buildings last
year.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
1995
1996 1995
Revenues
$ 177,000 $ 261,000
The Company operates as a single business segment, providing computer
peripheral
equipment to OEMs. Development fees in 1996 from partial funding of Coloray
development
efforts by outside companies were $115,000 lower than in 1995.
1996 1995
Cost of sales $
147,000 $ 175,000
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 $ 2,590,000
$ 2,276,000
Sales and marketing expenses 119,000
120,000
Research and development expenses 3,306,000
2,786,000
Certain members of management, employees and certain outside consultants
received
stock, compensatory stock options, or repriced 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, $283,000
in 1996 and $174,000 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,
$353,000 of severance costs, and $160,000 of second quarter legal costs or
costs of lawsuit
settlements. 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.
In 1996, the
Company accrued the full remaining $2,036,000 of Coloray's research commitments
as part of the
costs of closure of Coloray. The Company is working on reducing these
commitments.
1996 1995
Other expenses $
2,885,000 $ 935,000
Other expenses include interest expense of $495,000 and $689,000 in 1996
and 1995,
respectively. Other expense also includes finance costs of $2,182,000 in 1996.
Interest expense
is high due to higher levels of debt financing and, in 1995, included $163,000,
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 $1,256,000 in value of stock warrants surrendered as compensation on new
financing, a loss of
$350,000 on convertible debentures issued in June, and cash costs of 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. The Company
also recognized a $105,000 gain from sale of its Ampsco subsidiary in 1996.
The 1995 loss on
disposition of assets stemmed from the value of warrants granted as part of the
1995 transaction
to sell Ampsco's land and buildings (see below).
1996 1995
Discontinued operations; loss from operation
of Ampsco
$ --- $ (339,000)
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 June 30,
1996 and from the loss from continuing operations shown on the accompanying
statements of
operations for the three- and six-month periods ended June 30, 1996 and 1995.
The loss in 1995
included a loss of $286,000 from sale of Ampsco's land and buildings last year.
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 June 30, 1996, the
Company's stockholders
had paid or surrendered in value $43,648,000 (which is net of $8,000 of notes
receivable from
stockholders) to acquire 24,003,887 shares of common stock. In addition,
$6,383,000 of notes
payable and debentures were outstanding as of June 30, 1996, and accrued
interest on notes
was $1,205,000 at that date. From inception of the Company through June 30,
1996, the
Company has incurred an accumulated deficit of $59,428,000.
The Company had current liabilities in excess of current assets of
approximately
$15,100,000 at June 30, 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 16,300,000
the total
authorized shares of the Company at June 30, 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 June 30,
1996:
Principal Interest
Cognovit promissory notes payable, due in
December 1994 $
489,000 $ 57,000
Convertible promissory notes payable to
investors, due at various dates
894,000 330,000
Convertible promissory notes payable to major
stockholders, due at various dates
591,000 300,000
Notes payable to a corporation, in default
as of December 1, 1994
500,000 104,000
Notes payable to trade creditors, due at
various dates in 1994
38,000 8,000
Notes payable to related parties, due at various
dates in 1994
48,000 6,000
-------------- -----------------
Total in default
$ 2,560,000 $ 805,000
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:
27- Financial Data Schedule
(b) Reports on Form 8-K:
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 letter agreements with
Mr. Jacobs, 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.
The Company filed an 8-K dated May 13, 1996 relating to the resignation of
James W. France, Jr.
from his position as Chairman, President and Chief Executive Officer.
On July 8, 1996, the Company filed an 8-K dated June 26, 1996 relating to
settlement of a lawsuit
filed by Nicholas G. Venetis, a former officer and director of the Company.
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: August 9, 1996 /s/ Bernard H. Eckstein
Bernard H. Eckstein
Chairman and Chief
Executive Officer
Date: August 9, 1996 /s/ Frederick A. Niebauer
Frederick A. Niebauer
Treasurer (principal
financial and accounting officer)
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