<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 No (X)
The number of common shares outstanding at May 13, 1997 was 57,284,754.
SCRIPTEL HOLDING, INC.
Page No.
NON-TIMELY FILING OF FORM 10-QSB 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1997 (unaudited) 4
and December 31, 1996 (unaudited)
Consolidated Statements of Operations for the three months 5
ended March 31, 1997 and 1996, unaudited
Consolidated Statements of Cash Flows for the three months 6-7
ended March 31, 1997 and 1996, unaudited
Notes to Consolidated Financial Statements, unaudited 8-18
Item 2. Management's Discussion and Analysis of Financial 19-21
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal proceedings 22
Item 2. Changes in securities 22
Item 3. Defaults upon senior securities 22
Item 4. Submission of matters to a vote of security holders 22
Item 5. Other information 22
Item 6. Exhibits and reports on Form 8-K 23
SIGNATURES 23
Exhibits: 27 - Financial Data Schedule 24
NON-TIMELY FILING OF FORM 10-QSB
The Company's reports for the last several years have indicated that the
Company has an immediate need for additional capital, and that there is a risk
of liquidation should the Company be unable to obtain such capital. To date,
the Company has raised very little capital relative to its needs. The capital
which has been raised has been used to meet payroll and other immediate
obligations. Due to the fact that the Company owes its independent
accountants a material amount of fees for their audit work, and does not
currently have the means for payment of the remainder of the expected fees,
and cash has been used for other operating purposes, the Company suspended the
audit of its consolidated financial statements for the year ended December 31,
1996 until such time as it can pay the invoiced fees and has the means to pay
the remainder of the expected fees. After such invoiced fees are paid and the
Company has reasonable assurance that the remaining fees can be paid,
management expects that the independent accountants will be able to render an
opinion on the consolidated financial statements for the year ended December
31, 1996.
As a consequence of the suspension of the audit, the consolidated financial
statements included in the Form 10-K for the year ended December 31, 1996 are
unaudited. Also, the management's discussion included in the 10-K is subject
to change depending on audit results. Finally, the accountants' opinions and
consents are not included in the 10-K. The Company will file an amendment to
its Form 10-K for the year ended December 31, 1996 as soon as possible. This
amendment will include the audited financial statements, and the accountants'
opinions. Management expects that the opinions of the independent accountants
will continue to have reference to a "Going Concern".
Because of the pervasive effect of the lack of audited December 31, 1996
financial statements on the financial statements for the quarter ended March
31, 1997, the Company is unable to timely file its Form 10-QSB. The Company
has prepared this preliminary Form 10-QSB for the period ended March 31, 1997
without consideration for the effects, if any, on the unaudited financial
statements of any adjustments which might occur after completion of the audit
for the year ended December 31, 1996. The Company will file an amendment to
the March 31, 1997 Form 10-QSB as soon as possible after the audit for 1996 is
completed and the Form 10-K/A for the year ended December 31, 1996 is
completed.
Scriptel Holding, Inc. and Subsidiaries March 31, December 31,
CONSOLIDATED BALANCE SHEETS 1997 1996
(Unaudited) (Unaudited)
---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 3,000 $ 1,000
Trade accounts receivable, net of allowance for
doubtful accounts of $3,000 in 1997 and 1996 65,000 75,000
Inventories 109,000 59,000
Other current assets 3,000 6,000
---------- ----------
Total current assets 180,000 141,000
Property and equipment, net 623,000 592,000
---------- ----------
Total assets $ 803,000 $ 733,000
========== ==========
Liabilities and Stockholder's Deficit
Current liabilities:
Notes and debentures payable $4,559,000 $4,451,000
Accounts payable 1,175,000 1,057,000
Accrued interest 1,594,000 1,475,000
Other accrued liabilities 4,625,000 4,396,000
---------- ----------
Total current liabilities 11,953,000 11,379,000
Notes and debentures payable, long-term --- 370,000
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.10 par value, 125,000,000 shares
authorized: 49,843,809 shares and 42,299,512
shares issued and outstanding at March 31,
1997 and December 31, 1996, respectively 4,984,000 4,230,000
Additional paid in capital 47,463,000 47,259,000
Accumulated deficit (63,597,000) (62,505,000)
---------- ----------
Total stockholders' deficit (11,150,000) (11,016,000)
---------- ----------
Total liabilities and stockholders' deficit $ 803,000 $ 733,000
========== ==========
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,
1997 1996
(Unaudited) (Unaudited)
---------- ----------
Sales $ 139,000 $ 60,000
Cost of sales 96,000 46,000
---------- ----------
43,000 14,000
Costs and expenses:
General and administrative 545,000 1,494,000
Sales and marketing 39,000 62,000
Research and development 101,000 1,029,000
---------- ----------
Total costs and expenses 685,000 2,585,000
---------- ----------
Loss from operations (642,000) (2,571,000)
Other expense (income):
Interest expense 166,000 389,000
Finance charge 284,000 670,000
Loss on disposition of assets --- 314,000
---------- ----------
Total other expense 450,000 1,373,000
---------- ----------
Net loss $ (1,092,000) $(3,944,000)
========== ==========
Net loss per share $ (0.02) $ (0.18)
======= =======
Weighted average number of common shares
used in computing net loss per share 46,837,515 21,365,240
========== ==========
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,
1997 1996
(Unaudited) (Unaudited)
---------- ----------
Net cash used in operating activities $ (211,000) $(1,104,000)
Cash flows from investing activities:
Purchase of property and equipment (71,000) (97,000)
---------- ----------
Net cash provided by (used in)
investing activities (71,000) (97,000)
Cash flows from financing activities:
Proceeds from notes and debentures payable --- 707,000
Repayment of notes payable (12,000) (155,000)
Proceeds from the issuance of stock 296,000 628,000
---------- ----------
Net cash provided by financing activities 284,000 1,180,000
---------- ----------
Increase (decrease) in cash and cash equivalents 2,000 (21,000)
Cash and cash equivalents, at the beginning
of the year 1,000 51,000
---------- ----------
Cash and cash equivalents, at the end
of the period $ 3,000 $ 30,000
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 13,000 $ 21,000
========== ==========
Debt conversion and use of debt to exercise options and warrants:
Decrease in notes payable and debentures $ 248,000 ---
Decrease in accrued interest 14,000 ---
Increase in common stock (262,000) ---
Increase in additional paid-in-capital --- ---
---------- ----------
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
Nine months ended March 31, 1997 and 1996 (Unaudited)
Supplemental disclosures of cash flow information:
In the first three months of 1996, the Company had these non-cash transactions
relating to stock, stock options and convertible debt: issued 100,000 shares
and 100,250 stock options, net, to officers, directors, employees, creditors,
and consultants; repriced and extended a total of 4,274,500 stock options and
warrants; and repriced certain convertible debt. The Company recorded the
combined value of these transactions as administrative expense ($137,000); and
finance charges ($470,000).
In the first three months of 1997, the Company had these non-cash transactions
relating to stock, stock options and convertible debt: issued 700,000 shares
and 3,173,229 stock options and warrants, net, to officers, directors,
employees, creditors, and consultants; repriced and extended a total of
112,500 stock options and warrants; and repriced certain convertible debt.
The Company recorded the combined value of these transactions as
administrative expense ($141,000); and finance charges ($259,000).
Scriptel Holding, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
March 31, 1997 (Unaudited)
1. CONSOLIDATION:
The consolidated information presented for March 31, 1997 and 1996, 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 company was unable to pay the independent accountants to
complete their audit of the 1996 financial statements. Consequently, the
consolidated balance sheet data at December 31, 1996 was derived from
unaudited consolidated financial statements. These quarterly consolidated
financial statements should be read in conjunction with the Company's
unaudited financial statements for the year ended December 31, 1996, which
were included as part of the Company's Form 10-K.
The consolidated financial statements include the accounts of Scriptel
Holding, Inc. and its wholly-owned subsidiaries, Scriptel Corporation
("Scriptel") and Scriptel Communications Corp. (all of which are collectively
known as "the Company"). Until late in 1996, the Company also had a
consolidated majority-owned subsidiary, Coloray Display Corporation
("Coloray"), a development stage company. The investment in Coloray dropped
below 50% at December 31, 1996. Coloray is not consolidated in the
accompanying unaudited balance sheet as of December 31, 1996. All significant
intercompany transactions have been eliminated.
In early 1996, the Company closed the Coloray operation. This enabled the
Company to focus on its core pen/touch technology and related 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.
Management is seeking additional financing through other public or private
placements of debt, convertible debt and or common stock to fund its
activities (see Note 10). 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, 1997, prior to the effects of the proposed refinancing outlined
in Note 10, the Company was in default on approximately $2.7 million of its
notes and accrued interest payable, of which approximately $1.0 million have
been demanded, and in arrears over 60 days on trade accounts payable totaling
approximately $0.9 million. In addition, approximately $2.9 million of notes
payable and accrued interest were represented by demand cognovit notes at
March 31, 1997. At March 31, 1997 the Company had a reported deficit in
equity of approximately $11.2 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. (See Note 10.)
At March 31, 1997, 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, 1997, several additional creditors filed 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
remedies that might result in the Company ceasing to be a going concern.
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.
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 used to
settle the claims of secured creditors and none, except possibly some of the
value of the patents, would be available to other creditors. 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, 1997, 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,
1997. It is also management's estimate that the Company's patents would be
valuable; the Company has fully amortized its patents so there is no recorded
value of patents at March 31, 1997. 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,
1997 of $180,000. Management's estimate of realizable value on liquidation of
property and equipment is approximately $300,000, compared to a carrying value
at March 31, 1997 of $623,000. 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 $803,000
at March 31, 1997. At that date, the Company's recorded liabilities totaled
approximately $12,000,000. 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. LEGAL PROCEEDINGS
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. These total approximately $531,000 at March 31, 1997, which amount is
included in other accrued liabilities on the accompanying unaudited
consolidated balance sheet. Stimsonite 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 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 which total
approximately $650,000 at March 31, 1997. The Company has filed a
counterclaim against the creditor and its parent company, Apple computer,
Inc., 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, with an initial court date set for
summer 1997.
In February 1997, the Company was named as defendant in a suit for trademark
infringement. The suit was filed in the United States District Court, Central
District of California, Western Division, and is entitled "NMB technologies,
Inc. vs Symbios Logic, Inc. and Scriptel Corporation". NMB Technologies, Inc.
has a trademark "RIGHT TOUCH (TM)" which it alleges is being infringed by the
Company's use of the trademark "WriteTouch (TM)". No alleged damages are
specified. This case is in the early stages.
Several other creditors have filed suit against the Company and its
subsidiaries, in various courts in Ohio, 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 $50,000.
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 levy against the assets of Coloray to
collect approximately $100,000 of federal payroll tax liabilities, penalties,
and interest which Coloray owes. In addition, Coloray has received a levy for
withheld but unpaid California state income taxes of approximately $30,000.
The Company has recorded a liability for the federal and state payroll taxes
owed by Coloray because of the Company's contractual obligations made to
former officers of Coloray.
The Company has unpaid payroll, personal property, franchise, capital stock,
workers compensation, and other taxes aggregating approximately $370,000 at
March 31, 1997, and an additional $60,000 arising subsequently. 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 $1,000,000. 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. In May 1997, most of these note holders agreed to extend their
notes to December 1998, subject to the completion of a debt restructuring as
outlined in Note 10.
There can be no assurance that creditors will not hereafter seek other legal
remedies.
5. INVENTORIES
Inventories are valued at the lower of cost (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, 1997 and December 31, 1996
consist of the following:
1997 1996
---------- ----------
Convertible notes, at rates ranging from 10%
to 18%, principal and interest convertible to
common shares at $0.10 to $3.50 per share;
in default $ 877,000 $ 918,000
Convertible debenture, 6%, due December 1999 --- 90,000
Convertible debenture, 14%, due September 1997 171,000 221,000
Notes payable to a corporation, $250,000 at 10%
and $250,000 at 8%; in default 500,000 500,000
Demand notes payable to major stockholders
at 18% per annum 2,157,000 2,169,000
Demand and cognovit promissory notes payable,
at rates ranging from 8% to 18%; in default 444,000 513,000
Note payable on machinery purchases, due
August 1996; in default 93,000 93,000
Note payable to a corporation, 10%, due
March 1998 280,000 280,000
Demand notes payable to suppliers, 18%;
in default 37,000 37,000
---------- ----------
4,559,000 4,821,000
Less current portion 4,559,000 4,451,000
---------- ----------
$ --- $ 370,000
========== ==========
The prime interest rate was 8.5% at March 31, 1997. Substantially all assets
of the Company are pledged as collateral for certain of the notes. See Note
10 for an outline of the provisions of a proposed restructuring of debt.
7. COMMON STOCK AND COMMON STOCK COMMITMENTS
The Company entered into the following significant common stock transactions
and made the following common stock commitments to date in 1997:
* On January 22, 1997, the Company sold and issued 1,000,000 shares of common
stock to a foreign investor at a price of $0.10 per share. The shares were
issued under the provisions of Regulation S promulgated by the Securities and
Exchange Commission ("Regulation S"). The Company received cash proceeds of
$100,000. The Company paid a $13,000 cash commission to Alexander, Wescott &
Co., Inc. ("Wescott"), the placement agent for the shares. Under an agreement
with Wescott, the Company also issued to Wescott warrants to purchase 100,000
shares of common stock at an exercise price of $0.10 per share and which
expire in 2002, five years after issuance. See below. Such warrants were
issued under the provisions of Rule 144. The closing market bid price of the
Company's common stock on January 22, 1997 was $0.17 per share.
* Another, similar, sale of 1,000,000 shares to a foreign investor took place
on January 28, 1997. The closing market bid price of the Company's common
stock on January 28, 1997 was $0.14 per share. Wescott was also the agent on
that transaction, and received the same cash commission and the same quantity
of warrants.
* A debenture issued in November 1996 had been converted into 1,001,151
shares at a conversion rate of $0.20 per share. These shares were issued
under the provisions of Regulation S. Wescott was the placement agent. Due
to a change in price of the Company's common stock, the conversion terms were
amended and an additional 1,001,151 shares were issued to the investor in
January 1997 under the provisions of Regulation S. This effectively set the
revised conversion price on the debenture at $0.10 per share.
* The Company issued a $90,000 debenture in December 1996 under the
provisions of Regulation S. Wescott was the agent. This debenture, plus
accrued interest, was converted in January 1997 into 906,066 shares of common
stock at a conversion price of $0.10 per share.
* The Company amended its June 24, 1996 agreement with Wescott on February
12, 1997. The amendment retroactively required the Company to give Wescott a
warrant (under the provisions of Rule 144) to purchase an aggregate of 30% of
all of the shares issued under the agreement. The exercise price is $0.10 per
share and the warrant will expire in 2002, five years after issuance. Wescott
has piggyback registration rights on the shares which would be issued if the
warrants are exercised. (The prior agreements with Wescott limited the
warrants to a maximum of 10% of the shares issued under the agreement.) As a
result of this amendment, in 1997 the Company issued to Wescott warrants to
purchase an additional 1,923,229 shares (to a total of 2,885,286 warrants on
transactions through Wescott under this agreement). The market value of the
Company's common stock on February 12, 1997 was $0.14 per share. The
estimated value of these warrants, $133,000, was expensed as a finance charge
in the first quarter of 1997.
* In February 1997, the Company sold a total of 520,000 shares at $0.10 per
share to two accredited investors. The market bid price was approximately
$0.10 per share on the date of the transaction. Such shares are subject to
the provisions of Rule 144. The $52,000 proceeds were used to support the
Company's operations.
* Through March 1997, nine accredited investors converted their notes and
accrued interest into a total of 1,717,080 shares at $0.10 per share. The
market bid price was approximately $0.10 per share on the date of the
transactions. The shares are subject to the provisions of Rule 144. The
Company has reduced debt by $172,000 as a result of this conversion.
* In January 1997, the Company issued 700,000 shares of common stock to a
consultant in payment for services rendered in 1997. Such shares are subject
to the provisions of Rule 144. The value of approximately $140,000 was
treated as an administrative expense in the first quarter of 1997.
* An agreement with two creditors in February 1997 reduced the conversion
terms on $85,000 of debt from a conversion price of $0.55 per share to a new
conversion price of $0.10 per share. As a result, an additional 695,000
shares were committed for the conversion features on this debt. A finance
charge of $92,000 was recorded in the first quarter of 1997 on this
transaction.
* On December 31, 1996, Coloray (until then a majority owned subsidiary of
the Company) and the Company entered into a consulting agreement with M. Kathy
Vieth, former president of Coloray, for the purpose of having Ms. Vieth
promote Coloray's technology, license that technology to other companies, and
seek a monetary return on that technology. As part of the agreement with Ms.
Vieth, Scriptel transferred to Ms. Vieth 50,000 of its shares of Coloray
common stock. This reduced Scriptel's ownership interest in Coloray to forty-
six percent (46%), and Coloray then ceased to be a consolidated subsidiary of
Scriptel.
The consulting agreement with Ms. Vieth requires payment to her of 500,000
shares of stock and $10,000 cash, with half of the stock to be paid on success
in obtaining an acceptable conclusion to Coloray's research agreement with SRI
and the other half paid on success in obtaining an acceptable conclusion to
Coloray's membership in the U.S. Display Consortium. These shares have not
yet been issued.
* In March 1997, the Company entered into an agreement with two accredited
investors. Under this agreement, the investors purchased a total of 300,000
shares of Common Stock at $0.10 per share and exercised options to purchase an
additional 400,000 shares of Common Stock at $0.10 per share. The bid price
of the Company's stock on the date of the transaction was $0.085 per share.
The Company gave the investors new options to purchase 400,000 shares of
Common Stock at an initial exercise price of $0.10 per share (which exercise
price increases in steps to a maximum of $0.20 per share), and which are
exercisable until 2002. The Company also issued 600,000 new options to the
investors at a flat exercise price of $0.10 per share and which will expire in
2000. All of the options are callable by the Company if the Company's stock
price reaches $0.50 per share. The value of the options, $29,000, was
expensed as a finance charge in the first quarter of 1997. All of such shares
and options are subject to the provisions of the SEC's Rule 144.
* The Company agreed to issue a one-time stock grant to employees of Scriptel
at June 1, 1996, equal to twice each employee's monthly salary divided by
$0.75 per share. This grant totals 244,350 shares. The shares were issued in
May 1997. The Company also agreed to pay the employees' taxes on the stock
grant, subject to availability of cash.
* 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 for each dollar of salary
deferred. A total of 130,669 options were issued in May 1997 under these
provisions. The deferral of salaries ceased on May 1, 1997.
* In the first quarter of 1997, the Company granted 50,000 options to
employees with an exercise price of $0.40 per share. In connection with a
conversion of debt to stock, the Company also repriced 112,500 warrants held
by an investor from exercise prices ranging from $1.70 to $2.00 per share to a
new exercise price of $0.14 per share, and extended these warrants from 1998
to 2001. The $1,000 value of the options and $44,000 value of the warrants
was expensed as administrative expense and finance charge, respectively, in
the first quarter of 1997.
* In April 1997, the Company issued 200,000 shares of common stock to DeWitt
Wolf Consultants, LLC ("DeWitt") (of San Francisco, California) in payment of
their travel and related expenses in performing consulting services for the
Company in its proposed restructuring (see Note 10). The value of these
shares, $20,000, will be expensed as a finance charge in the second quarter.
* The Company issued a total of 220,000 options to two of its vice presidents
in May 1997, as additional compensation for their services. These options had
an exercise price of $0.40 per share and expired in 2002.
* The company issued in May 1997 a total of 6,721,280 shares of common stock
to its employees and several consultants, and in return cancelled all of the
6,721,280 options and warrants held by such individuals. The Company also
agreed to withhold and pay on the individuals' behalf by the end of May 1997
federal and state income taxes equivalent to $0.025 per share (a total of
$168,000). The value of the shares at date of issuance, $840,000 (the sum of
the par value of the common shares issued, $672,000, and the cash payment to
be made for taxes, $168,000), will be expensed as an administrative expense in
the second quarter of 1997. The shares were issued under the provisions of
Rule 144.
* The Company also expects to issue shares in its proposed refinancing (see
Note 10).
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 elsewhere herein, the Company had the
following events occur subsequent to December 31, 1996.
* The Company paid $12,000 of principal and $13,000 of interest to Mr.
Jacobs, a major creditor, through the end of March 1997. The Company has a
"handshake" agreement with Mr. Jacobs under which the Company pays Mr. Jacobs,
as reduction of debt, an amount equal to 15% of the net proceeds from its
financings. (See Note 10.)
* The Company continued to default on its payments of payroll taxes to date
in 1997.
10. REFINANCING
The Company is working with the consulting firm of DeWitt Wolf Consultants,
LLC ("DeWitt"), and new investors, in a proposed restructuring and refinancing
of the Company's debts. This transaction has not been finalized as of May 13,
1997. However, several actions have been started which are contingent on
successful completion of the refinancing. These include:
* An agreement with Mr. Jacobs and Standard Energy Company to hold still on
the Company's notes and interest payable to them (approximately $3.0 million
in total), and not demand payment on these notes until at least December 1998.
* Agreements with several creditors to extend approximately $0.6 million of
debt to December 1998.
* Agreements with several creditors to convert approximately $460,000 of
debt into approximately 4,600,000 shares of common stock at a conversion price
of $0.10 per share.
* Agreements with several creditors extending to December 1998 the $1.0
million of debt they hold; making the debts convertible or modifying the
conversion price on debt they hold to a new conversion price of $0.10 to $0.15
per share (from $1.00 to $5.01 per share); and/or repricing and extending
options and warrants they hold, generally to new exercise prices of $0.10 to
$0.15 per share (from $0.81 to $2.50 per share) and expiring in 2001; and/or
issuance of new options or warrants. As a result of such agreements and
conditioned on finalization of the refinancing and restructuring, the Company
has committed to issue 853,000 options and warrants, reprice and extend
765,000 options and warrants, and increase the amount of shares reserved for
issuance on convertible debt by 6,535,000 shares. The expected value of
$280,000 on all of these transactions will be expensed in the second quarter
as a finance charge, assuming the restructuring is completed.
In addition, under the proposed refinancing, the Company would issue
$4,250,000 of non-dilutive convertible debentures ($250,000 to Mr. Jacobs in
return for reduction of a similar amount of notes and interest due him, and
$4,000,000 to new investors). The debentures would be convertible initially
into common shares at the rate of $0.10 per share. However, after a reverse
stock split of 1-for-20 (see below) the debentures would be convertible into
post-reverse split shares at the rate of $0.20 per post-reverse split share.
If the transaction is completed as contemplated, the Company would issue
40,000,000 shares of common stock to Mr. John Wampler, an accredited investor,
against a small cash payment and a non-recourse note receivable for the
remainder of the $4,000,000 purchase price. Cash receipts from new investors
on the convertible debentures would offset amounts due from Mr. Wampler on the
note receivable. Cash receipts on the notes receivable/debentures would be
spread out over an extended period as working capital needs arise.
The proposed refinancing would also require the payment of a 10% commission to
DeWitt as payment of its commission.
Under the proposed refinancing, the Company understands that Mr. Wampler will
receive proxies to vote shares owned by Mr. Walter T. Krumm (approximately
8,200,000 shares), several other shareholders (approximately 1,500,000 shares)
and shares held by members of senior management of the Company (approximately
5,000,000 shares). After the 40,000,000 proposed share issuance to Mr.
Wampler, and the receipt of the proxies mentioned, Mr. Wampler would have
voting rights on more than 50% of the shares then outstanding (approximately
54,700,000 shares with voting rights against approximately 101,900,000 then to
be outstanding). Mr. Wampler would then have a controlling block of shares in
the Company. The proposed refinancing includes provisions for an immediate
meeting of the shareholders of the Company, at which meeting this block of
shares would be voted in favor of proposals to reduce the par value of the
common stock to $0.001 per share, do a 1-for-20 reverse stock split, and adopt
a new series of 25,000,000 shares of undesignated preferred stock.
The proposed $4,250,000 debentures would contain anti-dilutive provisions as
mentioned above. Immediately after the reverse stock split, and to the extent
that the debentures were funded and converted, Mr. Wampler and the new
investors alone would have effective control of the Company.
The Company expects to complete the refinancing in a short period of time.
The Company expects as a result of the refinancing that it may restate the
December 31, 1996 and March 31, 1997 consolidated unaudited balance sheets to
show the extended or converted debt as non-current liabilities at those dates.
The company expects to file as exhibits to a Form 8-K the agreements and other
documents outlining the refinancing, assuming it is completed.
The Company is currently authorized to issue up to 125,000,000 shares of its
common stock, par value $0.10 per share. If the refinancing goes as planned,
the Company would have the following approximate pro forma outstanding or
committed shares as of May 15, 1997, before the effects of the reverse stock
split:
Outstanding shares 101,900,000
Shares reserved for outstanding:
Options 6,800,000
Warrants 31,600,000
Convertible notes and accrued interest 8,600,000
Options which have been committed in various
agreements but not yet granted 2,000,000
Shares to be issued to M. Kathy Vieth 500,000
Shares to be reserved for the conversion of the
$4,250,000 of debentures issued in May 1997 42,500,000
-----------
Total 193,900,000
===========
If the refinancing goes as planned, the Company would have the following
approximate pro forma outstanding or committed shares as of May 15, 1997,
after the effects of the reverse stock split:
Outstanding shares (including 2,000,000 held by
Mr. Wampler) 20,095,000
Shares reserved for outstanding:
Options 340,000
Warrants 1,580,000
Convertible notes and accrued interest 430,000
Options which have been committed in various
agreements but not yet granted 100,000
Shares to be issued to M. Kathy Vieth 25,000
Shares to be reserved for the conversion of the
$4,250,000 of debentures issued in May 1997 21,250,000
-----------
Total 43,820,000
===========
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
manufacturing and licensing business of pen-based computing products for over
ten years, through its wholly owned subsidiary, Scriptel Corporation.
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 less 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. It is
estimated that the current electrostatic system will be highly competitive for
the next four to five years. In May 1996, the Company began shipping
development kits of its cordless pen/touch digitizer subsystem to potential
customers. In early 1997, the Company began shipping products using the
Company's patented WriteTouch (TM) technology. Two original equipment
manufacturers ("OEMs") are using these in their new computer notebook and
tablet applications. Scriptel has products under development with three other
OEMs. Due to the anticipated cost associated with the completion of the
development of the Company's products and the ramp up of production,
management cannot predict when the Company will achieve profitable operations
on a consolidated basis.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
The consolidated statements of operations include the results of operations
for Coloray since date of acquisition in April 1994 and until the investment
in Coloray dropped below 50% in December 1996.
1997 1996
Sales $ 139,000 $ 60,000
The Company operates as a single business segment, providing computer
peripheral equipment to OEMs. Scriptel's sales in this segment have increased
due to a higher demand for Scriptel's glass panels for pen-based computers,
and with the recent shipments of WriteTouch (TM) products.
1997 1996
Cost of sales $ 96,000 $ 46,000
The year-to-year fluctuations in cost of sales generally follow the change in
revenues. Scriptel continues to have unabsorbed burden caused by the low
level of manufacturing volume and the direct costs of excess capacity.
1997 1996
General and administrative expenses $ 545,000 $ 1,494,000
Sales and marketing expenses 39,000 62,000
Research and development expenses 101,000 1,029,000
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, $1,000 in 1997 and $302,000 in
1996, was expensed when all restrictions had lapsed. The 1996 administrative
expenses include $400,000 of costs on the closure of Coloray in early 1996.
The Company also lowered its general and administrative expenses by reducing
staff at Coloray and Scriptel, and reducing its use of consultants.
Sales and marketing expenses have not changed significantly.
Cash outflows for research and development expenses have been reduced
dramatically, principally through the closure of the Coloray operation.
Research and development expenses also include unfunded costs in 1996 of
research agreements with Xetron (by Scriptel) and SRI (by Coloray), and
Cooperative Research and Development Agreements (by Coloray). Coloray's
ongoing costs have now dropped to zero. Cash payments on research and
development will increase, as the Company funds Scriptel's research agreement
obligations.
1997 1996
Other expenses $ 329,000 $1,373,000
Other expenses include interest expense of $166,000 and $389,000 in 1997 and
1996, respectively. Other expense also includes finance costs of $163,000 in
1997 and $670,000 in 1996. Interest expense reflects high levels of debt
financing. Interest expense in 1996 included stated interest of $242,000 on
new demand notes totaling $672,000 of principal. Finance costs in 1996
related principally to $644,000 in value of stock warrants surrendered as
compensation on new financing. In 1997, finance costs included $46,000 in
value of warrants or options surrendered as compensation on new financings,
cash costs of financing, and a $92,000 loss recorded on changing the
conversion terms of certain debt.
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.
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, 1997, the
Company's stockholders had paid or surrendered in value $52,326,000 to acquire
49,843,809 shares of common stock and to obtain the outstanding options and
warrants. In addition, $4,559,000 of notes payable and debentures were
outstanding as of March 31, 1997, and accrued interest on notes was $1,594,000
at that date. From inception of the Company through March 31, 1997, the
Company has incurred an accumulated deficit of $63,476,000.
The Company had current liabilities in excess of current assets of
approximately $11,800,000 at March 31, 1997. This has occurred due to
cumulative operating losses being financed by the issuance of notes payable
and other liabilities.
Several debt and equity transactions have occurred to date in 1997. (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 1997 and to repay defaulted indebtedness. Management
has cut back on operating, development and marketing 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. (See Note 10.)
There can be no assurance that the proceeds from stock sales or other
financing activities will be sufficient to fund operating activities and repay
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 and anticipates that this revenue
growth will help provide for Scriptel's working capital needs on an ongoing
basis after 1997.
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. The Company has not been able to pay its
auditors to complete their audit of the 1996 financial statements. When the
audit can be completed, the Company expects a similar paragraph in the
auditor's opinion on the 1996 financial statements.
ADOPTION OF ACCOUNTING STANDARDS
There are no new accounting pronouncements which management believes will have
a material effect on the accompanying financial statements.
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 "Legal Proceedings" to the accompanying consolidated financial
statements, which is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
See Note 7 "Common Stock and Common Stock Commitments" and Note 10
"Refinancing" to the accompanying consolidated financial statements for a
discussion of recent transactions. This disclosure includes the information
required by Item 701 of Regulation S- K.
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, 1997:
Principal Interest
Cognovit promissory notes payable, due at
various dates through December 1994 $ 444,000 $ 199,000
Convertible promissory notes payable to
investors, due at various dates 877,000 342,000
Notes payable to a corporation, in default
as of December 1, 1994 500,000 149,000
Notes payable on machinery purchases,
due August 1996 93,000 8,000
Notes payable to trade creditors, due at
various dates in 1994 37,000 12,000
---------- ----------
Total in default $ 1,951,000 $ 710,000
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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27- Financial Data Schedule
(b) Reports on Form 8-K:
On January 13, 1997, the Company filed an 8-K dated December 31, 1996. This
8-K summarized the actions and effects of a reduction in the Company's
ownership interest of Coloray to below 50%. It also summarized an agreement
reached with Mr. Walter Krumm to convert $772,399 of Company indebtedness to
7,723,994 shares, and to reprice 5,669,332 warrants he owns.
On February 3, 1997, the Company filed an 8-K dated January 22, 1997 relating
to the issuance of 3,001,151 shares under the provisions of Regulation S. Of
these, 2,000,000 were purchased for cash and 1,001,151 were additional shares
issued on conversion of a debenture.
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: May 14, 1997 /s/ Bernard H. Eckstein
Bernard H. Eckstein
Chairman and Chief Executive Officer
Date: May 14, 1997 /s/ Frederick A. Niebauer
Frederick A. Niebauer
Treasurer (principal financial and
accounting officer)
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