SECURITIES AND EXCHANGE COMMISSION
Washington, D. C., 20549
Form 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended July 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 number 0-20309
TAPISTRON INTERNATIONAL, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1684918
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6203; Alabama Highway; Ringgold, GA 30736-1067
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 965-9300
--------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0004 Par Value
Redeemable Warrants
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 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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K |_|
On October 1, 1997, there were 27,192,961 shares of $.0004 Par Value Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: See part III hereof regarding incorporation
by reference from the registrant's definitive proxy statement to be filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
TAPISTRON INTERNATIONAL, INC.
PART I
Item 1. BUSINESS
GENERAL
Tapistron International, Inc. (the "Company" or "Tapistron") was organized
for the purpose of developing or acquiring proprietary technologies in the
textile industry and commercializing such technologies on a global basis. The
Company was incorporated under the laws of the State of Georgia on February 7,
1986, under the name of Textile Corporation of America. On July 19, 1986, the
Company exchanged shares of common stock for all of the outstanding stock of
Fabrication Center, Inc. ("FCI") in a transaction accounted for as a pooling of
interests. On July 16, 1991, the name was changed from Textile Corporation of
America to Tapistron International, Inc. All references to the Company include
Fabrication Center, Inc., its wholly owned subsidiary.
The Company's initial technology has been the development of a Computerized
Yarn Placement ("CYP") machine, for producing tufted carpets and rugs in highly
versatile patterns, colors and textures. The Company believes that the potential
market for its technologically advanced tufting machine lies with manufacturers
that wish to meet the growing demand for patterned products witnessed in the
commercial and residential floor covering markets. Virtually all existing
tufting machines, which produce piled products by inserting tufts of yarn into a
primary backing, are limited in their ability to produce a broad range of
patterned, multi-colored and multi-textured products. Most existing weaving
looms, which create the primary backing in the weaving process, require an
extremely time-consuming and labor intensive process to effect pattern and color
changes. The Company's CYP machine requires only minutes to change pattern,
color, texture and density combinations. Because of its compatibility with
commercially available pattern entry systems, such as those used by many major
textile manufacturers, virtually any hand-drawn, painted, photographed or
scanned image can be reproduced on the finished tufted product. The CYP machine
is not in the same market as, and will not compete with, low end solid color
plain cut pile carpet producing equipment, but is designed to provide an
alternative to current methods of producing patterned products.
Tapistron International, Inc. (The "Company") filed a voluntary petition for
relief under chapter 11 of title 11 of the United Stated Code (the "Code") on
June 21, 1996 (the "petition date"). The Company is currently operating its
business as a debtor-in-possession under the jurisdiction of the United States
Bankruptcy Court for the Northern District of Georgia (the "Court"). The
Company's liabilities as of the petition date are generally subject to
settlement in a plan or reorganization, which must be voted on by certain of its
creditors and confirmed by the Court. Until a reorganization plan has been
confirmed, the Company is prevented from making payments on pre-petition debt
unless permitted by the Code or approved by the Court. Certain contracts and
leases existing at the petition date have been rejected or assumed with the
approval of the Court. The Company continues to review all other unexpired
pre-petition executory contracts and leases to determine whether they should be
assumed or rejected. Parties affected by the rejection of contracts and leases
may file claims against the Company. Reference is made to Note 16 (Subsequent
Events) of the Company's financial statements.
INDUSTRY
The textile industry is one of the major industrial classifications in the
United States economy. Total annual dollars spent in 1995, based on D.O.C.
office of Textiles and Apparel, was over $86 billion. Many of the individual
segments within the textile industry are themselves considered separate
industries. The existing technologies of the Company focus on the carpet
industry.
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Carpet Industry
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The domestic carpet industry as we know it today, is a major subset of the
textile industry and dates back to the development of the tufting machine in the
1950's. While there are a variety of techniques for the production of carpet and
other fabric floor coverings, the dominant means of production today is machine
tufting. Tufting is a process whereby tufts of yarn are inserted into a sheet of
fabric called a primary backing. The tufts, which are closely spaced to form the
pile, are inserted into the backing by vertical, reciprocating needles similar
to those of a conventional sewing machine. Modern tufting machines consist of
one or more rows or "bars" of hundreds of threaded needles across the width of
the machine which insert the tufts as the primary backing is fed through the
machine beneath the needle-bars. The yarn is fed to the needles from cones of
yarn arranged in racks known as a creel. The advantage of machine tufting is
that it produces relatively low-cost, durable carpet in large production runs
when compared with hand tufted and hand and machine woven products. However,
because of mechanical and other limitations associated with existing tufting
technology machinery, tufting offers limited versatility in pattern style.
During recent years, carpet manufacturers in the United States have
experienced a substantial increase in demand for patterned carpets, particularly
in the commercial carpet market. During 1988, 23% of the carpet styles being
produced in the United States for the commercial market (comprised of broadloom
and modular products) incorporated some sort of pattern. Currently this figure
has risen to approximately 36%. The residential carpet market has also witnessed
an increased demand for patterned styles. Furthermore, industry statistics
reveal that the demand for patterned carpets and rugs are significant in Europe,
the Pacific Rim and other countries throughout the world.
There are currently three principal methods of manufacturing patterned,
machine-made, pile-faced floor coverings. The first method is the traditional
weaving process utilizing either of two basic types of looms: the Axminster,
which traces its origins back to the 1800s, or the Wilton, the dominant weaving
machine used in the United Kingdom and Europe which was first introduced in the
early 1800s. A second method involves printing or dyeing finished carpeting
using either a jet spray technique or flat bed screening. The third method
involves modifications to conventional tufting machinery to produce carpets with
high/low pile and/or geometric patterns. These include (i) single or double
shifting needle bars, which are mechanically controlled devices for producing
geometrics and small pattern repeats, (ii) scroll patterning attachments which
create pattern through high/low pile configurations by varying the speed at
which yarn is fed into each needle and (iii) individual controlled needles
(ICN), a method of creating pattern by "over-tufting" - implanting extra yarn
into a plain, previously tufted carpet. An enhanced version of the ICN
technology, the Colortec, is probably the CYP machine's closest competitor. The
range of patterns capable of being produced by such modifications to
conventional tufting machines is restricted, however, because of mechanical
limitations associated with these technologies. Although the CYP machine is not
in the same market as, and will not compete with, solid color carpet producing
equipment, the Company believes its CYP machine offers numerous advantages over
existing methods of producing patterned, machine-made, pile-faced floor
coverings in terms of time and cost efficiencies, versatility of pattern, color
and texture and ease of changing design parameters without the disadvantages
associated with conventional methods. Such disadvantages include the limited
pattern flexibility of existing tufting machines and the limited textures or
density characteristics associated with weaving looms, and the large creel loads
of yarn required to make a given pattern.
PRODUCT OVERVIEW
The CYP Machine
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The CYP machine is a patented process designed for the manufacture of
patterned tufted floor coverings with greater flexibility than conventional
tufting machines currently on the market. The CYP machine incorporates an
innovative technology for computerized yarn placement, whereby up to six colors
and/or types of yarn per needle are electro-mechanically selected, placed into
position within the machine's unique needle configuration and then injected into
a primary backing as directed by a computer utilizing the Company's proprietary
software. While the CYP machine needle-bar is stationary from side to side, the
primary backing can be shifted laterally as it is fed through the machine,
enabling the machine to produce products with more tufts per square inch
(resulting in greater density) than any other mechanical method currently
available.
-3-
The Company believes its CYP machine technology will enable carpet
manufacturers to meet the growing demand for patterned floor coverings by
offering them a means of producing high quality tufted carpeting in patterns.
The Company's proprietary technology provides designers and stylists with almost
complete versatility in styling and construction of tufted fabrics. The CYP
machine, used in conjunction with commercially available pattern entry systems,
enables the user to reproduce almost any scanned image or hand-drawn or painted
pattern and allows the creation of fabrics incorporating yarns with different
textures, luster levels and wear (i.e. gauge and pile) characteristics. In
effect, the designer or stylist has control of both aesthetics and quality in
the creation of the product, particularly in the critical areas of pattern,
color and texture.
A primary advantage of the CYP machine over conventional machine tufting and
weaving methods is the minimal amount of time required to change pattern, color,
texture and construction combinations. Whereas several hours to several days are
required to set up conventional machines to create certain construction
combinations, affecting a construction change with a CYP machine requires only
the touching of a computer screen - approximately a thirty second operation. The
touch screen system controls all of the machine's parameters with the exception
of pile height, which is adjusted manually. Set-up of a CYP machine can be
accomplished in less time than it takes competitive machines to set up. This
characteristic of the CYP machine allows manufacturers to economically undertake
short production runs in order to meet customer needs and specifications. It
also offers a means of supplying salespeople with a wide variety of sample
products to meet the particular interests of potential customers within a matter
of days.
Patterns in the CYP machine products can be created by using a variety of
yarn systems, including pre-dyed/solution-dyed BCF (bulked continuous filament)
or spun yarn, rather than injecting color onto an already tufted piece of
carpet.
The CYP machine also offers greater textural capabilities than other
existing carpet manufacturing methods. On a CYP machine, different types of yarn
can be placed in a variety of patterns according to the designer's preference.
The resulting carpet contains a textural design which is not easily obtainable
by other methods.
The CYP machine is compatible with a commercially available computerized
pattern entry system. A typical pattern entry system enables a designer to
create designs or patterns efficiently on a computer screen and quickly modify
or rearrange colors or other aspects of the design or pattern. Such pattern
entry systems are widely used in the carpet industry.
MANUFACTURING
The CYP machine
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The Company's facilities are located in Ringgold, Georgia. The Company
manufactures the CYP machine at its 50,000 square foot manufacturing facility
completed in July 1993. The manufacturing facility is capable of supporting
manufacturing requirements for the foreseeable future.
Suppliers
The Company purchases the frames for its existing CYP machine from local
tool and die manufacturers which fabricate the frames in accordance with Company
specifications. The Company purchases the motors and other various mechanical
components of the existing CYP machine as custom-made or stock components from
unaffiliated outside suppliers. The Company believes that alternative sources or
substitutes of most of the components for both CYP machines can be developed, if
necessary. To date, the Company has not experienced any delays in delivery of
components. The Company does not expect to maintain large inventories and will
generally order required components as it receives customer orders. Accordingly,
any delay or difficulties in developing such alternatives or substitutes could
result in shipment delays, which would adversely affect the Company's
operations.
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SALES, MARKETING AND SERVICING
The CYP Machine
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The Company intends to market its CYP machines initially to textile industry
concerns engaged in the manufacture of commercial carpeting and residential
floor coverings. Customers may choose to purchase an entire CYP machine system
from the Company or only certain components thereof, obtaining the remaining
components (such as the creel, the compressor, or the pattern entry system) from
alternate suppliers. The purchase price of the CYP machine systems varies based
on the configuration chosen.
The Company's ability to market CYP machines successfully will depend upon
the willingness of potential customers to incur substantial cost and expend the
time and effort involved in the development of these products, particularly
because many of such customers may be reluctant to replace or significantly
modify their existing manufacturing methods. The Company offers a limited
warranty on the CYP machine system and provides training, maintenance and
support to customers following the installation of the CYP machine system.
To date, the Company's marketing efforts have been focused primarily
overseas. However, the Company is currently expanding its efforts in the
domestic market, increasingly providing a greater concentration of resources on
the United States. Marketing efforts in the United States are conducted by the
Company's internal marketing personnel. In the international arena, the
Company's marketing personnel are assisted by independent agents throughout the
world who represent Tapistron in their respective countries.
DEVELOPMENT AND ACQUISITIONS
Research and development activities are being conducted by the Company's
in-house engineering staff to provide continual enhancements to the CYP
technology. It is anticipated that these in-house efforts will result in major
improvements during the next few years. Although well underway, it is premature
to discuss the objectives or completion dates.
COMPETITION
The CYP Machine
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The Company competes with entities engaged in the design, development and
marketing of equipment for the three existing methods of manufacturing
machine-made, patterned fiber floor coverings. In the area of traditional
weaving, the Company's product competes with Axminster and Wilton type looms,
the dominant manufacturers of which are Crabtree Ltd. of the United Kingdom and
Michel Van De Wiele of Belgium, respectively. In addition, there are other
smaller national and regional firms which manufacture weaving looms. CYP
machines also face competition from jet spray dyeing techniques such as the
Millitron process utilized by Milliken & Company and screen printing
apparatuses. CYP machines also compete with technologies which enhance the
traditional pattern tufting processes, such as shifting needle bars, scroll
patterning attachments, individual controlled needles, and the Colortec machine,
developed and marketed by the major U. S. tufting machine manufacturers,
including Card-Monroe Corporation, Cobble Tufting Machine Company, Inc. and
Tuftco Corporation. All entities with which the Company competes have
substantially greater financial, manufacturing and other resources than the
Company.
The Company will compete on the basis of pattern, color, texture and density
flexibility afforded by the CYP machine technology. The CYP machine offers
manufacturers a means of economically producing high quality, machine tufted
floor coverings in patterns and colors which to date have been unavailable or
too costly to produce in tufted carpet. The Company believes that its CYP
machines will compete favorably with existing manufacturing methods on the basis
of cost efficiencies for labor, materials and space, rather than price. CYP
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machines offer the advantages of (i) smaller creel means reduced changeover and
space requirements; (ii) simple set-up and manipulation of pattern, color,
texture and construction at the machine; (iii) short production runs and
customized strikeoffs can be done more economically than with other methods; and
(iv) more flexibility for the designer. In addition, because of the minimal time
required to change pattern, texture, density and color, the CYP machines allow
for the production of short-run, custom orders to meet customer specifications.
Competition to Date
- -------------------
In 1992, the Company faced the inherent difficulties of the introduction of
a new product that was competing with traditional technology in an established
industry. Not only did the machine need to be proven to the carpet industry, but
the product from the machine had to be proven in the marketplace. Initial sales
to established companies were promising; however, the year after its
introduction onto the market, when sales should be building, a premature
announcement was made of a revolutionary second generation CYP Machine with
improved production speed - R&D which was eventually discontinued. This
information dramatically decreased the interest of potential buyers in the
current machine and created a substantial obstacle to sales initiatives. The
result of fewer machine sales at such an early period in the machine's history
meant a reduced chance for the machine to be proven as a production machine to
carpet manufacturers, and less CYP product from the machine in the market to
create an interest in the machine and a niche for itself.
Although all of the earlier mentioned technologies compete with the CYP Machine
in the general area of patterned carpet, all are limited by either pattern
capability or by gauge. CYP product is unique. The closest competitor is another
advanced patterned tufting machine, the Colortec machine, which has the
advantages of being based on accepted technology already in the industry and
being manufactured by an established tufting machine manufacturer. Even so, it
also had a much slower start than anticipated. Against even this close
competitor though, the CYP Machine with its variable gauge has an advantage. The
overall flexibility of the CYP Machine makes it ideal for the creation of unique
and distinction products which expand the options of the carpet manufacturer.
PATENTS AND PROPRIETARY RIGHTS
The CYP Machine
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The Company has seven United States patents and 10 foreign patents and
anticipates filing additional patent applications, all generally covering the
technology incorporated in the Company's CYP product. The Company believes its
patents and proprietary rights have been and will continue to be important in
enabling the Company to compete with respect to the CYP technology. Failure to
obtain patents in certain foreign countries may materially adversely affect the
Company's ability to compete effectively in certain international markets. The
Company also relies on trade secrets that it seeks to protect, in part, through
confidentiality agreements with employees and other parties.
EMPLOYEES
As of July 31, 1997, the Company had 27 full-time employees. The Company
considers its relations with its employees to be satisfactory.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and positions of the executive
officers and the directors of the Company:
Name Age Position with the Company
---- --- -------------------------
Kim Amos 40 Vice President of Engineering and Director
Gary Coulter 51 Corporate Secretary and Director
Floyd Koegler 54 Vice President and Chief Financial Officer
J. Darwin Poe 52 President and Chief Executive Officer and Director
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KIM AMOS started his professional career in 1983 with SWI - Cobble
Division, a leading manufacturer of tufting machinery and peripheral tufting
equipment. While at Cobble he initially served in electrical engineering, where
he supported manufacturing, customer service, and special projects. In later
years he focused on introducing new technologies into the industry, which lead
to major tufting machine enhancements. In February 1990 Kim was contacted by the
Company to help develop the Computerized Yarn Placement (CYP) Machine and was
instrumental in that effort. He officially joined the Company in July, 1990. Kim
now serves as Vice President of Operations and has been a Director since
February 1996.
GARY COULTER, Corporate Secretary, is also Chairman of the Board and CEO of
Spintek Technologies and a partner of Coulter and Davenport Law Firm. Mr.
Coulter's experience includes: President, COO and Director of Private Biological
Corporation, a developer of biological products and treatments for cancer, from
1994 to 1996; CEO of Omega International, Inc., developer of natural products
for the treatment of AIDS, from 1992 to 1994; and President, COO and Director of
Woodruff Investment Co., a developer, manager and financier of real estate
investments, from 1986 to 1996. Mr. Coulter received his undergraduate degree
from Emory University, his J.D. degree from the University of Georgia School of
Law, and his L.L.M. in taxation from New York University School of Law.
FLOYD KOEGLER has served as a Vice President and CFO of Tapistron since
September 1996. He is a certified public accountant with an MBA from Brenau
University in Gainsville, Georgia. He has an extensive background in corporate
finance, which includes auditing and financial information analysis for Aladdin
Mills from 1994 until joining Tapistron. From 1990 to 1994, Mr. Koegler held
controller positions at a Crown America/Texture-Tex, Inc. and Citizens Federal
Savings and Loan. In addition, he served as CFO of the fiber spinning operations
of Integrated Products, Inc. In Rome, Georgia and he was a cost analyst for dyes
and chemicals for American Emulsions and Coronet Industries.
J. DARWIN POE came to Tapistron in July 1995 and became President of the
Company in February 1996. Mr. Poe is a graduate of Auburn University with a
degree in Textile Engineering and an MBA from Brenau University. He is also on
Tapistron's Board of Directors and has spent his entire professional career
in the U.S. textile industry. From 1993 to 1995, he served as Technical
Director of Prince Street Technologies, and from 1985 to 1993, he was an
Account Executive at Amoco Fabrics and Fibers Company. Mr. Poe also served as
COO of Desoto Falls, Inc. Of Dalton, Georgia, and has held various management
positions with other industry leaders such as the Bibb Company and West Point
Pepperell.
Item 2. PROPERTIES
The Company's executive offices and manufacturing operations are located in
an approximately 50,000 square foot facility at Alabama Highway, Ringgold,
Georgia. The building and adjacent land was sold on June 10, 1996 in a
sale-leaseback transaction.
Item 3. LEGAL PROCEEDINGS
Reference is made to Note 1 of the Company's financial statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders through the
solicitation of proxies or otherwise during the period from August 1, 1996
through July 31, 1997, covered by this report.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On June 24, 1992, the Securities and Exchange Commission declared effective
the Company's Registration Statement with respect to an initial public offering
of 2,250,000 shares of Common Stock and 2,587,500 Redeemable Warrants (including
337,500 Redeemable Warrants exercised under the Underwriter's over allotment
option). The Company consented to the de-listing of its warrants from the NASDAQ
Stock Market effective as of August 20, 1996 due to the lack of any significant
trading activity in the warrants and because there were no market makers for the
warrants as required by NASDAQ rules. NASDAQ deleted the Company from the NASDAQ
Stock Market effective August 29, 1996, as a result of the Company's
non-compliance with the quantitative maintenance criteria for continued listing
on the NASDAQ Stock Market. The Company's stock will continue to be traded as a
bulletin board stock. The Common Stock and the Redeemable Warrants were listed
on NASDAQ under the symbols TAPI and TAPIW, respectively.
The following tables set forth, for the periods indicated, the high and low
bid prices for the Company's Common Stock and Redeemable Warrants as reported by
NASDAQ. Prices represent actual transactions, but do not reflect adjustments for
retail markups, markdowns or commissions.
High Low
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COMMON STOCK
1995: First Quarter (August 1, 1994 - October 31, 1994) $4 1/2 $2 13/32
Second Quarter (November 1, 1994 - January 31, 1995) 3 7/8 2 1/4
Third Quarter (February 1, 1995 - April 30, 1995) 3 1/4 1 7/16
Fourth Quarter (May 1, 1995 - July 31, 1995) 2 1/8 5/8
1996: First Quarter (August 1, 1995 - October 31, 1995) 1 3/8 13/16
Second Quarter (November 1, 1995 - January 31, 1996) 1 1/16 1/4
Third Quarter (February 1, 1996 - April 30, 1996) 25/32 3/8
Fourth Quarter (May 1, 1996 - July 31, 1996) 5/8 1/4
1997: First Quarter (August 1, 1996 - October 31, 1996) NA NA
Second Quarter (November 1, 1996 - January 31, 1997) NA NA
Third Quarter (February 1, 1997 - April 30, 1997) NA NA
Fourth Quarter (May 1, 1997 - July 31, 1997) NA NA
REDEEMABLE WARRANTS
1995: First Quarter (August 1, 1994 - October 31, 1994) 11/16 3/8
Second Quarter (November 1, 1994 - January 31, 1995) 1/2 1/4
Third Quarter (February 1, 1995 - April 30, 1995) 3/8 3/32
Fourth Quarter (May 1, 1995 - July 31, 1995) 1/4 3/32
1996: First Quarter (August 1, 1995 - October 31, 1995) 3/16 3/16
Second Quarter (November 1, 1995 - January 31, 1996) 3/16 3/16
Third Quarter (February 1, 1996 - April 30, 1996) 3/16 3/16
Fourth Quarter (May 1, 1996 - July 31, 1996) 3/16 3/16
1997: First Quarter (August 1, 1996 - October 31, 1996) NA NA
Second Quarter (November 1, 1996 - January 31, 1997) NA NA
Third Quarter (February 1, 1997 - April 30, 1997) NA NA
Fourth Quarter (May 1, 1997 - July 31, 1997) NA NA
-8-
At October 25, 1997, there were approximately 400 shareholders of record, and
as of that date, the Company estimates there were approximately 3,000 beneficial
owners holding stock in nominee or "street" name. The Company has not paid any
cash dividends and does not anticipate paying any cash dividends in the
foreseeable future.
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included herein in Item 8. The consolidated statement of operations data set
forth below with respect to the fiscal years ended July 31, 1997, 1996 and 1995
and the consolidated balance sheet data at July 31, 1997 and 1996 are derived
from and are qualified by reference to, the audited consolidated financial
statements included in Item 8 of this report and should be read in conjunction
with those financial statements and notes thereto. The consolidated statement of
operations data for the Company set forth below with respect to the fiscal years
ended July 31, 1994, 1993 and 1992 and the consolidated balance sheet data at
July 31, 1994, 1993 and 1992 are derived from audited consolidated financial
statements of the Company, or its predecessor, as the case may be, not included
herein.
Years Ended July 31,
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1997 1996 1995 1994 1993
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Sales $ 3,626,092 $ 1,305,499 $ 2,565,544 $ 4,315,060 $ 6,823,721
Cost of sales 2,477,302 1,146,717 1,757,793 2,850,422 3,607,182
Operating expenses:
Administrative 1,998,245 3,473,581 3,656,532 3,730,194 2,927,558
Research and development 10,384 23,473 2,405,438 3,529,906 549,660
Net income (loss) 316,375 ( 4,478,096) ( 6,053,175) ( 5,840,945) 24,961
Net income (loss) per share .03 ( .49) ( .69) ( .76) -
Extraordinary item - .04 - - -
Shares used in computing per
share amounts 10,526,295 10,012,390 8,761,117 7,726,018 7,756,556
As of July 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital (deficiency) $ 758,111 $ 1,084,487 $( 907,020) $ 2,649,245 $ 8,570,445
Total Assets 5,267,780 4,016,538 9,655,907 10,982,246 14,733,746
Long-term debt 744 5,060 14,001 1,291,320 50,433
Accumulated deficit ( 21,918,100) ( 22,234,475) (17,756,379) (11,703,107) ( 5,862,162)
Stockholders' equity 972,449 656,074 4,839,170 7,653,669 13,332,499
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Years Ended July 31, 1997 and July 31, 1996
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Revenues for the year ended July 31, 1997 ("Fiscal 1997") were $3,626,092
as compared to revenues of $1,305,499 for the year ended July 31, 1996 ("Fiscal
1996"). The increase in revenues is primarily due to the increase in the number
of machines sold for the year. The increase in machines sold is a result of an
increased interest in the patterned carpet industry, improved operating
efficiencies and continuing enhancements in machine technology.
Cost of sales for July 31, 1997 were $2,477,302 as compared to $1,146,717
for July 31, 1996. The increase in cost of sales is due to increased machine
revenues. The cost of sales as a percentage of sales decreased to approximately
68% in Fiscal 1997 from 88% in Fiscal 1996. This decrease is the direct result
of the increase in the number of machines sold.
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Operating expenses consist of administrative expenses and research and
development expenses. Administrative expenses decreased from $3,473,581 in
Fiscal 1996 to $1,998,245 in Fiscal 1997, a decrease of approximately 42%. This
decrease reflects the allowances related to obsolete inventory and bad debt
expense recognized in Fiscal 1996. The remainder of the decrease relates to a
reduction of legal and other professional fees totaling $499,000. Management
anticipates operating expenses to increase in the future as they expand the
international marketing plan. Furthermore, the Company expects to spend more on
future developments to provide customers with the most current technologies
available.
Legal, accounting, and other professional fees in connection with
reorganization proceedings totaled $793,631. Interest expense decreased to
$30,269 in Fiscal 1997 from $314,611 in Fiscal 1996. The decrease was a result
of being able to operate under court protection which allowed no interest to
accrue on prior debt.
Years Ended July 31, 1996 and July 31, 1995
- -------------------------------------------
Revenues for the year ended July 31, 1996 ("Fiscal 1996") were $1,305,499
as compared to revenues of $2,565,544 for the year ended July 31, 1995 ("Fiscal
1995") resulting from the sale of one CYP machines in Fiscal 1996 as compared to
two CYP machines in Fiscal 1995. The decrease was primarily due to the fact that
potential customers delayed placing orders due to the perception that the
Company did not have sufficient cash to support operations and technical support
of the CYP machines. Cost of sales decreased to $1,146,717 in Fiscal 1996 from
$1,757,793 in Fiscal 1995 as a result of the decrease in the number of machines
sold. Cost of sales as a percentage of sales increased to approximately 88% in
Fiscal 1996 from 68% in Fiscal 1995. This increase is the result of CYP machines
being sold at a lower margin in order to generate cash.
Operating expenses consist of administrative expenses and research and
development expenses. Administrative expenses decreased to $3,473,581 in Fiscal
1996 from $3,656,532 in Fiscal 1995, a decrease of approximately 5%.
Material changes in administrative expense include a decrease in salary
expense of $447,798 due to a reduction in the work force. Consulting expense
decreased $307,371 due to a contract cancellation by the Company. Other
professional fees increased $333,077 due to expense of Chapter 11 filing. Also
included in the administrative expenses is a $500,000 allowance for
noncollectible long-term receivable related to machine sales. Also included in
the administrative expenses of Fiscal 1996 and 1995 is a $547,441 and $474, 215
allowance for obsolete raw materials inventory which resulted primarily from
enhancements to the existing CYP machine technology as well as the
discontinuation of the new model CYP machine. The Company has implemented
several cost control measures designed to maintain administrative expenses at an
acceptable level. The cost control measures include a reduction in the work
force and cross training of employees. Expenses such as telephone expense,
health insurance and building maintenance will be reduced due to overall
down-sizing and changing to a scaled down version of the former contracts.
Research and development expenses decreased to $23,473 in Fiscal 1996 from
$2,405,438 in Fiscal 1995, a 99% decrease. This decrease reflects the Company's
substantially decreased development activities relating to the new model of the
CYP machine, the enhancement of the existing CYP machine and the discontinuation
of the dye processes.
Interest expense increased to $314,611 in Fiscal 1996 from $248,594 in
Fiscal 1995, a 27% increase. This increase is the result of the Company securing
additional short-term financing during Fiscal 1996 which totaled approximately
$1,351,000. Interest income decreased to $26,292 in Fiscal 1996 from $42,529 in
Fiscal 1995.
Loss on disposal of assets increased to $1,022,505 in Fiscal 1996 from
$592,891 in Fiscal 1995, a 72% increase. This increase is the result of sale of
the main production facility building and another facility at a different
location.
The results of the forgiveness of debt by two creditors, one for accounting
services and the other for research and development consulting, totaling
$420,150 equals the reported extraordinary item. Reorganization items totaling
$249,150 are entirely comprised of attorneys' fees paid to two law firms.
-10-
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1997, the Company had working capital of $758,111, a
$326,376 decrease from July 31, 1996. This decrease is primarily a result of the
Company's reduction in inventory. As of July 31, 1997, the Company had total
cash of $27,946, up from $17,149 at July 31, 1996. Cash provided by operations
was $446,248 in 1997 compared to cash used in operations of $1,001,970 and
$3,608,283 in 1996 and 1995, respectively. Investing activities used $26,756 in
cash during 1997, compared to cash provided of $2,173,085 in 1996, and cash
consumed of $564,755 in 1995. The proceeds from the sale-leaseback of the
Company's main facility provided $1,900,000 of investing proceeds in 1996. The
Company used $408,695 for financing activities in 1997 compared to $1,253,392 in
1996. Cash provided by financing in 1995 was $3,559,751. Financing activities
for 1997 included $1,008,665 of principal payments on debt and $599,970 proceeds
from issuance of debt. Financing activities for 1996 included $2,372,678 of
principal payments on debt subject to settlement under a plan of reorganization;
and $1,210,495 proceeds from issuance of debt.
At July 31, 1997, the Company had $22.8 million of net operating losses
available to offset future taxable income for federal and state income tax
purposes. The loss carryforwards expire in various years through 2010.
Realization of deferred tax assets associated with the net operating loss
carryforwards and reversals of the temporary differences is dependent upon
generating sufficient taxable income prior to expiration of the NOL
carryforwards. Even though the Company has incurred tax losses for seven of the
past nine fiscal years, management believes that it is more likely than not it
will generate taxable income sufficient to realize a portion of the tax benefit
associated with future deductible temporary differences and NOL carryforwards
prior to their expiration. This belief is based upon, among other factors,
changes in operations that have occurred during the last two years.
Specifically, cost savings by bringing research and development in house and by
better usage of just-in-time inventory control. The Company has assessed the
trends regarding patterned carpet and with consideration of its current
marketing strategies, anticipates a continued improvement in operating results.
Management believes that a valuation allowance is appropriate given the current
estimates of future taxable income. If the Company is unable to generate
sufficient taxable income in the future through operating results, an increase
in the valuation allowance will be required through a charge to expense.
However, if the Company achieves sufficient profitability to utilize a greater
portion of the deferred tax asset, the valuation allowance will be reduced
through a credit to income.
On June 21, 1996, the Company filed a voluntary petition for protection
under Chapter 11 of the Federal bankruptcy code. The Company was allowed to
continue to operate under the supervision of the bankruptcy court and was given
a limited amount of time free from creditors' collection efforts in order to
restructure its finances. The Company's First Amended and Restated Plan of
Reorganization was filed on March 14, 1997 in the U.S. Bankruptcy Court Northern
District, Atlanta Division. On March 28, 1997, the Company filed the Debtors
Amended and Restated Disclosure Statement.
As a subsequent event, the Company's First Amended and Restated Plan of
Reorganization provided that the Company would do a private placement for
$2,500,000. As of August 6, 1997, the private placement was completed. As a
result, the bankruptcy court confirmed the Plan on August 18, 1997, the Plan
became effective as of August 29, 1997.
Management believes the proceeds from issuance of the Company's common
stock through the private placement of $2.5 million, the existing cash and
anticipated cash generated from operations will be sufficient to satisfy the
Company's future cash requirements
Recently Issued Accounting Standards
- ------------------------------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets", at July 31, 1997.
This Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. This Statement requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The adoption of
this accounting standard had no effect on the Company's financial statements.
-11-
At July 31, 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation". This Statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Examples are
stock purchase plans, stock options, restricted stock, and stock appreciation
rights. This Statement also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from non-employees. Those
transactions must be accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The adoption of this accounting standard had no effect on
the Company's financial statements.
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings Per Share", which establishes standards for computing
and presenting earnings per share. This Statement simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15. The
adoption of this Statement is required in fiscal year ending July 31, 1998. The
Company anticipates that the impact of adoption will be immaterial.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This Statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The adoption of this Statement is required in fiscal year
ending July 31, 1998. The Company anticipates that the impact of adoption will
be immaterial.
IMPACT OF INFLATION
Management does not believe that inflation has a material impact on the
Company's results of operations. Management believes that it is able to reflect
inflationary cost increases in its prices to customers.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this item is submitted as a separate section in
this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
With the exception of a description of the Directors and Executive Officers
of The Registrant which appears on page 7 herein, Part III is omitted because
prior to December 31, 1997, the Company will file a definitive Proxy Statement
with the Securities and Exchange Commission pursuant to Regulation 14A which
involves the election of directors.
-12-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
----
The following consolidated financial statements of Tapistron
International, Inc. are required to be included in Item 8 are listed below:
Report of Independent Auditors 16
Consolidated Balance Sheets - July 31, 1997 and 1996 17
Consolidated Statements of Operations - Year Ended July 31, 1997, 1996 and 1995 19
Consolidated Statements of Changes in Stockholders' Equity - Year Ended July 31, 1997,
1996 and 1995 20
Consolidated Statements of Cash Flows - Year Ended July 31, 1997, 1996 and 1995 21
Notes to Consolidated Financial Statements 23
The following consolidated financial statements schedules are included in Item 14(d):
Schedule I - Valuation and Qualifying Accounts 33
Consolidated Pro Forma Balance Sheet (Unaudited) 34
Note to Consolidated Pro Forma Balance Sheet (Unaudited) 36
All other schedules are omitted because the information required therein is
not applicable, or the information is given in the financial statements and
notes thereto.
-13-
(a) 3. EXHIBITS
3.1 -Articles of Incorporation of the Registrant, as amended*
3.2 -By-Laws of the Registrant*
3.3 -Amendment to Articles of Incorporation*
4.1 -Form of Representative's Warrant Agreement relating to
Representative's Options*
4.2 -Form of Warrant Agreement (including form of Redeemable Warrant
Certificate)*
4.3 -Specimen Common Stock Certificate*
10.1 -1992 Stock Option Plan*
10.2 -1989 Stock Option Plan*
10.3 -Lease for Registrant's Facility*
10.4 -Option Agreement to Purchase Technology between the Registrant and
Ful-Dye, Inc.*
10.5 -Form of Consulting Agreement with the Representative*
10.6 -First Exclusive License Agreement with Ful-Dye, Inc.**
10.8 -Exclusive License Agreement with Ful-Dye, Inc.****
10.10 -Exclusive Sales Representative Agreement with Asahi Trading Co.,
Ltd.****
21.1 -List of Subsidiaries*
27 -Financial Data Schedule
* Incorporated by reference to the exhibit with the same number filed in
connection with the Company's Registration Statement on Form S-1, File
Number 33-47759, declared effective by the Securities and Exchange
Commission on June 24, 1992.
** Incorporated by reference to the exhibit with the same number filed in
connection with the Company's Form 10-K filed for the year ended July 31,
1992.
*** Incorporated by reference to the exhibit with the same number filed in
connection with the Company's Form 10-K filed for the year ended July 31,
1993.
**** Incorporated by reference to the exhibit with the same number filed in
connection with the Company's Form 10-K filed for the year ended July 31,
1994.
(b) Report on Form 8-K - The Registrant did not file a Form 8-K report
during the last quarter of the period covered by this report.
(c) Exhibits. See (a)3. above.
(d) Financial Statement Schedules. The response to this portion of Item
14, is submitted under Item 14.(a) 1. and 2. above.
-14-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TAPISTRON INTERNATIONAL, INC.
By: /s/ J. Darwin Poe 10-27-97
------------------------------------------ -----------------
J. Darwin Poe Date
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons in the capacities and on the dates
indicated.
Signatures Title Date
---------- ----- ----
/s/ Gary Coulter
- -------------------------- Corporate Secretary and Director 10-27-97
Gary Coulter
/s/ J. Darwin Poe
- -------------------------- President, Chief Executive
J. Darwin Poe Officer and Director 10-27-97
/s/ Kim Amos
- -------------------------- Vice President of Engineering
Kim Amos and Director 10-27-97
/s/ Floyd S. Koegler, Jr.
- --------------------------
Floyd S. Koegler, Jr. Chief Financial Officer 10-27-97
-15-
Report of Independent Auditors
------------------------------
Board of Directors and Stockholders
Tapistron International, Inc.
Ringgold, Georgia
We have audited the accompanying consolidated balance sheets of Tapistron
International, Inc. and subsidiary as of July 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended July 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Tapistron International, Inc. and subsidiary as of July 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended July 31, 1997, in conformity with generally accepted
accounting principles.
DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP
Birmingham, Alabama
September 26, 1997
-16-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
July 31, 1997 and 1996
ASSETS
1997 1996
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 27,946 $ 17,149
Receivables, net of allowance of $39,905 as of July 31, 1997
and 1996, respectively 720,740 119,872
Note receivable 350,000 600,000
Inventory 1,231,002 2,082,495
Prepayments 102,453 20,707
Deferred income taxes 100,000 --
---------- ----------
Total current assets 2,532,141 2,840,223
---------- ----------
PROPERTY AND EQUIPMENT, NET 564,324 877,269
---------- ----------
OTHER ASSETS
Long-term receivables, net allowance of $500,000 as of
July 31, 1997 and 1996, respectively -- --
Patents and patent license 263,068 286,160
Deferred income taxes 1,900,000 --
Other 8,247 12,886
---------- ----------
Total other assets 2,171,315 299,046
---------- ----------
TOTAL $5,267,780 $4,016,538
========== ==========
The accompanying notes are an integral
part of these financial statements.
-17-
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
---- ----
CURRENT LIABILITIES
Short-term debt $ -- $ 1,028,687
Current portion of long-term debt 4,315 4,729
Accounts payable 178,068 33,970
Accrued expenses 655,621 408,350
Customer deposits 936,026 280,000
------------ ------------
Total current liabilities 1,774,030 1,755,736
------------ ------------
LIABILITIES SUBJECT TO SETTLEMENT UNDER
REORGANIZATION PROCEEDINGS 2,520,557 1,599,668
------------ ------------
LONG-TERM DEBT 744 5,060
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value - 2,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock - $.0004 par value - 100,000,000 shares
authorized; and 10,581,813 shares issued 4,233 4,233
Additional paid-in-capital 22,899,108 22,899,108
Accumulated deficit (21,918,100) (22,234,475)
Treasury stock - 55,518 shares outstanding as of
July 31, 1997 and 1996, at cost (12,792) (12,792)
------------ ------------
Total stockholders' equity 972,449 656,074
------------ ------------
TOTAL $ 5,267,780 $ 4,016,538
============ ============
The accompanying notes are an integral
part of these financial statements.
-18-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended July 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
SALES $ 3,626,092 $ 1,305,499 $ 2,565,544
COST OF SALES 2,477,302 1,146,717 1,757,793
------------ ------------ ------------
Gross profit 1,148,790 158,782 807,751
------------ ------------ ------------
OPERATING EXPENSES
Administrative expenses 1,998,245 3,473,581 3,656,532
Research and development 10,384 23,473 2,405,438
------------ ------------ ------------
2,008,629 3,497,054 6,061,970
OPERATING LOSS (859,839) (3,338,272) (5,254,219)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (30,269) (314,611) (248,594)
Interest income 114 26,292 42,529
Loss on disposal of assets -- (1,022,505) (592,891)
------------ ------------ ------------
Other income (expense) (30,155) (1,310,824) (798,956)
Loss before reorganization items, income tax
benefit and extraordinary item (889,994) (4,649,096) (6,053,175)
REORGANIZATION ITEMS (793,631) (249,150) --
------------ ------------ ------------
Loss before income tax benefit and extraordinary item (1,683,625) (4,898,246) (6,053,175)
INCOME TAX BENEFIT (2,000,000) -- --
------------ ------------ ------------
Income (loss) before extraordinary tem 316,375 (4,898,246) (6,053,175)
EXTRAORDINARY ITEM
Gain from extinguishment of debt -- 420,150 --
------------ ------------ ------------
NET INCOME (LOSS) $ 316,375 $ (4,478,096) $ (6,053,175)
============ ============ ============
EARNINGS PER SHARE
Income (loss) before extraordinary item $ 0.03 $ (0.49) $ (0.69)
Extraordinary item -- 0.04 --
Net income (loss) $ 0.03 $ (0.45) (0.69)
------------ ------------ ------------
Weighted average number of shares outstanding $ 10,526,295 $ 10,012,390 $ 8,761,117
============ ============ ============
The accompanying notes are an integral
part of these financial statements.
-19-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended July 31, 1997, 1996 and 1995
Common Stock
------------------------- Paid-in Accumulated Treasury
Shares Amount Capital Deficit Stock Total
------ ------ ------- ------- ----- -----
BALANCE - 8-1-94 7,737,013 $ 3,095 $ 19,366,473 $ ( 11,703,107) $ ( 12,792) $ 7,653,669
Issuance of new shares 1,944,800 778 3,237,995 - - 3,238,773
Other R/E transaction - - - ( 97) - ( 97)
Net loss - - - ( 6,053,175) - ( 6,053,175)
---------- ---------- ------------ ---- ---------- --- ------ -------------
BALANCE - 7-31-95 9,681,813 3,873 22,604,468 ( 17,756,379) ( 12,792) 4,839,170
Issuance of new shares 900,000 360 294,640 - - 295,000
Net loss - - - ( 4,478,096) - ( 4,478,096)
---------- ---------- ------------ ---- ---------- --- ------ -------------
BALANCE - 7-31-96 10,581,813 4,233 22,899,108 ( 22,234,475) ( 12,792) 656,074
Issuance of new shares - - - - - -
Net income - - - 316,375 - 316,375
---------- ---------- ------------ ---- ---------- --- ------ -------------
BALANCE - 7-31-97 10,581,813 $ 4,233 $ 22,899,108 $ ( 21,918,100) $ ( 12,792) $ 972,449
========== ========== ============ ==== ========== === ====== =============
The accompanying notes are an integral
part of these financial statements.
-20-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended July 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 316,375 $(4,478,096) $(6,053,175)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 207,934 414,992 484,315
Loss on sales of property, plant and equipment -- 1,022,504 592,891
Issuance of stock in lieu of compensation -- 145,000 --
Changes in operating assets and liabilities:
Decrease (increase) in receivables (350,868) 328,097 (369,731)
Decrease (increase) in prepayments (81,746) 76,439 93,782
Decrease in inventory 1,014,763 1,009,497 453,448
Decrease in long-term receivables -- 500,000 --
Decrease in other assets 1,644 170,933 --
Decrease in noncompete agreements -- 11,545 23,091
(Increase) in notes receivable -- (150,000) --
(Increase) in deferred income taxes (2,000,000) -- --
Increase in accounts payable and
accrued expenses 391,369 123,060 982,096
Increase (decrease) in accounts payable and
accrued expenses, which are subject to
settlement under a plan of reorganization 290,751 (170,941) --
Increase (decrease) in customer deposits 656,026 (5,000) 185,000
----------- ----------- -----------
Net cash provided by (used in) operating
activities 446,248 (1,001,970) (3,608,283)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property and equipment -- 2,187,500 201,250
Capital expenditures and retirements (15,407) -- (560,805)
Payment for patents (11,349) (14,415) (67,575)
Investment in other assets -- -- (137,625)
----------- ----------- -----------
Net cash provided by (used in) investing
activities (26,756) 2,173,085 (564,755)
----------- ----------- -----------
The accompanying notes are an integral
part of these financial statements.
-21-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For the Years Ended July 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 599,970 1,210,495 1,320,000
Principal payments of debt (1,008,665) (381,809) (998,926)
Proceeds from issuance of debt which is subject to
settlement under a plan of reorganization -- 140,600 --
Principal payments of debt which is subject to
settlement under a plan of reorganization -- (2,372,678) --
Proceeds from issuance of common stock -- 150,000 3,238,677
----------- ----------- -----------
Net cash provided by (used in) financing
activities (408,695) (1,253,392) 3,559,751
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 10,797 (82,277) (613,287)
Cash and cash equivalents - beginning of year 17,149 99,426 712,713
----------- ----------- -----------
Cash and cash equivalents - end of year $ 27,946 $ 17,149 $ 99,426
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ 19,569 $ 34,532 $ 252,471
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Equipment reclassified to inventory $ 163,270 $ 290,817 $ --
The accompanying notes are an integral
part of these financial statements.
-22-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - REORGANIZATION AND LEGAL MATTERS
- -----------------------------------------
Tapistron International, Inc. (the "Company") filed a voluntary petition for
relief under chapter 11 of title 11 of the United States Code (the "Code") on
June 21, 1996 (the "petition date"). The Company is currently operating its
business as a debtor-in-possession under the jurisdiction of the United States
Bankruptcy Court for the Northern District of Georgia (the "Court"). The
Company's liabilities as of the petition date are generally subject to
settlement in a plan of reorganization, which must be voted on by certain of its
creditors and confirmed by the Court. Until a reorganization plan has been
confirmed, the Company is prevented from making payments on pre-petition debt
unless permitted by the Code or approved by the Court. Certain contracts and
leases existing at the petition date have been rejected or assumed with the
approval of the Court. The Company continues to review all other unexpired
pre-petition executory contracts and leases to determine whether they should be
assumed or rejected. Parties affected by the rejection of contracts and leases
may file claims against the Company.
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates continuity of operations
and the realization of assets and the satisfaction of liabilities in the normal
course of business. The chapter 11 filing, the Company's leveraged financial
structure, and recurring net losses raise a question about the Company's ability
to continue as a going concern. A plan of reorganization may materially change
the amounts reported in the consolidated financial statements (which do not give
effect to adjustments to the carrying values of assets and liabilities which may
be necessary as a consequence of a plan of reorganization). The continuation of
the Company's business as a going concern is contingent upon, among other
things, the ability to (1) formulate a plan of reorganization that will be
confirmed by the court, (2) achieve satisfactory levels of future profitable
operations, (3) maintain adequate financing, and (4) provide sufficient cash
from operations to meet future obligations.
The Company is anticipating increased sales, as marketing efforts are increased
and as customers regain confidence in the financial stability of the Company.
The Company has been focused on establishing and improving customer
relationships, and ongoing research and development projects are building on
current proven CYP technology at a steady pace.
Immediate emphasis will be placed on actively promoting the machine in the
domestic market, which will be handled by the Company's internal sales and
marketing department. The primary markets outside the U.S. are in the Pacific
Rim and Europe, and foreign sales efforts will be maintained by outside
representatives.
Due to a number of domestic CYP Machine installations over the past three years,
CYP product has been able to find some market areas for which it is well suited,
the primary one being commercial/hospitality broadloom. This market, along with
the rug market and residential broadloom, will be prime applications for the CYP
Machine. The CYP Machine is not in the same market with low-end solid color
carpet tufting machines, and our focus will continue to be on the manufacturers
of high-end carpet, which is a value-added product market. So, as there has been
an increasing trend toward product differentiation in the carpet industry, the
future is continually looking brighter for this machine and for patterned
tufting in general.
The Company filed a plan of reorganization on March 14, 1997, which was amended
on July 18, 1997. (See Note 16 - Subsequent events).
-23-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
The significant accounting policies and practices followed by Tapistron
International, Inc. (the "Company") and its subsidiary are as follows:
Description of Business
- -----------------------
The Company is in the business of developing or acquiring proprietary
technologies in the textile industry. To date, the Company's efforts have been
focused on the continued development, production and marketing of the
computerized yarn placement (CYP) machine and the exploration of a second
technology involving the dyeing of textile materials.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Fabrication Center, Inc. ("FCI"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company maintains
at various financial institutions cash and cash equivalent accounts which may
exceed federally insured amounts at times.
Inventory
- ---------
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred and additions and improvements
that significantly extend the lives of assets are capitalized. Upon sale or
other retirement of depreciable property, the cost and accumulated depreciation
are removed from the related accounts and any gain or loss is reflected in
operations. Depreciation is provided using the straight-line method over the
estimated useful lives of the depreciable assets.
Intangible Assets
- -----------------
Intangible assets are stated at their unamortized cost and are amortized on the
straight-line method over their estimated useful lives. The estimated useful
lives of the Company's noncompete agreements range from 2 to 9 years and the
estimated useful lives of the Company's patents and licenses range from 7 to 17
years.
Earnings (Net Loss) Per Share
- -----------------------------
Earnings (net loss) per share is computed using the weighted average number of
shares of common stock outstanding.
Revenue Recognition
- -------------------
Sales and related cost of sales are recognized primarily at the time of shipment
of the product. Sales and cost of sales may be recognized when the product is
complete and ready for shipment if the customer requests the Company to hold the
product and there are no uncertainties as to the consummation of the sale. Upon
recognition of sales, a reserve for estimated warranty and other related
expenses is established. The reserve is periodically evaluated as to its
adequacy for the anticipated expenses to be incurred during the limited warranty
period.
-24-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
- ---------------------------------------------------------------
Income Taxes
- ------------
Income taxes are computed based on the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Deferred
tax assets and liabilities are recognized for the estimated future tax effects
attributed to temporary differences between the book and tax bases of assets and
liabilities and for carryforward items. The measurement of current and deferred
tax assets and liabilities is based on enacted tax law. Deferred tax assets are
reduced, if necessary, by a valuation allowance for the amount of tax benefits
that may not be realized.
Use of Estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain Significant Estimates
- -----------------------------
At July 31, 1997, the Company had significant deferred tax assets related to
operating losses available for carryforward. These deferred tax assets have been
recorded under the guidelines of SFAS No. 109, Accounting for Income Taxes, on
the premise that future taxable income will more likely than not be adequate to
realize future tax benefits of the available net operating loss carryforwards.
Under tax regulations, realization of tax benefits per period will be limited
and full realization will depend on future taxable income over a number of
years.
Reclassifications
- -----------------
Certain reclassifications have been made in the previously reported financial
statements to make prior year amounts comparable to those of the current year.
Such reclassifications had no effect on previously reported net loss or
shareholders' equity.
Disclosures About Fair Values of Financial Instruments
- ------------------------------------------------------
In the year ended July 31, 1996, the Company adopted Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of Financial
Instruments (SFAS 107), which requires companies to disclose fair value
information about certain financial instruments. SFAS 107 defines fair value as
the quoted market prices for those instruments that are actively traded in
financial markets. In cases where quoted market prices are not available, fair
values are estimated using present value or other valuation techniques. The fair
value estimates are made at a specific point in time, based on available market
information and judgments about the financial instrument, such as estimates of
timing and amount of expected future cash flows. Such estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument, nor do they
consider the tax impact of the realization of unrealized gains or losses.
In many cases, the fair value estimates cannot be substantiated by comparison to
independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument.
SFAS 107 excludes certain financial instruments, particularly trade accounts
receivable and payable, from its disclosure requirements.
The fair values of cash and cash equivalents approximate their carrying amounts
as reflected in the balance sheet due to their short-term availability or
maturity.
-25-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
- ---------------------------------------------------------------
Disclosures About Fair Values of Financial Instruments - Continued
- ------------------------------------------------------------------
The fair values of notes receivable approximate their carrying amounts as
reflected in the balance sheet due to interest rates that are similar to current
rates.
The fair values of notes payable also approximate their carrying amounts as
reflected in the balance sheet due to interest rates that are similar to current
rates.
NOTE 3 - ORGANIZATION
- ---------------------
The Company was incorporated on February 7, 1986, under the laws of the State of
Georgia under the name Textile Corporation of America. The Company was formed to
acquire FCI and to develop or acquire proprietary technologies in the textile
industry. On July 29, 1986, the Company exchanged 2,800,426 shares of common
stock for all of the outstanding stock of FCI having a net book value of
$342,608 in a transaction accounted for as a pooling of interests. FCI was
organized on August 19, 1981, under the laws of the State of Georgia and
commenced operations on August 1, 1983. FCI was formed for the purpose of
engaging in the research, development, production and marketing of a CYP machine
for the manufacturing of rugs and carpets. On July 16, 1991, the directors
changed the name of the Company to Tapistron International, Inc. Reference
herein to the "Company" includes Tapistron International, Inc. and FCI. The
Company was a development stage enterprise until January 1992 when the Company
realized revenues from the sale of its first CYP machine.
NOTE 4 - INVENTORY
- ------------------
Inventory consists of the following components:
1997 1996
---- ----
Raw materials $ 437,215 $ 1,413,531
Work in process 793,788 1,636,530
Finished goods -- 11,090
----------- -----------
1,231,003 3,061,151
Allowance for obsolete inventory -- (978,656)
----------- -----------
$ 1,231,003 $ 2,082,495
=========== ===========
The Company recognized a loss related to obsolete inventory of $-0- for the year
ended July 31, 1997 and $504,441 for the year ended July 31, 1996.
-26-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consists of the following major classifications:
1997 1996
----------------------- -----------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
---- ------------ ---- ------------
Office furniture, fixtures and
equipment $ 501,435 $382,696 $ 501,435 $ 306,490
Machinery and equipment 826,956 383,060 1,167,365 490,114
Vehicles 16,914 15,224 16,914 11,841
---------- -------- ---------- ---------
$1,345,305 $780,980 $1,685,714 $ 808,445
========== ======== ========== =========
Depreciation expense totaled $462,534 for 1995, $390,125 for 1996 and $171,642 for
1997.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ----------------------------------------------
Accounts payable and accrued expenses consist of the following:
1997 1996
---- ----
Trade accounts payable $ 178,069 $ 33,970
Reserve for product warranties 10,000 10,000
Other 645,621 398,350
--------- ---------
$ 833,690 $ 442,320
========= =========
NOTE 7 - LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS
- ---------------------------------------------------------------------------
If it is probable that the collateral value related to pre-petition secured
liabilities exceeds the amount of the obligation, such liabilities are included
in short-term debt.
The remainder of the pre-petition liabilities (including situations where it
cannot be determined whether the collateral value exceeds the amount of the
obligation)are:
June 21, 1996
-------------
Accounts payable $ 1,742,982
Unsecured term notes 777,575
------------
Total liabilities subject to settlement under
reorganization proceedings $ 2,520,557
============
A plan of reorganization may materially change the amount and terms of these
pre-petition liabilities.
The portions of debt contractually due within one year following each respective
balance sheet date are not classified in current liabilities because such
amounts will be settled under a plan of reorganization.
-27-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - LEASES
- ---------------
In June, 1996, the Company completed the refinancing of its main facility under
a sale/leaseback arrangement. The facility was sold for $1.9 million, $1.86
million of which was used to pay off the existing mortgage. The Company then
entered into an operating lease for a term of five years. The lease requires
minimum annual rental payments of $302,500 in 1997, $317,625 in 1998, $333,506
in 1999, $350,182 in 2000, and $303,877 in 2001. The Company has the option to
purchase the property at any time during the lease term.
The Company also leases office space, warehouse space, and equipment under
short-term operating leases. Rental expense under all operating leases totaled
$50,941 for 1995, $52,442 for 1996 and $244,143 for 1997.
NOTE 9 - DEBT
- -------------
Long-term debt consists of the following: 1997 1996
---- -----
9.3% Promissory note, maturing in January 2002, payable $1,200
annually, unsecured and subject to settlement under a plan of
reorganization $ - $ 4,869
------- -------
5.8% Promissory note, maturing September 9, 1998, payable $375
monthly including interest, collateralized by equipment 5,060 9,788
5,060 14,657
Less: Current portion 4,316 4,729
Current portion subject to settlement under a plan of reorganization - 748
------- -------
$ 744 $ 9,180
======= =======
Aggregate maturities of long-term debt for the five years subsequent to July 31,
1997, are as follows:
July 31, 1998 $ 4,316
July 31, 1999 744
July 31, 2000 -
July 31, 2001 -
July 31, 2002 -
Thereafter -
As of July 31, 1996 short-term debt consists of a line of credit agreement bearing interest
at 10% and various promissory notes bearing interest at rates varying from 6% to 13%. A
significant portion of the short-term debt is collateralized by CYP Loom machines.
Interest expense on debt totaled $248,594 for 1995, $314,611 for 1996 and $30,269 for 1997.
-28-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCK OPTIONS
- -----------------------
In April 1992, the Company adopted the 1992 qualified employee stock option plan
(the "1992 Plan") which provided for the granting of options to employees for
the purchase of up to 350,000 shares of common stock of the Company at a price
not less than fair market value on the date the options are granted. The
shareholders of the Company subsequently approved an increase in the number of
shares available for issuance under the 1992 Plan to 1,350,000 shares.
Previously, the Company had a qualified employee stock option plan (the "1989
Plan") which provided for the granting of options to employees for the purchase
of approximately 210,000 shares of which options for approximately 192,500 have
been granted. The 1989 Plan was terminated with the adoption of the 1992 Plan.
In addition, the Company has, at various times, granted options outside of the
Plan to employees and non-employees.
The following table summarized option activity:
Number of Option Price
Shares Per Share
--------- -------------
Outstanding as of July 31, 1991 554,062 $2.14 - $3.57
Granted 545,528 $5.00 - $6.75
Exercised ( 86,470) $3.57
Expired ( 17,512) $3.57
---------
Outstanding as of July 31, 1992 995,608 $3.57 - $6.75
Exercised (209,605) $3.57
Expired ( 3,500) $5.00
---------
Outstanding as of July 31, 1993 782,503 $2.14 - $3.57
Granted 1,513,000 $2.75 - $7.125
Exercised ( 25,000) $3.57
Expired (248,000) $6.75 - $7.125
---------
Outstanding as of July 31, 1994 2,022,503 $2.75 - $7.125
Granted 111,000 $1.875 - $2.625
Exercised - -
Expired (141,500) $2.750 - $7.125
---------
Outstanding as of July 31, 1995 1,992,003 $1.875 - $7.125
Granted 600,000 $.50 - $.87
Exercised - -
Expired - -
---------
Outstanding as of July 31, 1996 2,592,003 $.50 - $7.125
Granted - -
Exercised - -
Expired - -
Outstanding as of July 31, 1997 2,592,003 $.50 - $7.125
=========
Exercisable 2,592,003
=========
Options outstanding as of July 31, 1991, for the purchase of 86 049 shares of
the Company's common stock were exercised during April 1992 by the surrender of
28,502 shares of the Company's common stock.
Options outstanding as of July 31, 1992, for the purchase of 209,605 shares of
the Company's common stock were exercised by and the subscription notes
receivable were paid by the surrender of 95,649 shares of the Company's common
stock.
-29-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCK OPTIONS - CONTINUED
- -----------------------------------
In connection with the initial public offering on June 23, 1992, the Company
issued representative's options to purchase up to an aggregate of 225,000 shares
of the Company's common stock and 225,000 warrants at an initial purchase price
of $11.138 per share of the Company's common stock and $.165 per non-redeemable
warrant. These options are exercisable from June 24, 1993 through September 3,
2003. The non-redeemable warrants issuable upon exercise of the representative's
options are not subject to redemption by the Company. The options also contain
provisions providing for adjustment of the exercise price upon occurrence of
certain events, including the issuance of shares of common stock or other
securities convertible into or exercisable for shares of common stock at a price
per share less than the exercise price or the market price, recapitalization,
reclassification, stock dividend, stock split, stock combination or similar
transactions. The representative's options have not been included in the above
table. (See Note 16 - Subsequent Events.)
NOTE 11 - WARRANTS
- ------------------
During the year ended July 31, 1992, the Company issued redeemable warrants to
purchase 2,587,500 shares of common stock of the Company at a purchase price of
$8.10 per share, exercisable from June 24, 1993 through June 23, 1997. During
the year ended July 31, 1992, the Company issued warrants to purchase 45,049
shares of common stock of the Company at $3.93 per share and 34,727 shares at
$5.50 per share expiring at various dates through December 1994. During the year
ended July 31, 1994, warrants for the purchase of 18,550 shares of the Company's
common stock at a purchase price of $3.93 were exercised and warrants for the
purchase of 26,499 shares of the Company's common stock at a purchase price of
$3.93 expired. During the year ended July 31, 1995, warrants for the purchase of
50,000 shares at an exercise price of $1.00 were issued, warrants for the
purchase of 34,727 shares at an exercise price of $5.50 expired, and no warrants
were exercised during the year. Warrants for the purchase of 2,637,500 shares of
the Company's common stock remain outstanding as of July 31,1996 and 1997. (See
Note 16 - Subsequent Events.)
NOTE 12 - RELATED PARTY TRANSACTIONS
- ------------------------------------
During the three years ended July 31, 1996, the Company borrowed various amounts
from a principal shareholder and former director of the Company and his family
members, who are also shareholders. The shareholder was a director during the
year ended July 31, 1996. As of July 31, 1997, the Company was indebted to this
shareholder in the amount of $614,000 through a line-of-credit agreement bearing
interest at 10%.
During the year ended July 31, 1996, the Company expensed $219,000 in consulting
legal, and administrative fees owed to a principal shareholder. The Company was
also indebted to this shareholder's law firm for $174,000 for legal fees in
association with the reorganization.
During the year ended July 31, 1994, the Company contracted with an engineering
consulting firm, whose Chief Executive Officer and President was also a director
of the Company, to develop a new model of the CYP machine. During the years
ended July 31, 1994, 1995, and 1996 the Company incurred approximately
$2,733,000, $2,643,000, and $0, respectively, in fees to this firm.
During the year ended July 31, 1996, consulting fees of $50,000 were paid to a
capital Company whose Chairman is a former director of the Company. Also during
the year ended July 31, 1996, $50,000 was borrowed from this capital Company.
-30-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RELATED PARTY TRANSACTIONS - CONTINUED
- ------------------------------------------------
During the year ended July 31, 1996, the Company borrowed approximately $16,000
from an officer of the Company. The amount was also paid back to the officer
during the year.
During the year ended July 31, 1996, 200,000 shares of the Company's common
stock were issued to two former directors in consideration for services rendered
to the Company.
During the year ended July 31, 1997, no related party transactions occurred.
NOTE 13 - DOMESTIC AND EXPORT SALES
- -----------------------------------
The following table summarizes the sales of the Company:
1997 1996 1995
---- ---- ----
North America $1,041,189 $1,200,322 $1,659,928
Asia 56,739 24,822 32,432
Pacific Rim 1,783,241 58,854 38,226
Europe 744,923 21,501 834,958
---------- ---------- ----------
Total sales $3,626,092 $1,305,499 $2,565,544
========== ========== ==========
NOTE 14 - MAJOR CUSTOMERS
- -------------------------
Substantially all sales were made to two customers during the year ended July
31, 1995, two customers during the year ended July 31, 1996 and four customers
during the year ended July 31, 1997.
NOTE 15 - INCOME TAXES
- ----------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the tax bases of those assets and liabilities. Significant
components of the Company's deferred tax liabilities and assets are as follows:
1997 1996
---- ----
Deferred tax assets
Accounts receivable $ 16,000 $ 16,000
Inventory - 96,000
Accrued expenses and reserves 12,683 14,000
Net operating loss carryforward 8,642,000 8,006,000
Valuation allowance (6,670,683) (8,132,000)
---------- ----------
Net deferred tax assets $2,000,000 $ -
========== ==========
As of July 31, 1997, the Company had net operating loss carryforwards of
approximately $22,869,000 available to offset future taxable income which will
expire in various years through 2011.
-31-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCOME TAXES - CONTINUED
- ----------------------------------
Realization of deferred tax assets associated with the net operating loss
carryforwards and reversals of the temporary differences is dependent upon
generating sufficient taxable income prior to expiration of the NOL
carryforwards. Even though the Company has incurred tax losses for seven of the
past nine fiscal years, management believes that it is more likely than not, it
will generate taxable income sufficient to realize a portion of the tax benefit
associated with future deductible temporary differences and NOL carryforwards
prior to their expiration. This belief is based upon, among other factors,
changes in operations that have occurred during the last two years Specifically,
cost savings by bringing Research and Development in house and by better usage
of just-in-time inventory control. The Company has assessed the trends regarding
patterned carpet and with consideration of its current marketing strategies,
anticipates a continued improvement in operating results. Management believes
that a valuation allowance is appropriate given the current estimates of future
taxable income. If the Company is unable to generate sufficient taxable income
in the future through operating results, increases in the valuation allowance
will be required through a charge to expense. However, if the Company achieves
sufficient profitability to utilize a greater portion of the deferred tax asset,
the valuation allowance will be reduced through a credit to income.
NOTE 16 - SUBSEQUENT EVENTS
- ---------------------------
The Company's plan of reorganization was confirmed by the United States
Bankruptcy Court on August 18, 1997. As provided for in the plan of
reorganization, the Company has received the $2,500,000 proceeds from the
Regulation D offering. $500,000 of the proceeds will be applied to satisfy the
Class 7 claims (as indicated in the plan of reorganization) and the remaining
proceeds will be applied to provide operating capital for the continuation of
the Company's business. Upon confirmation of the plan of reorganization, all
outstanding stock options are cancelled; all redeemable warrants are modified to
reduce the exercise price to $1.00 and the exercise period is extended to August
31, 2000. As provided by the Plan, all Class 8 claims (convenience class) have
been paid in full.
NOTE 17 - ASSETS SUBJECT TO LIENS
- ---------------------------------
The Company has pledged two of its CYP machines as collateral on two customer
deposits. These machines are currently included in work-in-process inventory.
The machines pledged and the related deposit balances are as follows:
Collateral's Work-In
Collateral Process Book Value Deposit Book Balance
Description as of July 31, 1997 as of July 31, 1997
----------- ------------------- -------------------
4.4Meter CYP Machine 445,000 200,000
4.4 Meter CYP Machine 445,000 200,000
The Company has pledged one of its notes receivable as collateral on a note
payable. This pledge was subsequently assigned as collateral on an accrued
expense. The note pledged and other related accrued expense balances are as
follows:
Collateral Collateral's Book Value Accrued Expense Balance
Description as of July 31, 1997 as of July 31, 1997
----------- ----------------------- -----------------------
Note receivable 300,000 125,263
-32-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
SCHEDULE I
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance
Beginning Cost and at End
of Year Expenses Deductions of Year
---------- ---------- ---------- --------
Allowance for Doubtful Accounts
- -------------------------------
Year ended July 31, 1997 $ 39,905 $ - $ - $ 39,905
-------- ---------- -------- --------
Allowance for Obsolete Inventory
- --------------------------------
Year ended July 31, 1997 $978,656 $ - $978,656 $ -
-------- ---------- -------- --------
Allowance for Uncollectible Long-
- ---------------------------------
Term Receivables
- ----------------
Year ended July 31, 1997 $500,000 $ - $ - $500,000
-------- ---------- -------- --------
-33-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
CONSOLIDATED PRO FORMA BALANCE SHEET
(Unaudited)
July 31, 1997
ASSETS
Pro Forma
Historical Adjustments Pro Forma
Balance Sheet (See Note A) Balance Sheet
------------- ------------ -------------
CURRENT ASSETS
Cash and cash equivalents $ 27,946 $ 2,500,000 (a) $
(500,000) (f) 2,027,946
Receivables, net of allowance of $39,905 720,740 720,740
Notes receivable 350,000 350,000
Inventory 1,231,002 1,231,002
Prepayments 102,453 102,453
Deferred income taxes 100,000 100,000
--------- ---------
Total current assets 2,532,141 4,532,141
PROPERTY AND EQUIPMENT, NET 564,324 564,324
OTHER ASSETS
Long-term receivables, net of allowance
of $500,000 - -
Patents and patent license 263,068 263,068
Other 8,247 8,247
Deferred income taxes 1,900,000 1,900,000
--------- ---------
Total other assets 2,171,315 2,171,315
--------- ---------
TOTAL $5,267,780 $7,267,780
========== ==========
See Note to Consolidated Pro Forma Balance Sheet.
-34-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
CONSOLIDATED PRO FORMA BALANCE SHEET
(Unaudited)
July 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Pro Forma
Historical Adjustments Pro Forma
Balance Sheet (See Note A) Balance Sheet
------------- ------------ -------------
CURRENT LIABILITIES
Current portion of long-term debt $ 4,315 $ $ 4,315
Accounts payable 178,068 178,068
Accrued expenses 655,621 (225,000)(c)
(150,000)(d) 280,621
Customer deposits 936,026 936,026
----------- ----------
Total current liabilities 1,774,030 1,399,030
LIABILITIES SUBJECT TO SETTLEMENT
UNDER REORGANIZATION PROCEEDINGS 2,520,557 (613,894)(b)
(150,000)(e)
(500,000)(f) 1,256,663
LONG-TERM DEBT 744 744
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value - 2,000,000
shares authorized; no shares issued and
outstanding - -
Common stock - $.0004 par value - 100,000,000
shares authorized; 10,581,813 issued; pro
forma issued 34,841,108 4,233 6,667 (a)
1,637 (b)
600 (c)
400 (d)
400 (e) 13,937
Additional paid-in capital 22,899,108 2,493,333 (a)
612,257 (b)
224,400 (c)
149,600 (d)
149,600 (e) 26,528,298
Accumulated deficit (21,918,100) (21,918,100)
Treasury stock - 55,518 shares outstanding,
at cost ( 12,792) ( 12,792)
----------- ----------
Total stockholders' equity 972,449 4,611,343
----------- ----------
TOTAL $ 5,267,780 $ 7,267,780
============ ============
-35-
TAPISTRON INTERNATIONAL, INC.
(Debtor-in-Possession)
NOTE TO CONSOLIDATED PRO FORMA BALANCE SHEET
(Unaudited)
NOTE A - Plan of Reorganization Adjustments
- -------------------------------------------
The Company's plan of reorganization was confirmed by the United States
Bankruptcy Court on August 18, 1997.
The plan of reorganization requires the Company to issue 24,259,295 shares of
common stock which will dilute current equity interests.
The following adjustments when applied to the historical balance sheet of the
Company will give the effect of the plan of reorganization.
(a) To record issuance of 16,666,667 shares of Tapistron's common stock at $.15
per share.
(b) To record settlement of class 6 claims, including discharge of $613,894 in
return for the issuance of Tapistron's common stock at the rate of 1 share
for every $.15 of allowed claim (4,092,628 sh.).
(c) To record settlement of allowed class 4 claims, including discharge of a
$225,000 administrative claim in return for the issuance of 1,500,000
shares of Tapistron's common stock.
(d) To record settlement of allowed administrative claim of Ameristar Insurance
Services, Inc., including discharge of $150,000 in return for the issuance
of 1,000,000 shares of Tapistron's common stock.
(e) To record issuance of 1,000,000 shares of Tapistron's common stock in
partial payment of allowed class 7 claims, at the rate of $.15 per share.
(f) To record initial cash payment of allowed class 7 claims, including prorata
distribution of cash in the amount of $500,000.
-36-