SECURITIES AND EXCHANGE COMMISSION
Washington, D. C., 20549
Form l0-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, 2000
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
------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6203 Alabama Highway; Ringgold, GA 30736-1067
---------------------------------- ----------
(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 September 30, 2000, there were 34,271,111 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
The Company 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 17, 1991, the name
was changed from Textile Corporation of America to Tapistron International, Inc.
On June 2, 1992, the Company amended its Articles of Incorporation (the
"Restated and Amended Articles"). 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 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 Tapistron 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 Tapistron
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.
The Company filed a voluntary petition for relief under Chapter 11 of
Title 11 of the Code on June 21, 1996 under the jurisdiction of the Court for
the Northern District of Georgia. The Court confirmed the Company's Amended Plan
on August 18, 1997. Under the terms of the Amended Plan, Classes 1 through 5 and
8 received payment in full. Class 6 had its Claim satisfied by issuance of
Debtor's common stock. Class 7, unsecured creditors, were paid in full, unless
they voluntarily agreed to accept a lesser sum, through a combination of stock
and cash in satisfaction of their Allowed Claims or to the extent that they
receive payment as a Convenience Claim on the Distribution Date. The Debtor's
shareholders retained their interests subject to dilution for the Debtor's
common stock to be issued pursuant to the Plan. Debtors option holders had their
options cancelled. As part of the Company's negotiations with its creditors
under the Amended Plan, the Company sold 16,666,666 shares of its $.0004 par
value common stock for $0.15 per share, issued 1,500,000 shares of its Common
Stock to Avonwood Capital Corporation for investment banking services, and
issued 6,092,650 shares of its common stock, in the aggregate, to certain
creditors. All claim objections filed by the debtors have been resolved. The
Company emerged from Chapter 11 Protection on January 22, 1998 and the Company's
only open liability is a contingent liability for the stock that was issued to
the creditors. (See Note 6 - Contingencies and Note 16 - Subsequent Events in
the notes to consolidated financial statements.)
2
Industry
The textile industry is one of the major industrial classifications in
the United States economy. 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. Total annual dollars
spent in 1999, based on Department of Commerce reports were approximately $11.7
billion wholesale dollars which is an increase of approximately 5.7% over last
year. The carpet industry is virtually immune from imported carpet products.
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. For the year ended December 31, 1999, the U. S.
Department of Commerce reported in its Current Industrial Reports (the
"Reports") that total industry shipments of carpets was over 1.9 billion square
yards compared to 1.7 billion square yards in 1998. The percentage of patterned
carpet styles being produced for the commercial market in 1999 in the United
States has been estimated as high as 42%. The residential carpet market has also
witnessed an increased demand for patterned styles. This trend for more
patterned carpets in the domestic market is where the Company's technology is
poised to exploit this increased demand. Moreover, the Company is aware of the
fact that patterned carpets have a higher market share internationally than
U.S.A. and is taking advantage of this fact.
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
geometric 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 tufting carpet. An enhanced version of the ICN
technology, the Colortec, is probably the Tapistron 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
Tapistron 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.
3
Product Overview
The Tapistron 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 Tapistron 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 Tapistron 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.
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
Tapistron 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 Tapistron machine over conventional machine
tufting and weaving methods is the minimal amount of time required to change
pattern, color, and 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 Tapistron
machine required only the touching of a computer screen - approximately a
thirty-second operation. The touch screen system controls the entire machine's
parameters with the exception of pile height, which is adjusted manually. Set-up
of a Tapistron machine can be accomplished in less time than it takes a
competitive machine to set up. This characteristic of the Tapistron 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.
Tapistron machines are very efficient due to the minimal number of
yarns being processed at any one time - typically 92 or less. The reduced number
of needles and knives (92 or less) reduce downtime and maintenance cost. There
are no hooks or loopers to replace or adjust. Tapistron machines use a
traditional but much smaller creel, which reduces machine downtime when changing
colors and also reduces the amount of yarn needed to operate the machine
allowing a potential savings in cost of yarn inventory.
The Tapistron machine also offers greater textural capabilities than
other existing carpet manufacturing methods. On a Tapistron 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 Tapistron machine can make cut pile, level
loop, high-low loop and cut loop all on the same machine. No other styling or
weaving machine has this versatility. Our technology enables pattern designs to
create images and designs using up to six colors in the pattern. This styling
flexibility is being used to serve a broad spectrum of markets including
hospitality, residential, automotive, entrance mats, bath and area rugs.
The Tapistron 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 modifies or rearranges colors or other aspects of the design or pattern.
Such pattern entry systems are widely used in the carpet industry.
Manufacturing
The Company facilities, which were constructed in July 1993, are
located in Ringgold, Georgia. The Company manufactures various sizes of the
4
Tapistron machine at its manufacturing facility. The manufacturing facility is
capable of supporting manufacturing requirements for the foreseeable future. The
Company engages no subcontractors for any part of the manufacturing process.
Suppliers
The Company purchases the frames for its existing Tapistron 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 Tapistron 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 Tapistron
machines can be developed, if necessary. To date, the Company has not
experienced any delays in delivery of components. The Company expects to
maintain any inventory of parts and completed machines, which will alleviate any
short-term supply problems. In addition, the Company orders components as
purchase orders are received from the customers.
Sales, Marketing and Servicing
The Company markets its Tapistron machines to textile industry concerns
engaged in the manufacture of commercial and residential floor coverings. The
purchase price of the Tapistron machine systems varies from $550,000 to
$1,250,000 based on the configuration chosen.
The Company offers a limited warranty on the Tapistron machine system
and provides maintenance and support to customers following the installation of
the Tapistron machine system. Approximately one week of on-site training of a
tufting machine operator is required for proficient use of the Tapistron
machine. The Company's service technician at installation of the machine and
acceptance normally completes this training of operators designated by the
customer. The Company's on-site training obligation typically ends with the
expiration of the machine warranty.
The Company plans to identify and pursue carpet mill candidates who are
interested in developing high-end carpets for the residential broadloom carpet
market. This will considerably enlarge the target base of potential mill
customers.
The Company will pursue commercial carpet mills who are designer
oriented as a way of getting the new cut loop technology into the corporate
carpet segment (banks, offices, etc.). This segment is the largest segment of
the commercial carpet market and is an area that is currently untapped by
Tapistron produced carpets.
The cut loop technology has already been embraced by a few high-end rug
manufacturers. The Company will continue to identify and pursue these highly
specialized potential customers. The Tapistron machine fits extremely well into
this market because of its flexibility in color and design.
Because the machine's styling advantages are still essentially unknown
to the interior design community, the Company will develop pull-through demand
for Tapistron carpet (thereby generating machine sales) by establishing
relationships with large retail buying groups and interior design firms.
The Company's marketing efforts are worldwide. The Company is currently
expanding its efforts in the domestic market, increasingly providing a greater
concentration of resources in the United States. Marketing efforts in the United
States are conducted by the Company's internal marketing personnel. In the
international arena, independent agents throughout the world who represent
Tapistron in their respective countries assist the Company's marketing
personnel. The Tapistron machine is an expensive piece of capital equipment.
Many times a foreign mill will prefer to make these type purchases through a
local agent. Therefore, the Company plans to develop additional agents in key
carpet and rug manufacturing areas of the world. The Company plans to provide
excellent technical and marketing services to these agents so that the
disruptive effects of distance, language, and time zones are minimized.
5
Development and Acquisitions
The Company's in-house engineering staff is providing continual
enhancements to the CYP technology and conducting other research and development
activities. 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. The primary driving forces behind
all Research and Development are efficiency and yield.
Competition
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. Tapistron
machines also face competition from jet spray dyeing techniques such as the
Millitron process utilized by Milliken & Company and screen printing
apparatuses. Tapistron 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, Inc. and Tuftco
Corporation.
The Company will compete on the basis of pattern, color, texture, and
density flexibility afforded by the CYP machine technology. The Tapistron
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. Tapistron machines offer
the advantages of (i) a smaller creel meaning 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, color, and carpet construction, the
Tapistron 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 also 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 Tapistron
machine with improved production speed - a development project that 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
Tapistron machine in the general area of patterned carpet, all are limited by
either pattern capability or by gauge. CYP technology 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 Tapistron machine with its variable gauge and
ability to make cut pile, level loop, high-low loop, and cut loop has a distinct
advantage. The overall flexibility of the Tapistron machine makes it ideal for
the creation of unique and distinctive products that expand the options of the
carpet manufacturer.
6
Patents and Proprietary Rights
The Company has seven United States patents, one patent pending 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. The Company also relies on trade secrets that it seeks to protect,
in part, through confidentiality agreements with employees and other parties.
Financial Information regarding Foreign and Domestic and Export Sales
During its last three fiscal years, the Company has generated
substantial revenue from foreign sales. Revenue from foreign sales to
unaffiliated customers totaled $1,077,390 in Fiscal 2000, compared to $892,675
in Fiscal 1999, and to $1,176,020 in Fiscal 1998. The Company has no
identifiable assets specifically attributable to foreign sales during the
periods presented. The Company intends to expand its marketing efforts to
generate additional export sales in future years.
Employees
As of July 31, 2000, the Company had 35 full-time employees and 1
part-time employee. Among this number, the sales/service department employs 9
persons, the administration department employs 10 persons and the manufacturing
department employs 17 persons. The Company considers its relations with its
employees to be satisfactory. The employees are not subject to a collective
bargaining agreement.
Insurance
The Company carries comprehensive liability; fire, storm, earthquake
and business interruption insurance, with policy specifications, insured limits
and deductibles customarily carried for similar companies, which the Company
believes, are adequate. The Company currently has liability insurance in the
amount of $2 million in the aggregate and $1 million per occurrence.
Management
Directors and Executive Officers
The following table sets forth certain information concerning each
person who is a director or executive officer of the Company.
Name Age Position with the Company
---- --- -------------------------
Reg Burnett 66 Chairman of the Board of Directors
Henry Christopher 65 Director
Bruce C. Elliston, Jr. 52 Executive Vice President
Jack Godfrey 60 Director, Vice Chairman
Peter Greenberg 37 Director
Rodney C. Hardeman, Jr. 54 President, CEO, Director
Floyd S. Koegler, Jr. 57 Vice President Finance, CFO
Reg Burnett has served as a Director since January 1998. He is the
founder of RBI International Carpet Consultants, which was originated in 1967,
and continues to serve as the President and Senior Consultant. Since 1981, Mr.
Burnett has also served on the board of directors for two banks. He was educated
7
at Bradford Textile College, now a division of Leeds University. He is
recognized throughout the world as one of the most knowledgeable individuals in
the carpet industry. Mr. Burnett has lectured on all aspects of carpet fibers,
carpet yarn spinning, and the carpet industry in general at North Carolina State
University; Auburn University; Kidderminster College, England; Intercarpet in
Austria; TIFCON in Blackpool, England; The Japanese Carpet Institute; The
Australian Carpet Institute in China and at many other carpet conventions and
technical conferences throughout the world.
Henry Christopher has served as a Director since his retirement from
the Company in July 1998. He has been associated with the Company for the past
six years, most recently as Vice President of Operations. Prior to joining the
Company, he managed his own company, Oxford Textile Mills, Inc. and was a
pioneer in the development of fabricated area rugs. He is a native of Dalton,
Georgia and has spent his entire career in the tufted carpet industry. Mr.
Christopher is a graduate of Georgia Tech with a degree in Textiles.
Bruce Elliston, Jr., joined the Company's staff as Executive
Vice-President as of March 15, 1999. Mr. Elliston is a veteran of 27 years in
the carpet industry. Until recently, he was responsible for BASF's worldwide
Commercial Carpet Yarn business. He has broad experience with BASF in product
marketing working with carpet mills, architects and designers, and commercial
carpet specifiers and end-users. He is a graduate of Georgia Tech with a degree
in industrial management and received his MBA from Georgia State University with
a major in finance. Mr. Elliston serves on the board of directors of the
Northwest Georgia United Way and the Dalton State College Foundation.
Jack Godfrey joined the Company's Board of Directors as of January 7,
1999 to serve a term of three years. Mr. Godfrey is currently President of
Wayn-Tex, Inc. in Waynesboro, Virginia with offices in Dalton, Georgia. He is a
graduate of Georgia Tech with a degree in mechanical engineering and a MBA from
Valdosta State College. He has been recognized as a distinguished engineer from
Georgia Institute of Technology. He has served on the board of directors for the
Carpet & Rug Institute and the Floor Covering Marketing and Manufacturing
Association.
Peter Greenberg has served as a Director since January 2000 to serve a
term of three years. He is a graduate of the University of Florida with a
Bachelor's Degree in Finance. He has had diversified work experience, which
includes ownership in both manufacturing and sales businesses. Between 1985 and
1986, Mr. Greenberg had been a self-employed investor specializing in equity
markets and foreclosure real estate. Currently, he is engaged in the hospitality
industry and owns and operates the Morrison House in Alexandria, Virginia. He is
also a partner in Vacation Time, which is a private corporation focused upon
resort development and time-shares sales and marketing. Mr. Greenberg serves as
Chairman of the Alexandria Convention and Visitors Association.
Rodney C. Hardeman, Jr. has served as a Director since January 1998.
Mr. Hardeman became President & Chief Executive Officer on February 28, 1999.
From 1982 to present, Mr. Hardeman is a Director of Roga International -
Division of EX-IM Marketing International, Inc., an international marketing
concern. He received his degree in Business from Shorter College, Rome Georgia.
Since 1991, he has served as a member of the Board for Shorter College and is
also a board member for Admiral Travel, Inc., Atlanta, Georgia. Since 1994, Mr.
Hardeman has served as a partner in the Chattanooga firm of Manner Technologies,
L.L.C. and Vice President of Redux and Again, Inc., Rome, Georgia. Mr. Hardeman
specializes in International Sales and Marketing.
Floyd S. Koegler, Jr. has served as Vice President Finance and Chief
Financial Officer for the Company since September 1996. He is a Certified Public
Accountant with a MBA from Brenau University in Gainesville, Georgia. He has an
extensive background in corporate finance, which includes auditing and financial
information analysis for Aladdin Mills, a carpet manufacturer, from 1994 until
joining Tapistron. From 1990 to 1994, Mr. Koegler held controller positions at
Crown America/Texture-Tex, Inc., a carpet yarn manufacturer, 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.
8
Item 2. DESCRIPTION OF PROPERTIES
The Company maintains its headquarters in Ringgold, Georgia, where it
leases an aggregate of approximately 50,000 square feet under a lease expiring
in May 2001. The lease presently requires monthly rental payments of $30,387
through the lease termination date. General and administrative, manufacturing,
marketing, product development and customer support and service operations are
located in this space. The Company believes its facilities are in good condition
and adequate for present needs.
Item 3. LEGAL PROCEEDINGS
The Company filed a voluntary petition for relief under Chapter 11 of
the Code on June 21, 1996 and operated its business as a debtor-in-possession
under the jurisdiction of the Court. On August 18, 1997, the Court confirmed the
Amended Plan. As of January 22, 1998, the Court closed the case by ordering the
Final Decree.
The Company is not currently subject to litigation and claims
respecting employment, tort, contract, construction or similar disputes. The
Company knows of no claims, which are likely to have a material adverse effect
on the Company or its business operations.
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 three month period ended July
31, 2000.
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 2,637,500 Redeemable Warrants
(including 337,500 Redeemable Warrants exercised under the Underwriter's over
allotment option). The Company consented to the delisting 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 NASD rules. The NASD 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 an OTCBB stock. The Common Stock and the Redeemable Warrants
were listed on NASDAQ under the symbols "TAPI" and "TAPIW", respectively.
The following tables set forth the high and low bid prices for the
Company's Common Stock and Redeemable Warrants as reported by the OTCBB
historical system. Prices represent actual transactions, but do not reflect
adjustments for retail markups, markdowns or commissions.
Common Stock High Low
---- ---
1999: First Quarter (August 1, 1998 - October 31, 1998) .31 .13
Second Quarter (November 1, 1998 - January 31, 1999) .33 .13
Third Quarter (February 1, 1999 - April 30, 1999) .30 .19
Fourth Quarter (May 1, 1999 - July 31, 1999) .25 .13
9
Common Stock High Low
---- ---
2000: First Quarter (August 1, 1999 - October 31, 1999) .29 .19
Second Quarter (November 1, 1999 - January 31, 2000) .40 .31
Third Quarter (February 1, 2000 - April 30, 2000) .31 .24
Fourth Quarter (May 1, 2000 - July 31, 2000) .23 .18
Redeemable Warrants
1999: First Quarter (August 1, 1998 - October 31, 1998) .06 .03
Second Quarter (November 1, 1998 - January 31, 1999) .06 .03
Third Quarter (February 1, 1999 - April 30, 1999) .05 .02
Fourth Quarter (May 1, 1999 - July 31, 1999) .04 .02
2000: First Quarter (August 1, 1999 - October 31, 1999) .01 .01
Second Quarter (November 1, 1999 - January 31, 2000) .09 .03
Third Quarter (February 1, 2000 - April 30, 2000) .08 .05
Fourth Quarter (May 1, 2000 - July 31, 2000) .06 .02
At September 30, 2000, there were approximately 400 shareholders of
record based on a listing from the Company's stock transfer agent excluding
"street" names. The Company estimates there were approximately 3,000 beneficial
owners holding stock in nominee or "street" name as of that date based on
historical information. The Company has not paid any cash dividends and does not
anticipate paying any cash dividends in the foreseeable future.
10
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, 2000, 1999, and 1998
and the consolidated balance sheet data at July 31, 2000 and 1999 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, 1997 and 1996 and the consolidated balance sheet data at July 31,
1997 and 1996 are derived from audited consolidated financial statements of the
Company.
Years Ended July 31st
-------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- --------------- --------------- ---------------- ----------------
Statement of Operations Data:
Sales $ 6,084,921 $ 4,725,881 $ 5,651,555 $ 3,626,092 $ 1,305,499
Cost of sales 3,214,991 2,908,798 3,467,997 2,477,302 1,146,717
--------------- --------------- --------------- ---------------- ----------------
Gross profit 2,869,930 1,817,083 2,183,558 1,148,790 158,782
Operating expenses:
Administrative 2,419,880 2,329,521 2,367,602 1,998,245 3,473,581
Research and development 43,700 90,577 5,901 10,384 23,473
Net income (loss) 162,324 (744,839) (208,608) 316,375 (4,478,096)
Net income (loss) per share 0.00 (0.02) (0.01) 0.03 (0.49)
Extraordinary item - - - - 0.04
Shares used in computing per
share amounts 34,742,050 34,785,611 30,443,850 10,526,295 10,012,390
Years Ended July 31st
-------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- --------------- --------------- ---------------- ----------------
Balance Sheet Data:
Working capital $ 1,547,573 $ 1,392,165 $ 2,119,609 $ 758,111 $ 1,084,487
Total Assets 6,891,763 6,189,648 5,882,889 5,267,780 4,016,538
Long-term debt 478 180,932 - 744 5,060
Accumulated deficit (22,709,223) (22,871,547) (22,126,708) (22,918,100) (22,234,475)
Stockholders' equity 3,539,176 3,537,308 4,511,877 972,449 656,074
NOTE: The net income for Fiscal 1997 included $2,000,000 of tax benefit
resulting from a reduction in the valuation allowance for deferred tax assets.
This materially affected the comparability of the results of operations.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
11
Results of Operations
Sales
Tapistron's Fiscal 2000 sales were $6,084,921, compared with $4,725,881
in Fiscal 1999 and $5,651,555 in Fiscal 1998. The 28.7% increase in sales in
Fiscal Year 2000 was the result of an additional unit sold plus a larger average
sales price per unit sold resulting from technological improvements incorporated
into new and existing machines.
Cost of Sales
Cost of sales was $3,214,991 in Fiscal 2000 or 53% of sales, compared
with $2,908,798 (62%) in Fiscal 1999 and $3,467,997 (61%) in Fiscal 1998. Cost
of sales as a percentage of sales decreased as a result of manufacturing
efficiencies and better pricing obtained on the new attachments.
Operating Expenses
Operating expenses were $2,463,580 in Fiscal 2000, or 40% of sales,
compared with $2,420,098 (51%) in Fiscal 1999 and $2,373,503 (42%) in Fiscal
1998. During Fiscal 1999, operating expenses as a percentage of sales decreased
primarily due to the increase in sales volume. Management expects operating
expenses to increase slightly or remain relatively stable in absolute dollars
but decrease as a percentage of sales due to anticipated sales increases.
Net Income (Loss)
Net income was $162,324 in fiscal 2000 compared with a loss of $744,839
in fiscal 1999 and a loss of $208,608 in 1998. This fiscal year profit relates
to increased sales and an improved gross profit margin.
Deferred Tax Assets
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 - Accounting for Income Taxes (SFAS 109)
issued in February 1992. This standard requires among other things, recognition
of future tax benefits, measured by enacted tax rates, attributable to
deductible temporary differences between financial statement and income tax
basis of assets and liabilities and to net tax operating loss carryforwards, to
the extent that realization of such benefits is more likely than not. The
Company has tax net operating loss carryforwards (NOL's) totaling approximately
$21.7 million, which expire as follows: 2002, $113,720; 2003, $479,615; 2004,
$657,232; 2005, $620,345; 2006, $1,074,445; 2007, $2,343,377; 2008, $18,740;
2009, $5,020,586; 2010, $5,929,613; 2011, $2,597,119; 2012, $1,843,484; 2013,
$208,608; and $772,176, 2014. SFAS 109 requires that the tax benefit of such
NOL's be recorded as an asset to the extent that management assesses the
utilization of such NOL's to be "more likely than not." Management has
determined, based on the Company's history of operations and its expectations
for the future, that operating income of the Company will more likely than not
be sufficient to utilize approximately 5.0 million of NOL's prior to their
ultimate expiration in the year 2014.
The NOL's available for future utilization was generated principally
during development stage periods when Research and Development costs were
excessive and the customer base was not established. In 1997, the Company
reorganized under Chapter 11 of the Federal Bankruptcy Code. In assessing the
likelihood of utilization of existing NOL's, management considered the
historical results of the Company's operations, both prior to the reorganization
and as an independent public company subsequent to such reorganization, and the
current operating environment.
Due to a number of domestic Tapistron machine installations over the
last five years, CYP technology 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
12
applications for the Tapistron machine. The Tapistron machine is not in the same
market with low end solid color carpet tufting machines, and the focus will
continue to be on the manufacturer's 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 the Tapistron machine and for patterned tufted carpet in general.
The Company is anticipating increased sales, as marketing efforts are
increased and as customers regain confidence in the financial stability of the
Company.
Realization of the future tax benefits is dependent upon the Company's
ability to generate taxable income within the carryforward period. In assessing
the likelihood of utilization of existing NOL's management considered the
consistent positive trend toward profitable operations and the overall market
acceptance of CYP technology. Since the company was established in 1986, there
has been a continual operating loss per year until this current profitable one.
Using 2000 as a base, taxable income would have to grow at an average annual
compound rate of 5% in order to realize $1,900,000 of tax benefit prior to
expiration.
Liquidity and Capital Resources
The Company's highly liquid assets (cash and cash equivalents at July
31, 2000 aggregated $65,812, a decrease from the $685,328 balance at July 31,
1999. Its working capital position at July 31, 2000 of $1,547,573 increased from
the comparable amount of $1,392,165 at July 31, 1999. The increase in working
capital resulted from the Company's net income for the year. Inventory increased
due to building Tapistron machines using cash and short term debt to support
operations.
Net cash used in operations for Fiscal 2000 was $984,294 compared to
cash used in operations of $861,716 for Fiscal 1999 and cash used in operations
of $2,221,679 for Fiscal 1998. Net cash used in investing activities for Fiscal
2000 was $0 compared to net cash used in investing activities of $339,205 for
Fiscal 1999 and net cash used in investing activities of $54,499 for Fiscal
1998. The 1999 increase was a result of the Company manufacturing a Tapistron
Machine for internal sampling and developmental projects. Net cash provided by
financing activities for Fiscal 2000 was $364,778 compared with cash provided by
financing activities of $1,639,148 during Fiscal 1999 and cash provided by
financing activities of $2,495,333 during Fiscal 1998. As of July 31, 2000, the
Company had available $50,000 on its lines of credit.
The Company believes its current cash requirements will be adequately
provided from anticipated cash generated from operations and short-term
borrowings. Additional cash may be needed for long term cash requirements other
than normal operating expenses, development and enhancement of CYP technology,
financing anticipated growth and possible acquisitions of certain businesses
which are complimentary to the Company's business.
Forward-Looking Statement for Purposes of "Safe Harbor" Under the Private
Securities Reform Act 1995
The Company has made, and may continue to make, various forward-looking
statements with respect to its financial position, projected costs, projected
savings and plans and objectives of management. Such forward-looking statements
are identified by the use of forward-looking words or phrases such as
"anticipates," "intends," "expect," "plans," "believes," "estimates," or words
or phrases of similar import. These forward-looking statements are subject to
numerous assumptions, risks, and uncertainties, and the statements looking
forward beyond Fiscal 2000 are subject to greater uncertainty because of the
increased likelihood of changes in underlying factors and assumptions. Actual
results could differ materially from those anticipated by the forward-looking
statements.
The applicable risks and uncertainties include general economic and
industry conditions that affect all international businesses, as well as,
matters that are specific to the Company and the market it serves. Actual sales
in Fiscal 2000 may be materially less than the sales projected in the
forward-looking statements if the Company's customers cancel or delay current
13
orders or reduce the rate at which the Company is building or expects to build
Tapistron machines for such customers. Such cancellations, delays, or reductions
may occur if there is a substantial change in the general economy or if a
customer were to experience major financial difficulties. Margins may differ
from those projected in the forward-looking statements if management does not
achieve success in improving margins or other events occur that differ from the
estimates used in preparing the Company financial statements.
In addition, all subsequent written and oral forward-looking statements
attributable to the Company, or persons acting on behalf of the Company, are
expressly qualified in their entirety by reference to such factors.
The Company's forward-looking statements represent its judgment only on
the dates such statements are made. By making any forward-looking statements,
the Company assumes no duty to update them to reflect new, changed, or
unanticipated events or circumstances.
Recently Issued Accounting Standards
The Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, ("SFAS No. 130") effective August 1, 1998.
SFAS No. 130 establishes reporting and presentation for comprehensive income and
its components in a set of general-purpose financial statements. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances arising from
non-owner sources. Restatement for prior periods for comparative financial
statements is required. The adoption of SFAS No. 130 did not have a material
impact on the financial statements of the Company.
As of August 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
related Information, ("SFAS No. 131"). SFAS No. 131 requires that financial and
descriptive information be disclosed for each reportable operating segment based
on the management approach. The management approach focuses on financial
information that a business enterprise's decision-makers use to assess
performance and make decisions about resource allocations. The statement also
prescribes the enterprise-wide disclosures to be made about products, services,
geographic areas and major customers. The adoption of SFAS No. 131 did not have
a material impact on the financial statements of the Company.
As of August 1, 1999, the Company adopted Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, ("SFAS No. 132"). SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits,
eliminates certain disclosures and requires additional information on changes in
benefit obligations and fair values of plan assets. The adoption of SFAS No. 132
did not have a material impact on the financial statements of the Company.
As of August 1, 1999 the Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The adoption of SFAS No. 133 did not have a
material impact on the financial statements of the Company.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
A review of the Company's financial instruments and risk exposures at
July 31, 2000, revealed that the Company had exposure to foreign currency
exchange rate risks. At July 31, 2000, the Company had an outstanding debt
denominated in the Japanese Yen, which matures in February of 2001. As exchange
14
rates vary, the Company's financial position, results of operations or cash
flows may vary from expectations and overall expected earnings may be adversely
impacted. The effect of foreign exchange rate fluctuations on the Company for
the year ended July 31, 2000 was an expense of $71,628.
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, 2000, the Company will file a definitive Proxy
Statement with the Securities and Exchange Commission pursuant to Regulation
14A, which involves the election of directors.
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
The following consolidated financial statements of Tapistron
International, Inc. are required to be included in Item 8 are listed below:
Page No.
--------
Report of Independent Auditors 18
Consolidated Balance Sheets - July 31, 2000 and 1999 20
Consolidated Statements of Operations - Years Ended July 31, 2000, 1999 and 1998 22
Consolidated Statements of Changes in Stockholders' Equity - Years Ended July 31, 23
2000, 1999 and 1998
Consolidated Statements of Cash Flows - Years Ended July 31, 2000, 1999, and 1998 24
Notes to Consolidated Financial Statements 26
The following consolidated financial statements schedules are included in Item
14(d):
Schedule II - Valuation and Qualifying Accounts 39
15
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.
(a) 3. EXHIBITS
2.1 - First Amended and Restated Plan of Reorganization****
2.2 - First Amendment to First Amended and Restated Plan of Reorganization****
2.3 - Other Confirming Debtor's First Amended and Restated Plan of Reorganization****
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 (For SEC Use Only)
* 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,
1994.
**** 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 333-45807, declared effective by the Securities and Exchange
Commission on May 29, 1998.
(b) Report on Form 8-K - The following reports were filed during the quarterly
period ended July 31, 2000:
May 22, 2000 -- Dismissed prior certifying accountant.
May 26, 2000 -- Retained new certifying accountant.
June 7, 2000 -- Announced a stock repurchase program.
16
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/ Rodney C. Hardeman, Jr.
----------------------------- --------------------------
Rodney C. Hardeman, Jr. Date
President & 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 Titles Date
/s/ Reg Burnett Chairman, Board of Directors
- -------------------------------------
Reg Burnett
/s/ Henry B. Christopher Director
- -------------------------------------
Henry B. Christopher
/s/ Bruce C. Elliston, Jr. Executive Vice President
- -------------------------------------
Bruce C. Elliston, Jr.
/s/ Jack F. Godfrey Vice Chairman, Board of Directors
- -------------------------------------
Jack F. Godfrey
/s/ Peter Greenberg Director
- -------------------------------------
Peter Greenberg
/s/ Rodney C. Hardeman, Jr. President, Chief Executive Officer &
- ------------------------------------- Director
Rodney C. Hardeman, Jr.
/s/ Floyd S. Koegler, Jr. Vice President Finance, CFO
- -------------------------------------
Floyd S. Koegler, Jr.
17
Report of Independent Auditors
To the Board of Directors and Stockholders
Tapistron International, Inc.
Ringgold, Georgia
We have audited the accompanying consolidated balance sheet of Tapistron
International, Inc. and subsidiary as of July 31, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. 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 audit.
We conducted our audit 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 consolidated
financial statement presentation. We believe that our audit provides 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, 2000, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
BARFIELD, MURPHY, SHANK & SMITH, P.C.
Birmingham, Alabama
August 25, 2000
18
Report of Independent Auditors
Board of Directors and Stockholders
Tapistron International, Inc.
Ringgold, Georgia
We have audited the accompanying consolidated balance sheet of Tapistron
International, Inc. and subsidiary as of July 31, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended July 31, 1999. 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, 1999, and the
results of their operations and their cash flows for each of the two years in
the period ended July 31, 1999, in conformity with generally accepted accounting
principles.
DUDLEY, HOPTON-JONES, SIMS & FREEMAN, PLLP
Birmingham, Alabama
August 25, 1999
19
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
July 31
-----------------------------
2000 1999
----------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 65,812 $ 685,328
Receivables, net of allowance of $25,000 as of
July 31, 2000 and 1999 84,945 105,092
Receivables from employees 76,070 1,475
Sales contracts receivable 520,000 75,000
Inventory 3,339,603 2,121,639
Prepayments 81,107 193,116
Deferred income taxes 100,000 100,000
---------- ----------
Total current assets 4,267,537 3,281,650
---------- ----------
PROPERTY AND EQUIPMENT, NET 619,641 769,935
---------- ----------
OTHER ASSETS
Long-term receivables, net of allowance of $500,000
as of July 31, 2000 and 1999 -- --
Patents and patent license 202,085 234,013
Deferred income taxes 1,800,000 1,900,000
Other assets 2,500 4,050
---------- ----------
Total other assets 2,004,585 2,138,063
---------- ----------
TOTAL $6,891,763 $6,189,648
========== ==========
The accompanying notes are an integral part of these financial statements.
20
TPISTRON INTERNATIONAL, INC.
LIABILITIES AND STOCKHOLDERS' EQUITY
July 31
-----------------------------------
2000 1999
------------- -------------
CURRENT LIABILITIES
Short-term debt $ 1,750,125 $ 1,144,046
Short-term debt - related party 250,000 50,000
Current portion of long-term debt 200,972 279,961
Accounts payable 224,998 99,184
Accrued expenses 269,774 211,660
Customer deposits 24,095 104,634
------------ ------------
Total current liabilities 2,719,964 1,889,485
------------ ------------
CONTINGENT REORGANIZATION LIABILITY 632,145 581,923
------------ ------------
LONG-TERM DEBT 478 180,932
------------ ------------
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: 34,841,129 shares issued at July 31, 2000 and
July 31, 1999 13,936 13,936
Additional paid-in-capital 26,357,489 26,407,711
Accumulated deficit (22,709,223) (22,871,547)
Treasury stock - 570,018 and 55,518 shares outstanding as of
July 31, 2000 and 1999, respectively, at cost (123,026) (12,792)
------------ ------------
Total stockholders' equity 3,539,176 3,537,308
------------ ------------
TOTAL $ 6,891,763 $ 6,189,648
============ ============
The accompanying notes are an integral part of these financial statements.
21
TAPISTRON INTERNATIONAL, INC.
LIABILITIES AND STOCKHOLDERS' EQUITY
Years Ended July 31
-------------------------------------------------
2000 1999 1998
---------- ----------- -----------
SALES $6,084,921 $ 4,725,881 $ 5,651,555
COST OF SALES 3,214,991 2,908,798 3,467,997
---------- ----------- -----------
Gross profit 2,869,930 1,817,083 2,183,558
---------- ----------- -----------
OPERATING EXPENSES
Administrative expenses 2,419,880 2,329,521 2,367,602
Research and development 43,700 90,577 5,901
---------- ----------- -----------
2,463,580 2,420,098 2,373,503
---------- ----------- -----------
OPERATING INCOME (LOSS) 406,350 (603,015) (189,945)
---------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (180,254) (100,392) (39,268)
Interest income 1,619 2,648 42,043
Miscellaneous income 106,701 - -
Loss on disposal of assets - (2,820) (23)
Loss on foreign currency exchange rates (71,628) - -
---------- ----------- -----------
Other income (expense) (143,562) (100,564) 2,752
---------- ----------- -----------
Income (loss) before reorganization items and
income tax provision 262,788 (703,579) (187,193)
REORGANIZATION ITEMS (464) (41,260) (21,415)
---------- ----------- -----------
Income (loss) before income tax provision 262,324 (744,839) (208,608)
INCOME TAX PROVISION - Deferred 100,000 - -
---------- ----------- -----------
NET INCOME (LOSS) $ 162,324 $ (744,839) $ (208,608)
========== =========== ===========
BASIC & DILUTED EARNINGS (LOSS) PER SHARE $ 0.00 $ (0.02) $ (0.01)
========== =========== ===========
Weighted average number of shares outstanding 34,742,050 34,785,611 30,443,850
========== =========== ===========
The accompanying notes are an integral part of these financial statements.
22
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Common Stock
----------------------- Paid-in Accumulated Treasury
Shares Amount Capital Deficit Stock Total
---------- ------- ----------- ------------ --------- ----------
BALANCE - 8-1-97 10,581,813 $ 4,233 $22,899,108 $(21,918,100) $ (12,792) $ 972,449
Issuance of stock 24,259,316 9,703 3,738,333 - - 3,748,036
Net loss - - - (208,608) - (208,608)
---------- ------- ----------- ------------ --------- ----------
BALANCE - 7-31-98 34,841,129 13,936 26,637,441 (22,126,708) (12,792) 4,511,877
Adjustment for stock
contingency - - (229,730) - - (229,730)
Net loss - - - (744,839) - (744,839)
---------- ------- ----------- ------------ --------- ----------
BALANCE - 7-31-99 34,841,129 13,936 26,407,711 (22,871,547) (12,792) 3,537,308
Purchase of treasury
stock - - - - (110,234) (110,234)
Adjustment for stock
contingency - - (50,222) - - (50,222)
Net income - - - 162,324 - 162,324
---------- ------- ----------- ------------ --------- ----------
BALANCE - 7-31-00 34,841,129 $13,936 $26,357,489 $(22,709,223) $(123,026) $3,539,176
========== ======= =========== ============ ========= ==========
The accompanying notes are an integral part of these financial statements.
23
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended July 31
------------------------------------------------
2000 1999 1998
---------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 162,324 $ (744,839) $(208,608)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 200,103 187,895 152,763
Loss on foreign currency adjustment 71,627 - -
Loss on sales of property, plant and equipment 0 2,820 23
Adjustment from pre-confirmation to
confirmation of liabilities subject to settlement
under reorganization proceedings - - (98,863)
Changes in operating assets and liabilities:
Receivables (499,448) 801,159 (261,986)
Prepayments 112,009 (52,328) (140,241)
Inventory (1,234,297) (520,493) (375,346)
Notes receivable - 66,667 283,333
Deferred income taxes 100,000 - -
Accounts payable and accrued expenses 183,927 (213,237) 65,742
Accounts payable and accrued expenses,
which are subject to settlement under a
plan of reorganization - (350,000) (846,464)
Customer deposits (80,539) (39,360) (792,032)
---------- ---------- ---------
Net cash used in operating
activities (984,294) (861,716) (2,221,679)
---------- ---------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sales of property and equipment - - 600
Capital expenditures - (339,205) (18,837)
Payment for patents - - (36,262)
---------- ---------- ---------
Net cash used in investing
activities $ - $ (339,205) $ (54,499)
---------- ---------- ---------
The accompanying notes are an integral part of these financial statements.
24
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended July 31
--------------------------------------------------
2000 1999 1998
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of short-term debt $ 920,020 $2,105,120 $ -
Principal payments of debt (445,008) (465,972) (4,667)
Purchase of treasury stock (110,234) - -
Proceeds from issuance of common stock - - 2,500,000
--------- ---------- ----------
Net cash provided by financing
activities 364,778 1,639,148 2,495,333
--------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (619,516) 438,227 219,155
Cash and cash equivalents - beginning of year 685,328 247,101 27,946
--------- ---------- ----------
Cash and cash equivalents - end of year $ 65,812 $ 685,328 $ 247,101
========= ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $164,134 $ 97,337 $ 39,268
========= ========== ==========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Equipment reclassified to inventory $ - $ - $ 282,212
Prepayment reclassified to property and
equipment $ - $ - $ 85,400
Inventory reclassified to equipment $ 16,332 $ - $ 303,921
Debt settled by issuance of stock $ - $ - $1,225,330
Equipment acquired by long-term debt $ - $ 15,046 $ -
The accompanying notes are an integral part of these financial statements.
25
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies and practices followed by Tapistron
International, Inc. (the "Company") and its subsidiary are as follows:
Business and Credit Concentrations
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.
The Company's customers are not concentrated in any specific geographic region.
See Note 13 for significant concentrations of sales to major customers. The
Company reviews a customer's credit history before extending credit. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends, and other information.
To reduce credit risk, the Company generally requires a down payment on large
equipment orders, and international sales are generally secured by a letter of
credit.
The Company maintains its cash accounts with a bank located in Georgia. The FDIC
insures the total cash balances up to $100,000. The Company would not realize a
material loss as of July 31, 2000 in the event of nonperformance by the bank.
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.
Tapistron machines are reclassified from equipment to inventory when they are no
longer being used as demonstration and/or lease machines and are considered as
being held for sale to a potential customer.
Management evaluates inventory for impairment due to obsolescence and records an
allowance for obsolete inventory when it appears that a decline in net
realizable value has occurred. Management considers the impact of new technology
on the Company's ability to effectively market and sell the inventory.
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.
26
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 patents and licenses range from 7 to 17 years.
Earnings (Net Loss) Per Share
Earnings (net loss) per share are 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. Bill
and hold sales have the same terms of payment, the same policies as to the right
of return exist, and the average collection periods on accounts receivable are
the same as on sales of shipped product. Although the Company holds the product,
title has passed to the customer at time of billing. 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.
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 basis 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, 2000 and 1999, the Company reported significant deferred tax assets
relating 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 a portion of the future tax benefits from 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 income or
shareholders' equity.
27
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Disclosures about Fair Values of Financial Instruments
The following methods and assumptions were used to estimate fair value for each
class of financial instruments for which it is practicable to estimate that
value.
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.
The fair values of notes payable approximate their carrying amounts as reflected
in the balance sheet due to interest rates that are similar to current rates.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets not held for sale
by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their fair values. Based on these
evaluations, there were no adjustments to the carrying value of long-lived
assets in 2000 or 1999.
NOTE 2 - 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 Tapistron
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 Tapistron machine.
NOTE 3 - INVENTORY
Inventory consists of the following components:
2000 1999
---------- -----------
Raw materials $ 908,214 $ 674,752
Work in process 1,602,224 605,213
Finished goods 859,165 841,674
Allowance for obsolete inventory (30,000) -
---------- ----------
$3,339,603 $2,121,639
========== ==========
28
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following major classifications:
2000 1999
----------------------------- ----------------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
---------- ------------ ---------- ------------
Office furniture, fixtures and
equipment $ 557,560 $ 493,261 $ 557,560 $ 468,407
Machinery and equipment 1,223,500 669,477 1,207,168 529,462
Vehicles 22,186 20,867 22,186 19,110
---------- ---------- ---------- -----------
$1,803,246 $1,183,605 $1,786,914 $ 1,016,979
========== ========== ========== ===========
Depreciation expense totaled $161,079 for 1998, $153,868 for 1999, and $166,626
for 2000.
NOTE 5 - LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS
The Company filed a Voluntary Petition for Chapter 11 Bankruptcy on June 21,
1996. The original Plan of Reorganization of Tapistron International, Inc. was
filed with the U.S. Bankruptcy Court ("the court") on November 21, 1996 (the
"Plan"). An Amended and restated Plan of Reorganization of Tapistron
International, Inc. was filed with the Court on March 14, 1997 (the "Amended
Plan") and confirmed on August 18, 1997. After confirmation, the Company
proceeded with an issuance of common stock at the rate of $0.15 per share for a
total of 16,666,666 shares. Under the Amended Plan of Reorganization, all
creditors were paid in full (unless the creditor elected to accept a discounted
amount or the creditor and the Company agreed to different terms), with interest
from stock and cash payments.
In accordance with the Amended Plan, the treatment for each class of creditors
is as follows:
Class 1: In accordance with the Company's Amended Plan, the allowed Class 1
Administrative Claims have been paid in full.
Class 2: The allowed Class 2 Claim of Metrahealth, Administrator for the
Travelers, Employee Benefits Plan has been paid in full. (A)
Class 3: There were no Class 3 claims.
Class 4: The allowed Administrative Claim of Avonwood Capital Corporation as the
Company's investment banker for post-petition payments due for professional
services to the Company is being satisfied in accordance with the terms of its
employment as approved by the Court on November 12, 1996 and subsequently
modified by the parties on August 11, 1997 over twenty (20) months by monthly
retainer payments of $10,000 per month for nineteen (19) months and a final
payment $2,000 on the twentieth month, and issuance of 1,500,000 shares of the
common stock of the Company, issued on November 12, 1997, pursuant to Section
5.5 of the Amended Plan and Section 1145 of the Bankruptcy Code.
29
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS -
CONTINUED
Class 5: The allowed Secured Claim of the holders of the DeMoss Loan Documents,
the Culbreath Loan Documents and the Parker Loan Documents, which were secured
by liens upon the Company's personal property were paid from the liquidation of
their collateral pre-confirmation. (B)
Class 6: The allowed claim of the holders of the Landav Loan Documents were
satisfied in exchange for the issuance and delivery of 4,092,629 shares of
common stock on November 24, 1997. (C)
Class 7: As provided for in the Amended Plan, each unsecured creditor shall
receive its pro rata share (based on the amount of its allowed claim compared to
the total of unsecured claims) of (i) cash in the amount of $500,000 plus (ii)
its pro rata share of a second aggregate payment of $500,000 together with
interest, payable at $50,000 per new machine sale by the Company. The balance of
the unsecured claims shall be paid as follows: Each unsecured creditor could
elect one of two options with respect to the payment of the balance of its
claims. Option 1: The sum of 15% of the balance of its claim. Option 2: The
creditors pro rata share of 1,000,021 shares of common stock issued by the
Company. At any time on or prior to September 30, 2000 (the "Final Settlement
Date:"), each unsecured creditor shall, at the sole and exclusive option of the
Company, receive an additional cash payment or additional shares of common stock
based on the average of the closing prices of the Company's common stock for the
period that is not less than five (5) nor more than thirty-five (35) trading
days prior to the Final Settlement Date such that the total amount received by
the unsecured creditors pursuant to this Option 2, either in additional stock or
cash, equals its pro rata share of the difference between the total amount of
unsecured claims less all principal amounts to be paid pursuant to the first
$500,000 and the second aggregate amount of $500,000. If between the August 29,
1997 (the "Effective Date") and the September 30, 2000, the average of the
closing prices of the Company's stock for any five (5) consecutive trading day
period multiplied by 1,000,021 exceeds the balance of unsecured claims
multiplied by factor for time value or if any unsecured creditors shall sell,
pledge or trade the stock, directly or indirectly, issued to it, then such
creditors shall no longer be entitled to any further distribution on the Final
Settlement Date. On September 12, 1997, each holder of an allowed Class 7
unsecured claim received their pro rata share of the first $500,000 payment in
cash and on November 28, 1997, the creditors that elected Option 1 received
their 15% payment. In addition, the creditors that elected Option 2 received
their pro rate share of the 1,000,000 shares of common stock issued on November
25, 1997. As of July 31, 1999, the Company had paid out all $500,000 toward the
second $500,000 cash payment payable at $50,000 per new machine sale. (D, E, F)
Class 8: Each holder of an allowed Class 8 convenience claim, or those claimants
electing Class 8 treatment received their payment in cash equal to the lesser of
$1,200 or the allowed amount of such allowed convenience claim on September 19,
1997. (G)
Class 9: The holders of the Class 9 claims had their equity interest in the
Company diluted by the common stock of the Company issued to implement the
Amended Plan and any existing preemptive rights to acquire and other rights to
limit issuance of the Company's common stock have been canceled.
Class 10: The holders of the outstanding Redeemable Warrants to acquire common
stock of the Company had their rights to acquire equity interests modified.
Class 11: The holders of outstanding options to acquire common stock of the
Company have had their stock options canceled and rejected and shall hold no
claim.
30
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANACIAL STATEMENTS
NOTE 5 - LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS -
CONTINUED
Class 12: The holders of outstanding, non-redeemable, non-public warrants to
acquire common stock of the Company retain the rights as set forth under the
various representative warrant agreements or other agreements with respect to
non-public, non-redeemable warrants.
Class 13: The claim of Associates Commercial Corporation, Inc. shall be as set
forth in the "Consent Order Allowing Use of Cash Collateral and Providing for
Adequate Protection" entered by the Court on November 12, 1996.
In addition, the Company was authorized by the Court to incur secured debt on
January 14, 1997 from Ameristar Capital Corporation. For services rendered,
Ameristar Capital Corporation received a security interest and lien on one
Tapistron Machine (No. 414) to secure repayment of the loan and to pay a
placement fee of $25,000 to Avonwood Capital Corporation from the proceeds of
the loan and issue 1,000,000 shares of the Company's common stock in accordance
with its plan of reorganization. Shares of common stock were issued as of
November 25, 1997.
Liabilities Subject to Settlement under Reorganization Proceedings:
July 31, 1997 Pre-confirmation $2,520,557
(A) Class 2 Metrahealth Claim (7,911)
(B) Class 5 Culbreath Loan Documents (50,000)
(C) Class 6 Landav Loan Documents exchanged for stock (613,894)
(D) Class 7 First $500,000 payment (500,000)
(E) Class 7 Option 1 payment (89,300)
(F) Class 7 Option 2 shares issued for debt (611,336)
(G) Class 8 Convenience Claims (49,253)
Adjustment from Pre-confirmation to Confirmation (98,863)
----------
Second $500,000 to be payable $50,000 per new machine sale 500,000
Less: Payments (500,000)
----------
Total liabilities subject to settlement under reorganization proceedings $ -
==========
NOTE 6 - CONTINGENCIES
Amended Plan
Under the Amended Plan, the Class 7 unsecured creditors are to receive their pro
rata share of the first $500,000 cash payment and their pro rata share of a
second $500,000 cash payment, payable at $50,000 per new machine sale. With
regard to the balance of their claim, each unsecured creditor could elect either
(1) 15% of the balance of its claim or (2) the creditors pro rata share of
1,000,021 shares of common stock issued by the Company. If between August 29,
1997 and September 30, 2000, the average of the closing prices of the Company's
common stock for any five (5) consecutive trading day period multiplied by
1,000,021 exceeds the balance of unsecured
31
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CONTINGENCIES - CONTINUED
claims multiplied by factor for time value or if any unsecured creditor shall
sell, pledge, or trade the stock, directly or indirectly, issued to it, then
such creditors shall no longer be entitled to any further distribution.
July 31, 2000 closing market price $ 0.1562
Shares issued to Class 7 (no fractional shares were issued) 1,000,021
-----------
Total Market Value of Class 7 Stock 156,203
-----------
Balance of Class 7 unsecured claims 611,336
Time value factor @8.75% 1.28955083
-----------
Total Liability of Class 7 Claims 788,348
-----------
Total contingency for stock that will cover Class 7 debt $ 632,145
===========
Subsequent to year-end, common stock was issued to cover the
Class 7 debt.
Going Concern
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. Recurring negative cash flows from operating activities
raise a question about the Company's ability to continue as a going concern. The
Company emerged from bankruptcy protection when the final decree closed the case
as of January 22, 1998.
The continuation of the Company's business as a going concern is contingent
upon, among other things, the ability to (1) achieve satisfactory levels of
future profitable operations (2) maintain adequate financing, and (3) 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 is being placed on actively promoting the Tapistron machine
in the domestic market, which is being handled by the Company's internal sales
and marketing department. The primary markets outside the United States are in
the Pacific Rim and Europe, and outside representatives will maintain foreign
sales efforts.
Due to a number of domestic Tapistron machine installations over the past five
years, CYP technology 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 Tapistron machine. The Tapistron 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 the Tapistron machine and for patterned tufted carpet in general.
32
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LEASES
The Company leases office space, warehouse space, and equipment under short-term
operating leases. Rental expense under these operating leases for the years
ended July 31, 1998, 1999 and 2000 was approximately $308,813, $338,773 and
$350,193, respectively.
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 entered
into an operating lease for a term of five years. The lease expires in 2001 and
requires minimum annual rental payments of $303,877 in 2001. The Company has the
option to purchase the property at any time during the lease term.
NOTE 8 - DEBT
2000 1999
---------- ----------
Short-term debt consists of the following:
15.0% Promissory Note, maturing September 1999,
interest only payable through August 1999, collaterized
by inventory - 500,000
10.25% Promissory Note, maturing August 16, 1999, monthly principal and
interest payments of $22,549 payable beginning March 16, 1999, and
continuing until maturity
on August 16, 1999, collaterized by machinery and equipment - 146,119
10% Bank line of credit, maturing September 3, 1999, interest only
payable through September 3, 1999, collaterized
by inventory - 497,927
10.75% Bank line of credit, maturing September 1, 2000, interest payable
monthly through August 31, 2000, collaterized
by inventory, equipment and accounts receivable 450,020 -
11% Bank line of credit, maturing October 21, 2000, interest payable
monthly through October 20, 2000, collaterized
by inventory, equipment, and accounts receivable 500,000 -
11.50% Promissory Note, maturing August 19, 2000,
interest payable at maturity, collaterized by inventory 400,000 -
12.5% Promissory Note, maturing September 19, 2000, interest payable
monthly through September 18, 2000,
collateralized by inventory and equipment 400,105 -
---------- ----------
Total short-term debt $1,750,125 $1,144,046
========== ==========
33
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEBT - CONTINUED
Short-term debt - related party consists of the following:
2000 1999
-------- --------
12% Promissory Note, maturing September 15, 1999,
interest only payable quarterly, collaterized by inventory - 50,000
12% Promissory Note, interest and principal due on demand,
collateralized by inventory 250,000 -
-------- --------
Total short-term debt - related party $250,000 $ 50,000
======== ========
Long-term debt consists of the following:
5%Promissory Note, maturing February 2001, payable beginning September
1999, $25,000 plus interest monthly,
collateralized by inventory 195,518 450,000
9.5% Promissory Note, maturing August 2001, payable $482
monthly including interest, collaterized by equipment 5,932 10,893
Less: Current portion 200,972 279,961
-------- --------
Total long-term debt $ 478 $180,932
======== ========
Interest expense on debt totaled $39,268 for 1998, $100,392 for 1999 and
$180,254 for 2000. The weighted average interest rate on short-term borrowings
at July 31, 2000 was 11.47%. The scheduled maturities of long-term debt
outstanding at July 31, 2000 are summarized as follows: $200,972 in 2001 and
$478 in 2002.
NOTE 9 - UNUSED LINES OF CREDIT
At July 31, 2000, the Company had $50,000 available in an unused line of credit
from a local financial institution.
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,
canceling the 192,500 options. All options in the 1992 Plan expired prior to
July 31, 1997. During
34
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCK OPTIONS - CONTINUED
fiscal year 1998, options under the 1992 Plan were approved for the three
officers and a key consultant. During the year ended July 31, 2000, the
shareholders of the Company approved an increase in the number of shares
available for issuance to 5,400,000. At July 31, 2000, there were 926,000
options outstanding.
The following table summarizes option activity:
Shares Per Share
---------- --------------
Outstanding as of July 31, 1997 2,592,003 $ .50 - $7.125
Granted - -
Exercised - -
Expired (2,592,003) -
----------
Outstanding as of July 31, 1998 - -
Granted 926,000 $0.23
Exercised - -
Expired - -
----------
Outstanding as of July 31, 1999 926,000 $0.23
Granted - -
Exercised - -
Expired - -
----------
Outstanding as of July 31, 2000 926,000 $0.23
==========
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, 1995, warrants for the purchase of 50,000 shares at an
exercise price of $1.00 were issued. Warrants for the purchase of 2,637,500
shares of the Company's common stock remain outstanding as of July 31, 1999 and
2000. Upon confirmation of the plan of reorganization, all redeemable warrants
were modified to reduce the exercise price to $1.00 and the exercise period was
extended to August 31, 2000.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the year ended July 31, 1998, the Company paid $17,000 for consulting
services from a company that is owned by a director of the Company.
35
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RELATED PARTY TRANSACTIONS - CONTINUED
During the year ended July 31, 1998, the Company made a $27,000 personal loan to
an officer of the Company. The entire loan was paid back within the year.
During the year ended July 31, 1998, the Company paid approximately $5,000 for
printing for printing services from a company that is owned by the Chairman of
the Company.
During the year ended July 31, 1999, the Company borrowed amounts totaling
$155,000 from a director of the Company. All but $50,000 was paid back to the
director during the year.
During the year ended July 31, 1999, the Company paid $56,085 for consulting
services from a company that is owned by a director of the Company.
During the year ended July 31, 2000, the Company borrowed amounts totaling
$15,000 from an officer of the Company. The entire loan was paid back within the
year.
During the year ended July 31, 2000, the Company borrowed amounts totaling
$450,000 from a director of the Company. All but $250,000 was paid back to the
director during the year.
During the year ended July 31, 2000, the Company paid $36,211 for consulting
services from a company that is owned by a director of the Company.
NOTE 13 - DOMESTIC AND EXPORT SALES
The following table summarizes the sales of the Company:
2000 1999 1998
----------- ----------- -----------
North America $ 5,007,531 $ 3,833,206 $ 4,475,535
Asia 1,062,704 51,667 22,198
Pacific Rim - 41,325 1,120,954
Europe 14,686 799,683 32,868
----------- ----------- -----------
Total Sales $ 6,084,921 $ 4,725,881 $ 5,651,555
=========== =========== ===========
NOTE 14 - MAJOR CUSTOMERS
The Company operates in a single textile machinery line of business,
encompassing the manufacture and service of the computerized yarn placement
(CYP) machine. For the year ending 2000, the Company has five (5) customers
whose sales represent a significant portion of sales in their line of business.
Sales to one of these customers were in excess of 16% of sales. Sales to a
second customer were in excess of 15%. Sales to a third customer accounted for
17% of sales. Sales to a fourth customer were in excess of 16%. Sales to a fifth
customer were in excess of 15%.
For the years ending 1999 and 1998, the Company had nine (9) customers whose
sales represented a significant portion of sales in their line of business.
Sales to one of these customers were in excess of 17% of sales in 1999, and 0%
in 1998. Sales to a second customer accounted for 16% of sales in 1999, and 0%
in 1998. Sales to a third customer accounted for 18% in 1999, and 0% in 1998.
Sales to a fourth customer accounted for 19% in 1999, and
36
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - MAJOR CUSTOMERS - CONTINUED
0% in 1998. Sales to a fifth customer accounted for 17% in 1999, and 0% in 1998.
Sales to a sixth customer accounted for 0% in 1999, and 21% in 1998. Sales to a
seventh customer accounted for 0% in 1999, and 20% in 1998. Sales to an eighth
customer accounted for 0% in 1999, and 39% in 1998. Sales to a ninth customer
accounted for 0% in 1999, and 20% in 1998.
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 basis of those assets and liabilities. Significant
components of the Company's deferred tax liabilities and assets are as follows:
2000 1999
----------- -----------
Deferred tax assets
Accounts receivable $ 9,250 $ 9,250
Accrued expenses and reserves 27,513 21,106
Net operating loss carryforward 8,102,458 8,188,100
Valuation allowance (6,239,221) (6,218,456)
----------- -----------
Net deferred tax assets $ 1,900,000 $ 2,000,000
=========== ===========
As of July 31, 2000, the Company had net operating loss carry-forwards of
approximately $21,898,000 available to offset future taxable income, which will
expire in various years through 2014.
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 nine of the
past twelve 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 carryforward
prior to their expiration. This belief is based upon, among other factors,
changes in operations that have occurred during the last five years.
Specifically, cost savings by bringing Research and Development in house and by
better usage of just-in-time inventory control. 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. Using 2000
as a base, taxable income will have to grow at an average annual compound rate
of 5% in order to realize $1,900,000 of tax benefit prior to expiration.
37
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCOME TAXES - CONTINUED
The income tax provision varies from the amount computed by applying the current
federal statutory rates to income before income tax provision. The reasons for
these differences and the approximate tax effects are as follows:
Tax at federal statutory rate $ 89,190
State income taxes 9,832
Nondeductible expenses 2,146
Other (1,168)
--------
Income tax provision $100,000
========
NOTE 16 - SUBSEQUENT EVENTS
On August 14, 2000, the Company closed on a Small Business Administration loan
in the amount of $500,000. The loan is a twelve-month term note with interest
payable monthly at the prime rate plus 1 1/2% (currently 11%). One Tapistron
machine and the personal guarantees of the officers of the Company secure the
loan.
On August 17, 2000, the Company received a deposit on the sale of a Tapistron
machine.
On August 31, 2000, all outstanding warrants expired.
On October 19, 2000, the board of directors approved to issue common stock to
cover the contingent liability of the unsecured creditors' Class 7 debt.
38
TAPISTRON INTERNATIONAL, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance
Beginning Cost and at End
of Year Expenses Deductions of Year
---------- ----------- ---------- ---------
2000
- -------------
Allowance for doubtful accounts $ 25,000 $ - $ - $ 25,000
Allowance for uncollectible long-
term receivables $500,000 $ - $ - $500,000
Allowance for obsolete inventory $ - $30,000 $ - $ 30,000
1999
- -------------
Allowance for doubtful accounts $ 31,556 $25,000 $31,556(1) $ 25,000
Allowance for uncollectible long-
term receivables $500,000 $ - $ - $500,000
1998
- -------------
Allowance for doubtful accounts $ 39,905 $ - $ 8,349(1) $ 31,556
Allowance for uncollectible long-
term receivables $500,000 $ - $ - $500,000
(1) Uncollectible accounts written off
39