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, 1999
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, 1999, there were 34,785,611 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 CYP machine requires only minutes to change pattern,
color, texture and density combinations. Because of its compatibility with
commercially available pattern entry systems, such as those used by many major
textile manufacturers, virtually any hand-drawn, painted, photographed or
scanned image can be reproduced on the finished tufted product. The CYP machine
is not in the same market as, and will not compete with, low end solid color
plain cut pile carpet producing equipment, but is designed to provide an
alternative to current methods of producing patterned products.
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 Class 7 creditors. (See Note 6 - Contingencies in the notes to the
financials.)
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 1998, based on Department of Commerce reports were approximately $10.4
billion wholesale dollars. The carpet industry is virtually immune from imported
carpet products.
2
Carpet Industry
- ---------------
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, 1998, the U. S.
Department of Commerce reported in its Current Industrial Reports (the
"Reports") that total industry shipments of carpets was over 1.71 billion square
yards. The Reports further indicated that, from 1988 to 1993, the percentage of
patterned carpet styles produced in the United States for the commercial market
(comprised of broadloom and modular products) rose from 23% of the commercial
market to 36% of the commercial market. The percentage of patterned carpet
styles being produced for the commercial market in 1998 in the United States was
42%. The residential carpet market has also witnessed an increased demand for
patterned styles. The report demonstrates that, from 1988 to 1998, the
percentage of patterned carpet styles being produced in the United States for
the residential market rose from less than 1% of the residential market to above
3% of the residential market. 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 believes that worldwide demand will
expand the patterned carpet market considerably.
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 CYP machine's closest competitor. The
range of patterns capable of being produced by such modifications to
conventional tufting machines is restricted, however, because of mechanical
limitations associated with these technologies. Although the CYP machine is not
in the same market as, and will not compete with, solid color carpet producing
equipment, the Company believes its CYP machine offers numerous advantages over
existing methods of producing patterned, machine-made, pile-faced floor
coverings in terms of time and cost efficiencies, versatility of pattern, color
and texture and ease of changing design parameters without the disadvantages
associated with conventional methods. Such disadvantages include the limited
pattern flexibility of existing tufting machine and the limited textures or
density characteristics associated with weaving looms, and the large creel loads
of yarn required to make a given pattern.
Product Overview
The CYP machine is a patented process designed for the manufacture of
patterned tufted floor coverings with greater flexibility than conventional
tufting machines currently on the market. The CYP machine incorporates an
innovative technology for computerized yarn placement, whereby up to six colors
and/or types of yarn per needle are electromechanically selected, placed into
position within the machine's unique needle
3
configuration and then injected into a primary backing as directed by a computer
utilizing the Company's proprietary software. While the CYP machine needle-bar
is stationary from side to side, the primary backing can be shifted laterally as
it is fed through the machine, enabling the machine to produce products with
more tufts per square inch (resulting in greater density) than any other
mechanical method currently available.
The Company believes its CYP machine technology will enable carpet
manufacturers to meet the growing demand for patterned floor coverings by
offering them a means of producing high quality tufted carpeting in patterns.
The Company's proprietary technology provides designers and stylists with almost
complete versatility in styling and construction of tufted fabrics. The CYP
machine, used in conjunction with commercially available pattern entry systems,
enables the user to reproduce almost any scanned image or hand-drawn or painted
pattern and allows the creation of fabrics incorporating yarns with different
textures, luster levels and wear (i.e. gauge and pile) characteristics. In
effect, the designer or stylist has control of both aesthetics and quality in
the creation of the product, particularly in the critical areas of pattern,
color and texture.
A primary advantage of the CYP machine over conventional machine
tufting and weaving methods is the minimal amount of time required to change
pattern, color, 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 CYP machine
requires 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 CYP
machine can be accomplished in less time than it takes a competitive machine to
set up. This characteristic of the CYP machine allows manufacturers to
economically undertake short production runs in order to meet customer needs and
specifications. It also offers a means of supplying salespeople with a wide
variety of sample products to meet the particular interests of potential
customers within a matter of days.
The CYP machine also offers greater textural capabilities than other
existing carpet manufacturing methods. On a CYP machine, different types of yarn
can be placed in a variety of patterns according to the designer's preference.
The resulting carpet contains a textural design, which is not easily obtainable
by other methods. The CYP machine 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.
The CYP machine is compatible with a commercially available
computerized pattern entry system. A typical pattern entry system enables a
designer to create designs or patterns efficiently on a computer screen and
quickly 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's facilities, which were constructed in July 1993, are
located in Ringgold, Georgia. The Company manufactures various sizes of the CYP
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 CYP machine from
local tool and die manufacturers, which fabricate the frames in accordance with
Company specifications. The Company purchases the motors and other various
mechanical components of the existing CYP machine as custom-made or stock
components from unaffiliated outside suppliers. The Company believes that
alternative sources or substitutes of most of the components for the CYP
machines can be developed, if necessary. To date, the Company has not
experienced any delays in delivery of components. The Company expects to
maintain an 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.
4
Sales, Marketing and Servicing
The Company markets its CYP machines to textile industry concerns
engaged in the manufacture of commercial and residential floor coverings. The
purchase price of the CYP machine systems varies from $550,000 to $1,250,000
based on the configuration chosen.
The Company offers a limited warranty on the CYP machine system and
provides maintenance and support to customers following the installation of the
CYP machine system. Approximately one week of on-site training of a tufting
machine operator is required for proficient use of the CYP machine. This
training of operators is normally completed by the Company's service technician
at the installation of the machine. 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. A few high-end rug manufacturers have already
embraced the cut loop technology. The Company will continue to identify and
pursue these highly specialized potential customers. The CYP 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 internal marketing personnel conduct marketing efforts in
the United States. In the international arena, independent agents throughout the
world who represent Tapistron in their respective countries assist the Company's
marketing personnel. The CYP 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.
Development and Acquisitions
In order to provide continual enhancements to the CYP technology, the
Company's in-house engineering staff is conducting 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.
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. CYP
machines also face competition from jet spray dyeing techniques such as the
Millitron process utilized by Milliken & Company and screen printing
apparatuses. CYP machines also compete with technologies which enhance the
traditional pattern tufting processes, such as shifting needle bars, scroll
patterning attachments, individual controlled needles, and the Colortec machine,
developed and marketed by the major United States 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 CYP machine
offers manufacturers a means of economically producing high quality, machine
tufted floor coverings in patterns and colors which to date have been
unavailable or too
5
costly to produce in tufted carpet. CYP 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 CYP machines allow for the
production of short-run, custom orders to meet customer specifications.
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 CYP 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 CYP
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 CYP 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 CYP machine makes it ideal for the creation of unique
and distinctive products that expand the options of the carpet manufacturer.
Patents and Proprietary Rights
The Company has seven United States patents and 10 foreign patents and
anticipates filing additional patent applications, all generally covering the
technology incorporated in the Company's CYP product. The Company believes its
patents and proprietary rights have been and will continue to be important in
enabling the Company to compete with respect to the CYP technology. 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 $892,675 in Fiscal 1999, compared to $1,176,020
in Fiscal 1998, compared to $2,584,903 in Fiscal 1997. 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, 1999, the Company had 31 full-time employees and 1
part-time employee. Among this number, the sales/service department employs 4
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 limited liability insurance in
the amount of $2 million in the aggregate and $1 million per occurrence.
6
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 65 Chairman of the Board of Directors
Henry Christopher 64 Director
Gary L. Coulter 53 Corporate Secretary and Director
Bruce C. Elliston 51 Executive Vice President
Jack Godfrey 59 Vice Chairman of the Board of Directors
Rodney C. Hardeman, Jr. 53 President, Chief Executive Officer, Director
Edward Hine, Jr 46 Director, General Attorney
Floyd S. Koegler, Jr. 56 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
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; Kidder Minster 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
five 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.
Gary L. Coulter has been a Director since April 1996. He presently
serves as Corporate Secretary. He is also Chairman of the Board and CEO of
Spintek Gaming Technologies, a publicly-held reporting company engaged in the
gaming technology business, and a partner of Coulter & Davenport, a law firm.
Mr. Coulter's experience includes: President, COO and Director of Private
Biological Corporation, a developer of biological products and treatments for
cancer, from 1994 to 1996; CEO of Omega International, Inc., developer of
natural products for the treatment of AIDS, from 1992 to 1994; and President,
COO and Director of Woodruff Investment Co., a developer, manager and financier
of real estate investments, from 1986 to 1996. Mr. Coulter received his
undergraduate degree from Emory University, his J.D. degree from the University
of Georgia School of Law, and his L.L.M. in Taxation from New York University
School of Law.
Bruce C. Elliston, joined the Company's staff as Executive
Vice-President as of March 15, 1999. Mr. Elliston is a veteran of 26 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.
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.
7
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 the President 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.
Edward Hine, Jr. has represented the Company as General Counsel since
1998. In March 1999, he was elected to serve as a director on the Company's
Board of Directors. He is a lawyer and principal in the firm Hine & Niedrach,
P.C. The firm, which is based in Rome, Georgia has a business practice and has
represented manufacturers, lenders and other entities involved in the carpet
industry for over 20 years. Mr. Hine was an Honor graduate of Emory University
in 1973 and received his law degree from Emory University School of Law in 1976.
He is active in professional, state and local affairs.
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.
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 $28,940
through May 2000 and $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 period from August 1, 1998
through July 31, 1999, covered by this report.
8
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 has continued
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
---- ---
1998: First Quarter (August 1, 1997 - October 31, 1997) .63 .28
Second Quarter (November 1, 1997 - January 31, 1998) .41 .22
Third Quarter (February 1, 1998 - April 30, 1998) .41 .11
Fourth Quarter (May 1, 1998 - July 31, 1998) .59 .16
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
Redeemable Warrants
1998: First Quarter (August 1, 1997 - October 31, 1997) .13 .04
Second Quarter (November 1, 1997 - January 31, 1998) .08 .03
Third Quarter (February 1, 1998 - April 30, 1998) .07 .03
Fourth Quarter (May 1, 1998 - July 31, 1998) .11 .04
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
At September 30, 1999, there were approximately 417 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.
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, 1999, 1998 and 1997
and the consolidated balance sheet data at July 31, 1999 and 1998 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
9
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, 1996 and 1995 and the consolidated balance sheet data at July 31,
1997, 1996 and 1995 are derived from audited consolidated financial statements
of the Company not included herein.
Years Ended July 31st
-------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ----------------- --------------------- --------------- ----------------
Statement of Operations Data:
Sales $ 4,725,881 $ 5,651,555 $ 3,626,092 $ 1,305,499 $ 2,565,544
Cost of sales 2,908,798 3,467,997 2,477,302 1,146,717 1,757,793
Operating expenses:
Administrative 2,329,521 2,367,602 1,998,245 3,473,581 3,656,532
Research and development 90,577 5,901 10,384 23,473 2,405,438
Net income (loss) (744,839) (208,608) 316,375 (4,478,096) (6,053,175)
Net income (loss) per share (0.02) (0.01) 0.03 (0.49) (0.69)
Extraordinary item - - - 0.04 -
Shares used in computing per
share amounts 34,785,611 30,443,850 10,526,295 10,012,390 8,761,117
Years Ended July 31st
-------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ----------------- --------------------- --------------- ----------------
Balance Sheet Data:
Working capital (deficiency) $ 1,392,165 $ 2,119,609 $ 758,111 $ 1,084,487 $(907,020)
Total assets 6,189,648 5,882,889 5,267,780 4,016,538 9,655,907
Long-term debt 180,932 - 744 5,060 14,001
Accumulated deficit (22,871,547) (22,126,708) (21,918,100) (22,234,475) (17,756,379)
Stockholders' equity 3,537,308 4,511,877 972,449 656,074 4,839,170
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.
Results of Operations
Sales
- -----
The Company's Fiscal 1999 sales were $4,725,881, compared with
$5,651,555 in Fiscal 1998 and $3,626,092 in Fiscal 1997. The decline in sales
was a result of customers awaiting the new technology that had been developed
during the past year. The Company has developed cutting attachments that can be
retrofitted on existing CYP Machines. These cutting attachments allow customers
to produce cut pile, level loop, high-low loop and cut loop products. The
Company expects with the introduction of this new technology that sales will
increase in Fiscal year 2000.
10
Cost of Sales
- -------------
Cost of sales was $2,908,798 in Fiscal 1999 or 62% of sales, compared
with $3,467,997 (61%) in Fiscal 1998 and $2,477,302 (68%) in Fiscal 1997. During
Fiscal 1997, the Company sold CYP machines at lower margins in order to generate
cash and support operations while under Chapter 11 protection. In Fiscal 1998,
the Company began realizing benefits from cost control measures and increased
purchasing power. During Fiscal 1999, the continued growing strength of the
Company and the continued growing reputation of the CYP machine's reliability
has enabled the Company to sell CYP machines at a consistent margin of profit.
The Company expects that the margin of profit will continue at current levels
during the next fiscal year.
Operating Expenses
- ------------------
Operating expenses were $2,420,098 in Fiscal 1999, or 51% of sales,
compared with $2,373,503 (42%) in Fiscal 1998 and $2,008,629 (55%) in Fiscal
1997. During Fiscal 1999, operating expenses as a percentage of sales increase
primarily due to the decrease in sales volume. In addition, research and
development costs increased during Fiscal 1999 due to the recent developments of
the new cutting attachments, which can be retrofitted to current and existing
CYP machines. Management anticipates operating expenses to increase in the
future but decrease as a percentage of sales due to the anticipated sales
volume. The Company expects to spend more on research and development in order
to provide customers with the most current technologies available.
Reorganization Items
- --------------------
Reorganization items were $41,260 in Fiscal 1999 compared with $21,415
in Fiscal 1998 and $793,632 in Fiscal 1997. The decrease is primarily due to the
decrease in legal costs associated with the Chapter 11 reorganization
proceedings.
Deferred Tax Assets
- -------------------
The results of operations for the year ended July 31, 1997 were
materially impacted by a decrease in the valuation allowance for the deferred
tax asset. The valuation allowance decreased by $2,000,000, resulting in a
$2,000,000 increase in net income. This valuation allowance decreased due to
management's estimate that future taxable income would be sufficient to realize
a portion of the tax benefits available from net operating loss carry-forwards.
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 carry-forwards, to
the extent that realization of such benefits is more likely than not. The
Company has tax net operating loss carry-forwards (NOL's) totaling approximately
$22 million, which expire as follows: 2000, $52,685; 2001, $95,910; 2002,
$254,765; 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 2014, $772,176. 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 5.3 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.
11
Due to a number of domestic CYP machine installations over the last
three 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 CYP machine. The CYP 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 CYP machine
and for patterned tufted 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 carry-forward period. In assessing
the likelihood of utilization of existing NOL's management considered the
percentage of decrease in the operating loss and the current overall market
acceptance of CYP technology. Using 1997 as a base, taxable income would have to
grow at an average annual compound rate of 31% in order to realize $2,000,000 of
tax benefit prior to expiration.
Liquidity and Capital Resources
- -------------------------------
The Company's highly liquid assets (cash and cash equivalents) at July
31, 1999 aggregated $685,328, an increase from the $247,101 balance at July 31,
1998. Its working capital position at July 31, 1999 of $1,392,165 decreased
significantly from the comparable amount of $2,119,609 at July 31, 1998. The
decrease in working capital resulted from the Company incurring short-term debt
to support operations.
Net cash used in operations for Fiscal 1999 was $861,716 compared to
cash used in operations of $2,221,679 for Fiscal 1998 and cash provided by
operations of $446,248 for Fiscal 1997. The decrease in cash used in operations
was primarily due to the Company reducing liabilities associated with the
reorganization proceedings during Fiscal 1998. Net cash used in investing
activities for Fiscal 1999 was $339,205 compared to net cash used in investing
activities of $54,499 for Fiscal 1998 and net cash used in investing activities
of $26,756 for Fiscal 1997. The increase was a result of the Company
manufacturing a CYP machine for internal sampling and developmental projects.
Net cash provided by financing activities for Fiscal 1999 was $1,639,148
compared with cash provided by financing activities of $2,495,333 during Fiscal
1998 and cash used in financing activities of $408,695 during Fiscal 1997. As of
July 31, 1999, the Company had available $242,000 on its lines of credit.
The Company believes its current cash needs will be adequately provided
from anticipated cash generated from operations and short-term borrowings.
Long-term cash requirements, other than normal operating expenses, are
anticipated for development and enhancement of CYP technology, financing
anticipated growth and possible acquisitions of certain businesses that are
complementary to the Company's business.
Year 2000 Compliance
- --------------------
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "year 2000 issue" and has
substantially developed an implementation plan to resolve such issues. The "year
2000 issue" is the result of computer programs being written using two digits
rather than four to define the applicable year. Programs with this problem may
recognize a date using "00" as the year 1900 rather than the year 2000,
resulting in system failures or miscalculations. Although no assurance can be
given, the Company presently believes that with its modifications to existing
software and conversions to new software, the "year 2000 issue" will not pose
significant operational problems for the Company's computer systems as so
modified and converted and that the cost of such modifications and conversions
will not have a material impact on the Company's financial statements.
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,"
12
"intends," "expects," "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 1999 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
orders or reduce the rate at which the Company is building or expects to build
CYP 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's 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.
121, Accounting for the Impairment of Long-lived Assets ("SFAS No. 121") at July
31, 1997. This Statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed. SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of this
accounting standard had no effect on the Company's financial statements.
At July 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123").
This Statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. Those plans include all arrangements by
which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based on the
price of the employer's stock. Examples are stock purchase plans, stock options,
restricted stock, and stock appreciation rights. This statement also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. Those transactions must be accounted for based
on the fair value of the consideration received or the fair value of the equity
instruments issued whichever is more reliably measurable. The adoption of this
accounting standard had no effect on the Company's financial statements.
At July 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings per Share (SFAS No. 128"). This statement simplifies
the standards for computing earnings per share previously set forth in APB
Opinion No. 15, "Earnings per Share," and makes them comparable to international
Earnings per Share ("EPS") standards. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. The adoption of this accounting
standard had no material effect on the Company's financial statements.
13
Effective August 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 129, Disclosure of Information about Capital Structures
("SFAS No. 129"). This statement requires all companies to provide specific
disclosure regarding their capital structure. SFAS No. 129 specifies the
disclosure for all companies, including descriptions of their capital structure
and the contractual rights of the holders of such securities. The adoption of
SFAS No. 129 did not have a material impact on the consolidated financial
statements.
The Company adopted Statement of Financial 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 to
have a material impact on the financial statements of the Company.
In February 1998, the FASB issued 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. SFAS No. 132 is effective
for annual financial statements for periods beginning after December 15, 1998.
Restatement of disclosures for previous periods is also required. The Company
does not expect the implementation of this statement to have a material impact
on the financial statement of the Company.
In June 1998, the FASB issued 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. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The adoption of this
statement is not expected to have a material effect on the Company's financial
statements.
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, 1999 revealed that the Company had exposure to foreign currency
exchange rate risks. At July 31, 1999, the Company had an outstanding debt
denominated in the Japanese Yen, which matures in February of 2001. As exchange
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 in
Fiscal 1999 was not material.
14
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, 1999, 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, 1999 and 1998 19
Consolidated Statements of Operations - Year Ended July 31, 1999, 1998 and 1997 21
Consolidated Statements of Changes in Stockholders' Equity - Year Ended July 31, 22
1999, 1998 and 1997
Consolidated Statements of Cash Flows - Year Ended July 31, 1999, 1998 and 1997 23
Notes to Consolidated Financial Statements 25
The following consolidated financial statements schedules are included in Item
14(d):
Schedule II - Valuation and Qualifying Accounts 37
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 - No reports on Form 8-K were filed during the quarterly
period ended July 31, 1999.
(c) Exhibits. See (a) 3. above.
(d) Financial Statement Schedules. The response to this portion of Item 14, is
submitted under Item 14.(1) 1. and 2. above.
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. October 26, 1999
----------------------------------- --------------------------
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 10/26/1999
- -----------------------
Reg Burnett
/s/Henry B. Christopher Director 10/26/1999
- -----------------------
Henry B. Christopher
_______________________ Corporate Secretary and Director 10/26/1999
Gary L. Coulter
/s/Bruce C. Elliston Executive Vice-President 10/26/1999
- -----------------------
Bruce C. Elliston
_______________________ Vice Chairman, Board of Directors 10/26/1999
Jack F. Godfrey
/s/Rodney C. Hardeman, Jr. President, Chief Executive Officer & 10/26/1999
- ----------------------- Director
Rodney C. Hardeman, Jr.
/s/Edward Hine, Jr. Director 10/26/1999
- -----------------------
Edward Hine, Jr.
/s/Floyd S. Koegler, Jr. Vice President Finance, CFO 10/26/1999
- -----------------------
Floyd S. Koegler, Jr.
17
Report of Independent Auditors
------------------------------
Board of Directors and Stockholders
Tapistron International, Inc.
Ringgold, Georgia
We have audited the accompanying consolidated balance sheets of
Tapistron International, Inc. and subsidiary as of July 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three 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 1998, and
the results of their operations and their cash flows for each of the three 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
18
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
July 31, 1999 and 1998
ASSETS
1999 1998
----------------- ------------------
CURRENT ASSETS
Cash and cash equivalents $ 685,328 $ 247,101
Receivables, net of allowance of $25,000 and $31,556
as of July 31, 1999 and 1998, respectively 105,092 980,221
Receivables from employees 1,475 2,505
Sales contract receivable 75,000 -
Note receivable - 66,667
Inventory 2,121,639 1,601,146
Prepayments 193,116 140,788
Deferred income taxes 100,000 100,000
----------------- ------------------
Total current assets 3,281,650 3,138,428
----------------- ------------------
PROPERTY AND EQUIPMENT, NET 769,935 572,372
----------------- ------------------
OTHER ASSETS
Long-term receivables, net of allowance of $500,000 - -
Patents and patent license 234,013 265,941
Deferred income taxes 1,900,000 1,900,000
Other assets 4,050 6,148
----------------- ------------------
Total other assets 2,138,063 2,172,089
----------------- ------------------
TOTAL $ 6,189,648 $ 5,882,889
================= ==================
The accompanying notes are an integral part of these financial statements.
19
TAPISTRON INTERNATIONAL, INC.
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------------- -------------------
CURRENT LIABILITIES
Short-term debt $ 1,194,046 $ 744
Current portion of long-term debt 279,961 -
Accounts payable 99,184 137,966
Accrued expenses 211,660 386,115
Customer deposits 104,634 143,994
------------------- -------------------
Total current liabilities 1,889,485 668,819
------------------- -------------------
LIABILITIES SUBJECT TO SETTLEMENT UNDER
REORGANIZATION PROCEEDINGS - 350,000
------------------- -------------------
CONTINGENT REORGANIZATION LIABILITY 581,923 352,193
------------------- -------------------
LONG-TERM DEBT 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 13,936 13,936
Additional paid-in-capital 26,407,711 26,637,441
Accumulated deficit (22,871,547) (22,126,708)
Treasury stock - 55,518 shares outstanding, at cost (12,792) (12,792)
------------------- -------------------
Total stockholders' equity 3,537,308 4,511,877
------------------- -------------------
TOTAL $ 6,189,648 $ 5,882,889
=================== ===================
The accompanying notes are an integral part of these financial statements.
20
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended July 31, 1999, 1998 and 1997
1999 1998 1997
------------------ ----------------- ------------------
SALES $4,725,881 $5,651,555 $ 3,626,092
COST OF SALES 2,908,798 3,467,997 2,477,302
------------------ ----------------- ------------------
Gross profit 1,817,083 2,183,558 1,148,790
------------------ ----------------- ------------------
OPERATING EXPENSES
Administrative expenses 2,329,521 2,367,602 1,998,245
Research and development 90,577 5,901 10,384
------------------ ----------------- ------------------
2,420,098 2,373,503 2,008,629
------------------ ----------------- ------------------
OPERATING LOSS (603,015) (189,945) (859,839)
------------------ ----------------- ------------------
OTHER INCOME (EXPENSE)
Interest expense (100,392) (39,268) (30,269)
Interest income 2,648 42,043 114
Loss on disposal of assets (2,820) (23) -
------------------ ----------------- ------------------
Other income (expense) (100,564) 2,752 (30,155)
------------------ ----------------- ------------------
Loss before reorganization items and income tax
benefit (703,579) (187,193) (889,994)
REORGANIZATION ITEMS (41,260) (21,415) (793,631)
------------------ ----------------- ------------------
Loss before income tax benefit (744,839) (208,608) (1,683,625)
INCOME TAX BENEFIT - - 2,000,000
------------------ ----------------- ------------------
NET INCOME (LOSS) $ (744,839) $ (208,608) $ 316,375
================== ================= ==================
BASIC & DILUTED EARNINGS [LOSS] PER SHARE $ (0.02) $ (0.01) $ 0.03
================== ================= ==================
Weighted average number of shares outstanding 34,785,611 30,443,850 10,526,295
================== ================= ==================
The accompanying notes are an integral part of these financial statements.
21
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended July 31, 1999, 1998 and 1997
Common Stock
---------------------------- Paid-in Accumulated Treasury
Shares Amount Capital Deficit Stock Total
-------------- ------------- --------------- ----------------- ------------ ---------------
BALANCE - 8-1-96 10,581,813 $ 4,233 $22,899,108 $ (22,234,475) $(12,792) $ 656,074
Net income - - - 316,375 - 316,375
-------------- ------------- --------------- ----------------- ------------ ---------------
BALANCE - 7-31-97 10,581,813 4,233 22,899,108 (21,918,100) (12,792) 972,449
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
============== ============= =============== ================= ============ ===============
The accompanying notes are an integral part of these financial statements.
22
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended July 31, 1999, 1998 and 1997
1999 1998 1997
--------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (744,839) $ (208,608) $ 316,375
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 187,895 152,763 207,934
Loss on sales of property, plant and equipment 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 801,159 (261,986) (350,868)
Prepayments (52,328) (140,241) (81,746)
Inventory (520,493) (375,346) 1,014,763
Other assets - - 1,644
Notes receivable 66,667 283,333 -
Deferred income taxes - - (2,000,000)
Accounts payable and accrued expenses (213,237) 65,742 391,369
Accounts payable and accrued expenses,
which are subject to settlement under a
plan of reorganization (350,000) (846,464) 290,751
Customer deposits (39,360) (792,032) 656,026
--------------- ---------------- ----------------
Net cash provided by (used in)
operating activities (861,716) (2,221,679) 446,248
--------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property and equipment - 600 -
Capital expenditures (339,205) (18,837) (15,407)
Payment for patents - (36,262) (11,349)
--------------- ---------------- ----------------
Net cash used in investing
activities (339,205) (54,499) (26,756)
--------------- ---------------- ----------------
The accompanying notes are an integral part of these financial statements.
23
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For the Years Ended July 31, 1999, 1998 and 1997
1999 1998 1997
------------------ ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of debt $2,105,120 $ - $ 599,970
Principal payments of debt (465,972) (4,667) (1,008,665)
Proceeds from issuance of common stock - 2,500,000 -
------------------ ----------------- -----------------
Net cash provided by (used in) financing
activities 1,639,148 2,495,333 (408,695)
------------------ ----------------- -----------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 438,227 219,155 10,797
Cash and cash equivalents -- beginning of year 247,101 27,946 17,149
------------------ ----------------- -----------------
Cash and cash equivalents -- end of year $ 685,328 $ 247,101 $ 27,946
================== ================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ 97,337 $ 39,268 $ 19,569
================== ================= =================
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Equipment reclassified to inventory $ - $ 282,212 $ 163,270
Prepayment reclassified to property and
equipment - 85,400 -
Inventory reclassified to equipment - 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.
24
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, 1999 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.
Inventory
- ---------
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.
CYP 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.
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.
25
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
- ---------------------------------------------------------------
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 bases of assets and
liabilities and for carry-forward 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, 1999 and 1998, the Company had significant deferred tax assets
relating to operating losses available for carry-forward. These deferred tax
assets have been recorded under the guidelines of SFAS No. 109, Accounting for
Income Taxes, on the premise that future taxable income will more likely than
not be adequate to realize future tax benefits of the available net operating
loss carry-forwards. 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.
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.
26
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
- ---------------------------------------------------------------
The fair values of notes receivable approximate their carrying amounts as
reflected in the balance sheet due to interest rates that are similar to current
rates.
The fair values of notes payable also approximate their carrying amounts as
reflected in the balance sheet due to interest rates that are similar to current
rates.
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 1999 or 1998.
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 CYP machine
for the manufacturing of rugs and carpets. On July 16, 1991, the directors
changed the name of the Company to Tapistron International, Inc. Reference
herein to the "Company" includes Tapistron International, Inc. and FCI. The
Company was a development stage enterprise until January 1992 when the Company
realized revenues from the sale of its first CYP machine.
NOTE 3 - INVENTORY
- ------------------
Inventory consists of the following components:
1999 1998
--------------- --------------
Raw materials $ 674,752 $ 593,221
Work in process 605,213 1,007,925
Finished goods 841,674 -
--------------- --------------
$2,121,639 $1,601,146
=============== ==============
27
TAPISTRON INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consists of the following major classifications:
1999 1998
------------------------------------------- -----------------------------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
----------------- ------------------ ------------------ ---------------
Office furniture, fixtures and
equipment $ 557,560 $ 529,462 $ 503,278 $434,657
Machinery and equipment 1,207,168 468,407 918,070 419,152
Vehicles 22,186 19,110 22,186 17,353
----------------- ------------------ ------------------ ---------------
$1,786,914 $1,016,979 $1,443,534 $871,162
================= ================== ================== ===============
Depreciation expense totaled $171,642 for 1997, $161,079 for 1998, and $153,868
for 1999.
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 I
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.
28
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 1,000,021 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.
29
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 CYP
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
30
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, 1999 closing market price $ 0.1406
Shares issued to Class 7 (no fractional shares were issued) 1,000,021
------------------
Total Market Value of Class 7 Stock 140,603
------------------
Balance of Class 7 unsecured claims 611,336
Time value factor @8.75% 1.18188127
------------------
Total Liability of Class 7 Claims 722,526
------------------
Total contingency for stock that will cover Class 7 debt $ 581,923
==================
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 operating losses and 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 CYP 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 CYP machine installations over the past four 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 CYP machine. The CYP machine is not in the same market with low-end
solid color carpet tufting machines, and the focus will continue to be on the
manufacturers of high-end carpet, which is a value-added product market. So, as
there has been an increasing trend toward product differentiation in the carpet
industry, the future is continually looking brighter for this machine and for
patterned tufting in general.
31
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, 1997, 1998 and 1999 was approximately $244,143, $308,813 and
$338,773, 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 requires minimum
annual rental payments of $333,506 in 1999, $350,182 in 2000, and $303,877 in
2001. The Company has the option to purchase the property at any time during the
lease term.
NOTE 8 - DEBT
- -------------
1999 1998
----------------- ------------
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 -
12% Promissory Note, maturing September 15, 1999,
interest only payable quarterly, collaterized by inventory. 50,000 -
----------------- ------------
Total short-term debt $1,194,046 $ -
================= ============
Long-term debt consists of following:
5.8%Promissory Note, maturing September 9, 1998, payable $375
monthly including interest, collaterized
by equipment. $ - $ 744
9.5%Promissory Note, maturing August 2001, payable $482 monthly
including interest, collaterized
by equipment. 10,893 -
5.0%Promissory Note, maturing in February 2001, payable beginning
September 1999, $25,000 plus
interest monthly, collaterized by inventory. 450,000 -
Less: Current portion 279,961 744
----------------- ------------
Total long-term debt $ 180,932 $ -
================= ============
Interest expense on debt totaled $30,269 for 1997, $39,268 for 1998 and $100,392
for 1999. The weighted average interest rate on short-term borrowings at July
31, 1999 was 12.21%. The scheduled maturities of long-term debt outstanding at
July 31, 1999 are summarized as follows: $279,961 in 2000 and $180,932 in 2001.
32
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 9 - 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.
The following table summarizes option activity:
Number of Option Price
Shares Per Share
------------------ ------------------
Outstanding as of August 1, 1996 2,592,003 $ .50 - $7.125
Granted - -
Exercised - -
Expired - -
------------------
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
==================
NOTE 10 - 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, 1998 and
1999. 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.
33
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - RELATED PARTY TRANSACTIONS
- ------------------------------------
During the year ended July 31, 1997, no related party transactions occurred.
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.
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 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.
NOTE 12 - DOMESTIC AND EXPORT SALES
- -----------------------------------
The following table summarizes the sales of the Company:
1999 1998 1997
------------------ ------------------ ------------------
North America $ 3,833,206 $ 4,475,535 $ 1,041,189
Asia 51,667 22,198 56,739
Pacific Rim 41,325 1,120,954 1,783,241
Europe 799,683 32,868 744,923
------------------ ------------------ ------------------
Total Sales $ 4,725,881 $ 5,651,555 $ 3,626,092
================== ================== ==================
NOTE 13 - 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. The Company has ten (10) customers whose sales represent a
significant portion of sales in their line of business. Sales to one of these
customers were in excess of 17% in 1999, 0% in 1998 and 20% in 1997. Sales to a
second customer accounted for 16% of net sales in 1999, 0% in 1998 and 0% in
1997. Sales to a third customer accounted for 18% in 1999, 0% in 1998 and 0% in
1997. Sales to a fourth customer accounted for 19% in 1999, 0% in 1998 and 0% in
1997. Sales to a fifth customer accounted for 17% in 1999, 0% in 1998 and 0% in
1997. Sales to a sixth customer accounted for 0% in 1999, 21% in 1998 and 0% in
1997. Sales to a seventh customer accounted for 0% in 1999, 20% in 1998 and 0%
in 1997. Sales to a eighth customer accounted for 0% in 1999, 39% in 1998 and 0%
in 1997. Sales to a ninth customer accounted for 0% in 1999, 20% in 1998 and 48%
in 1997. Sales to a tenth customer accounted for 0% in 1999, 0% in 1998 and 19%
in 1997.
34
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - INCOME TAXES
- ----------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the tax bases of those assets and liabilities. Significant
components of the Company's deferred tax liabilities and assets are as follows:
1999 1998
------------------ ------------------
Deferred tax assets
Accounts receivable $ 9,250 $ 11,675
Accrued expenses and reserves 21,106 15,819
Net operating loss carry-forward 8,188,100 7,924,660
Valuation allowance (6,218,456) (5,952,154)
------------------ ------------------
Net deferred tax assets $ 2,000,000 $ 2,000,000
================== ==================
As of July 31, 1999, the Company had net operating loss carry-forwards of
approximately $22,130,000 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
carry-forwards and reversals of the temporary differences is dependent upon
generating sufficient taxable income prior to expiration of the NOL
carry-forwards. Even though the Company has incurred tax losses for nine of the
past eleven 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 carry-forward
prior to their expiration. This belief is based upon, among other factors,
changes in operations that have occurred during the last three 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 1997
as a base, taxable income will have to grow at an average annual compound rate
of 31% in order to realize $2,000,000 of tax benefit prior to expiration.
NOTE 15 - YEAR 2000 COMPLIANCE
- ------------------------------
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "year 2000 issue" and has substantially
developed an implementation plan to resolve such issues. The "year 2000 issue"
is the result of computer programs being written using two digits rather than
four to define the applicable year. Programs with this problem may recognize a
date using "00" as the year 1900 rather than the year 2000, resulting in system
failures or miscalculations. Although no assurance can be given, the Company
presently believes that with its modifications to existing software and
conversions to new software, the "year 2000 issue" will not pose significant
operational problems for the Company's computer systems as so modified and
converted and that the cost of such modifications and conversions will not have
a material impact on the Company's financial statements.
35
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENT
- --------------------------
Subsequent to Fiscal 1999 year-end, the Company has received deposits or a
letter of credit for the purchase of four (4) CYP machines. In addition, the
Company has received an order and deposit for a retrofit attachment. The Company
expects 3 of the 4 machines to ship during the first quarter along with a
retrofit. The remaining machine is expected to ship during the second quarter.
36
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
--------------- --------------- ------------------- ---------------
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
1997
- -------------
Allowance for doubtful accounts $ 39,904 $ - $ - $ 39,905
Allowance for uncollectible long-
term receivables $500,000 $ - $ - $500,000
Allowance for obsolete inventory $978,656 $ - $ 978,656(2) $ -
(1) Uncollectible accounts written off
(2) Obsolete inventory written off
37