SECURITIES AND EXCHANGE COMMISSION
Washington, D. C., 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-20309
TAPISTRON INTERNATIONAL, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1684918
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(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
6203 Alabama Highway; Ringgold, GA 30736-1067
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 965-9300
--------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0004 Par Value
Redeemable Warrants
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K [ ]
On October 1, 1998, 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.
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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 tufting machines, which produce piled products by inserting tufts
of yarn into a primary backing, are limited in their ability to produce a broad
range of patterned, multi-colored and multi-textured products. Most existing
weaving looms, which create the primary backing in the weaving process, require
an extremely time-consuming and labor intensive process to effect pattern and
color changes. The Company's CYP machine requires only minutes to change
pattern, color, texture and density combinations. Because of its compatibility
with commercially available pattern entry systems, such as those used by many
major textile manufacturers, virtually any hand-drawn, painted, photographed or
scanned image can be reproduced on the finished tufted product. The CYP machine
is not in the same market as, and will not compete with, low end solid color
plain cut pile carpet producing equipment, but is designed to provide an
alternative to current methods of producing patterned products.
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 Company's Amended Plan was confirmed by
the Court 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. Debtor's 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.
Therefore, the Amended Plan has been substantially consummated.
Industry
The textile industry is one of the major industrial classifications
in the United States economy. Total annual dollars spent in 1995, based on
Department of Commerce office of Textiles and Apparel, was over $86 billion.
Many of the individual segments within the textile industry are themselves
considered separate industries. The existing technologies of the Company focus
on the carpet industry.
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
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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, 1997, the U.S.
Department of Commerce reported in its Current Industrial Reports (the
"Reports") that total industry shipments of carpets was over 1.6 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. From 1993 to 1996, the percentage of
patterned carpet styles being produced in the United States for the commercial
market rose to 50% of the commercial market. The residential carpet market has
also witnessed an increased demand for patterned styles. The report demonstrates
that, from 1988 to 1996, 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 approximately 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 geometrics and small pattern repeats, (ii) scroll patterning
attachments which create pattern through high/low pile configurations by varying
the speed at which yarn is fed into each needle and (iii) individual controlled
needles (ICN), a method of creating pattern by "over-tufting" - implanting extra
yarn into a plain, previously tufted carpet. An enhanced version of the ICN
technology, the Colortec, is probably the CYP machine's closest competitor. The
range of patterns capable of being produced by such modifications to
conventional tufting machines is restricted, however, because of mechanical
limitations associated with these technologies. Although the CYP machine is not
in the same market as, and will not compete with, solid color carpet producing
equipment, the Company believes its CYP machine offers numerous advantages over
existing methods of producing patterned, machine-made, pile-faced floor
coverings in terms of time and cost efficiencies, versatility of pattern, color
and texture and ease of changing design parameters without the disadvantages
associated with conventional methods. Such disadvantages include the limited
pattern flexibility of existing tufting machines and the limited textures or
density characteristics associated with weaving looms, and the large creel loads
of yarn required to make a given pattern.
Product Overview
The CYP Machine
- ---------------
The CYP machine is a patented process designed for the manufacture
of patterned tufted floor coverings with greater flexibility than conventional
tufting machines currently on the market. The CYP machine incorporates an
innovative technology for computerized yarn placement, whereby up to six colors
and/or types of yarn per needle are electro-mechanically selected, placed into
position within the machine's unique needle configuration and then injected into
a primary backing as directed by a computer utilizing the Company's proprietary
software. While the CYP machine needle-bar is stationary from side to side, the
primary backing can be shifted laterally as it is fed through the machine,
enabling the machine to produce products with more tufts per square inch
(resulting in greater density) than any other mechanical method currently
available.
The Company believes its CYP machine technology will enable carpet
manufacturers to meet the growing demand for patterned floor coverings by
offering them a means of producing high quality tufted carpeting in patterns.
The Company's proprietary technology provides designers and stylists with almost
complete versatility in styling and construction of tufted fabrics. The CYP
machine, used in conjunction with commercially available pattern entry systems,
enables the user to reproduce almost any scanned image or hand-drawn or painted
pattern and allows the creation of fabrics incorporating yarns with different
textures, luster levels and wear (i.e. gauge and pile) characteristics. In
effect, the designer or stylist has control of both aesthetics and quality in
the creation of the product, particularly in the critical areas of pattern,
color and texture.
A primary advantage of the CYP machine over conventional machine
tufting and weaving methods is the minimal amount of time required to change
pattern, color, texture and construction combinations. Whereas several hours to
several days
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are required to set up conventional machines to create certain construction
combinations, affecting a construction change with a CYP machine requires only
the touching of a computer screen - approximately a thirty second operation. The
touch screen system controls all of the machine's parameters with the exception
of pile height, which is adjusted manually. Set-up of a CYP machine can be
accomplished in less time than it takes competitive machines to set up. This
characteristic of the CYP machine allows manufacturers to economically undertake
short production runs in order to meet customer needs and specifications. It
also offers a means of supplying salespeople with a wide variety of sample
products to meet the particular interests of potential customers within a matter
of days.
Patterns in the CYP machine products can be created by using a
variety of yarn systems, including pre-dyed/solution-dyed BCF (bulked continuous
filament) or spun yarn, rather than injecting color onto an already tufted piece
of carpet.
The CYP machine also offers greater textural capabilities than other
existing carpet manufacturing methods. On a CYP machine, different types of yarn
can be placed in a variety of patterns according to the designer's preference.
The resulting carpet contains a textural design, which is not easily obtainable
by other methods.
The CYP machine is compatible with a commercially available
computerized pattern entry system. A typical pattern entry system enables a
designer to create designs or patterns efficiently on a computer screen and
quickly modify or rearrange colors or other aspects of the design or pattern.
Such pattern entry systems are widely used in the carpet industry.
Manufacturing
CYP Machines
- ------------
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 both CYP
machines can be developed, if necessary. To date, the Company has not
experienced any delays in delivery of components. The Company does not expect to
maintain large inventories and will generally order required components as it
receives customer orders. Accordingly, any delay or difficulties in developing
such alternatives or substitutes could result in shipment delays, which would
adversely affect the Company's operations.
Sales, Marketing and Servicing
The CYP Machine
- ---------------
The Company markets its CYP machines to textile industry concerns
engaged in the manufacture of commercial carpeting and residential floor
coverings. Customers may choose to purchase an entire CYP machine system from
the Company or only certain components thereof, obtaining the remaining
components (such as the creel, the compressor, or the pattern entry system) from
alternate suppliers. The purchase price of the CYP machine systems varies from
$550,000 to $1,100,000 based on the configuration chosen.
The Company's ability to market CYP machines successfully will
depend upon the willingness of potential customers to incur substantial cost and
expend the time and effort involved in the development of these products,
particularly because many of such customers may be reluctant to replace or
significantly modify their existing manufacturing methods. The Company offers a
limited warranty on the CYP machine system and provides 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 designated by the
customer is normally completed by the Company's service technician at
installation of the machine and acceptance by the customer. The Company's
on-site training obligation typically ends with the expiration of the machine
warranty.
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Historically, the Company's marketing efforts have been focused
primarily overseas. However, the Company is currently expanding its efforts in
the domestic market, increasingly providing a greater concentration of resources
in the United States. Marketing efforts in the United States are conducted by
the Company's internal marketing personnel. In the international arena,
independent agents throughout the world who represent Tapistron in their
respective countries assist the Company's marketing personnel.
Development and Acquisitions
Research and development activities are being conducted by the
Company's in-house engineering staff to provide continual enhancements to the
CYP technology. It is anticipated that these in-house efforts will result in
major improvements during the next few years. Although well underway, it is
premature to discuss the objectives or completion dates.
Competition
The CYP Machine
- ---------------
The Company competes with entities engaged in the design,
development and marketing of equipment for the three existing methods of
manufacturing machine-made, patterned fiber floor coverings. In the area of
traditional weaving, the Company's product competes with Axminster and Wilton
type looms, the dominant manufacturers of which are Crabtree Ltd. of the United
Kingdom and Michel Van De Wiele of Belgium, respectively. In addition, there are
other smaller national and regional firms, which manufacture weaving looms. CYP
machines also face competition from jet spray dyeing techniques such as the
Millitron process utilized by Milliken & Company and screen printing
apparatuses. CYP machines also compete with technologies which enhance the
traditional pattern tufting processes, such as shifting needle bars, scroll
patterning attachments, individual controlled needles, and the Colortec machine,
developed and marketed by the major U. S. tufting machine manufacturers,
including Card-Monroe Corporation, Cobble Tufting Machine Company, Inc. and
Tuftco Corporation. All entities with which the Company competes have
substantially greater financial, manufacturing and other resources than the
Company.
The Company will compete on the basis of pattern, color, texture,
and density flexibility afforded by the CYP machine technology. The CYP machine
offers manufacturers a means of economically producing high quality, machine
tufted floor coverings in patterns and colors which to date have been
unavailable or too costly to produce in tufted carpet. 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 and color, the CYP machines allow for the
production of short-run, custom orders to meet customer specifications.
Competition to Date
- -------------------
In 1992, the Company faced the inherent difficulties of the
introduction of a new product that was competing with traditional technology in
an established industry. Not only did the machine need to be proven to the
carpet industry, but 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 - R&D 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 has an 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.
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Patents and Proprietary Rights
The CYP Machine
- ---------------
The Company has seven United States patents and 10 foreign patents
and anticipates filing additional patent applications, all generally covering
the technology incorporated in the Company's CYP product. The Company believes
its patents and proprietary rights have been and will continue to be important
in enabling the Company to compete with respect to the CYP technology. Failure
to obtain patents in certain foreign countries may materially adversely affect
the Company's ability to compete effectively in certain international markets.
The Company also relies on trade secrets that it seeks to protect, in part,
through confidentiality agreements with employees and other parties.
Financial Information regarding Foreign and Domestic Operations and Export Sales
During its last three fiscal years, the Company has generated
substantial revenue from foreign sales. Revenue from foreign sales to
unaffiliated customers totaled $1,176,020 in Fiscal 1998, compared to $2,584,903
in Fiscal 1997 and $105,177 in Fiscal 1996. 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, 1998, the Company had 28 full-time employees and 1
part-time employee. Among this number, the sales/service department employs 5
persons, the administration department employs 13 persons and the manufacturing
department employs 10 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 $2 million per occurrence.
Management
Directors and Executive Officers
- --------------------------------
The following table sets forth certain information concerning each
person who is a director or executive officer of the Company.
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Kim Amos 41 Vice President of Sales and Director
Reg Burnett 64 Chairman of the Board of Directors
Henry Christopher 63 Director
Gary L. Coulter 52 Corporate Secretary and Director
Rodney C. Hardeman, Jr. 52 Executive Vice President and Director
Floyd S. Koegler, Jr. 55 Vice President and Chief Financial Officer
J. Darwin Poe 53 President, Chief Executive Officer and Vice
Chairman of the Board of Directors
</TABLE>
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Kim Amos has been a Director since February 1996. Since July 1990
Mr. Amos has been employed by the Company, serving in various capacities within
engineering and operations. He is currently Vice President of Sales. Previously,
Mr. Amos was employed by SWI - Cobble Division, a leading manufacturer of
tufting machinery and peripheral tufting equipment.
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
four 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, Inc., 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.
Rodney C. Hardeman, Jr. has served as a Director since January 1998.
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.
Floyd S. Koegler, Jr. has served as a Vice President and CFO of
Tapistron since September 1996. He is a Certified Public Accountant with an MBA
from Brenau University in 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 a 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.
J. Darwin Poe came to Tapistron in July 1995 and became President of
the Company in February 1996. Mr. Poe, has served on Tapistron's Board of
Directors since July 1995. His entire professional career has been in the U.S.
textile industry. From 1993 to 1995, he served as Technical Director of Prince
Street Technologies, a carpet manufacturer, and from 1985 to 1993, he was an
Account Executive at Amoco Fabrics and Fibers Company. Mr. Poe also served as
COO of Desoto Falls, Inc. of Dalton, Georgia, a carpet yarn manufacturer, and
has held various management positions with other industry leaders such as the
Bibb Company and West Point Pepperell. Mr. Poe is a graduate of Auburn
University with a degree in Textile Engineering and an MBA from Brenau
University in Gainesville, Georgia.
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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
$27,562 through May 1999, $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 Title 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, 1997
through July 31, 1998, covered by this report.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On June 24, 1992, the Securities and Exchange Commission declared
effective the Company's Registration Statement with respect to an initial public
offering of 2,250,000 shares of Common Stock and 2,637,500 Redeemable Warrants
(including 337,500 Redeemable Warrants exercised under the Underwriter's over
allotment option). The Company consented to the de-listing of its warrants from
the NASDAQ Stock Market effective as of August 20, 1996 due to the lack of any
significant trading activity in the warrants and because there were no market
makers for the warrants as required by NASD rules. The NASD deleted the Company
from the NASDAQ Stock Market effective August 29, 1996, as a result of the
Company's non-compliance with the quantitative maintenance criteria for
continued listing on the NASDAQ Stock Market. The Company's stock will continue
to be traded as an OTCBB stock. The Common Stock and the Redeemable Warrants
were listed on NASDAQ under the symbols "TAPI" and "TAPIW", respectively.
The following tables set forth, for the periods indicated, the high and
low bid prices for the Company's Common Stock and Redeemable Warrants as
reported by the NASDAQ system (or the OTCBB Historical system, as the case may
be). Prices represent actual transactions, but do not reflect adjustments for
retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Common Stock
1996: First Quarter (August 1, 1995 - October 31, 1995) $1 3/8 $13/16
Second Quarter (November 1, 1995 - January 31, 1996) 1 1/16 1/4
Third Quarter (February 1, 1996 - April 30, 1996) 25/32 3/8
Fourth Quarter (May 1, 1996 - July 31, 1996) 5/8 1/4
1997: First Quarter (August 1, 1996 - October 31, 1996)* 9/32 1/100
Second Quarter (November 1, 1996 - January 31, 1997)* 3/8 1/100
Third Quarter (February 1, 1997 - April 30, 1997)* 5/8 1/8
Fourth Quarter (May 1, 1997 - July 31, 1997)* 3/8 1/8
1998: First Quarter (August 1, 1997 - October 31, 1997)* 5/8 9/32
Second Quarter (November 1, 1997 - January 31, 1998)* 13/32 7/32
Third Quarter (February 1, 1998 - April 30, 1998)* 13/32 7/64
Fourth Quarter (May 1, 1998 - July 31, 1998)* 19/32 5/32
Redeemable Warrants
1996: First Quarter (August 1, 1995 - October 31, 1995) 3/16 3/8
Second Quarter (November 1, 1995 - January 31, 1996) 3/16 1/4
Third Quarter (February 1, 1996 - April 30, 1996) 3/16 3/32
Fourth Quarter (May 1, 1996 - July 31, 1996) 3/16 3/32
1997: First Quarter (August 1, 1996 - October 31, 1996)* NA NA
Second Quarter (November 1, 1996 - January 31, 1997)* NA NA
Third Quarter (February 1, 1997 - April 30, 1997)* NA NA
Fourth Quarter (May 1, 1997 - July 31, 1997)* 1/100 1/100
1998: First Quarter (August 1, 1997 - October 31, 1997)* 1/8 4/100
Second Quarter (November 1, 1997 - January 31, 1998)* 5/64 3/100
Third Quarter (February 1, 1998 - April 30, 1998)* 7/100 3/100
Fourth Quarter (May 1, 1998 - July 31, 1998)* 7/64 4/100
</TABLE>
* The high and low bid prices for the Company's common stock and redeemable
warrants as reported by the OTCBB System.
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<PAGE>
At October 1, 1998, there were approximately 400 shareholders of record based
on a listing from the Company's stock transfer agent excluding "street" names.
The Company estimates there were approximately 3,000 beneficial owners holding
stock in nominee or "street" name as of that date based on historical
information. The Company has not paid any cash dividends and does not anticipate
paying any cash dividends in the foreseeable future.
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, 1998, 1997 and 1996
and the consolidated balance sheet data at July 31, 1998 and 1997 are derived
from and are qualified by reference to, the audited consolidated financial
statements included in Item 8 of this report and should be read in conjunction
with those financial statements and notes thereto. The consolidated statement of
operations data for the Company set forth below with respect to the fiscal years
ended July 31, 1995 and 1994 and the consolidated balance sheet data at July 31,
1995 and 1994 are derived from audited consolidated financial statements of the
Company, or its predecessor, as the case may be, not included herein.
<TABLE>
<CAPTION>
Years Ended July 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $ 5,651,555 $ 3,626,092 $ 1,305,499 $ 2,565,544 $ 4,315,060
Cost of sales 3,467,997 2,477,302 1,146,717 1,757,793 2,850,422
Operating expenses:
Administrative 2,367,602 1,998,245 3,473,581 3,656,532 3,730,194
Research and development 5,901 10,384 23,473 2,405,438 3,529,906
Net income (loss) (208,608) 316,375 (4,478,096) (6,053,175) (5,840,945)
Net income (loss) per share (.01) .03 (.49) (.69) (.76)
Extraordinary item - - .04 - -
Shares used in computing per
share amounts 30,443,850 10,526,295 10,012,390 8,761,117 7,726,018
</TABLE>
<TABLE>
<CAPTION>
As of July 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficiency) $ 2,119,609 $ 758,111 $ 1,084,487 $ (907,020) $ 2,649,245
Total Assets 5,882,889 5,267,780 4,016,538 9,655,907 10,982,246
Long-term debt 0 744 5,060 14,001 1,291,320
Accumulated deficit (22,126,708) (21,918,100) (22,234,475) (17,756,379) (11,703,107)
Stockholders' equity 4,511,877 972,449 656,074 4,839,170 7,653,669
</TABLE>
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
- -----
Tapistron's Fiscal 1998 sales were $5,651,555, compared with $3,626,092 in
Fiscal 1997 and $1,305,499 in Fiscal 1996. Sales to domestic customers in Fiscal
1998 was $4,475,535 compared to $1,041,189 in Fiscal 1997 and $1,200,322 in
Fiscal 1996. The increase in domestic sales is primarily due to increased
acceptance by the domestic carpet industry of the CYP Machine. The Company made
multiple machine sales to a number of major American commercial carpet
manufacturers and to a large USA manufacturer of custom mats. Internationally
the Company had sales of $1,176,020 in Fiscal 1998 compared to $2,584,903 in
Fiscal 1997 and $105,177 in Fiscal 1996. The Company sold two more CYP Machines
to our largest Japanese
10
<PAGE>
customer this past Fiscal year making them the owner of six CYP Machines. The
marketing of the CYP Machine requires significant overseas and domestic travel,
attendance at both machine and carpet markets. The Company expects that this
hard work and determination will provide even more positive results for Fiscal
1999.
Cost of Sales
- -------------
Cost of sales was $3,467,997 in Fiscal 1998, or 61% of sales, compared with
$2,477,302 (68%) in Fiscal 1997 and $1,146,717 (88%) in Fiscal 1996. During
Fiscal years 1997 and 1996, 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. The growing strength of the Company and the
growing reputation of the CYP Machine's reliability enabled the Company to sell
CYP Machines for a more realistic margin of profit.
Operating Expenses
- ------------------
Operating expenses were $2,373,503 in Fiscal 1998, or 42% of sales,
compared with $2,008,629 (55%) in Fiscal 1997 and $3,497,054 (268%) in Fiscal
1996. During Fiscal 1998, operating expenses as a percentage of sales decreased
primarily due to the increase in sales volume. The Company believes that as
sales increase, the operating expenses as a percentage of sales will decrease
because of the current capacity of the Company's operations. Included in the
operating expenses of Fiscal 1996 is a $1,021,656 allowance for obsolete
inventory that resulted primarily from enhancements to the existing CYP Machine
technology. Also included in Fiscal 1996 is a $500,000 allowance for
noncollectible long-term receivable related to machine sales. 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 future developments to provide customers with the most current
technologies available.
Reorganization Items
- --------------------
Reorganization items were $21,415 in Fiscal 1998 compared with $793,631 in
Fiscal 1997 and $249,150 in Fiscal 1996. The decrease is primarily due to
decreased 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
$21 million, which expire as follows: 1999, $172,235; 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; and 2013, $208,608. SFAS 109 required 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 like
than not be sufficient to utilize 5.3 million of NOL's prior to their ultimate
expiration in the year 2013.
The NOL's available for future utilization was generated principally during
development stage periods when Research and Development costs were excessive and
the customer base was not established. In 1997, the Company reorganized under
Chapter 11 of the Federal Bankruptcy Code. In assessing the likelihood of
utilization of existing NOL's, management considered the historical results of
the Company's operations, both prior to the reorganization and as an independent
public company subsequent to such reorganization, and the current operating
environment.
Due to a number of domestic 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.
11
<PAGE>
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. Excluding
the reorganization items and loss from disposal of assets (all relating to
Chapter 11), the pretax loss in 1998, 1997 and 1996 would have been $187,193,
$889,994, and $3,626,591, respectively. The loss decreased by 34% from 1995 to
1996, 75% from 1996 to 1997and 79% from 1997 to 1998. 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,
1998 aggregated $247,101, an increase from the $27,946 balance at July 31, 1997.
Its working capital position at July 31, 1998 of $2,119,609 increased
significantly from the comparable amount of $758,111 at July 31, 1997. The
increase in working capital resulted from the Company reducing short-term
liabilities associated with the reorganization proceedings.
Net cash used in operations for Fiscal 1998 was $2,221,679 compared to cash
provided by operations of $446,248 for Fiscal 1997 and cash used in operations
of $1,001,970 for Fiscal 1996. The increase in cash used in operations was
primarily due to the Company reducing the liabilities associated with the
reorganization proceedings. Net cash provided by financing activities for Fiscal
1998 was $2,495,333, which included the $2,500,000 private placement the Company
consummated in August of 1997.
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 complementary
to the Company's business.
Year 2000 Compliance
- --------------------
The Company has conducted a comprehensive 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 further modifications to
existing software and conversion 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. The
Company also is in the process of communicating with suppliers, dealers,
financial institutions and others with which it does business to coordinate year
2000 conversion.
Forward-Looking Statements for Purposes of "Safe Harbor" Under the Private
- --------------------------------------------------------------------------
Securities Reform Act 1995
- --------------------------
The Company has made, and may continue to make, various forward-looking
statements with respect to its financial position, projected costs, projected
savings and plans and objectives of management. Such forward-looking statements
are identified by the use of forward-looking words or phrases such as
"anticipates," "intends," "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 1998 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 1999 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.
12
<PAGE>
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 judgement 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 of. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of this accounting standard had no effect on the Company's financial
statements.
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 reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. 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.
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.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, ("SFAS No. 130"). SFAS No. 130 establishes
reporting and presentation standards 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.
SFAS No. 130 is effective for financial statements issued for periods beginning
after December 15, 1997. Restatement for prior periods for comparative financial
statements is required. These reporting requirements are not expected to have a
material impact on the financial statements of the Company.
Also in June 1997, the FASB issued 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
13
<PAGE>
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. SFAS No. 131 is effective for annual
financial statements issued for periods beginning after December 15, 1997, and
for interim financial statements in the second year of application. These
disclosure requirements are not expected 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 an entity 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
Not applicable.
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, 1998, the Company will file a definitive Proxy
Statement with the Securities and Exchange Commission pursuant to Regulation 14A
which involves the election of directors.
14
<PAGE>
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
<TABLE>
<CAPTION>
Page
----
The following consolidated financial statements of Tapistron
International, Inc. are required to be included in Item 8 are listed below:
<S> <C>
Report of Independent Auditors 18
Consolidated Balance Sheets - July 31, 1998 and 1997 19
Consolidated Statements of Operations - Year Ended July 31, 1998, 1997 and 1996 21
Consolidated Statements of Changes in Stockholders' Equity - Year Ended July 31, 1998, 1997 and 1996 22
Consolidated Statements of Cash Flows - Year Ended July 31, 1998, 1997 and 1996 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 36
</TABLE>
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
<TABLE>
<CAPTION>
<S> <C>
2.1 - First Amended and Restated Plan of Reorganization****
2.2 - First Amendment to First Amended and Restated Plan of Reorganization****
2.3 - Order 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)
</TABLE>
* 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.
15
<PAGE>
** Incorporated by reference to the exhibit with the same number filed in
connection with the Company's Form 10-K filed for the year ended July
31, 1992.
*** Incorporated by reference to the exhibit with the same number filed in
connection with the Company's Form 10-K filed for the year ended July
31, 1994.
**** Incorporated by reference to the exhibit with the same number filed in
connection with the Company's Registration Statement on Form S-1, File
Number 333-45807, declared effective by the Securities and Exchange
Commission on May 29, 1998.
(b) Report on Form 8-K - The Company filed a report on Form 8-K on June 1, 1998
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.
(c) Exhibits. See (a)3. above.
(d) Financial Statement Schedules. The response to this portion of Item 14, is
submitted under Item 14.(a) 1. and 2. above.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TAPISTRON INTERNATIONAL, INC.
By: /s/ J.Darwin Poe
------------------------------------- 10-28-98
J. Darwin Poe ---------
President and Chief Executive Officer Date
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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/Kim K. Amos Vice President of Sales and Director 10-28-98
- ---------------------------------
Kim K. Amos
/s/Reg Burnett Chairman of the Board of Directors 10-28-98
- ---------------------------------
Reg Burnett
/s/Henry B. Christopher Director 10-28-98
- ---------------------------------
Henry B. Christopher
/s/Gary L. Coulter Corporate Secretary and Director 10-28-98
- ---------------------------------
Gary L. Coulter
/s/Rodney C. Hardeman, Jr. Executive Vice President and Director 10-28-98
- ---------------------------------
Rodney C. Hardeman, Jr.
/s/Floyd S. Koegler, Jr. Vice President and Chief Financial Officer 10-28-98
- ---------------------------------
Floyd S. Koegler, Jr.
/s/J. Darwin Poe President, Chief Executive Officer and 10-28-98
- --------------------------------- Vice Chairman of the Board of Directors
J. Darwin Poe
</TABLE>
17
<PAGE>
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended July 31, 1998. 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended July 31, 1998, in conformity with generally accepted
accounting principles.
DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP
Birmingham, Alabama
September 4, 1998
18
<PAGE>
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
July 31, 1998 and 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 247,101 $ 27,946
Receivables, net of allowance of $31,556 and $39,905 as of July 31, 1998
and 1997, respectively 980,221 720,740
Receivables from employees 2,505 -
Note receivable 66,667 350,000
Inventory 1,601,146 1,231,002
Prepayments 140,788 102,453
Deferred income taxes 100,000 100,000
------------- -------------
Total current assets 3,138,428 2,532,141
------------- -------------
PROPERTY AND EQUIPMENT, NET 572,372 564,324
------------- -------------
OTHER ASSETS
Long-term receivables, net of allowance of $500,000 as of
July 31, 1998 and 1997, respectively - -
Patents and patent license 265,941 263,068
Deferred income taxes 1,900,000 1,900,000
Other Assets 6,148 8,247
------------- -------------
Total other assets 2,172,089 2,171,315
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $ 744 $ -
Current portion of long-term debt - 4,315
Accounts payable 137,966 178,068
Accrued expenses 386,115 655,621
Customer deposits 143,994 936,026
------------- -------------
Total current liabilities 668,819 1,774,030
------------- -------------
LIABILITIES SUBJECT TO SETTLEMENT UNDER
REORGANIZATION PROCEEDINGS 350,000 2,520,557
------------- -------------
CONTINGENT REORGANIZATION LIABILITY 352,193 -
------------- -------------
LONG-TERM DEBT - 744
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value - 2,000,000 shares authorized;
no shares issued and outstanding - -
Common stock - $.0004 par value - 100,000,000 shares authorized; 34,841,129
and 10,581,813 shares issued at July 31, 1998 and 1997, respectively 13,936 4,233
Additional paid-in-capital 26,637,441 22,899,108
Accumulated deficit (22,126,708) (21,918,100)
Treasury stock - 55,518 shares outstanding as of
July 31, 1998 and 1997, at cost (12,792) (12,792)
------------- -------------
Total stockholders' equity 4,511,877 972,449
------------- -------------
TOTAL $ 5,882,889 $ 5,267,780
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
SALES $ 5,651,555 $ 3,626,092 $ 1,305,499
COST OF SALES 3,467,997 2,477,302 1,146,717
--------------- ------------ ------------
Gross profit 2,183,558 1,148,790 158,782
--------------- ------------ ------------
OPERATING EXPENSES
Administrative expenses 2,367,602 1,998,245 3,473,581
Research and development 5,901 10,384 23,473
--------------- ------------ ------------
2,373,503 2,008,629 3,497,054
--------------- ------------ ------------
OPERATING LOSS (189,945) (859,839) (3,338,272)
--------------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (39,268) (30,269) (314,611)
Interest income 42,043 114 26,292
Loss on disposal of assets (23) - (1,022,505)
--------------- ------------ ------------
Other income (expense) 2,752 (30,155) (1,310,824)
--------------- ------------ ------------
Loss before reorganization items, income tax
benefit and extraordinary item (187,193) (889,994) (4,649,096)
REORGANIZATION ITEMS (21,415) (793,631) (249,150)
--------------- ------------ ------------
Loss before income tax benefit and extraordinary item (208,608) (1,683,625) (4,898,246)
INCOME TAX BENEFIT - (2,000,000) -
Income (loss) before extraordinary item (208,608) 316,375 (4,898,246)
EXTRAORDINARY ITEM
Gain from extinguishment of debt - - 420,150
--------------- ------------ ------------
NET INCOME (LOSS) $ (208,608) $ 316,375 $ (4,478,096)
=============== ============ ============
BASIC AND DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary item $ (0.01) $ 0.03 $ (0.49)
Extraordinary item - - 0.04
=============== ============ ============
Net income (loss) $ (0.01) $ 0.03 $ (0.45)
=============== ============ ============
Weighted average number of shares outstanding 30,443,850 10,526,295 10,012,390
=============== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQITY
For the Years Ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Paid-in Accumulated Treasury
Shares Amount Capital Deficit Stock Total
------ ------ ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE - 8-1-95 9,681,813 $ 3,873 $22,604,468 $ (17,756,379) (12,792) $ 4,839,170
Issuance of stock 900,000 360 294,640 - - 295,000
Net Loss - - - (4,478,096) - (4,478,096)
---------- ---------- ------------ --------------- --------- -------------
BALANCE -7-31-96 10,581,813 $ 4,233 $22,899,108 $ (22,234,475) $ (12,792) $ 656,074
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
========== ========== ============ =============== ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (208,608) $ 316,375 $(4,478,096)
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Depreciation and amortization 152,763 207,934 414,992
Loss on sales of property, plant and equipment 23 - 1,022,504
Issuance of stock in lieu of compensation - - 145,000
Adjustment from pre-confirmation to
Confirmation of liabilities subject to settlement
Under reorganization proceedings (98,863) - -
Changes in operating assets and liabilties:
Receivables (261,986) (350,868) 328,097
Prepayments (140,241) (81,746) 76,439
Inventory (375,346) 1,014,763 1,009,497
Long-term receivables - - 500,000
Other assets - 1,644 170,933
Noncompete agreements - - 11,545
Notes receivable 283,333 - (150,000)
Deferred income taxes - (2,000,000) -
Accounts payable and accrued expenses 65,742 391,369 123,060
Accounts payable and accrued expenses,
which are subject to settlement under a plan
of reorganization. (846,464) 290,751 (170,941)
Customer deposits (792,032) 656,026 (5,000)
------------- ----------- ------------
Net cash provided by (used in) operating Activities (2,221,679) 446,248 (1,001,970)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of proeprty and equipment 600 - 2,187,500
Capital expenditures (18,837) (15,407) -
Payment for patents (36,262) (11,349) (14,415)
Net cash provided by (used in) investing activities $ (54,499) $ (26,756) $ 2,173,085
------------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
23
<PAGE>
TAPISTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For the Years Ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt - 599,970 1,210,495
Principal pyaments of debt (4,667) (1,008,665) (381,809)
Proceeds from issuance of debt which is subject to
settlement under a plan of reorganization - - 140,600
Principal payments of debt which is subject to
settlement under a plan of reorganization - - (2,372,678)
Proceeds from issance of common stock 2,500,000 - 150,000
------------- ------------- --------------
Net cash provided by (used in) financing
Activities 2,495,333 (408,695) (1,253,392)
------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 219,155 10,797 (82,277)
Cash and cash equivalents - beginning of year 27,946 17,149 99,426
------------- ------------- --------------
Cash and cash equivalents- end of year $ 247,101 $ 27,946 $ 17,149
============= ============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ 39,268 $ 19,569 $ 34,532
============ ============= ==============
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Equipment reclassified to inventory $ 282,212 $ 163,270 $ 290,817
Prepayment reclassified to property and
Equipment $ 85,400 $ - $ -
Inventory reclassified to equipment $ 303,921 $ - $ -
Debt settled by issuance of stock $ 1,225,330 $ - $ -
</TABLE>
The accompanying notes are an integral part of these financial statements
24
<PAGE>
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, Company's efforts have been
focused on the continued development, production and marketing of the
computerized yarn placement (CYP) machine and the exploration of a second
technology involving the dyeing of textile materials.
The Company's customers are not concentrated in any specific geographic region.
See Note 13 for significant concentrations of sales to major customers, and
there were significant accounts receivable from two customers of $237,500 and
$706,945, respectively. 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, histrocial
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 letters of credit.
The Company maintains its cash accounts with two banks located in Georgia and
Tennessee, respectively. The total cash balances are insured by the FDIC up to
$100,000 per bank. The Company would not realize a material loss as of July 31,
1998 in the event of nonperformance by the two banks.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Fabrication Center, Inc. ("FCI"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company maintains
at various financial institutions cash and cash equivalent accounts which may
exceed federally insured amounts at times.
Inventory
- ---------
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.
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.
25
<PAGE>
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
- ---------------------------------------------------------------
Intangible Assets
- -----------------
Intangible assets are stated at their unamortized cost and are amortized on the
straight-line method over their estimated useful lives. The estimated useful
lives of the Company's noncompete agreements range from 2 to 9 years and the
estimated useful lives of the Company's patents and licenses range from 7 to 17
years.
Earnings (Net Loss) Per Share
- -----------------------------
Earnings (net loss) per share is computed using the weighted average number of
shares of common stock outstanding.
Revenue Recognition
- -------------------
Sales and related cost of sales are recognized primarily at the time of shipment
of the product. Sales and cost of sales may be recognized when the product is
complete and ready for shipment if the customer requests the Company to hold the
product and there are no uncertainties as to the consummation of the sale. 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, 1998 and 1997, 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.
26
<PAGE>
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
- ---------------------------------------------------------------
Disclosures about Fair Values of Financial Instruments
- ------------------------------------------------------
The following methods and assumptions were used to estimate fair value for each
class of financial instruments for which it is practicable to estimate that
value.
The fair values of cash and cash equivalents approximate their carrying amounts
as reflected in the balance sheet due to their short-term availability or
maturity.
The fair values of notes 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 1998 or 1997.
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:
1998 1997
------------ -----------
Raw materials $ 593,221 $ 437,214
Work in process 1,007,925 793,788
----------- -----------
$ 1,601,146 $ 1,231,002
=========== ===========
27
<PAGE>
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consists of the following major classifications:
<TABLE>
<CAPTION>
1998 1997
------------------------------------ --------------------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
Office furniture, fixtures and
equipment $ 503,278 $ 434,657 $ 501,435 $ 382,697
Machinery and equipment 918,070 419,152 826,956 383,060
Vehicles 22,186 17,353 16,914 15,224
------------- ----------- ----------- -----------
$ 1,443,534 $ 871,162 $ 1,345,305 $ 780,981
============= =========== =========== ===========
</TABLE>
Depreciation expense totaled $390,125 for 1996, $171,642 for 1997 and $161,079
for 1998.
NOTE 5 - LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS
- ---------------------------------------------------------------------------
The Company filed a Voluntary Petition for Chapter 11 Bankruptcy on June 21,
1996. The original Plan of Reorganization of Tapistron International, Inc. was
filed with the U.S. Bankruptcy Court ("the court") on November 21, 1996 (the
"Plan"). An Amended and Restated Plan of Reorganization of Tapistron
International, Inc. was filed with the Court on March 14, 1997 (the "Amended
Plan") and confirmed on August 18, 1997. After confirmation, the Company
proceeded with an issuance of common stock at the rate of $0.15 per share for a
total of 16,666,666 shares. Under the Amended Plan of Reorganization, all
creditors were paid in full (unless the creditor elected to accept a discounted
amount or the creditor and the Company agreed to different terms), with interest
from stock and cash payments.
In accordance with the Amended Plan, the treatment for each class of creditors
is as follows:
Class 1: In accordance with the Company's Amended Plan, the allowed Class 1
Administrative Claims have been paid in full.
Class 2: The allowed Class 2 Claim of Metrahealth, Administrator for the
Travelers, Employee Benefits Plan has been paid in full. (A)
Class 3: There were no Class 3 Claims.
Class 4: The allowed Administrative Claim of Avonwood Capital Corporation as the
Company's investment banker for post-petition payments due for professional
services to the Company is being satisfied in accordance with the terms of its
employment as approved by the Court on November 12, 1996 and subsequently
modified by the parties on August 11, 1997 over twenty (20) months by monthly
retainer payments of $10,000 per month for nineteen (19) months and a final
payment of $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
<PAGE>
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 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 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 election Option 2 received
their pro rate share of the 1,000,000 shares of common stock issued on November
25, 1997. As of July 31, 1998, the Company had paid out $150,000 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
<PAGE>
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL 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.
<TABLE>
<CAPTION>
Liabilities Subject to Settlement under Reorganization Proceedings:
<S> <C>
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 ( 150,000)
------------
Total liabilities subject to settlement under reorganization proceedings $ 350,000
============
</TABLE>
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 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.
30
<PAGE>
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CONTINGENCIES - (CONTINUED)
- ------------------------------------
<TABLE>
<CAPTION>
<S> <C>
July 31, 1998 closing market price $ 0.3100
Shares issued to Class 7 (no fractional shares were issued) 1,000,021
-------------
Total Market Value of Class 7 Stock 310,007
Balance of Class 7 unsecured claims 611,336
Time value factor @8.75% 1.08320145
-------------
Total Liability of Class 7 Claims 662,200
Total contingency for stock that will cover Class 7 debt $ 352,193
=============
</TABLE>
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 our focus will continue to be on the
manufacturers of high-end carpet, which is a value-added product market. So, as
there has been an increasing trend toward product differentiating in the carpet
industry, the future is continually looking brighter for this machine and for
patterned tufting in general.
NOTE 7 - LEASES
- ---------------
In June 1996, the Company completed the refinancing of its main facility under a
sale/leaseback arrangement. The facility was sold for $1.9 million, $1.86
million of which was used to pay off the existing mortgage. The Company then
entered into an operating lease for a term of five years. The lease requires
minimum annual rental payments of
31
<PAGE>
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LEASES (CONTINUED)
- --------------------------
$317,625 in 1998, $333,506 in 1999, $350,182 in 2000, and $303,877 in 2001. The
Company has the option to purchase the property at any time during the lease
term.
The Company also leases office space, warehouse space, and equipment under
short-term operating leases. Rental expense under all operating leases totaled
$52,442 for 1996, $244,143 for 1997 and $308,813 for 1998.
NOTE 8 - DEBT
- -------------
<TABLE>
<CAPTION>
Long-term debt consists of the following:
1998 1997
-------- -------
<S> <C> <C>
5.8% Promissory note, maturing September 9, 1998, payable $375
monthly including interest, collateralized by equipment $ 744 $ 5,060
Less: Current portion 744 4,316
------- --------
$ - $ 744
======= ========
</TABLE>
Interest expense on debt totaled $314,611 for 1996, $30,269 for 1997 and $39,268
for 1998.
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.
<TABLE>
<CAPTION>
The following table summarized option activity:
Number of Option Price
Shares Per Share
------ ---------
<S> <C> <C> <C>
Outstanding as of August 1, 1995 1,992,003 $1.875 - $7.125
Granted 600,000 $ .50 - $ .87
Exercised - -
Expired - -
----------
Outstanding as of July 31, 1996 2,592,003 $ .50 - $7.125
Granted - -
Exercised - -
Expired - -
-----------
Outstanding as of July 31, 1997 2,592,003 $ .50 - $7.125
Granted - -
Exercised - -
Expires (2,592,003) -
-----------
Outstanding as of July 31, 1998 -
===========
</TABLE>
32
<PAGE>
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 and
1998. Upon confirmation of the plan of reorganization, all redeemable warrants
were modified to reduce the exercise price to $1.00 and the exercise period was
extended to August 31, 2000.
NOTE 11 - RELATED PARTY TRANSACTIONS
- ------------------------------------
During the three years ended July 31, 1996, the Company borrowed various amounts
from a principal shareholder and former director of the Company and his family
members, who are also shareholders. The shareholder was a director during the
year ended July 31, 1996. As of July 31, 1997, the Company was indebted to this
shareholder in the amount of $614,000 through a line-of-credit agreement bearing
interest at 10%. As of July 31, 1998, the Company's indebtedness was fulfilled.
Common stock was issued in lieu of the debt through the chapter 11
reorganization.
During the year ended July 31, 1996, the Company expensed $219,000 in
consulting, legal, and administrative fees owed to a principal shareholder. The
Company was also indebted to this shareholder's law firm for $174,000 for legal
fees in association with the reorganization.
During the year ended July 31, 1996, consulting fees of $50,000 were paid to a
capital Company whose Chairman is a former director of the Company. Also, during
the year ended July 31, 1996, $50,000 was borrowed from this capital Company.
During the year ended July 31, 1996, the Company borrowed approximately $16,000
from an officer of the Company. The amount was also paid back to the officer
during the year.
During the year ended July 31, 1996, 200,000 shares of the Company's common
stock were issued to two former directors in consideration for services rendered
to the Company.
During the year ended July 31, 1997, no related party transactions occurred.
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.
33
<PAGE>
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - DOMESTIC AND EXPORT SALES
- -----------------------------------
The following table summarizes the sales of the Company:
<TABLE>
<CAPTION>
1998 1997 1996
---- ----- ----
<S> <C> <C> <C>
North America $4,475,535 $1,041,189 $1,200,322
Asia 22,198 56,739 24,822
Pacific Rim 1,120,954 1,783,241 58,854
Europe 32,868 744,923 21,501
---------- ------------ ------------
Total sales $5,651,555 $3,626,092 $1,305,499
========== ============ ============
</TABLE>
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 seven customers whose sales represent a
significant portion of sales in their line of business. Sales to one of these
customers was in excess of 20% in 1998, 48% in 1997 and 0% in 1996. Sales to
another customer accounted for 0% of net sales in 1998, 20% in 1997 and 0% in
1996. Sales to a third customer accounted for 0% in 1998, 19% in 1997 and 0% in
1996. Sales to a fourth customer accounted for 0% in 1998, 0% in 1997, and 46%
in 1996. Sales to a fifth customer accounted for 39% in 1998, 0% in 1997, and 0%
in 1996. Sales to a sixth customer accounted for 21% in 1998, 0% in 1997 and 0%
in 1996. Sales to a seventh customer accounted for 20% in 1998, 0% in 1997 and
0% in 1996.
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:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets
Accounts receivable $ 11,675 $ 16,000
Accrued expenses and reserves 15,819 12,683
Net operating loss carry-forward 7,924,660 8,642,000
Valuation allowance (5,952,154) (6,670,683)
------------- -------------
Net deferred tax assets $ 2,000,000 $ 2,000,000
============= =============
</TABLE>
As of July 31, 1998, the Company had net operating loss carry-forwards of
approximately $21,370,000 available to offset future taxable income, which will
expire in various years through 2013.
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 eight of the
past ten 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-forwards
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. The Company has
34
<PAGE>
TAPISTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - INCOME TAXES - (CONTINUED)
- ------------------------------------
continued improvement in operating results. Management believes that a valuation
allowance is appropriate given the current estimates of future taxable income.
If the Company is unable to generate sufficient taxable income in the future
through operating results, increases in the valuation allowance will be required
through a charge to expense. However, if the Company achieves sufficient
profitability to utilize a greater portion of the deferred tax asset, the
valuation allowance will be reduced through a credit to income. 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
- ------------------------------
Existing computer programs of many businesses were developed with two-digit year
identification without consideration of the upcoming change in century or
millennium in the year 2000. Without addressing this issue, many computer
programs could fail or produce erroneous results, creating considerable
uncertainty and potentially adversely affecting the operations of the business.
The Company has been in the process of modifying its computer system and
applications for the year 2000. It is expected that the project will be
substantially completed during 1998 and that the final testing will be conducted
in 1999. The Company is utilizing primarily internal staff for this conversion
but is also using outside consultants where necessary. The cost of the project,
which is immaterial to the Company, is expensed as incurred.
NOTE 16 - SUBSEQUENT EVENT
- --------------------------
On August 3, 1998, the Company entered into a credit agreement with a bank. The
credit agreement provided for a $250,000 revolving line of credit to be used for
working capital purposes. The rate of interest is variable and is based on prime
plus 2-1/2%. It is secured by accounts receivable and inventory, and matures on
January 30, 1999. This credit agreement is subject to standard covenants, which,
among other things, restrict the payment of dividends and incurrance of debt.
35
<PAGE>
TAPISTRON INTERNATIONAL, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Cost and at End
of Year Expenses Deductions of Year
------- -------- ---------- -------
<S> <C> <C> <C> <C>
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 $ 39,905 $ - $ - $ 39,905
Allowance for uncollectible long-
term receivables $500,000 $ - $ - $500,000
Allowance for obsolete inventory $978,656 $ - $978,656(2) $ -
1996
- ----
Allowance for doubtful accounts $200,000 $ - $160,095(1) $ 39,905
Allowance for uncollectible long-
term receivables $ - $ 500,000 $ - $500,000
Allowance for obsolete inventory $474,215 $ 547,440 $ 42,999(2) $978,656
</TABLE>
(1) Uncollectible accounts written off
(2) Obsolete inventory written off
36
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TAPISTRON INTERNATIONAL, INC. FOR THE YEAR
ENDED JULY 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> JUL-31-1998
<CASH> 247
<SECURITIES> 0
<RECEIVABLES> 1,081
<ALLOWANCES> 32
<INVENTORY> 1,601
<CURRENT-ASSETS> 3,138
<PP&E> 1,446
<DEPRECIATION> 873
<TOTAL-ASSETS> 5,883
<CURRENT-LIABILITIES> 669
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 4,498
<TOTAL-LIABILITY-AND-EQUITY> 5,883
<SALES> 5,652
<TOTAL-REVENUES> 5,652
<CGS> 3,468
<TOTAL-COSTS> 3,468
<OTHER-EXPENSES> 2,374
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (39)
<INCOME-PRETAX> (209)
<INCOME-TAX> 0
<INCOME-CONTINUING> (209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (209)
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
