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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended June 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 1-13669
TAG-IT PACIFIC, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 95-4654481
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3820 SOUTH HILL STREET
LOS ANGELES, CALIFORNIA 90037
(Address of Principal Executive Offices)
(213) 234-9606
(Issuer's Telephone Number)
Indicate by check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes No X
----- -----
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, par value $0.001
per share, 4,070,011 shares issued and outstanding as of July 31, 1998.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
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TAG-IT PACIFIC, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Condensed Financial Statements:
Condensed Consolidated Balance Sheets (unaudited) as of June 30, 1998
and December 31, 1997............................................................ 3
Condensed Consolidated Statements of Operations (unaudited) for the
Three Months and Six Months Ended June 30, 1998 and 1997......................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 1998 and 1997.......................................... 5
Notes to Condensed Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 9
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................................... 19
Item 5. Other Information................................................................. 20
Item 6. Exhibits and Reports on Form 8-K.................................................. 20
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TAG-IT PACIFIC, INC.
Condensed Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash........................................................................... $ 310,161 $ 44,109
Due from factor, net........................................................... 180,857 -
Accounts receivable, trade..................................................... 3,168,282 3,017,391
Due from related parties....................................................... 199,751 138,418
Inventories.................................................................... 2,496,441 2,331,131
Prepaid expenses and other current assets...................................... 414,029 273,468
------------ ------------
Total current assets........................................................ 6,769,521 5,804,517
Property and Equipment (net of accumulated Depreciation and amortization)......... 1,179,267 974,309
Other assets...................................................................... 126,401 392,238
------------ ------------
Total Assets...................................................................... $ 8,075,189 $ 7,171,064
============ ============
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities:
Bank overdrafts............................................................. $ - $ 306,565
Due to factor, net.......................................................... - 1,404,133
Accounts payable............................................................ 2,102,228 3,977,568
Accrued expenses............................................................ 690,235 628,086
Current portion of long-term debt........................................... 621,295 463,708
Current portion notes payable to related parties............................ 1,172,381 277,003
------------ ------------
Total current liabilities................................................ 4,586,139 7,057,063
Long-term debt, less current portion.............................................. - 55,315
Notes payable to related parties, less current portion............................ - 1,249,698
------------ ------------
Total Liabilities................................................................. 4,586,139 8,362,076
------------ ------------
Commitments and Contingencies (Note 4)
Stockholders' Equity (Deficiency):
Preferred stock............................................................. - -
Common stock................................................................ 4,070 2,470
Additional paid-in capital.................................................. 5,598,459 957,530
Accumulated deficit......................................................... (2,113,479) (2,151,012)
------------ ------------
Total Stockholders' Equity (Deficiency).................................. 3,489,050 (1,191,012)
------------ ------------
Total Liabilities and Stockholders' Equity (Deficiency)........................... $ 8,075,189 $ 7,171,064
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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TAG-IT PACIFIC, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales.................................... $4,402,522 $4,341,200 $7,870,235 $8,592,248
Cost of goods sold........................... 2,733,204 2,670,091 4,986,472 5,341,238
---------- ---------- ---------- ----------
Gross profit............................... 1,669,318 1,671,109 2,883,763 3,251,010
Selling expenses............................. 462,907 375,021 670,777 785,666
General and administrative expenses.......... 1,019,295 1,068,009 2,003,653 1,916,820
Write-off of printing division............... 0 0 0 116,000
---------- ---------- ---------- ----------
Total operating expenses................... 1,482,202 1,443,030 2,674,430 2,818,486
Income (loss) from operations................ 187,116 228,079 209,333 432,524
Interest expense............................. 18,685 202,026 124,289 396,372
---------- ---------- ---------- ----------
Income (loss) before income taxes............ 168,431 26,053 85,044 36,152
Provision for Income Taxes................... 60,635 27,000 47,511 84,000
---------- ---------- ---------- ----------
Net Income (Loss).......................... $ 107,796 $ (947) $ 37,533 $ (47,848)
========== ========== ========== ==========
Basic earnings per share..................... $ 0.03 $ (0.00) $ 0.01 $ (0.02)
========== ========== ========== ==========
Diluted earnings per share................... $ 0.03 $ (0.00) $ 0.01 $ (0.02)
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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TAG-IT PACIFIC, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1998 1997
----------- ---------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Net income (loss)..................................................... $ 37,533 $ (47,848)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation....................................................... 185,985 145,054
Changes in operating assets and liabilities:
Accounts receivable............................................... (331,747) 515,651
Inventories....................................................... (165,310) (363,113)
Other assets...................................................... 265,837 (138,318)
Prepaid expenses and other current assets......................... (140,561) 545,725
Accounts payable.................................................. (1,875,340) 67,722
Accrued expenses.................................................. 62,148 220,043
----------- ---------
Net cash provided (used in) operating activities...................... (1,961,455) 944,916
Cash Flows From Investing Activities:
Loans to related parties............................................... (61,333) (103,651)
Acquisition of property and equipment.................................. (390,943) (320,896)
----------- ---------
Net cash used in investing activities.................................. (452,276) (424,547)
Cash Flows from Financing Activities:
Bank overdraft......................................................... (306,565) (391,838)
Net advances from factor............................................... (1,404,133) (369,310)
Proceeds from IPO, net 4,642,529 -
Proceeds from bank line of credit 562,000 -
Proceeds (repayment) from long-term debt............................... (459,728) 85,002
Proceeds (repayment) from notes payable to related parties, net........ (354,320) 388,203
----------- ---------
Net cash provided (used in) financing activities.......................... 2,679,783 (287,943)
----------- ---------
Net increase (decrease) in cash........................................... 266,052 232,426
Cash at beginning of period............................................... 44,109 5,057
----------- ---------
Cash at end of period..................................................... $ 310,161 $ 237,483
=========== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest............................................................. $ 124,289 $ 396,372
Income taxes......................................................... $ 14,670 $ 9,230
Non-cash financing activity:
Note payable converted to equity..................................... $ 0 $ 0
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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TAG-IT PACIFIC, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. PRESENTATION OF INTERIM INFORMATION
In the opinion of the management of Tag-It Pacific, Inc. and
Subsidiaries (collectively, the "Company"), the accompanying unaudited
condensed consolidated financial statements include all normal adjustments
considered necessary to present fairly the financial position as of June 30,
1998, and the results of operation and cash flows for the six months ended
June 30, 1998 and 1997. Interim results are not necessarily indicative of
results for a full year.
The condensed consolidated financial statements and notes are presented
as permitted by Form 10-QSB, and do not contain certain information included
in the Company's audited consolidated financial statements and notes for the
year ended August 31, 1997.
2. NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("Statement 129"), which is effective for financial
statements ending after December 15, 1997. Statement 129 reinstates various
securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by Statement 128.
The Company does not expect adoption of Statement 129 to have a material
effect, if any, on its consolidated financial position or results of
operation.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("Statement 130"), which is effective for financial statements with
fiscal years beginning after December 15, 1997. Statement 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
Company has not determined the effect on its consolidated financial position
or results of operations, if any, from the adoption of this statement.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("Statement 131"), which
is effective for financial statements with fiscal years beginning after
December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to stockholders. It also requires that
public business enterprises report certain information about their products
and services, the geographic areas in which they operate and their major
customers. The Company does not expect adoption of Statement 131 to have a
material effect, if any, on its consolidated results of operation.
3. EARNINGS PER SHARE
The Company has adopted Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("Statement 128"), which is effective for financial statements issued for the
periods after December 15, 1997, including interim periods. Statement 128
requires the restatement of all prior period earnings per share ("EPS") data
presented.
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The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
<S> <C> <C> <C>
For the three months ended June 30, 1998:
- -----------------------------------------
Basic earnings per share:
Income available to common stockholders...................... $107,796 4,070,011 $ 0.03
Effect of Dilutive Securities:
Options...................................................... -
Warrants..................................................... 36,186
Shares Issued................................................ -
-------- --------- ------
Income available to common stockholders...................... $107,796 4,106,197 $ 0.03
======== ========= ======
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
<S> <C> <C> <C>
For the three months ended June 30, 1998:
- -----------------------------------------
Basic earnings per share:
Income available to common stockholders...................... $ 37,533 3,865,567 $ 0.01
Effect of Dilutive Securities:
Options...................................................... -
Warrants..................................................... 36,186
Shares Issued................................................ -
-------- --------- ------
Income available to common stockholders...................... $ 37,533 3,901,753 $ 0.01
======== ========= ======
</TABLE>
For the three months and six months ended June 30, 1997 basic and
diluted earning per share are the same amount based on weighted average
shares of 2,085,609. Warrants to purchase 80,000, 110,000 and 35,555 shares
of common stock at $6.00, $4.80 and $3.60, respectively, were outstanding
for the six months ended June 30, 1998 but were not included in the
computations of diluted earnings per share because the effect of exercise
would have an antidilutive effect on earnings per share. Stock options to
purchase 260,000 shares of common stock at $3.20 were outstanding for the
six months ended June 30, 1998 but were not included in the computations of
diluted earnings per share because the effect of exercise would have an
antidilutive effect on earnings per share.
On January 23, 1998 the Company completed its initial public offering
(the "IPO") and issued 1,600,000 shares of common stock at price of $4.00 per
share. In conjunction with the IPO the Company issued options to directors
to purchase 65,000 shares of common stock at $3.20, warrants to legal counsel
to purchase 35,555 shares of common stock at $3.60, warrants to underwriters
to purchase 110,000 shares of common stock at $4.80, and warrants in
connection with bridge financing to purchase 80,000 shares of common stock at
$6.00.
7
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4. CONTINGENCIES
The Company is subject to certain legal proceedings and claims arising
in connection with its business. In the opinion of management, there are
currently no claims that will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Tag-It Pacific, Inc. (the "Company") is a single-source provider of
complete brand identity programs to manufacturers of fashion apparel and
accessories as well as specialty retailers and mass merchandisers. Such
programs communicate a certain lifestyle, image or identity and enable the
Company's customers to promote and differentiate their product line or brand.
The Company also designs and produces high-quality paper, metal and injection
molded boxes, woven and leather labels, paper-hanging and bar-coded tags,
metal jean buttons, and custom shopping bags. In addition, the Company
designs and produces specialty private label and licensed stationery as well
as related accessories and backpacks.
The Company is the parent holding company of Tag-It, Inc., a California
corporation, Tag-It Printing & Packaging Ltd., a BVI corporation, Tagit de
Mexico, SA de CV, A.G.S. Stationery, Inc., a California corporation ("AGS
Stationery") and Pacific Trim & Belt, Inc., a California corporation
(collectively, the "Subsidiaries"), all of which were consolidated under a
parent limited liability company on October 17, 1997 (the "Consolidation")
and became wholly-owned subsidiaries of the Company immediately prior to the
effective date of the Company's initial public offering in January 1998 (the
"Offering").
The following discussion and analysis, which should be read in
connection with the Company's Financial Statements and accompanying
footnotes, contain forward-looking statements that involve risks and
uncertainties. Important factors that could cause actual results to differ
materially from the Company's expectations are set forth in "Factors That May
Affect Future Results" below as well as those discussed elsewhere in this
Form 10-QSB. All subsequent written or oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the "Factors That May Affect Future Results."
Those forward-looking statements relate to, among other things, the Company's
working capital requirements and need for additional financing.
RESULTS OF OPERATIONS
Net Sales. Net sales increased approximately $61,000 to $4.4 million
(or 1.4%) for the three months ended June 30, 1998 from $4.3 million for the
three months ended June 30, 1997. The increase in net sales was a result of
small increases in tags, specialty packaging, and specialty licensed
stationery products.
Net sales decreased approximately $722,000 to $7.9 million (or 8.4%) for
the six months ended June 30, 1998 from $8.6 million for the six months ended
June 30, 1997. The decrease in net sales was primarily the result of
$830,000 decrease in sales of tags and specialty packaging, partially offset
by an increase of $225,000 of apparel trim products, plus $180,000 in returns
of specialty licensed stationery products shipped in 1997. The sales
decrease in tags and specialty packaging was due, in part, to management's
efforts relating to the initial public offering (IPO), including the effect
of an approximate 5-week delay of the IPO from December 1997 to January 1998,
a period when substantial management focus on development of customer
programs was required. In January 1998, the Company also started focusing on
private label specialty stationery and de-emphasizing its specialty licensed
products. The Company expects that de-emphasizing specialty licensed
products will reduce occurrences of product returns in the future. While
sales momentum is building, the Company does not expect to experience the
benefits of this momentum until the third quarter of 1998.
Gross Profit. Gross profit decreased approximately $2,000 to $1.7
million (or 0.1%) for the three months ended June 30, 1998 from $1.7 million
for the three months ended June 30, 1997. Gross margin as a percentage of net
sales decreased to approximately 37.9% as compared to 38.5% for the three
months ended June 30, 1997. The decrease in gross margin was primarily
attributable to 1997 contribution of higher margin specialty licensed
stationery products, offset by labor and other cost savings associated with
normalized production at the Company's Mexico facility and lower overhead
resulting from termination of printing operations in November 1996.
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Gross profit decreased approximately $367,000 to $2.9 million (or 11.3%)
for the six months ended June 30, 1998 from $3.3 million for the six months
ended June 30, 1997. Gross margin as a percentage of net sales decreased to
approximately 36.6% as compared to 37.8% for the six months ended June 30,
1997. The decrease in gross margin was primarily attributable to the return
of $180,000 higher margin specialty licensed stationery products, and
secondarily to lower overhead absorption, offset by labor and other cost
savings associated with normalized production at the Company's Mexico
facility and lower overhead resulting from termination of printing operations
in November 1996. The Company expects that de-emphasizing specialty licensed
products will also result in sales of inventory in the third and fourth
quarter at reduced prices which will decrease the gross margin as a
percentage of net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $39,000 to $1.5 million for
the three months ended June 30, 1998 from $1.4 million for the three months
ended June 30, 1997. As a percentage of net sales, these expenses increased
to 33.7% in the three months ended June 30, 1998 compared to 33.2% for the
three months ended June 30, 1997 due to additional salesmen, advertising and
promotion expenses, offset by decreased expenses in specialty licensed
stationery products.
Selling, general and administrative expenses decreased approximately
$28,000 to $2.7 million for the six months ended June 30, 1998 and 1997. As
a percentage of net sales, these expenses increased to 34.0% in the six
months ended June 30, 1998 compared to 31.5% for the six months ended June
30, 1998 due to the lower net sales, additional salesmen, advertising and
promotion expenses, offset by decreased expenses in specialty licensed
stationery products. A one-time incentive bonus of approximately $38,000 was
paid to two salesmen in the quarter ended March 31, 1998 which the Company
does not anticipate providing in the future.
Printing Division Expense. In the three months ended March 31, 1997,
the Company incurred approximately $116,000 of incremental printing costs
associated with its captive printing division which was closed in February
1997.
Interest Expense. Interest expense decreased approximately $183,000 (or
90.8%) to $19,000 for the three months ending June 30, 1998 from $202,000 for
the three months ended June 30, 1997. This decrease is attributable to
decreased factoring expenses associated with decreased borrowings under the
factoring arrangements due to proceeds received from the initial public
offering in January.
Interest expense decreased approximately $272,000 (or 68.6%) to $124,000
for the six months ended June 30, 1998 from $396,000 for the six months June
30, 1997. During the six months ended June 30, 1998, the Company
substantially reduced its use of factors, a trend which the Company intends
to continue. The Company intends to rely upon its $2 million line of credit
which was established in April 1998.
Provision for Income Taxes. The provision for income taxes increased
approximately $34,000 to $61,000 for the three months ended June 30, 1998 as
compared to $27,000 for the three months ended June 30, 1997. The provision
for income taxes decreased approximately $36,000 to $48,000 for the six
months ended June 30, 1998 as compared to $84,000 for the six months ended
June 30, 1997. Provision for income taxes has been made for each Subsidiary
through October 17, 1997, the date of the consummation of the Consolidation.
Notwithstanding the Consolidation, operating losses from AGS Stationery were
not available to offset taxable income of the Company's other Subsidiaries
and in future periods may only be used to offset future AGS Stationery
profits. Management has established a valuation allowance on the deferred
tax asset because it is more likely than not that the deferred tax asset will
not be realized.
Net Income (Loss). Net income was $108,000 for the three months ended
June 30, 1998 as compared to a net loss of ($1,000) for the three months
ended June 30, 1997, due to the factors set forth above. Net income of
$38,000 for the six months ended June 30, 1998 as compared to a net loss of
($48,000) for the six months ended June 30, 1997, due to the factors set
forth above.
10
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LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997 the Company satisfied its working capital
requirements primarily through cash flows generated from operations,
borrowings under factoring agreements with Heller Financial, Inc. ("Heller
Financial") and Safcor, Inc. ("Safcor") and related party borrowings.
Generally, the Company's borrowing requirements have been somewhat seasonal,
with peak working capital need occurring at the end of the year. The Company
has substantially reduced its use of factoring arrangements with Heller and
Safcor as of June 30, 1998.
Pursuant to the terms of its factoring agreements, the Company's factors
purchase the Company's eligible accounts receivable and assume the credit
risk only with respect to those accounts for which the factors have given
prior approval. Where the Company's factors do not assume the credit risk
for a receivable, the collection risk associated with the receivable remains
with the Company and if the factor, in its discretion, determines to advance
against the receivable, the customer's payment obligation is recorded as a
Company receivable and the advance from the factor is recorded as a current
liability. As of June 30, 1998, the amount factored without recourse was
$148,000 and the amount due from the factor recorded as a current asset was
$181,000.
The Company's initial public offering resulted in net proceeds to the
Company of approximately $4,643,000. As of June 30, 1998, $4,370,000 had
been applied and the remaining $272,000 was available for working capital and
other purposes. Effective May 1, 1998, the Company entered into a line of
credit agreement with a bank for $2 million to be used for working capital
purposes. The line of credit expires on May 31, 1999. The line of credit
interest rate is equal to the bank's reference rate and includes certain
financial covenants relating to net worth, debt to net worth, current ratio,
and profitability. The Company used a portion of the net proceeds from its
public offering to satisfy the majority of its obligations existing under the
Heller Financial and Safcor factoring arrangements.
As of June 30, 1998, the Company had outstanding related party debt of
$1.16 million (the "Related Party Indebtedness") and non-related party debt
of $59,000 at a weighted average rate of 8.0%. All Related Party
Indebtedness is due and payable on the fifteenth day following the date of
delivery of written demand for payment which may be delivered at any time
after December 31, 1998. As of June 30, 1998 the Company had outstanding
balance of $562,000 on the bank line of credit. As of March 31, 1998, the
Cruttenden Roth Bridge Fund, LLC and Beta Research Corporation promissory
notes purchased for $323,125 and $226,875, respectively, of the Company's
Senior Subordinated Secured Notes (the "Bridge Notes"), were repaid.
Net cash (used in) provided by operating activities was approximately
($1,961,000) and $945,000 for the six months ended June 30, 1998 and 1997,
respectively. Cash provided in the six months ended June 30, 1997 resulted
primarily from increased accounts receivable, prepaid expenses, accounts
payable, and accrued expenses partially offset by decreases in inventory.
Cash used in operations in the six months ended June 30, 1998 resulted
primarily from decreased accounts payable, increased accounts receivables,
inventory and expenses related to the Offering.
Net cash used in investing activities was $452,000 and $425,000 for the
six months ended June 30, 1998 and 1997, respectively. Those activities
related primarily to capital expenditures for production equipment, leasing
of equipment and expenditures for office and assembly equipment in connection
with the Mexico facility.
Net cash (used in) provided by financing activities was approximately
$2,680,000 and ($288,000) for the six months ending June 30, 1998 and 1997,
respectively. Net cash provided by financing activities for the six months
ended June 30, 1998 reflects proceeds from the IPO and bank line of credit;
offset by reductions in advances from factors, related parties and non-
related parties. Net cash used for the six months ending June 30,
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1997 resulted from net advances from factors and related parties, offset by
reductions from related party borrowings.
The Company believes that it will be required to obtain additional
financing in order to provide adequate liquidity to funds its business growth
plans and operations during the next 12 months. The Company is continually
evaluating various financing strategies to be utilized in expanding its
business and to fund future growth or acquisitions. The extent of the
Company's future capital requirements will depend, however, on many factors,
including but not limited to, results of operations, the size and timing of
future acquisitions, if any, and the availability of additional financing. No
assurance can be given that such additional financing will be available or
that, if available, it can be obtained on terms favorable to the Company and
its stockholders. The Company's inability to obtain adequate funds would
adversely affect the Company's operations and ability to implements its
strategy. In addition, any equity financing could result in dilution to the
Company's stockholders. See "Factors That May Affect Future Results Future
Capital Needs; Uncertainty of Additional Funding".
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("Statement 129"), which is effective for financial
statements ending after December 15, 1997. Statement 129 reinstates various
securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by Statement 128.
The Company does not expect adoption of Statement 129 to have a material
effect, if any, on its consolidated financial position or results of
operation.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("Statement 130"), which is effective for financial statements with
fiscal years beginning after December 15, 1997. Statement 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
Company has not determined the effect on its consolidated financial position
or results of operations, if any, from the adoption of this statement.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("Statement 131"), which
is effective for financial statements with fiscal years beginning after
December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to stockholders. It also requires that
public business enterprises report certain information about their products
and services, the geographic areas in which they operate and their major
customers. The Company does not expect adoption of Statement 131 to have a
material effect, if any, on its consolidated results of operation.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following is a discussion of certain factors that may affect the
Company's financial condition and results of operations.
Management of Business Changes; Potential Growth; Potential
Acquisitions. The Subsidiaries have been operated under family management
since inception and have recently significantly expanded their operations.
Such expansion has placed, and any future expansion, internally or through
acquisitions, will place, significant demands on the Company's management,
operational, administrative, financial and accounting resources. Successful
management of the Company's operations will require the Company to continue
to implement and improve its financial and management information and
reporting systems and procedures on a
12
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timely basis. The Company's ability to manage its future growth, if any, will
also require it to hire and train new employees, including management and
operating personnel, and motivate and manage its new employees and integrate
them into its overall operations and culture. The Company recently has made
additions to its management team and is in the process of improving its
financial and management information and reporting systems to adapt to its
new role as a public company, a process which is expected to continue. The
Company's failure to manage implementation of its growth strategies and to
implement and improve its financial and management information and reporting
systems would have a material adverse effect on the Company's results of
operations and its ability to implement its growth strategy.
In the future, the Company may acquire complementary companies, products
or technologies, although no specific acquisitions currently are pending or
under negotiation. Acquisitions involve numerous risks, including adverse
short-term effects on the combined business' reported operating results,
impairments of goodwill and other intangible assets, the diversion of
management's attention, the dependence on retention, hiring and training of
key personnel, the amortization of intangible assets and risks associated
with unanticipated problems or legal liabilities.
Potential Fluctuations in Quarterly Operating Results; Seasonality. The
Company may in the future experience significant quarterly fluctuations in
sales, operating income and cash flows as a result of certain factors,
including the volume and timing of customer orders received during the
quarter, the timing and magnitude of customers' marketing campaigns, the loss
of a major customer, the availability and pricing of materials for the
Company's products, increased selling, general and administrative expenses
incurred in connection with acquisitions or the introduction of new products,
the costs and timing of any future acquisitions, the timing and magnitude of
capital expenditures, and changes in the Company's product mix or in the
relative contribution to sales of the various Subsidiaries. Due to the
foregoing factors, it is possible that in some future quarter the Company's
operating results may be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would
likely be materially and adversely affected.
In addition, most of the Company's customers are in the apparel
industry, which historically has been subject to substantial cyclical
variations. The Company's business has experienced and is expected to
continue to experience significant seasonality, in part due to customer
buying patterns. A recession in the general economy or uncertainties
regarding future economic prospects that affect consumer spending habits
could have a material adverse effect on the Company's financial condition and
results of operations.
Requirement for Integrated Information System. The Consolidation and
resulting centralized management of the Subsidiaries, implementation of the
Company's growth strategies and the general strains of the Company's new role
as a public company will place significant demands on the Company's financial
and management information and reporting systems and require that the Company
significantly expand and improve its financial and operating controls.
Additionally, the Company must effectively integrate the information systems
of Hong Kong and Mexico with its principal offices in Los Angeles. There are
no assurances that the Company will be successful in implementing and
improving its financial and management information reporting systems and
staff, and the Company's failure to do so could have a material adverse
effect on the Company's results of operations and its ability to implement
its business strategy.
Dependence on Key Customers; Absence of Long-Term Contracts with
Customers. The Company's two largest customers, Guess? and Swank (a licensee
of Yves Saint Laurent, Kenneth Cole, Geoffrey Beene and Pierre Cardin),
accounted for approximately 13.3% and 9.7%, respectively, of the Company's
net sales (on a consolidated basis) for the six months ended June 30, 1998,
and approximately 16.3% and 12.5%, respectively, of the Company's net sales
(on a consolidated basis) for the year ended December 31, 1997. There can be
no assurance that the Company will be able to maintain the current level of
sales derived from these or any other customer in the future.
13
<PAGE>
The Company generally does not enter into long-term sales contracts with
its customers requiring them to make purchases from the Company. The
Company's sales are generally evidenced by a purchase order and similar
documentation limited to a specific sale. As a result, a customer from whom
the Company generates substantial revenue in one period may not be a
substantial source of revenue in a subsequent period. In addition, the
Company's customers generally have the right to terminate their relationships
with the Company without penalty and on little or no notice. In the absence
of such long-term contracts, there can be no assurance that these customers
will continue to engage the Company to design and produce products, and thus
there can be no assurance that the Company will be able to maintain a
consistent level of sales.
The termination of the Company's business relationship with any of its
significant customers or a material reduction in sales to a significant
customer could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Key Personnel. The Company's success has and will
continue to depend to a significant extent upon certain key management and
design and sales personnel, many of whom would be difficult to replace,
particularly Colin Dyne, its Chief Executive Officer and Harold Dyne, its
President, neither of whom is bound by an employment agreement or the subject
of key man insurance. The Company has no current plan to enter into
employment agreements with Colin Dyne or Harold Dyne but does intend to
obtain $1 million key man life insurance on Colin Dyne. The loss of the
services of one or more of these key executives and other key employees could
have a material adverse effect on the Company, including the Company's
ability to establish and maintain client relationships. The Company's future
success will depend in large part upon its ability to identify, attract,
assimilate, retain and motivate personnel with a variety of design, sales,
operating and managerial skills. There can be no assurance that the Company
will be able to retain and motivate its managerial, design, sales and
operating personnel or attract additional qualified members to management,
design or sales staff.
Future Capital Needs; Uncertainty of Additional Funding. The Company
anticipates that it will need to raise additional capital to fund its
business growth plans and operations during the next 12 months. To the extent
that existing resources and future earnings are insufficient to fund the
Company's activities, the Company will need to raise additional funds through
debt or equity financings. No assurance can be given that such additional
financing will be available or that, if available, it can be obtained on
terms favorable to the Company and its stockholders. Even if the Company is
able to obtain alternative financing on acceptable terms, any decrease or
material limitation on the amount of capital available to the Company under
such arrangements will limit the ability of the Company to expand its sales
levels and, therefore, would have a material adverse effect on the Company's
financial position, operating results and cash flows. In addition, any
significant increases in interest rates will increase the cost of financing
to the Company and would have a material adverse effect on the Company's
financial position, operating results and cash flows. In addition, any equity
financing could result in dilution to the Company's stockholders. The
Company's inability to obtain adequate funds would adversely affect the
Company's operations and ability to implement its strategy.
Control by Existing Stockholders. The Company's officers and directors
(and their affiliates), own approximately 46.6% of the Company's outstanding
shares; and the Dyne family (Harold Dyne, Mark Dyne, Colin Dyne, Larry Dyne
and Jonathan Burstein) own approximately 46.2% of the Company's outstanding
shares. As a result, these stockholders, or the Dyne family acting as a
group, effectively control the Company and its operations, including the
election of at least a majority of the Company's Board of Directors and thus
the policies of the Company. The voting power of these stockholders could
also serve to discourage potential acquirors from seeking to acquire control
of the Company through the purchase of the Common Stock, which might have a
depressive effect on the price of the Common Stock.
14
<PAGE>
Dependence on Limited Assembly Facilities. Certain of the Company's
products are assembled or finished at the foreign assembly facilities of the
Company. Since the Company does not currently operate duplicate facilities
in different geographic areas, a disruption of the Company's manufacturing
operations resulting from various factors, including human error, foreign
trade disruptions, import restrictions, labor disruptions, embargos,
government intervention or a natural disaster such as fire, earthquake or
flood, could cause the Company to cease or limit its assembly or finishing
operations and consequently could have a material adverse effect on the
Company's business, financial condition and results of operations.
Limited Sources of Supply. The Company generally does not have long-
term agreements with its key sources of supply. Lead times for materials
ordered by the Company can vary significantly and depend on factors such as
the specific supplier, contract terms and demand for particular materials at
a given time. From time to time, the Company has experienced fluctuations in
materials prices and disruptions in supply. Shortages or disruptions in the
supply of materials, or the inability of the Company to procure such
materials from alternate sources at acceptable prices in a timely manner,
could lead to the loss of customers due to the failure to timely meet orders
which in turn could result in a material adverse effect on the Company's
business, financial condition and results of operations.
Fluctuating Paper Costs and Paper Shortages. The cost of paper is a
principal component of the price the Company charges for its paper products,
including its high quality paper boxes, custom shopping bags, hang tags,
packaging and stationery products. Historically, the Company has been able
to pass on to its customers any increase or decrease in the cost of paper,
and therefore maintain its gross margins on paper products during
fluctuations in the cost of paper. There can be no assurance, however, that
the Company will continue to be able to pass increases in paper costs to its
customers. To the extent that the Company's customers are unwilling to
absorb increases in paper costs, the Company's results of operations could be
materially adversely affected.
While capacity in the paper industry has remained relatively stable in
recent years, increases or decreases in demand for paper have led to
corresponding pricing changes and, in periods of high demand, to limitations
on the availability of certain grades of paper, including grades utilized by
the Company. Any disruption in the Company's paper sources could cause
shortages in needed materials which could have a material adverse effect on
the Company's results of operations. Although the Company actively manages
its paper supply and has established strong relationships with its paper
suppliers, the Company does not have any long-term agreements with its key
paper suppliers and there can be no assurance that the Company's sources of
paper supply will be adequate or, in the event that such sources are not
adequate, that alternative sources can be developed in a timely manner.
Competition. The industries in which the Company competes are highly
competitive and fragmented and include numerous local and regional companies
that provide some or all of the services offered by the Company. The Company
also competes with United States and international design companies,
distributors and manufacturers of tags, packaging products and trims. Some
of the Company's competitors, including Paxar, Inc., RVL, Inc, Copac
International Packaging, Inc., Universal Button, Inc., and Scovill Fasteners,
Inc., have greater name recognition, longer operating histories and, in many
cases, substantially greater financial and other resources than the Company.
15
<PAGE>
In addition, new competitors, potentially with substantially greater
resources than the Company, may arise and may develop products which compete
with the Company's products. Moreover, there can be no assurance that new or
proprietary technology will not be introduced by an existing or new
competitor that may make some of the Company's products or services obsolete.
To the extent that the Company is unable to compete successfully against its
existing and future competitors, its business, operating results and
financial condition would be materially adversely affected. While the Company
believes that it competes effectively within the value-added design and
packaging industry, there are numerous factors that could reduce the
Company's ability to compete effectively.
Dependence Upon Guess? License. The Company, through AGS Stationery,
manufactures Guess? stationery products pursuant to an exclusive license with
Guess? entered into as of March 1, 1996. Net sales of Guess? stationery
products accounted for 0.1% and 2.9% of the Company's consolidated net sales
for the six months ended June 30, 1998 and 1997, respectively. The Guess?
license terminates on December 31, 2001, but may be renewed by the Company
through December 31, 2006 so long as the Company is not in breach of the
license and generates the required amount of minimum net sales for the two
contract years prior to renewal. Guess? may terminate the license before its
term expires upon the occurrence of certain events, including (i) if the
Company commits a breach of the license and fails to cure that breach within
any applicable cure period, (ii) if net sales for any contract year do not
meet or exceed the minimum net sales required for such contract year, (iii)
if, following any consolidation, sale or merger of AGS Stationery, Mark Dyne
(the Company's Chairman) and Colin Dyne do not retain, directly or
indirectly, the power to vote or direct the voting of more than fifty percent
of the outstanding voting securities of AGS Stationery, or (iv) if Colin Dyne
leaves the employment of AGS Stationery or otherwise fails to devote the vast
majority of his time and efforts to the daily management of AGS Stationery's
business, or Mark Dyne ceases to exert, on a regular basis, actual and bona
fide management control and oversight over AGS Stationery's business. The
termination of the Guess? license could have a material adverse effect on the
Company's business, operating results and financial condition. Additionally,
Guess? has certain approval rights over the various aspects of the design,
manufacture, marketing and distribution of products under the license and
consequently may delay the distribution of products bearing its proprietary
marks. There can be no assurance that the Company will not be subject to
delays resulting from disagreements with, or an inability to obtain approvals
from Guess?.
Risk of Product Returns. The Company incurs expenses as a result of the
return of products by customers, particularly in connection with customers of
the Company's licensed stationery business. Such returns may result from
sale or return arrangements, defective goods, inadequate performance relative
to customer expectations, shipping errors and other causes which are outside
the Company's control. Generally, returned items have limited or no value
and the Company will be forced to bear the cost of such returns. Product
returns could result in loss of revenue or delay in market acceptance,
diversion of development resources, damage to the Company's reputation, and
increases service and warranty costs. Any significant increase in the rate
of product returns could have a material adverse effect on the Company's
financial position, operating results, and cash flows.
International Business. For the year ended December 31, 1997,
approximately 40% of the Company's products were purchased, assembled or
finished outside the United States, principally in Hong Kong and Mexico, and
the Company intends to continue to purchase, assemble or finish a similar or
greater percentage of its products outside of the United States in the
future. The Company's international business is subject to numerous risks,
including the need to comply with a wide variety of foreign and United States
export and import laws, changes in export or import controls, tariffs and
other regulatory requirements, the imposition of governmental controls,
political and economic instability, trade restrictions, the difficulty of
administering business overseas and general economic conditions. The
inability of a contractor or supplier to ship orders in a timely manner could
cause the Company to miss the delivery date requirements of its customers for
those items, which could result in the cancellation of orders, refusal to
accept deliveries or a reduction in sales price. Although the Company's
international operations are denominated principally in United States
dollars, purchases from foreign vendors and sales to foreign customers may
also be affected by changes in demand
16
<PAGE>
resulting from fluctuations in interest and currency exchange rates,
including the recent Asian currency fluctuations. There can be no assurance
that these factors will not have a material adverse effect on the Company's
business and results of operations. In addition, the Company cannot predict
the effects the above risks will have on its business arrangements with its
customers, contractors or suppliers. If any such risks were to render the
conduct of business in a particular country undesirable or impractical, or if
the Company's current contractors or suppliers were to cease doing business
with the Company for any reason, the Company's financial position, operating
results and cash flows could be adversely affected.
Sovereignty over Hong Kong was transferred from the United Kingdom to
The People's Republic of China on July 1, 1997. If the business climate in
Hong Kong were to experience an adverse change as a result of the transfer,
the Company believes it could relocate its production and sourcing facilities
outside Hong Kong and replace the products currently produced in Hong Kong
with products produced elsewhere without a material adverse effect on the
Company's financial condition or results of operations. Nevertheless, there
can be no assurance that the Company would be able to do so.
Shared Responsibilities of Chairman. The Company's Chairman, Mark Dyne,
also serves as Chief Executive Officer and Chairman of Brilliant Digital
Entertainment, Inc. ("Brilliant"), as the joint managing director of Sega
Ozisoft Pty., Limited ("Sega Ozisoft"), a director of Monto Holdings Pty.
Ltd. ("Monto Holdings") and Nu-Metro Multimedia Pty. Ltd. ("Nu-Metro"), and a
co-owner and director of Packard Bell Australia Pty. Ltd. ("Packard Bell NEC
Australia"). Mr. Dyne is a shareholder of Sega Enterprises (Australia) Pty.
Ltd., which operates a $70 million interactive indoor theme park in Darling
Harbor in Sydney, Australia. Brilliant is a production and development
studio involved in the production of a new generation of digital
entertainment that is being distributed over the internet and on CD-ROM.
Sega Ozisoft is an Australia-distributor of software products for many
leading publishers. Monto Holdings is a private investment holding company,
Nu-Metro is a South African based distributor of multi-media software
products and Packard Bell NEC Australia is one of the leading manufacturers
and distributors of personal computers through the Australian mass merchant
channel. Mr. Dyne is not required to spend a certain amount of time at the
Company nor is he able to devote his full time and resources to the Company.
Holding Company Structure. The Company is a holding company with no
substantial operations and, consequently, is dependent on dividends and other
payments from the Subsidiaries for virtually all of its cash flow, including
cash flow for management salaries and overhead, to service debt, to make
equity investments and to finance its growth.
No Earthquake Insurance. The Company's principal executive offices are
located in Los Angeles, California -- an area which often experiences
earthquakes. The Company faces the risks that it may experience uninsured
property damage and/or sustain interruption of its business and operations.
The Company does not currently carry insurance against earthquake-related
risks.
Limited Proprietary Protection. The Company relies on trademark, trade
secret and copyright laws to protect its designs and other proprietary
property. The Company does not have United States or foreign patents or
patent applications currently pending. If litigation is necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets or to determine the validity and scope of the
proprietary rights of others, such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
the Company's business, operating results and financial condition.
Ultimately, the Company may be unable, for financial or other reasons, to
enforce its rights under intellectual property laws, and the laws of certain
countries in which the Company's products are or may be distributed may not
protect the Company's products and intellectual rights to the same extent as
the laws of the United States.
The Company believes that its products do not infringe any validly
existing proprietary rights of third parties. Although the Company has
received no communication from third parties alleging the infringement of
proprietary rights of such parties, there can be no assurance that third
parties will not assert infringement claims
17
<PAGE>
in the future and the Company could be subject to such claims in the future.
Any such third party claims, whether or not meritorious, could result in
costly litigation or require the Company to enter into royalty or licensing
agreements. There can be no assurance that any such licenses would be
available on acceptable terms, if at all, or that the Company would prevail
in any such litigation. If the Company were found to have infringed upon the
proprietary rights of third parties, it could be required to pay damages,
cease sales of the infringing products and redesign or discontinue such
products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition.
Shares Eligible for Future Sale. Future sales of Common Stock by
existing stockholders could adversely affect the prevailing market price of
the Common Stock and the Company's ability to raise capital in the equity
markets. The Company has 4,070,011 shares of Common Stock outstanding. Of
those shares, 1,680,000 shares are freely tradeable without restriction or
further registration under the Securities Act, unless purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act ("Rule 144"). The remaining 2,390,011 shares of Common Stock
outstanding are "restricted securities," as that term is defined by Rule 144,
and are also subject to the holding period, volume and manner of sale
limitations of Rule 144. Under certain lock-up agreements, the officers,
directors and other stockholders, holding an aggregate of 2,277,894 shares of
Common Stock, have agreed that they will not, directly or indirectly, sell,
assign or otherwise transfer any shares of Common Stock owned by them until
January 1999, without the prior written consent of Cruttenden Roth
Incorporated. Upon expiration of the lock-up agreements, such 2,277,894
shares of Common Stock will become eligible for sale, subject to compliance
with the volume and manner of sale limitations of Rule 144. The Company also
intends to file a registration statement under the Securities Act to register
the shares of Common Stock reserved for issuance pursuant to the Company's
1997 Stock Incentive Plan (the "1997 Plan"). This registration statement
will become effective immediately upon filing. As of June 30, 1998, options
to purchase 260,000 shares of Common Stock and warrants to purchase 287,631
shares of Common Stock had been granted, none of which had been exercised.
The availability for sale, as well as actual sales, of currently outstanding
shares of Common Stock, and shares of Common Stock issuable upon the exercise
of options and warrants, may depress the prevailing market price for the
Common Stock and could adversely affect the terms upon which the Company
would be able to obtain additional equity financing.
Environmental Regulations. Certain of the Subsidiaries use hazardous
materials in their manufacturing operations. As a result, the Company is
subject to federal, state and local regulations governing the storage, use
and disposal of such materials. The use and disposal of hazardous materials
involves the risk that the Company could be required to incur substantial
expenditures for preventive or remedial action, reduction of chemical
exposure, or waste treatment or disposal. The liability in the event of an
accident or the costs of such actions could exceed the Company's resources or
otherwise have a material adverse effect on the Company's business, financial
condition or results of operations.
Effect of Certain Charter Provisions; Anti-Takeover Effects of
Certificate of Incorporation, Bylaws and Delaware Law. The Company's Board
of Directors has the authority to issue up to 3,000,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The Preferred Stock could be issued with
voting, liquidation, dividend and other rights superior to those of the
Common Stock. Following the Offering, no shares of Preferred Stock of the
Company will be outstanding, and the Company has no present intention to
issue any shares of Preferred Stock. However, the rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. Further, certain
provisions of the Company's Certificate of Incorporation and Bylaws and of
Delaware law could delay or make more difficult a merger, tender offer or
proxy contest involving the Company.
18
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 1998, in connection with the purchase of $550,000 of Bridge
Notes, Cruttenden Roth Bridge Fund, LLC and Beta Research Corporation
received Bridge Warrants to purchase 47,000 shares and 33,000 shares,
respectively, of Common Stock. The Bridge Warrants will be exercisable for a
period of four years, commencing January 23, 1999, at an initial per share
exercise price of $6.00. The Bridge Warrants provide for demand and
piggyback registration rights. The issuance and sale of these securities was
made in reliance on Section 4(2) of the Securities Act as a transaction not
involving any public offering.
Also in January 1998, in connection with the Company's initial public
offering, the Company granted to Cruttenden Roth Incorporated and Josephtal &
Co. Inc. (the "Representatives") warrants to purchase up to 110,000 shares of
Common Stock (the "Representatives' Warrants"). The Representatives'
Warrants will be exercisable for a period of four years, commencing January
23, 1999, at an initial per share exercise price of $4.80. Neither the
Representatives' Warrants nor the shares of Common Stock issuable upon
exercise thereof may be transferred, assigned or hypothecated until one year
from the date of the Offering, except that they may be assigned, in whole or
in part, (i) to individuals who are either officers or partners of the
Representatives, or (ii) by will or the laws of descent and distribution or
(iii) to certain successor of the Representatives. Any profit realized by
the Representatives on the sale of securities issuable upon exercise of the
Representatives' Warrants may be deemed to be additional compensation. The
issuance and sale of these securities was made in reliance on Section 4(2) of
the Securities Act as a transaction not involving any public offering.
The Company's Registration Statement on Form SB-2 (File No. 333-38397)
relating to the offer and sale (the "Offering") of an aggregate of 1,680,000
shares (the "Shares") of Common Stock, par value $0.001 per share (the
"Common Stock"), of the Company was declared effective by the Securities and
Exchange Commission (the "Commission") on January 23, 1998. Of the 1,680,000
shares of Common Stock registered under the Registration Statement, 1,600,000
shares were sold by the Company and 80,000 shares were sold by a stockholder
of the Company (the "Selling Stockholder").
The Offering closed on January 28, 1998. All of the Shares registered
were sold in the Offering at an aggregate price of $4.00 per share, for
aggregate proceeds of $6,400,000 and $320,000 to the Company and the Selling
Stockholder, respectively. After deducting underwriting discounts and
commissions of $0.32 per share, the Selling Stockholder received net proceeds
of $294,400 and the Company received net proceeds equal to $5,888,000 less
expenses of $1,245,471 incurred in connection with the Offering (all of
which were paid or are payable by the Company). Of the $1,245,471, $134,400
represents non-accountable expenses payable to the underwriters. Cruttenden
Roth Incorporated and Josepthal & Co. Inc. were the co-managing underwriters.
The Offering resulted in net proceeds ("Net Proceeds") to the Company of
approximately $4,643,000. As of June 30, 1998, the Company had applied an
aggregate of approximately $4,370,000 of the Net Proceeds as follows: (i)
$2,279,000 to repay certain indebtedness (of which approximately $416,000
was paid to officers, directors, stockholders and/or other affiliates of the
Company), (ii) $450,000 to develop a national sales and marketing network,
including hiring additional sales personnel, (iii) $229,000 to acquire
computer & production equipment, (iv) $166,000 to purchase inventories, and
(v) $1,246,000 for working capital. As of June 30, 1998, the Company had
invested the remaining $272,000 of the Net Proceeds in short-term interest
bearing securities.
19
<PAGE>
As required by Rule 463 of the Securities Act, the Company will disclose
the application of the remaining Net Proceeds in the Company's periodic
report for the quarter ending September 30, 1998 and, to the extent
necessary, in subsequent periodic reports filed by the Company pursuant to
Section 13(a) or 15(d) of the Exchange Act.
ITEM 5. OTHER INFORMATION
Effective May 1, 1998, the Company entered into a $2 million line of
credit agreement with a bank to be used for working capital purposes and
expires on May 31, 1999. The Line of Credit interest rate is equal to the
bank's reference rate and includes certain financial covenants relating to
net worth, debt to net worth, current ratio, and profitability.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the period covered by this
transition report.
20
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: August 3, 1998 TAG-IT PACIFIC, INC.
By: /s/ Francis Shinsato
---------------------
Francis Shinsato
Chief Financial Officer
(Principal Financial & Accounting Officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS OF TAG-IT PACIFIC, INC. AS OF AND FOR THE FOUR MONTHS ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 310,161
<SECURITIES> 0
<RECEIVABLES> 3,457,330
<ALLOWANCES> 108,191
<INVENTORY> 2,496,441
<CURRENT-ASSETS> 6,769,521
<PP&E> 2,132,680
<DEPRECIATION> 953,413
<TOTAL-ASSETS> 8,075,189
<CURRENT-LIABILITIES> 4,586,139
<BONDS> 0
0
0
<COMMON> 4,070
<OTHER-SE> 3,484,980
<TOTAL-LIABILITY-AND-EQUITY> 8,075,189
<SALES> 7,870,235
<TOTAL-REVENUES> 7,870,235
<CGS> 4,986,472
<TOTAL-COSTS> 7,660,902
<OTHER-EXPENSES> 124,289
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124,289
<INCOME-PRETAX> 85,044
<INCOME-TAX> 47,511
<INCOME-CONTINUING> 37,533
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,533
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
