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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 September 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to _______________.
Commission file number 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)
(323) 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 X No
--- ---
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, 6,728,177 shares issued and outstanding as of November 12, 1999.
Transitional Small Business Disclosure Format (check one):
Yes X No
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<PAGE>
TAG-IT PACIFIC, INC.
INDEX TO FORM 10-QSB
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited) as of
September 30, 1999 and December 31, 1998...................... 3
Consolidated Statements of Income (unaudited) for the
Three Months and Nine Months Ended
September 30, 1999 and 1998................................... 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 1999 and 1998................ 5
Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............. 16
Item 6. Exhibits and Reports on Form 8-K................................ 16
Page 2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
TAG-IT PACIFIC, INC.
Consolidated Balance Sheets
(unaudited)
<CAPTION>
September 30, December 31,
Assets 1999 1998
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................... $ 26,186 $ 2,065,331
Due from factor, net............................................. 248,743 221,770
Accounts receivable, trade, net.................................. 6,314,039 3,629,338
Due from related parties......................................... 249,834 752,602
Inventories...................................................... 8,902,306 5,700,196
Prepaid expenses and other current assets........................ 1,032,884 892,853
------------- -------------
Total current assets........................................... 16,773,992 13,262,090
Property and Equipment, net of accumulated depreciation and
amortization...................................................... 1,982,968 1,335,066
Other assets........................................................ 46,103 46,684
------------- -------------
Total Assets........................................................ $18,803,063 $ 14,643,840
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable............................................... $ 5,963,294 $ 2,638,448
Accounts payable, related party................................ - 2,250,626
Accrued expenses............................................... 730,658 668,240
Line of credit................................................. 3,499,000 1,489,000
Current portion of long-term debt.............................. 50,124 56,040
Current portion notes payable to related parties............... 296,259 451,626
------------- -------------
Total current liabilities...................................... 10,539,335 7,553,980
------------- -------------
Contingencies (Note 4)
Stockholders' Equity:
Preferred stock, $0.001 par value; 3,000,000 shares
authorized; no shares issued or outstanding .................. - -
Common stock; $0.001 par value; 30,000,000 shares
authorized; 6,728,177 shares issued and outstanding at
September 30, 1999; 6,726,177 shares issued and
outstanding at December 31, 1998.............................. 6,728 6,727
Additional paid-in capital...................................... 8,708,557 8,707,258
Translation loss................................................ (24,877) -
Accumulated deficit............................................. (426,680) (1,624,125)
------------- -------------
Total Stockholders' Equity .................................... 8,263,728 7,089,860
------------- -------------
Total Liabilities and Stockholders' Equity ......................... $18,803,063 $ 14,643,840
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
TAG-IT PACIFIC, INC.
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -----------------------------
1999 1998 1999 1998
-------------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales............................. $ 10,226,746 $ 5,045,971 $ 24,039,238 $12,916,206
Cost of goods sold.................... 6,796,930 3,283,871 15,933,153 8,270,344
------------- ------------ ------------ -----------
Gross profit....................... 3,429,816 1,762,100 8,106,085 4,645,862
Selling expenses...................... 418,265 484,809 1,407,063 1,155,586
General and administrative expenses... 2,128,645 883,386 5,141,361 2,887,039
------------- ------------ ------------ -----------
Total operating expenses........... 2,546,910 1,368,195 6,548,424 4,042,625
Income from operations............... 882,906 393,905 1,557,661 603,237
Interest expense...................... 72,849 56,094 138,616 180,383
------------- ------------ ------------ -----------
Income before income taxes............ 810,057 337,811 1,419,045 422,854
Provision for income taxes............ 163,589 101,612 221,600 149,122
------------- ------------ ------------ -----------
Net Income ........................ $ 646,468 $ 236,199 $ 1,197,445 $ 273,732
============= ============ ============ ===========
Basic earnings per share.............. $ 0.10 $ 0.06 $ 0.18 $ 0.07
============= ============ ============ ===========
Diluted earnings per share............ $ 0.09 $ 0.06 $ 0.17 $ 0.07
============= ============ ============ ===========
Weighted Average Number of Common
Shares Outstanding:
Basic............................. 6,726,677 4,070,011 6,726,677 3,881,440
============= ============ ============ ===========
Diluted .......................... 7,276,318 4,097,839 7,271,335 3,923,046
============= ============ ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4
<PAGE>
TAG-IT PACIFIC, INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1999 1998
------------ --------------
Increase (decrease) in cash and cash equivalents Cash flows from operating
activities:
<S> <C> <C>
Net income ......................................................... $ 1,197,445 $ 273,732
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ................................ 443,906 297,315
Translation gain ............................................. (24,877) -
Changes in operating assets and liabilities:
Receivables................................................ (2,711,674) (1,378,956)
Inventories................................................ (3,202,110) (403,720)
Other assets............................................... 581 347,135
Prepaid expenses and other current assets.................. (140,031) 3,403
Accounts payable........................................... 3,324,846 (1,915,880)
Accounts payable, related party............................ (1,747,858) -
Accrued expenses........................................... 62,418 47,039
------------ --------------
Net cash used in operating activities............................... (2,797,354) (2,729,932)
Cash Flows From Investing Activities:
Loans to related parties............................................ - (25,206)
Acquisition of property and equipment............................... (1,091,808) (583,103)
------------ --------------
Net cash used in investing activities............................... (1,091,808) (608,309)
Cash Flows from Financing Activities:
Bank overdraft...................................................... - (306,565)
Net advances from factor............................................ - (1,404,133)
Proceeds from IPO, net.............................................. - 4,627,336
Proceeds from stock issuance........................................ 1,300 -
Proceeds from bank line of credit................................... 2,010,000 1,689,000
- -
Repayment on long-term debt......................................... (5,916) (452,174)
-
Repayment on notes payable to related parties....................... (155,367) (596,675)
------------ --------------
Net cash provided by financing activities............................. 1,850,017 3,556,789
------------ --------------
Net increase (decrease) in cash........................................ (2,039,145) 218,548
Cash at beginning of period............................................ 2,065,331 44,109
------------ --------------
Cash at end of period.................................................. $ 26,186 $ 262,657
============ ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest....................................................... $ 138,616 $ 180,383
============ ==============
Income taxes................................................... $ 16,903 $ 53,154
============ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TAG-IT PACIFIC, INC.
Notes to the Consolidated Financial Statements
(unaudited)
1. PRESENTATION OF INTERIM INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited consolidated financial
statements reflect all adjustments that, in the opinion of the management, are
considered necessary for a fair presentation of the financial position, results
of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
financial statements should be read in conjunction with the audited consolidated
financial statements of Tag-It Pacific, Inc. and subsidiaries included in our
Form 10-KSB for the fiscal year ended December 31, 1998.
2. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), is effective for
financial statements ending June 15, 1999. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. We do not expect adoption of SFAS 133
to have a material impact, if any, on our consolidated results of operations.
3. EARNINGS PER SHARE
We have adopted Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
is effective for financial statements issued for the periods after December 15,
1997, including interim periods. SFAS 128 requires the restatement of all prior
period earnings per share ("EPS") data presented.
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
THREE MONTHS ENDED SEPTEMBER 30, 1999: (NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- -----------
BASIC EARNINGS PER SHARE:
<S> <C> <C> <C>
Income available to common stockholders. $ 646,468 6,726,677 $ 0.10
EFFECT OF DILUTIVE SECURITIES:
Options................................. 442,833
Warrants................................ 106,808
Shares issued........................... -
============= =============== ===========
Income available to common stockholders. $ 646,468 7,276,318 $ 0.09
============= =============== ===========
6
<PAGE>
INCOME SHARES PER SHARE
THREE MONTHS ENDED SEPTEMBER 30, 1998: (NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- -----------
BASIC EARNINGS PER SHARE:
Income available to common stockholders. $ 236,199 4,070,011 $ 0.06
EFFECT OF DILUTIVE SECURITIES:
Options................................. -
Warrants................................ 27,828
Shares issued........................... -
============= =============== ===========
Income available to common stockholders. $ 236,199 4,097,839 $ 0.06
============= =============== ===========
INCOME SHARES PER SHARE
NINE MONTHS ENDED SEPTEMBER 30, 1999: (NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- -----------
BASIC EARNINGS PER SHARE:
Income available to common stockholders. $1,197,445 6,726,677 $ 0.18
EFFECT OF DILUTIVE SECURITIES:
Options................................. 440,854
Warrants................................ 103,804
Shares issued........................... -
============= =============== ===========
Income available to common stockholders. $1,197,445 7,271,335 $ 0.17
============= =============== ===========
INCOME SHARES PER SHARE
NINE MONTHS ENDED SEPTEMBER 30, 1998: (NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- -----------
BASIC EARNINGS PER SHARE:
Income available to common stockholders. $ 273,732 3,881,440 $ 0.07
EFFECT OF DILUTIVE SECURITIES:
Options................................. -
Warrants................................ 41,606
Shares issued........................... -
============= =============== ===========
Loss available to common stockholders.. $ 273,732 3,923,046 $ 0.07
============= =============== ===========
</TABLE>
4. CONTINGENCIES
We are subject to certain legal proceedings and claims arising in
connection with our business. In the opinion of management, there are currently
no claims that will have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis, should together with the
Consolidated Financial Statements of Tag-It Pacific and the notes to the
Consolidated Financial Statements included elsewhere in this Form 10-QSB.
THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF TAG-IT PACIFIC FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30,
1998. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES
AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR
CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE FACTORS
DESCRIBED BELOW UNDER THE CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS."
OVERVIEW
Tag-It Pacific, Inc. is a single-source provider of complete brand identity
programs to manufacturers of fashion driven apparel and licensed consumer
products and to specialty retailers and mass merchandisers. We design and
produce 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. We also design and/or manufacture products for a variety of major brand
and private label oriented companies including Guess?, Calvin Klein, Tommy
Hilfiger, A\X Armani Exchange, Sony Signatures, Warner Bros. and Carol Little,
among others.
We are 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 and Pacific
Trim & Belt, Inc., a California corporation, all of which were consolidated
under a parent limited liability company on October 17, 1997 and became our
wholly-owned subsidiaries immediately prior to the effective date of our initial
public offering in January 1998. In November 1998, we formed a wholly-owned
subsidiary, Pacific Trim, SA de CV located in Tehuacan, Mexico.
RESULTS OF OPERATIONS
NET SALES. Net sales increased approximately $5.2 million (or 102.7%) to
$10.2 million for the three months ended September 30, 1999 from $5.0 million
for the three months ended September 30, 1998. The increase in net sales was
primarily the result of $5.9 million in additional trim related sales from our
new Tehuacan, Mexico operations offset by a decrease in sales of trim and
specialty packing products.
Net sales increased approximately $11.1 million (or 86.1%) to $24.0 million
for the nine months ended September 30, 1999 from $12.9 million for the nine
months ended September 30, 1998. The increase in net sales was primarily the
result of additional trim related sales from our new Tehuacan, Mexico
operations.
GROSS PROFIT. Gross profit increased approximately $1.6 million to $3.4
million (or 94.6%) for the three months ended September 30, 1999 from $1.8
million for the three months ended September 30, 1998. Gross margin as a
percentage of net sales decreased to approximately 33.5% as compared to 34.9%
for the three months ended September 30, 1998. The decrease in gross margin was
primarily attributable to slightly lower margins trim products from the Tehuacan
operations. The decrease in gross margin was partially offset by higher overhead
absorption, primarily as a result of higher net sales in 1999.
Gross profit increased approximately $3.5 million (or 74.5%) to $8.1
million for the nine months ended September 30, 1999 from $4.6 million for the
nine months ended September 30, 1998. Gross margin as a percentage of net sales
decreased to approximately 33.7% as compared to 36.0% for the nine months ended
September 30, 1998. The decrease in gross margin was primarily attributable to
slightly lower margins on trim products from the Tehucan operations. The
decrease in gross margin was partially offset by higher overhead absorption,
primarily as a result of higher net sales in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $1.1million to $2.5 million for
the three months ended September 30, 1999 from $1.4 million for the three months
ended September 30, 1998. As a percentage of net sales, these expenses decreased
to 24.9% for the three months ended September 30, 1999 compared to 27.1% for the
three months ended September 30, 1998. The increase in these expenses was due
primarily to the additional staffing and expenses related to our Tehuacan,
Mexico and larger Hong Kong facilities.
8
<PAGE>
Selling, general and administrative expenses increased approximately $2.5
million to $6.5 million for the nine months ended September 30, 1999 from $4.0
million for the nine months ended September 30, 1998. As a percentage of net
sales, these expenses decreased to 27.2% for the nine months ended September 30,
1999 compared to 31.3% for the nine months ended September 30, 1998. The
increase in these expenses was due to the combination of additional staffing and
expenses related to our Tehuacan, Mexico and Hong Kong facilities, hiring
additional salesmen, and expanding our advertising and promotion efforts. The
increase in expenses was also offset by a decrease in expenses related to our
discontinued line of specialty licensed stationery products.
INTEREST EXPENSE. Interest expense increased approximately $17,000 (or
29.9%) to $73,000 for the three months ended September 30, 1999 from $56,000 for
the three months ended September 30, 1998. The increase in the use of our line
of credit resulted from increased working capital requirements to support the
increased trim sales from our Tehuacan operations. Interest expense decreased
approximately $42,000 (or 23.2%) to $139,000 for the nine months ended September
30, 1999 from $180,000 for the nine months ended September 30, 1998. We used the
proceeds of our January 1998 initial public offering and our October 1998
private stock sale to KG Invesment, LLC to substantially reduce our use of
factors, which reduced our cost of funds. We intend to continue to limit our use
of factors in the future and intend to rely upon the increased bank line of
credit that we renewed in October 1999 for our short-term financing needs.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
approximately $62,000 to $164,000 for the three months ended September 30, 1999
as compared to $102,000 for the three months ended September 30, 1998. The
provision for income taxes increased approximately $72,000 to $221,000 for the
nine months ended September 30, 1999 as compared to $149,000 for the nine months
ended September 30, 1998. Income taxes increased primarily due to increased
operating income, offset by the use of net operating loss carryforwards from AGS
Stationery, Inc. which were available to offset our taxable income during 1999.
NET INCOME. Net income was $646,000 for the three months ended September
30, 1999 as compared to net income of $236,000 for the three months ended
September 30, 1998, and $1,197,000 for the nine months ended September 30, 1999
as compared to net income of $274,000 for the nine months ended September 30,
1998, due to the factors set forth above.
LIQUIDITY AND CAPITAL RESOURCES
Prior to fiscal 1998, we satisfied our working capital requirements
primarily through cash flows generated from operations, borrowings under
factoring agreements with Heller Financial, Inc. and Safcor, Inc., and
borrowings from related parties. Generally, our borrowing requirements have been
somewhat seasonal, with peak working capital needs occurring at the end of the
year. We terminated the use of domestic factoring arrangements with Heller and
Safcor as of December 31, 1998. We continue to use Heller's factoring services
for our Hong Kong subsidiary's sales.
Pursuant to the terms of our factoring agreement, our factor purchases our
eligible accounts receivable and assumes the credit risk with respect to those
accounts for which the factor has given their prior approval. As of September
30, 1999, the amount factored without recourse was $249,000 and the amount due
from the factor and recorded as a current asset was $249,000. If the factor does
not assume the credit risk for a receivable, the collection risk associated with
the receivable remains with us. If the factor determines, at its discretion, to
advance against the receivable, the customer's payment obligation is recorded as
our receivable and the advance from the factor is recorded as a current
liability.
In October 1999, we extended our line of credit with Sanwa Bank to May 31,
2000 and increased the amount available under the line of credit from $3 million
line to $5 million. We intend to continue to use the line of credit for working
capital purposes. The line of credit interest rate is equal to the bank's
reference rate, and the line of credit agreement requires us to meet certain
financial covenants relating to net worth, debt to net worth, current ratio and
profitability. At September 30, 1999, we were in compliance with these
covenants. As of September 30, 1999, our outstanding balance on the bank line of
credit was $3,499,000.
As of September 30, 1999, we had outstanding related party debt of $296,000
at a weighted average interest rate of 8.2%, and non-related party debt of
$50,000 at a weighted average interest rate of 2.5%. All related party debt is
due and payable on the fifteenth day following the date of delivery of written
demand for payment.
Net cash used in operating activities was approximately $2,797,000 and
$2,730,000 for the nine months ended September 30, 1999 and 1998, respectively.
Cash used in operations for the nine months ended September 30, 1999 resulted
primarily from increases in receivables, inventory and decreases in accounts
payable, related party, partially offset by increases in accounts payable. Cash
used in operations for the nine months ended September 30, 1998 resulted
primarily from decreased accounts payable, increased accounts receivables,
inventory and expenses relating to our initial public offering.
9
<PAGE>
Net cash used in investing activities was $1,091,000 and $608,000 for the
nine months ended September 30, 1999 and 1998, respectively. Net cash used in
investing activities consisted primarily of capital expenditures for computer
equipment upgrades, procurement of production equipment, leasing of equipment in
connection with the opening of our new facilities in Tehuacan, Mexico and Hong
Kong and, in 1998, expenditures for office and assembly equipment in connection
with the Tijuana, Mexico facility.
Net cash provided by financing activities was approximately $1,850,000 and
$3,557,000 for the nine months ended September 30, 1999 and 1998, respectively.
Net cash provided by financing activities for the nine months ended September
30, 1999 reflects proceeds from our bank line of credit, offset by repayments of
notes payable to related parties. Net cash provided by financing activities for
the nine months ending September 30, 1998 results from our initial public
offering, offset by reductions in advances and/or loans from factors, related
parties and non-related parties.
We may need to obtain additional financing in order to provide adequate
liquidity to fund our business growth plans and operations during the next 12
months. We are continually evaluating various financing strategies to be used to
expand our business and fund future growth or acquisitions. The extent of our
future capital requirements will depend, however, on many factors, including our
results of operations, the size and timing of future acquisitions, if any, and
the availability of additional financing. We cannot be certain that additional
financing will be available or that, if available, we can obtain it on terms
favorable to us and our stockholders. See " - Cautionary Statements and Risk
Factors -- If we are unable to raise additional funds, we may be required to
defer implementation of our growth strategy."
YEAR 2000 UPDATE
GENERAL. We are continuing with our project to address the potential impact
of the Year 2000 problem on the processing of date-sensitive information by our
information technology systems and the information technology systems used by
our significant customers and vendors. The Year 2000 problem is the result of
computer programs being written using two digits to define the applicable year.
As a result, certain computer programs may recognize a date using "0" as the
year 1900 rather than 2000, which could cause miscalculations or system
failures. The Year 2000 problem could adversely affect the domestic and foreign
economies, infrastructures, transportation systems and raw material sources, as
well as defer purchases of our products by consumers and defer payments of our
receivables during the last calendar quarter of 1999. The objectives of our Year
2000 project are to determine and assess the risks of the Year 2000 problem and
to plan and institute mitigating actions to minimize those risks to acceptable
level.
In 1997, we began a systems replacement program to improve access to
business information through common, integrated computing systems. We use
programs primarily from Sage/State of The Art (MAS90), which programs have been
certified by Sage/State of The Art as Year 2000 compliant. These new systems
have been completed as of September 30, 1999, are expected to make approximately
95% of our business computer systems Year 2000 compliant and our remaining
business software programs either will be made Year 2000 compliant through other
means, or they will be discontinued. We have not delayed implementation of any
information technology projects due to our Year 2000 efforts.
YEAR 2000 PROJECT. Our Year 2000 project is proceeding on schedule. The
project is divided into three major categories: infrastructure, applications
software and third-party suppliers and customers.
o INFRASTRUCTURE. Infrastructure consists of hardware and systems software
other than applications software. We must identify and assess those systems that
are material to our business, test the systems and repair or replace those
systems that are not Year 2000 compliant. We estimate that approximately 95% of
the activities related to this category have been completed as of September 30,
1999. We are currently testing our infrastructure and upgrading and replacing
our systems software and hardware where necessary. We have engaged a network
consultant to assist in managing this aspect of our Year 2000 project. We will
continue contingency planning through the remainder of 1999.
o APPLICATIONS SOFTWARE. This portion of our Year 2000 project requires
that we identify and assess applications systems that are material to our
business, determine if those systems are Year 2000 compliant and replace those
systems that are not Year 2000 compliant. We estimate that approximately 95% of
the activities related to this category have been completed as of September 30,
1999. The remaining software conversion activities are scheduled for completion
by the end of 1999. This includes integrating the Mexico and Hong Kong
information systems to our principal office in Los Angeles. We have engaged a
software consultant to assist in managing this aspect of our Year 2000 project.
We will continue contingency planning through the remainder of 1999.
10
<PAGE>
o THIRD PARTY SUPPLIERS AND CUSTOMERS. We must identify, prioritize and
communicate with critical suppliers and customers to understand their Year 2000
issues and how they may affect us, and determine what steps they have taken to
prepare and manage their Year 2000 issues as they relate to us. In the fourth
quarter of 1998, we distributed detailed questionnaires to our critical
suppliers and customers about their Year 2000 issues. As of September 30, 1999,
we have received responses from 40% of the recipients of these questionnaires.
We will continue contingency planning and continue to communicate with customers
and suppliers through the remainder of 1999.
COSTS. We do not expect the costs associated with our Year 2000 project to
be material. We estimate that the entire cost of the Year 2000 project will be
approximately $250,000. Of this amount, we expensed approximately $235,000 as of
September 30, 1999 for replacement software and hardware upgrades.
RISKS. Our failure to correct a material Year 2000 problem could have a
material adverse effect on our results of operations and ability to implement
our business strategy. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third-party suppliers and customers as well as foreign economies,
infrastructures and transportation systems, we are unable to determine with any
degree of certainty whether the consequences of Year 2000 failures will have a
material impact on our results of operations and financial condition.
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain forward-looking
statements that involve risks and uncertainties. Factors associated with the
forward-looking statements that could cause actual results to differ from those
projected or forecast are included in the statements below. In addition to other
information contained in this document, readers should carefully consider the
following cautionary statements and risks factors:
IF WE ARE NOT BE ABLE TO MANAGE OUR RAPID EXPANSION AND GROWTH, OUR
REVENUES WILL BE ADVERSELY affected. Our subsidiaries have been operated under
family management since they were formed and have recently significantly
expanded their operations. The growth of our operations and activities has
placed and will continue to place a significant strain on our management,
operational, financial and accounting resources. If we cannot implement and
improve our financial and management information and reporting systems, we will
not be able to implement our growth strategies and our revenues will be
adversely affected. In addition, we will not be able to manage future growth, if
any, and increase production levels and continue to market and distribute our
products, if we cannot hire, train, motivate and manage new employees, including
management and operating personnel, and integrate them into our overall
operations and culture.
FLUCTUATIONS IN OPERATING RESULTS MAY RESULT IN UNEXPECTED REDUCTIONS IN
REVENUE AND STOCK PRICE VOLATILITY. We operate in an industry that is subject to
significant fluctuations in operating results from quarter to quarter, which may
lead to unexpected reductions in revenues and stock price volatility. Factors
that may influence our quarterly operating results include:
o the volume and timing of customer orders received during the quarter;
o the timing and magnitude of customers' marketing campaigns;
o the loss or addition of a major customer;
o the availability and pricing of materials for our products;
o the increased expenses incurred in connection with the introduction of
new products; and
o changes in our product mix or in the relative contribution to sales of
our subsidiaries.
Due to these factors, it is possible that in some quarters our operating
results may be below the expectations of public market analysts and investors.
If this occurs, the price of our common stock would likely be adversely
affected.
CYCLICAL BUYING PATTERNS MAY RESULT IN PERIODS OF LOW SALES VOLUME. Most of
our customers are in the apparel industry. The apparel industry historically has
been subject to substantial cyclical variations. Our business has experienced,
and we expect our business to continue to experience, significant cyclical
fluctuations due, in part, to customer buying patterns, which may result in
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<PAGE>
periods of low sales. A recession in the general economy or uncertainties
regarding future economic prospects that affect consumer spending habits could
also reduce our sales.
IF WE DO NOT IMPROVE AND INTEGRATE OUR INFORMATION AND MANAGEMENT SYSTEMS,
WE WILL NOT BE ABLE TO EFFICIENTLY MANAGE OUR OPERATIONS IN HONG KONG, MEXICO
AND THE UNITED STATES AND IMPLEMENT OUR GROWTH STRATEGIES. Prior to
consolidating our subsidiaries under a single parent company in January 1998,
each subsidiary operated as a separate company with its own information and
management reporting systems. We must consolidate and centralize the management
of our subsidiaries and significantly expand and improve our financial and
operating controls. Additionally, we must update our computer systems to become
Year 2000 compliant and effectively integrate the information systems of Hong
Kong and Mexico with the information systems of our principal offices in Los
Angeles. We cannot be certain that we will be successful in doing so.
IF WE LOSE ANY OF OUR THREE LARGEST CUSTOMERS, OUR SALES AND OPERATING
RESULTS WILL BE ADVERSELY AFFECTED. Our three largest customers, Tarrant Apparel
Group, Guess? and Swank, which is a licensee of Yves Saint Laurent, Kenneth
Cole, Geoffrey Beene and Pierre Cardin, accounted for approximately 49.1%, 3.0%
and 5.3%, respectively, of our net sales, on a consolidated basis, for the nine
months ended September 30, 1999, and approximately 0%, 14.40% and 12.2%,
respectively, of our net sales, on a consolidated basis, for the nine months
ended September 30, 1998. We may not be able to derive the same level of sales
from these customers in the future. The termination of our business relationship
with these or any of our other significant customers or a material reduction in
sales to a significant customer could significantly reduce our revenue.
BECAUSE WE DO NOT ENTER INTO LONG-TERM SALES CONTRACTS WITH OUR CUSTOMERS,
OUR SALES MAY DECLINE IF OUR EXISTING CUSTOMERS CHOOSE NOT TO BUY OUR PRODUCTS
OR SERVICES. Our customers are not required to purchase our products. Our sales
are generally evidenced by a purchase order and similar documentation limited to
a specific sale. As a result, a customer from whom we generate substantial
revenue in one period may not be a substantial source of revenue in a future
period. In addition, our customers generally have the right to terminate their
relationships with us without penalty and on little or no notice. Without
long-term contracts with our customers, we cannot be certain that our existing
customers will continue to engage us to design and produce products.
Accordingly, we cannot guarantee that we will be able to maintain a consistent
level of sales.
WE DEPEND ON KEY MANAGEMENT AND DESIGN AND SALES PERSONNEL TO OBTAIN AND
SECURE ACCOUNTS AND GENERATE SALES. Our 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,
our Chief Executive Officer. Colin Dyne is not bound by an employment agreement
or the subject of key man insurance. The loss of the services of Colin Dyne or
the services of other key employees could have a material adverse effect on our
business, including our ability to establish and maintain client relationships.
Our future success will depend in large part upon our ability to identify,
attract, assimilate, retain and motivate personnel with a variety of design,
sales, operating and managerial skills. We may not be able to do so.
IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS, WE MAY BE REQUIRED TO DEFER
IMPLEMENTATION OF OUR GROWTH STRATEGY. We anticipate that we will need to raise
additional funds through debt or equity financings during the next 12 months if
our line of credit, existing resources and future earnings are insufficient to
fund our business growth plans and operations. We cannot guarantee that
additional financing will be available or that, if available, it can be obtained
on terms that we deem favorable. If necessary funds are not available, we may be
required to delay implementation of our growth strategy. Additionally, our
stockholders may be diluted if we raise additional funds through the sale of our
stock.
BECAUSE OUR OFFICERS AND DIRECTORS OWN A SIGNIFICANT PORTION OF OUR COMMON
STOCK, THEY MAY BE ABLE TO INFLUENCE STOCKHOLDER VOTES AND DISCOURAGE OTHERS
FROM ATTEMPTING TO ACQUIRE US. As of September 30, 1999, our officers and
directors and their affiliates owned approximately 27.2% of the outstanding
shares of our common stock. The Dyne family, which includes Mark Dyne, Colin
Dyne, Larry Dyne, Jonathan Burstein and the estate of Harold Dyne, owned
approximately 27.5% of the outstanding shares of our common stock. KG
Investments, LLC, a significant stockholder, owned approximately 35.5% of the
outstanding shares of our common stock with certain transfer and voting
restrictions. As a result, our officers and directors, the Dyne family and KG
Investments, LLC are able to exert influence over the outcome of all matters
submitted to a vote of the holders of our common stock, including the election
of our board of directors. The voting power of these stockholders could also
discourage others from seeking to acquire control of us through the purchase of
our common stock, which might depress the price of our common stock.
IF WE EXPERIENCE DISRUPTIONS AT ANY OF OUR FOREIGN PRODUCTION FACILITIES,
WE WILL NOT BE ABLE TO MEET OUR PRODUCTION OBLIGATIONS AND MAY LOSE SALES AND
CUSTOMERS. Some of our products are assembled or finished at our foreign
assembly facilities. Currently, we do not operate duplicate facilities in
different geographic areas. Therefore, in the event of a disruption in the
region in which we maintain our facilities, we cannot shift manufacturing
operations to a different geographic region and we may be required to
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<PAGE>
cease or limit our assembly or finishing operations. This may cause us to lose
sales and customers. The types of disruptions that may occur include:
o foreign trade disruptions;
o import restrictions;
o labor disruptions;
o embargoes;
o government intervention; and
o natural disaster.
BECAUSE WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS, WE MAY NOT BE ABLE TO
ALWAYS OBTAIN MATERIALS WHEN WE NEED THEM AND WE MAY LOSE SALES AND CUSTOMERS.
Generally, we do not have long-term agreements with our key sources of supply.
Lead times for materials we order can vary significantly and depend on many
factors, including the specific supplier, the contract terms and the demand for
particular materials at a given time. From time to time, we experience
fluctuations in the prices, and disruptions in the supply, of materials.
Shortages or disruptions in the supply of materials, or our inability to procure
materials from alternate sources at acceptable prices in a timely manner, could
lead us to miss deadlines for orders and lose sales and customers.
WE ARE SUBJECT TO FLUCTUATING PAPER COSTS, WHICH MAY ADVERSELY AFFECT OUR
PROFITS. The cost of paper is a principal component of the price we charge for
our paper products, including our high quality paper boxes, custom shopping
bags, hang tags and packaging. Historically, we have been able to pass on to our
customers any increase or decrease in the cost of paper, which has allowed us to
maintain our gross margins on paper products during fluctuations in the cost of
paper. If our customers are unwilling to absorb these price increases in the
future, our gross margins may decrease, which will lower our profits.
IF THERE IS A PAPER SHORTAGE, WE MAY NOT BE ABLE TO SELL SOME OF OUR PAPER
PRODUCTS. The capacity in the paper industry has remained relatively stable in
recent years. During periods of high demand for paper, certain grades of paper,
including grades that we use in our paper products, have been unavailable or
only available in limited quantities. If we cannot acquire the paper we use to
produce our products, our sales will be lower and we may lose customers.
Although we actively manage our paper supplies and have established strong
relationships with our paper suppliers, we do not have long-term agreements with
our key paper suppliers. We cannot be certain that our sources of paper supply
will be adequate or, if they are not adequate, that we will be able to develop
alternative sources of paper supply in a timely manner.
THERE ARE MANY COMPANIES THAT OFFER SOME OR ALL OF THE PRODUCTS AND
SERVICES WE SELL. We compete in highly competitive and fragmented industries
with numerous local and regional companies that provide some or all of the
products and services we offer. We compete with United States and international
design companies, distributors and manufacturers of tags, packaging products and
trims. Some of our 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 us.
PRODUCT RETURNS THAT EXCEED OUR ANTICIPATED RESERVES COULD RESULT IN WORSE
THAN EXPECTED OPERATING RESULTS. We incur expenses when customers return our
products. Product returns or price protection concessions that exceed our
reserves could result in worse than expected operating results. Generally,
returned items have limited or no value and we are forced to bear the cost of
their return. Product returns also could result in lost revenue, delays in
market acceptance, diversion of development resources, increased service and
warranty costs and damage to our reputation. Products are returned for a number
of reasons, including as a result of:
o sale or return arrangements;
o defective goods;
o inadequate performance relative to customer expectations;
o shipping errors; and
13
<PAGE>
o other causes which are outside of our control.
BECAUSE WE CONDUCT A SUBSTANTIAL PORTION OF OUR BUSINESS OUTSIDE OF THE
UNITED STATES, WE ARE SUBJECT TO MANY RISKS RELATING TO INTERNATIONAL BUSINESS
THAT MAY ADVERSELY AFFECT OUR OPERATING RESULTS. For the nine months ended
September 30, 1999 and 1998, approximately 35% of our products were purchased,
assembled or finished outside of the United States, principally in Hong Kong and
Mexico. We currently intend to continue to purchase, assemble and/or finish a
similar or greater percentage of our products outside of the United States in
the future. Our international business is subject to numerous risks which could
result in lost sales, increased costs and worse than expected operating results,
including:
o the need to comply with a wide variety of foreign and United States
export and import laws;
o changes in export or import controls, tariffs and other regulatory
requirements;
o the imposition of governmental controls;
o political and economic instability;
o trade restrictions;
o the difficulty of administering business overseas; and
o the general economic conditions of the countries in which we do business.
If any of the above risks were to render the conduct of business in a
particular country undesirable or impractical, we may not be able to deliver
products to our customers and our sales will be lower.
IF OUR OVERSEAS SUPPLIERS TO NOT SHIP ORDERS TO US IN A TIMELY MANNER, WE
MAY LOSE SALES OR BE FORCED TO REDUCE SALES PRICES OF OUR PRODUCTS. We could
miss our customers' delivery requirements if our overseas contractors or
suppliers do not ship orders to us in a timely manner. If we fail to deliver
products on time, our customers could cancel orders, refuse to accept deliveries
or require us to reduce the sales price of the delivered products.
OUR PROPRIETARY TECHNOLOGY MAY NOT BE ADEQUATELY PROTECTED FROM
UNAUTHORIZED USE BY OTHERS, WHICH COULD INCREASE OUR LITIGATION COSTS AND
ADVERSELY AFFECT OUR SALES. We rely on trademark, trade secret and copyright
laws to protect our designs and other proprietary property. We cannot be certain
that these laws will be sufficient to protect our property. If litigation is
necessary in the future to enforce our intellectual property rights, to protect
our 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. This could have a material adverse effect on our
operating results and financial condition. Ultimately, we may be unable, for
financial or other reasons, to enforce our rights under intellectual property
laws, which could result in lost sales. The laws of certain countries in which
our products are distributed or may be distributed in the future may not protect
our products and intellectual rights to the same extent as the laws of the
United States.
IF OUR PRODUCTS INFRINGE ANY PROPRIETARY RIGHTS OF OTHERS, A LAWSUIT MAY BE
BROUGHT AGAINST US THAT COULD REQUIRE US TO PAY LARGE LEGAL EXPENSES AND
JUDGMENTS AND REDESIGN OR DISCONTINUE SELLING OUR PRODUCTS. We believe that our
products do not infringe any valid existing proprietary rights of third parties.
Although we have received no communications from third parties alleging
infringement of any of their proprietary rights, we cannot be certain that any
infringement claims will not be made in the future. Any infringement claims,
whether or not meritorious, could result in costly litigation or require us to
enter into royalty or licensing agreements. If we are found to have infringed
the proprietary rights of others, we could be required to pay damages, cease
sales of the infringing products and redesign the products or discontinue their
sale. Any of these outcomes, individually or collectively, could have a material
adverse effect on our operating results and financial condition.
WE HAVE ADOPTED A NUMBER OF ANTI-TAKE OVER MEASURES THAT MAY DEPRESS THE
PRICE OF OUR COMMON STOCK. Our adoption of a stockholder's rights plan, our
ability to issue up to 2,750,000 shares of preferred stock and some provisions
of our certificate of incorporation and bylaws and of Delaware law could make it
more difficult for a third party to make an unsolicited takeover attempt of us.
These anti-takeover measures may depress the price of our common stock by making
third parties less able to acquire us by offering to purchase shares of our
stock at a premium to its market price. Our board of directors can issue up to
2,750,000 shares of preferred stock and determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders. Our board of
directors could issue the preferred stock with voting, liquidation, dividend and
other rights superior to the rights of our common stock. The rights of holders
of our common stock will be subject to, and may be adversely affected by, the
rights of holders of the share purchase rights and of any preferred stock that
may be issued in the future.
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The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could make
it more difficult for a third party to acquire a majority of our outstanding
voting stock.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Registrant's 1999 Annual Meeting of Stockholders held on July 1,
1999, the Registrant's stockholders (a) elected Kevin Bermeister and Brent Cohen
to serve as Class I Directors of Registrant for two years and until their
respective successors have been elected, (b) elected Harold Dyne, Michael Katz
and Paul Markiles to serve as Class II Directors of Registrant for three years
and until their respective successors have been elected, (c) approved an
amendment to the Registrant's 1997 Stock Plan to increase from 562,500 to
1,177,500 the maximum number of shares of common stock that may be issued
pursuant to awards granted under the plan, and (d) approved an amendment to the
Registrant's Certificate of Incorporation to increase the Registrant's
authorized common stock from 15,000,000 shares to 30,000,000 shares.
Each Class I Director and each Class II Director was elected by a vote of
6,382,199 shares in favor of, and 12,600 shares withheld from voting for, that
Director. At the annual meeting, 5,214,135 shares were voted in favor of, 23,250
shares were voted against, and 1,157,414 shares were withheld from voting on the
amendment to the Registrant's 1997 Stock Plan. Additionally, 6,383,304 shares
were voted in favor of, 9,495 shares were voted against, and 2,000 shares were
withheld from voting on the amendment to the Registrant's Certificate of
Incorporation. There were no broker non-votes at the annual meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
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<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: November 12, 1999 TAG-IT PACIFIC, INC.
By: /S/ FRANCIS SHINSATO
-----------------------------------
Francis Shinsato
Chief Financial Officer
(Principal Financial & Accounting
Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE FORM 10-QSB OF TAG-IT
PACIFIC, INC. TO WHICH THIS EXHIBIT IS A PART AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 26,186
<SECURITIES> 0
<RECEIVABLES> 6,562,782
<ALLOWANCES> 416,106
<INVENTORY> 8,902,306
<CURRENT-ASSETS> 16,773,992
<PP&E> 3,644,671
<DEPRECIATION> 1,661,703
<TOTAL-ASSETS> 18,803,063
<CURRENT-LIABILITIES> 10,539,335
<BONDS> 0
0
0
<COMMON> 6,728
<OTHER-SE> 8,257,000
<TOTAL-LIABILITY-AND-EQUITY> 18,803,063
<SALES> 24,039,238
<TOTAL-REVENUES> 24,039,238
<CGS> 15,933,153
<TOTAL-COSTS> 22,481,577
<OTHER-EXPENSES> 138,616
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138,616
<INCOME-PRETAX> 1,419,045
<INCOME-TAX> 221,600
<INCOME-CONTINUING> 1,197,445
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,197,445
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.17
</TABLE>
