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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, 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
(I.R.S. Employer Incorporation (State or Other Jurisdiction
or Organization) of 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, 6,727,677 shares issued and outstanding as of August 6, 1999.
Transitional Small Business Disclosure Format (check one):
Yes No X
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<TABLE>
TAG-IT PACIFIC, INC.
INDEX TO FORM 10-QSB
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements:
<S> <C> <C>
Consolidated Balance Sheets (unaudited) as of June 30, 1999
and December 31, 1998......................................... 3
Consolidated Statements of Income (unaudited) for the
Three Months and Six Months Ended June 30, 1999 and 1998..... 4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 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.................................... 9
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 16
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
TAG-IT PACIFIC, INC.
Consolidated Balance Sheets
(unaudited)
<CAPTION>
June 30, December 31,
Assets 1999 1998
-------- -----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents................................ $ - $ 2,065,331
Due from factor, net................................... 272,161 221,770
Accounts receivable, trade, net........................ 5,358,272 3,629,338
Due from related parties............................... 90,803 752,602
Inventories............................................ 6,488,776 5,700,196
Prepaid expenses and other current assets.............. 924,460 892,853
---------- -------------
Total current assets................................. 13,134,472 13,262,090
Property and Equipment, net of accumulated
depreciation and amortization ........................... 1,923,205 1,335,066
Other assets............................................. 96,345 46,684
----------- ------------
Total Assets............................................. $15,154,022 $14,643,840
=========== ============
Liabilities and Stockholders' Equity
Current Liabilities:
Bank overdraft....................................... $ 231,107 $ -
Accounts payable..................................... 4,046,500 2,638,448
Accounts payable, related party...................... - 2,250,626
Accrued expenses..................................... 678,894 668,240
Line of credit....................................... 2,209,000 1,489,000
Current portion of long-term debt.................... 72,749 56,040
Current portion notes payable to related parties..... 254,023 451,626
----------- ------------
Total current liabilities.......................... 7,492,273 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; 15,000,000 shares
authorized; 6,726,677 shares issued and
outstanding at June 30, 1999 and
December 31, 1998................................. 6,727 6,727
Additional paid-in capital........................... 8,707,258 8,707,258
Translation gain..................................... 20,912 -
Accumulated deficit.................................. (1,073,148) (1,624,125)
----------- ------------
Total Stockholders' Equity ........................ 7,661,749 7,089,860
----------- ------------
Total Liabilities and Stockholders' Equity .............. $15,154,022 $14,643,840
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
TAG-IT PACIFIC, INC.
Condensed Consolidated Statements of Income
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales....................... $ 8,179,479 $ 4,402,522 $13,812,492 $7,870,235
Cost of goods sold.............. 5,513,179 2,733,204 9,136,223 4,986,472
------------ ------------- ------------ ------------
Gross profit.................. 2,666,300 1,669,318 4,676,269 2,883,763
Selling expenses................ 462,974 462,907 988,798 670,777
General and administrative
expenses........................ 1,777,028 1,019,295 3,012,716 2,003,653
------------ ------------- ------------ ------------
Total operating expenses...... 2,240,002 1,482,202 4,001,514 2,674,430
Income from operations......... 426,298 187,116 674,755 209,333
Interest expense................ 42,089 18,685 65,767 124,289
------------ ------------- ------------ ------------
Income before income taxes...... 384,209 168,431 608,988 85,044
Provision for Income Taxes...... 20,726 60,635 58,011 47,511
------------ ------------- ------------ ------------
Net Income ................... $ 363,483 $ 107,796 $ 550,977 $ 37,533
============ ============= ============ ============
Basic earnings per share........ $ 0.05 $ 0.03 $ 0.08 $ 0.01
============ ============= ============ ============
Diluted earnings per share...... $ 0.05 $ 0.03 $ 0.08 $ 0.01
============ ============= ============ ============
Weighted Average Number of Common
Shares Outstanding:
Basic....................... 6,726,677 4,070,011 6,726,677 3,865,567
============ ============= ============ ============
Diluted .................... 7,275,318 4,106,197 7,288,442 3,901,753
============ ============= ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<TABLE>
TAG-IT PACIFIC, INC.
Consolidated Statements of Cash Flows
(unaudited)
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
---------- -----------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income ............................................. $ 550,977 $ 37,533
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ...................... 283,236 185,985
Translation gain ................................... 20,912 -
Changes in operating assets and liabilities:
Receivables...................................... (1,779,325) (331,747)
Inventories...................................... (788,580) (165,310)
Other assets..................................... (49,661) 265,837
Prepaid expenses and other current assets........ (31,607) (140,561)
Accounts payable................................. 1,408,052 (1,875,340)
Accounts payable, related party.................. (1,588,827) -
Accrued expenses................................. 10,654 62,148
---------- -----------
Net cash used in operating activities................... (1,964,169) (1,961,455)
Cash Flows From Investing Activities:
Loans to related parties................................ - (61,333)
Acquisition of property and equipment................... (871,375) (390,943)
---------- -----------
Net cash used in investing activities................... (871,375) (452,276)
Cash Flows from Financing Activities:
Bank overdraft.......................................... 231,107 (306,565)
Net advances from factor................................ - (1,404,133)
Proceeds from IPO, net.................................. - 4,642,529
Proceeds from bank line of credit....................... 720,000 562,000
Proceeds from long-term debt............................ 19,091 -
Repayment on long-term debt............................. (2,382) (459,728)
Proceeds from notes payable to related parties.......... - -
Repayment on notes payable to related parties........... (197,603) (354,320)
---------- -----------
Net cash provided by financing activities................. 770,213 2,679,783
---------- -----------
Net increase (decrease) in cash............................ (2,065,331) 266,052
Cash at beginning of period................................ 2,065,331 44,109
---------- -----------
Cash at end of period...................................... $ - $ 310,161
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest............................................. $ 85,815 $ 310,161
========== ===========
Income taxes......................................... $ 6,053 $ 14,670
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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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 JUNE 30, 1999: (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
BASIC EARNINGS PER SHARE:
<S> <C> <C> <C>
Income available to common
stockholders ..................... $ 363,483 6,726,677 $ 0.05
EFFECT OF DILUTIVE SECURITIES:
Options........................... 441,833
Warrants.......................... 106,808
Shares issued..................... -
=========== ============= ==========
Income available to common
stockholders...................... $ 363,483 7,275,318 $ 0.05
=========== ============= ==========
</TABLE>
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<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
THREE MONTHS ENDED JUNE 30, 1998: (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
BASIC EARNINGS PER SHARE:
<S> <C> <C> <C>
Loss available to common
stockholders ..................... $ 107,796 4,070,011 $ 0.03
EFFECT OF DILUTIVE SECURITIES:
Options........................... -
Warrants.......................... 36,186
Shares issued..................... -
=========== ============= ==========
Loss available to common
stockholders...................... $ 107,796 4,106,197 $ 0.03
=========== ============= ==========
</TABLE>
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
SIX MONTHS ENDED JUNE 30, 1999: (NUMERATOR) (DENOMINATOR) AMOUNT
------------------------------ ----------- ------------- ----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income available to common
stockholders ..................... $ 550,977 6,726,677 $ 0.08
EFFECT OF DILUTIVE SECURITIES:
Options........................... 447,047
Warrants.......................... 114,719
Shares issued..................... -
=========== ============= ==========
Income available to common
stockholders...................... $ 550,977 7,288,442 $ 0.08
=========== ============= ==========
</TABLE>
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
SIX MONTHS ENDED JUNE 30, 1998: (NUMERATOR) (DENOMINATOR) AMOUNT
------------------------------ ----------- ------------- ----------
<S> <C> <C> <C>
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..................... -
=========== ============= ==========
Loss available to common
stockholders...................... $ 37,533 3,901,753 $ 0.01
=========== ============= ==========
</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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis, which should be read in connection
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 SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 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 $3.8 million (or 85.8%) to
$8.2 million for the three months ended June 30, 1999 from $4.4 million for the
three months ended June 30, 1998. The increase in net sales was primarily the
result of $4.3 million 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 $5.9 million (or 75.5%) to $13.8 million
for the six months ended June 30, 1999 from $7.9 million for the six months
ended June 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 $1.0 million to $2.7
million (or 59.7%) for the three months ended June 30, 1999 from $1.7 million
for the three months ended June 30, 1998. Gross margin as a percentage of net
sales decreased to approximately 32.6% as compared to 37.9% for the three months
ended June 30, 1998. The decrease in gross margin was primarily attributable to
slightly lower margins on 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 $1.8 million (or 62.2%) to $4.7
million for the six months ended June 30, 1999 from $2.9 million for the six
months ended June 30, 1998. Gross margin as a percentage of net sales decreased
to approximately 33.9% as compared to 36.6% for the six months ended June 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 $758,000 to $2.2 million for the
three months ended June 30, 1999 from $1.5 million for the three months ended
June 30, 1998. As a percentage of net sales, these expenses decreased to 27.4%
for the three months ended June 30, 1999 compared to 33.7% for the three months
ended June 30, 1998. The increase in these expenses was due primarily to the
additional staffing and expenses related to our Tehuacan, Mexico and our larger
Hong Kong facilities.
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Selling, general and administrative expenses increased approximately $1.3
million to $4.0 million for the six months ended June 30, 1999 from $2.7 million
for the six months ended June 30, 1998. As a percentage of net sales, these
expenses decreased to 29.0% for the six months ended June 30, 1999 compared to
34.0% for the six months ended June 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 $23,000 (or
125.3%) to $42,000 for the three months ended June 30, 1999 from $19,000 for the
three months ended June 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 $58,000 (or 47.1%) to $66,000 for the six months ended June 30,
1999 from $124,000 for the six months ended June 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 July 1999 for our short-term financing needs.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased
approximately $40,000 to $21,000 for the three months ended June 30, 1999 as
compared to $61,000 for the three months ended June 30, 1998. The provision for
income taxes increased approximately $10,000 to $58,000 for the six months ended
June 30, 1999 as compared to $48,000 for the six months ended June 30, 1998.
Income taxes decreased primarily due to 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 $363,000 for the three months ended June 30,
1999 as compared to net income of $108,000 for the three months ended June 30,
1998, and $551,000 for the six months ended June 30, 1999 as compared to net
income of $38,000 for the six months ended June 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 June 30,
1999, the amount factored without recourse was $272,000 and the amount due from
the factor and recorded as a current asset was $272,000. 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 July 1999, we extended our line of credit with Sanwa Bank to August 15,
1999 and increased the amount available under the line of credit from $2 million
line to $3 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 June 30, 1999, we were in compliance with these covenants. As
of June 30, 1999, our outstanding balance on the bank line of credit was
$2,209,000. We currently are in negotiations with Sanwa Bank to obtain a new $5
million line of credit, which we believe will be completed in August 1999. We
cannot guarantee, however, that we will be able to obtain a new line of credit
with Sanwa Bank or, if we do obtain a new line of credit, that it will be on
terms favorable to us.
As of June 30, 1999, we had outstanding related party debt of $254,000 at
a weighted average interest rate of 8.2%, and non-related party debt of $73,000
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 $1,964,000 and
$1,961,000 for the six months ended June 30, 1999 and 1998, respectively. Cash
used in operations for the six months ended June 30, 1999 resulted primarily
from increases in
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receivables, inventory and decreases in accounts payable, related party,
partially offset by increases in accounts payable. Cash used in operations for
the six months ended June 30, 1998 resulted primarily from decreased accounts
payable, increased inventory and expenses relating to our initial public
offering.
Net cash used in investing activities was $871,000 and $452,000 for the
six months ended June 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 $770,000 and
$2,680,000 for the six months ended June 30, 1999 and 1998, respectively. Net
cash provided by financing activities for the six months ended June 30, 1999
reflects proceeds from our bank line of credit and bank overdraft, offset by
repayments of notes payable to related parties. Net cash provided by financing
activities for the six months ending June 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 -- We May Need to Raise Additional Funds."
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.
YEAR 2000 UPDATE
GENERAL. We have begun a 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 June 30, 1999, are expected to make approximately 80%
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
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material to our business, test the systems and repair or replace those systems
that are not Year 2000 compliant. We estimate that approximately 90% of the
activities related to this category have been completed as of June 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 expect to commence
contingency planning in the second half 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
90% of the activities related to this category have been completed as of June
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 expect to commence contingency planning in the second half of 1999.
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 June 30, 1999, we
have received responses from 40% of the recipients of these questionnaires. We
expect to commence contingency planning in the third quarter of 1999 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 $220,000 as of
June 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:
WE MAY NOT BE ABLE TO MANAGE OUR RAPID EXPANSION AND GROWTH. 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. Our
ability to manage future growth, if any, and to increase production levels and
continue to market and distribute our products also will require us to 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. 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. Factor 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.
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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 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.
WE DEPEND ON A FEW KEY CUSTOMERS WITH WHOM WE DO NOT HAVE LONG-TERM
CONTRACTS. Our three largest customers, Tarrant Apparel Group, Guess? and Swank
(a licensee of Yves Saint Laurent, Kenneth Cole, Geoffrey Beene and Pierre
Cardin), accounted for approximately 42.8%, 2.9% and 4.3%, respectively, of our
net sales (on a consolidated basis) for the six months ended June 30, 1999, and
approximately 0%, 16.3% and 12.5%, respectively, of our net sales (on a
consolidated basis) for the six months ended June 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.
We generally do not enter into long-term sales contracts with our
customers. Our customers, therefore, 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 June 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 Harold Dyne, Mark Dyne, Colin
Dyne, Larry Dyne and Jonathan Burstein, 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,
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<PAGE>
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 EXPERINCE 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 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. 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 AFFECT OUR margins.
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. This has allowed us to maintain
our gross margins on paper products during fluctuations in the cost of paper. We
cannot be certain, however, that we will continue to be able to pass increases
in paper costs to our customers. If our customers are unwilling to absorb these
price increases, 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 this time, increases and decreases in the demand for paper
have led to corresponding pricing changes. In periods of high demand, certain
grades of paper, including grades that we use in our paper products, have been
unavailable or only available in limited quantities. 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.
There is a possibility that paper supplies may be adversely affected by supply
chain disruptions in the last months of 1999 and first months of 2000, as a
result of the Year 2000 problem, which may make it difficult or more expensive
to obtain necessary supplies to fill orders and meet delivery schedules. 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. 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
o other causes which are outside of our control.
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<PAGE>
Generally, returned items have limited or no value and we are forced to bear the
cost of their return. Product returns could result in lost revenue, delays in
market acceptance, diversion of development resources and damage to our
reputation. Returns also may increase our service and warranty costs. Product
returns or price protection concessions that exceed our reserves could increase
the magnitude of quarterly fluctuations in our operating and financial results.
BECAUSE WE CONDUCT A SUBSTANTIAL PORTION OF OUR BUSINESS OUTSIDE OF THE
UNITED STATES, WE ARE SUBJECT TO MANY RISKS RELATING TO INTERNATIONAL BUSINESS.
For the six months ended June 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, 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 due
business.
In addition, 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. Although our international operations are denominated
principally in United States dollars, purchases from foreign vendors and sales
to foreign customers also may be affected by changes in demand resulting from
fluctuations in interest and currency exchange rates. We cannot predict the
effects the above risks will have on our business arrangements with customers,
contractors or suppliers. If any of the above risks were to render the conduct
of business in a particular country undesirable or impractical, or if our
current contractors or suppliers ceased doing business with us for any reason,
we may not be able to deliver products to our customers and our sales will be
lower.
BECAUSE WE ARE A HOLDING COMPANY, WE MUST RELY ON LOANS AND DIVIDENDS FROM
OUR SUBSIDIARIES TO FUND OUR OPERATIONS. Tag-It Pacific is a holding company
with no substantial operations. Our only material asset is the stock of our
subsidiaries. All of our operations are conducted by our subsidiaries, which
subsidiaries own substantially all of our consolidated assets. We depend on
dividends and other payments from our subsidiaries for virtually all of our cash
flow, including cash flow for management salaries and overhead, to service debt,
to make equity investments and to finance our growth. The ability of our
subsidiaries to make payments to us depends on applicable law and restrictions
under present and future debt instruments and other agreements to which our
subsidiaries are parties.
OUR PROPRIETARY TECHNOLOGY MAY NOT BE ADEQUATELY PROTECTED FROM
UNAUTHORIZED USE BY OTHERS. 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. 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 RIGHT OF OTHER, 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 communication 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. In October 1998, we adopted a stockholder's rights
plan. We adopted the rights plan to make it more difficult for a third party to
make an unsolicited takeover attempt of us. Under the rights plan we distributed
one preferred share purchase right for each outstanding share of our
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Common Stock outstanding on November 6, 1998. Upon the occurrence of certain
triggering events related to an unsolicited takeover attempt of Tag-It Pacific,
each purchase right not owned by the party or parties making the unsolicited
takeover attempt will entitle its holder to purchase shares of our Series A
Preferred Stock at a value below the then market value of the Series A Preferred
Stock. Our board of directors can issue up to an additional 2,750,000 shares of
preferred stock and determine the price, rights, preference, privileges and
restrictions, including voting right, 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, the Series A Preferred Stock and any other 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 make it more difficult for a third party to acquire a
majority of our outstanding voting stock. Further, certain provisions of our
Certificate of Incorporation and Bylaws and of Delaware law could delay or make
more difficult a merger, tender offer or proxy contest involving Tag-It Pacific.
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<PAGE>
PART II
OTHER INFORMATION
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: August 12, 1999 TAG-IT PACIFIC, INC.
By: /S/ FRANCIS SHINSATO
-------------------------------
Francis Shinsato
Chief Financial Officer
(Principal Financial &
Accounting Officer)
Page 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,999,546
<ALLOWANCES> 369,113
<INVENTORY> 6,488,776
<CURRENT-ASSETS> 13,134,472
<PP&E> 3,424,238
<DEPRECIATION> 1,501,033
<TOTAL-ASSETS> 15,154,022
<CURRENT-LIABILITIES> 7,492,273
<BONDS> 0
0
0
<COMMON> 6,727
<OTHER-SE> 7,655,022
<TOTAL-LIABILITY-AND-EQUITY> 15,154,022
<SALES> 13,812,492
<TOTAL-REVENUES> 13,812,492
<CGS> 9,136,223
<TOTAL-COSTS> 13,137,737
<OTHER-EXPENSES> 65,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,767
<INCOME-PRETAX> 608,988
<INCOME-TAX> 58,011
<INCOME-CONTINUING> 550,977
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 550,977
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
