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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 March 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to _____________.
Commission file number 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 No X
----- -----
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, par value $0.001
per share, 6,726,677 shares issued and outstanding as of May 14, 1999.
Transitional Small Business Disclosure Format (check one):
Yes No X
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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
March 31, 1999 and December 31, 1998 ......................... 3
Consolidated Statements of Operations (unaudited)
for the Three Months Ended March 31, 1999 and 1998 .......... 4
Consolidated Statements of Cash Flows (unaudited)
for the Three Months Ended March 31, 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 6. Exhibits and Reports on Form 8-K ............................... 16
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TAG-IT PACIFIC, INC.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
Assets ----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................... $ 215,357 $ 2,065,331
Due from factor, net ...................................... 98,924 221,770
Accounts receivable, trade, net ........................... 3,719,316 3,629,338
Due from related parties .................................. 186,297 752,602
Inventories ............................................... 6,201,270 5,700,196
Prepaid expenses and other current assets ................. 908,065 892,853
----------- -----------
Total current assets .................................... 11,329,229 13,262,090
Property and Equipment, net of accumulated depreciation
and amortization .......................................... 1,591,231 1,335,066
Other assets ................................................. 67,651 46,684
----------- -----------
Total Assets ................................................. $12,988,111 $14,643,840
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable ........................................ $ 2,836,114 $ 2,638,448
Accounts payable, related party ......................... 78,320 2,250,626
Accrued expenses ........................................ 574,221 668,240
Line of credit .......................................... 1,959,000 1,489,000
Current portion of long-term debt ....................... 48,761 56,040
Current portion notes payable to related parties ........ 252,234 451,626
----------- -----------
Total current liabilities ............................ 5,748,650 7,553,980
----------- -----------
Commitments and 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
March 31, 1999 and December 31, 1998................... 6,727 6,727
Additional paid-in capital............................... 8,707,258 8,707,258
Translation gain (loss).................................. (37,893) -
Accumulated deficit...................................... (1,436,631) (1,624,125)
----------- -----------
Total Stockholders' Equity............................. 7,239,461 7,089,860
----------- -----------
Total Liabilities and Stockholders' Equity.................... $12,988,111 $14,643,840
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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TAG-IT PACIFIC, INC.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Net sales............................................... $ 5,633,013 $ 3,467,713
Cost of goods sold...................................... 3,623,044 2,253,268
------------ -------------
Gross profit......................................... 2,009,969 1,214,445
Selling expenses........................................ 525,824 207,870
General and administrative expenses..................... 1,235,688 984,358
------------ -------------
Total operating expenses............................. 1,761,512 1,192,228
Income from operations................................. 248,457 22,217
Interest expense........................................ 23,678 105,604
------------ -------------
Income (loss) before income taxes....................... 224,779 (83,387)
Provision (benefit) for income taxes.................... 37,285 (13,124)
------------ -------------
Net Income (Loss).................................... $ 187,494 $ (70,263)
============ =============
Basic earnings per share................................ $ 0.03 $ (0.02)
============ =============
Diluted earnings per share.............................. $ 0.03 $ (0.02)
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
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TAG-IT PACIFIC, INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
---------- -----------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss)...................................... $ 187,494 $ (70,263)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization ................... 134,128 94,893
Translation loss ................................ (37,893) -
Changes in operating assets and liabilities:
Receivables 32,868 190,659
Inventories................................... (501,074) (245,370)
Other assets.................................. (20,967) 289,236
Prepaid expenses and other current assets..... (15,212) (219,672)
Accounts payable.............................. 197,666 (1,771,720)
Accounts payable, related party............... (1,606,001) -
Accrued expenses.............................. (94,019) 95,907
---------- -----------
Net cash used in operating activities.................. (1,723,010) (1,636,331)
Cash Flows From Investing Activities:
Loans to related parties............................... - (8,317)
Acquisition of property and equipment.................. (390,293) (135,768)
---------- -----------
Net cash used in investing activities.................. (390,293) (144,085)
Cash Flows from Financing Activities:
Bank overdraft......................................... - (306,565)
Net advances from factor............................... - (1,404,133)
Proceeds from IPO, net................................. - 4,785,176
Proceeds from bank line of credit...................... 470,000 -
Proceeds from long-term debt........................... - -
Repayment on long-term debt............................ (7,279) (346,162)
Proceeds from notes payable to related parties......... - -
Repayment on notes payable to related parties.......... (199,392) (255,416)
---------- -----------
Net cash provided by financing activities................ 263,329 2,472,900
---------- -----------
Net increase (decrease) in cash........................... (1,849,974) 692,484
Cash at beginning of period............................... 2,065,331 44,109
---------- -----------
Cash at end of period..................................... $ 215,357 $ 736,593
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest.......................................... $ 21,329 $ 105,604
Income taxes...................................... $ 3,458 $ 3,270
</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 of
Tag-It Pacific, Inc. and Subsidiaries (collectively, the "Company"), 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 the Company included in the Company's 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
The Company has 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 MARCH 31, 1999: (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- ----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income available to common stockholders... $ 187,494 6,726,677 $ 0.03
EFFECT OF DILUTIVE SECURITIES:
Options...................................
451,674
Warrants.................................. 121,738
Shares issued............................. -
---------- ----------- ----------
Income available to common stockholders... $ 187,494 7,300,089 $ 0.03
========== =========== ==========
</TABLE>
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<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
THREE MONTHS ENDED MARCH 31, 1998: (NUMERATOR) (DENOMINATOR) AMOUNT
---------- ----------- ----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Loss available to common stockholders..... $ (70,263) 3,661,122 $ (0.02)
EFFECT OF DILUTIVE SECURITIES:
Options................................... -
Warrants.................................. -
Shares issued............................. -
---------- ----------- ----------
Loss available to common stockholders..... $ (70,263) 3,661,122 $ (0.02)
========== =========== ==========
</TABLE>
Warrants to purchase 80,000 and 110,000 shares of common stock at $6.00
and $4.80, respectively, were outstanding for the three months ended March 31,
1998 but were not included in the computations of diluted earnings per share
because the effect of exercise would have an antidilutive effect on earnings per
share.
4. CONTINGENCIES
The Company is subject to certain legal proceedings and claims arising in
connection with its business. In the opinion of management, there are currently
no claims that will have a material adverse effect on the Company's consolidated
financial position, results of operation 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 THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 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 $2.1 million (or 62.4%) to
$5.6 million for the three months ended March 31, 1999 from $3.5 million for the
three months ended March 31, 1998. The increase in net sales was primarily the
result of $1.6 million in trim related sales from our new Tehuacan, Mexico
operations and the balance due to increases in sales of trim and specialty
packaging products.
GROSS PROFIT. Gross profit increased approximately $795,000 to $2.0 million
(or 65.5%) for the three months ended March 31, 1999 from $1.2 million for the
three months ended March 31, 1998. Gross margin as a percentage of net sales
increased to approximately 35.7% as compared to 35.0% for the three months ended
March 31, 1998. The increase in gross margin was primarily attributable to
slightly higher margins on trim and specialty packaging products offset by lower
margins from the startup Tehuacan operations. The increase in gross margin was
secondarily attributable to 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 $569,000 to $1.8 million for the
three months ended March 31, 1999 from $1.2 million for the three months ended
March 31, 1998. As a percentage of net sales, these expenses decreased to 31.3%
for the three months ended March 31, 1999 compared to 34.4% for the three months
ended March 31, 1998. The increase in these expenses was due to the combination
of hiring additional salesmen, opening our Tehuacan, Mexico facility 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 decreased approximately $82,000 (or
77.6%) to $24,000 for the three months ended March 31, 1999 from $106,000 for
the three months ended March 31, 1998. The proceeds of our January 1998 initial
public offering and our October 1998 private stock sale to KG Investment, LLC
were used to
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substantially reduce our use of factors. This has substantially reduced our cost
of funds. We intend to continue to limit our use of factors in the future and
intend to rely upon the bank line of credit that we established in 1998 for our
short-term financing needs.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
approximately $50,000 to $37,000 for the three months ended March 31, 1999 as
compared to ($13,000) for the three months ended March 31, 1998. Income taxes
increased 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 (LOSS). Net income was $187,000 for the three months ended March
31, 1999 as compared to a net loss of $70,000 for the three months ended March
31, 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 assume the credit risk with respect to those
accounts for which the factors have given their prior approval. As of March 31,
1999, the amount factored without recourse was $98,924 and the amount due from
the factor and recorded as a current asset was $98,924. If a 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 May 1998, we obtained a $2 million line of credit with Sanwa Bank to be
used for working capital purposes. The line of credit expires on May 31, 1999.
The line of credit interest rate is equal to the bank's reference rate, and 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
March 31, 1999, we were in compliance with these covenants. As of March 31,
1999, our outstanding balance on the bank line of credit was $1,959,000. We are
in the process of negotiating a new $5 million line of credit. We cannot be
certain, however, that our negotiations will be successful or that we will
obtain a new line of credit on terms favorable to us and our stockholders.
As of March 31, 1999, we had outstanding related party debt of $252,000 at
a weighted average interest rate of 8.2%, and non-related party debt of $49,000
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 $1,723,000 and
$1,636,000 for the three months ended March 31, 1999 and 1998, respectively.
Cash used in operations for the three months ended March 31, 1999 resulted
primarily from increases in inventory and increases in accounts payable, related
party partially offset by decreases in accounts payable. Cash used in operations
for the three months ended March 31, 1998 resulted primarily from decreased
accounts payable, increased inventory and expenses relating to our initial
public offering.
Net cash used in investing activities was $390,000 and $144,000 for the
three months ended March 31, 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 Tehuacan, Mexico facility and, in 1998,
expenditures for office and assembly equipment in connection with the Tijuana,
Mexico facility.
Net cash provided by financing activities was approximately $263,000 and
$2,473,000 for the three months ended March 31, 1999 and 1998, respectively. Net
cash provided by financing activities for the three months ended
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March 31, 1999 reflects proceeds from our bank line of credit. Net cash provided
by financing activities for the three months ending March 31, 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 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,
scheduled for complete installation by mid-1999, are expected to make
approximately 80% of our business computer systems Year 2000 compliant.
Installation of the MAS90 programs is approximately 80% complete. 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 80% of
the activities related to this category have been completed as of March 31,
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 quarter 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 75% of
the activities related to this category have been completed as of March 31,
1999. The remaining software conversion activities
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are scheduled for completion by mid-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 quarter
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 March 1, 1999, we
have received responses from 33% of the recipients of these questionnaires. We
expect to commence contingency planning in the second 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 $200,000 as of
March 31, 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, 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. To
successfully manage our operations, we will need to continue to implement and
improve our financial and management information and reporting systems and
procedures. 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. We recently made additions to our management team. We
are also in the process of continuing to improve our financial and management
information and reporting systems. Our failure to successfully implement our
growth strategies and implement and improve our financial and management
information and reporting systems will have a material adverse effect on our
business and financial condition.
WE MAY EXPERIENCE RISKS ASSOCIATED WITH ACQUISITIONS. In the future, we may
acquire products, technologies or companies that are complimentary to our
business. These acquisitions involve numerous risks, including:
o adverse short-term effects on the combined business' reported
operating results;
o diversion of management's attention;
o dependence on retention, hiring and training of key personnel;
o amortization and/or impairment of goodwill and other intangible
assets; and
o risks associated with unanticipated problems or legal liabilities.
OUR OPERATING RESULTS MAY VARY FROM QUARTER TO QUARTER WHICH COULD
IMPACT OUR STOCK PRICE. Our operating results may vary significantly from
quarter to quarter in the future. Many factors may cause our operating results
to fluctuate, some of which are beyond our control. These factors include:
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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 acquisitions or the
introduction of new products;
o the costs and timing of any future acquisitions;
o the timing and magnitude of capital expenditures; 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.
In addition, 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 seasonal fluctuations due, in part, to customer buying patterns. A
recession in the general economy or uncertainties regarding future economic
prospects that affect consumer spending habits could have a material adverse
effect on our business and financial condition.
WE MUST IMPROVE AND INTEGRATE OUR INFORMATION SYSTEMS. To be successful, we
must consolidate and centralize the management of our subsidiaries, implement
our growth strategies and successfully manage the general strains of our new
role as a public company. These efforts will place significant demands on our
financial and management information and reporting systems and require us to
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 28.5%, 4.0% and 5.9%, respectively, of our
net sales (on a consolidated basis) for the three months ended March 31, 1999,
and approximately 0%, 14.6% and 7.4%, respectively, of our net sales (on a
consolidated basis) for the three months ended March 31, 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 have a material adverse effect on our business and financial condition.
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 PERSONNEL. 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 and Harold Dyne, our President. Neither Colin Dyne nor Harold
Dyne is bound by an employment agreement or the subject of key man insurance.
The loss of the services of either of these key executives or of 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.
WE MAY NEED TO RAISE ADDITIONAL FUNDS. 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
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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.
OUR OFFICERS AND DIRECTORS AND CERTAIN STOCKHOLDERS OWN A SIGNIFICANT
AMOUNT OF OUR COMMON STOCK. As of March 31, 1999, our officers and directors
(and their affiliates) owned approximately 27.2% of the outstanding shares of
our Common Stock. The Dyne family (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, 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.
WE HAVE LIMITED ASSEMBLY FACILITIES. 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, we cannot shift
manufacturing operations to a different geographic region in the event of a
disruption in the region in which we maintain our facilities. The types of
disruptions that may occur include:
o human error;
o foreign trade disruptions;
o import restrictions;
o labor disruptions;
o embargoes.
o government intervention; and
o natural disaster.
If we experience a disruption in our manufacturing operations, we may be
required to cease or limit our assembly or finishing operations, which would
have a material adverse effect on our business and financial condition.
WE HAVE LIMITED SOURCES OF SUPPLY. 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
customers.
WE ARE SUBJECT TO FLUCTUATING PAPER COSTS AND PAPER SHORTAGES. 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. A decrease in our gross margins
would have an adverse effect on our operating results.
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. 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.
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WE FACE SUBSTANTIAL COMPETITION IN OUR INDUSTRIES. We compete in highly
competitive and fragmented industries with numerous local and regional companies
that provide some or all of the 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.
In addition, new competitors may enter our industry and develop products
that compete with our products. Our competitors may introduce proprietary
technology that may make some of our products or services obsolete. While we
believe that we compete effectively within the value-added design and packaging
industry, these and other factors may reduce our ability to compete effectively
in the future.
OUR PRODUCTS MAY BE RETURNED. 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.
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. Any
significant increase in the rate of product returns could have a material
adverse effect on our financial position, operating results and cash flows.
WE ARE SUBJECT TO RISKS RELATING TO OUR INTERNATIONAL BUSINESS. For the
three months ended March 31, 1999 and 1998, approximately 40% 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,
our financial position, operating results and cash flows could be adversely
affected.
WE ARE A HOLDING COMPANY AND MUST RELY ON LOANS AND DIVIDENDS FROM OUR
SUBSIDIARIES. 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.
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WE ARE SUBJECT TO EARTHQUAKE RISKS. Our principal executive offices are
located in Los Angeles, California, an area that often experiences earthquakes.
If an earthquake occurs, we may experience uninsured property damage and/or
sustain interruption of our business and operations. We currently do not carry
insurance against earthquake-related risks.
PROTECTION OF OUR PROPRIETARY TECHNOLOGY IS LIMITED. We rely on trademark,
trade secret and copyright laws to protect our designs and other proprietary
property. We do not have United States or foreign patents or patent applications
currently pending. 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.
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 ARE SUBJECT TO ENVIRONMENTAL REGULATIONS. Some of our subsidiaries use
hazardous materials in their manufacturing operations. As a result, we are
subject to federal, state and local regulations governing the storage, use and
disposal of such materials. The use and disposal of hazardous materials involves
the risk that we could be required to incur substantial expenditures for
preventive or remedial action, reduction of chemical exposure or waste treatment
or disposal. The liability in the event of an accident or the costs of such
actions could exceed our resources or otherwise have a material adverse effect
on our operating results and financial condition.
WE HAVE ADOPTED A NUMBER OF ANTI-TAKE OVER MEASURES. Our Board of Directors
can issue up to 3,000,000 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. In October 1998, we
adopted a stockholder's rights plan. Under the rights plan we distributed one
preferred share purchase right for each outstanding share of our 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.
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.
No reports on Form 8-K were filed during the period covered by this
transition report.
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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: May 14, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 215,357
<SECURITIES> 0
<RECEIVABLES> 4,112,353
<ALLOWANCES> 294,113
<INVENTORY> 6,201,270
<CURRENT-ASSETS> 11,329,229
<PP&E> 2,943,156
<DEPRECIATION> 1,351,925
<TOTAL-ASSETS> 12,988,111
<CURRENT-LIABILITIES> 5,748,650
<BONDS> 0
0
0
<COMMON> 6,727
<OTHER-SE> 7,232,734
<TOTAL-LIABILITY-AND-EQUITY> 12,988,111
<SALES> 5,633,013
<TOTAL-REVENUES> 5,633,013
<CGS> 3,623,044
<TOTAL-COSTS> 5,384,556
<OTHER-EXPENSES> 23,678
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,678
<INCOME-PRETAX> 224,779
<INCOME-TAX> 37,285
<INCOME-CONTINUING> 187,494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 187,494
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
