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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, 2000.
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, 6,777,556 shares issued and outstanding as of May 11, 2000.
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, 2000 and December 31, 1999.............................. 3
Consolidated Statements of Income (unaudited) for
the Three Months Ended March 31, 2000 and 1999.................... 4
Consolidated Statements of Cash Flows (unaudited)
for the Three Months Ended March 31, 2000 and 1999................ 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 8
PART II OTHER INFORMATION
Item 4. Submission of matters to a vote of security
holders........................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................................. 15
Page 2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
TAG-IT PACIFIC, INC.
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
Assets 2000 1999
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 32,244 $ 100,798
Due from factor, net 160,786 180,767
Accounts receivable, trade, net 2,938,220 2,905,866
Due from related parties 1,905,585 2,397,511
Inventories 10,060,742 10,102,115
Prepaid expenses and other current assets 1,158,687 1,133,324
------------- -------------
Total current assets 16,256,264 16,820,381
Property and Equipment, net of accumulated depreciation and amortization 2,997,967 2,815,308
Other assets 263,689 219,332
------------- -------------
Total assets $19,517,920 $ 19,855,021
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit $ 5,013,962 $ 5,067,259
Accounts payable 3,946,455 4,225,661
Accrued expenses 400,500 401,789
Income taxes payable 25,351 219,310
Notes payable 25,200 25,200
Notes payable to related parties 368,783 405,149
Current portion of capital lease obligations 264,298 254,023
------------- -------------
Total current liabilities 10,044,549 10,598,391
Capital lease obligations, less current portion 300,972 346,337
Deferred income tax liability 48,818 48,818
------------- -------------
Total liabilities 10,394,339 10,993,546
Commitments and Contingencies (Notes 4 and 5)
Stockholders' Equity:
Preferred stock, $0.001 par value; 3,000,000 shares
authorized; no shares issued or outstanding - -
Common stock; $0.001 par value; 30,000,000 shares
authorized; 6,777,556 shares issued and outstanding at
March 31, 2000 and December 31, 1999 6,778 6,778
Additional paid-in capital 8,748,157 8,748,157
Retained earnings 368,646 106,540
------------- -------------
Total Stockholders' Equity 9,123,581 8,861,475
------------- -------------
Total Liabilities and Stockholders' Equity $ 19,517,920 $ 19,855,021
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
<CAPTION>
TAG-IT PACIFIC, INC.
Consolidated Statements of Income
(unaudited)
Three Months Ended March 31,
------------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Net sales $ 8,190,824 $ 5,633,013
Cost of goods sold 5,682,670 3,623,044
-------------- --------------
Gross profit 2,508,154 2,009,969
Selling expenses 360,849 525,824
General and administrative expenses 1,711,096 1,235,688
-------------- --------------
Total operating expenses 2,071,945 1,761,512
Income from operations 436,209 248,457
Interest expense 103,119 23,678
-------------- --------------
Income before income taxes 333,090 224,779
Provision for income taxes 70,983 37,285
-------------- --------------
Net Income $ 262,107 $ 187,494
============== ==============
Basic earnings per share $ 0.04 $ 0.03
============== ==============
Diluted earnings per share $ 0.04 $ 0.03
============== ==============
Weighted average number of common shares outstanding:
Basic 6,777,556 6,726,677
============== ==============
Diluted 7,287,789 7,300,089
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
<CAPTION>
TAG-IT PACIFIC, INC.
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 262,107 $ 187,494
Adjustments to reconcile net income to net cash
Depreciation and amortization 207,777 134,128
Translation loss - (37,893)
Changes in operating assets and liabilities:
Receivables, including related parties 479,553 32,868
Inventories 41,373 (501,074)
Other assets (44,357) (20,967)
Prepaid expenses and other current assets (25,363) (15,212)
Accounts payable (279,206) 197,666
Accounts payable, related party - (1,606,001)
Accrued expenses (1,289) (94,019)
Income taxes payable (193,960) -
------------ ------------
Net cash / (used in) provided by operating activities 446,635 (1,723,010)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (390,436) (390,293)
------------ ------------
Cash flows from financing activities:
Proceeds from bank line of credit - 470,000
Repayments on bank line of credit, net (53,297) -
Repayment on capital leases (35,090) -
Repayment on long-term debt - (7,279)
Repayment on notes payable to related parties (36,366) (199,392)
------------ ------------
Net cash / (used in) provided by financing activities (124,753) 263,329
------------ ------------
Net decrease in cash (68,554) (1,849,974)
Cash at beginning of period 100,798 2,065,331
------------ ------------
Cash at end of period $ 32,244 $ 215,357
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 122,651 $ 21,329
Income taxes $ 223,017 $ 3,458
</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 year ended December 31, 1999.
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:
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<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
THREE MONTHS ENDED MARCH 31, 2000: (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income available to common stockholders $ 262,107 6,777,556 $ 0.04
EFFECT OF DILUTIVE SECURITIES:
Options - 446,342 -
Warrants - 63,891 -
Shares issued - - -
----------- ----------- ----------
Income available to common stockholders $ 262,107 7,287,789 $ 0.04
=========== =========== ==========
</TABLE>
<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>
Warrants to purchase 80,000 shares of common stock at $6.00 were
outstanding for the three months ended March 31, 2000 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
Warrant 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, 1999
but were not included in the computations of diluted earnings per share because
the effect of the exercise would be antidulitive 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.
5. SUBSEQUENT EVENT
On April 1, 2000, the Company entered into a ten-year exclusive license and
distribution agreement with Talon, Inc. and Grupo Industrial Cierres Ideal, S.A.
de C.V. ("GICISA"). Tag-It Pacific will become the exclusive sales, marketing,
distribution and e-commerce arm for "Talon" products for all customers in the
United States; Mexico based Maquiladores, Canada and the Pacific Rim. Tag-It has
been granted the exclusive license to market trim products under the name
"Talon" brand. In exchange for exclusive distribution rights for the next
decade, Tag-It has agreed to issue 850,000 shares of Series B Restricted
Convertible Preferred Stock to Talon's parent company GICISA. After a period of
30 months the shares will be convertible into Tag-It common stock once the
average share price of Tag-It common stock reaches or exceeds $ 8.00. The
preferred stock is automatically convertible into shares of the Company's common
stock based on a rate of one less the fraction of $2.50 over the average per
share closing price of the 30-day period preceding the conversion.
The Series B Preferred stock has a liquidation preference of $.001 per share,
and is entitled to receive non-cumulative dividends on an as converted basis if
and when such dividends are declared on the common stock and may be redeemed by
the Company under certain conditions as outlined in the agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read together with the
Consolidated Financial Statements of Tag-It Pacific and the notes to the
Consolidated Financial Statements included elsewhere in this Form 10-QSB.
THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF TAG-IT PACIFIC FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999.
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 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, Warner Bros., Chorus Line, Tarrant Apparel Group
and Swank, among others.
Revenues for all of our product lines are recognized at the time of product
shipment. Cost of goods sold consists primarily of raw material purchases,
direct labor, certain overhead, art and design costs associated with the product
development process, die and printing plate charges, finishing costs and
freight-in costs.
We develop photographic films and dies and design art images that are used
for various products. Development costs associated with films, dies and designs
that are deemed to have no future use are expensed as incurred. Development
costs associated with films, dies and designs that are deemed to have future use
are capitalized and amortized over three years on a straight-line basis.
Tag-It Pacific has positioned itself as a fully-integrated single-source
provider of complete brand identity programs. We offer our customers a complete
solution to their brand identity needs, including the complete management of
their trim procurement and distribution functions on a just-in-time basis.
We have assembled a team of creative design personnel, sales
representatives, assembly workers, program managers and global production and
distribution coordinators at our facilities in Los Angeles, New York, Mexico and
Hong Kong. We believe our innovative designs and global manufacturing and
distribution operations will enable us to take advantage of and address the
increasingly complicated requirements of the large and expanding demand for
effective brand identity programs.
Over the past year, we have continued to develop and expand the use of
TAG-IT TURNKEY, our proprietary business-to-business e-commerce system. TAG-IT
TURNKEY is a complete supply-chain management system that allows us to provide
our customers with a customized, comprehensive system for the management of
their brand identity programs. TAG-IT TURNKEY provides our customers with
assistance in the ordering, production, inventory management and just-in-time
worldwide distribution of their trim and packaging requirements. Traditionally,
manufacturers of apparel products have been required to operate their own
apparel trim departments, which requires a significant amount of infrastructure
to coordinate the buying of trim products from a large number of vendors.
Inefficient trim departments result in production delays. TAG-IT TURNKEY helps
to eliminate a manufacturer's need to maintain a trim department in an efficient
and cost-effective manner. We intend to continue to market TAG-IT TURNKEY to
existing and potential customers.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data shown as a percentage of net sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
----------- ----------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 69.4 64.3
----------- ----------
Gross profit 30.6 35.7
Selling expenses 4.4 9.3
General and administrative expenses 20.9 21.9
----------- ----------
Operating Income 5.3% 4.5%
=========== ==========
</TABLE>
NET SALES. Net sales increased approximately $2.6 million (or 45.4%) to
$8.2 million for the three months ended March 31, 2000 from $5.6 million for the
three months ended March 31, 1999. The increase in net sales was primarily the
result of a broader product line and an increase in trim related sales from our
Tehuacan, Mexico operations to our largest customer, Tarrant Apparel Group.
Tarrant Apparel Group accounted for $3.8 million of net sales (or 46.1%) during
the three months ended March 31, 2000, as compared to net sales of $ 1.6 (or
28.4 %) for the three months ended March 31, 1999.
GROSS PROFIT. Gross profit increased approximately $498,000 to $2.5 million
(or 24.8%) for the three months ended March 31, 2000 from $2.0 million for the
three months ended March 31, 1999. Gross margin as a percentage of net sales
decreased to approximately 30.6% for the three months ended March 31, 2000 as
compared to 35.7% for the three months ended March 31, 1999. The reduction was
primarily due to the hiring of additional operational personnel to manage the
TAG-IT TURNKEY SYSTEM. The remaining reduction was due to an increase in sales
of trim products with a lower gross margin that were included within the
complete trim package we offered to our customers through the TAG-IT TURNKEY
system, which accounted for a least 50% of net sales for the three months ended
March 31, 2000.
SELLING EXPENSES. Selling expense decreased approximately $165,000 to
$361,000 for the three months ended March 31, 2000 from $526,000 for the three
months ended March 31, 1999. As a percentage of net sales, these expenses
decreased to 4.4% for the three months ended March 31, 2000 compared to 9.3% for
the three months ended March 31, 1999. This decrease was due to a reduction of
selling expenses associated with the use of the TAG-IT TURNKEY SYSTEM. The
TAG-IT TURNKEY SYSTEM accounted for a least 50% of net sales for the three
months ended March 31, 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $475,000 to $1.7 million for the three months ended
March 31, 2000 from $1.2 million for the three month ended March 31, 1999. The
increase in these expenses was due to the combination of additional staffing and
expenses related to growth in our Tehuacan, Mexico and Hong Kong facilities. We
hired additional customer service and marketing personnel. As a percentage of
net sales, these expenses decreased to 20.9% for the three months ended March
31, 2000 compared to 21.9% for the three months ended March 31, 1999, due to an
increase in net sales that exceeded the rate of increase in general and
administrative expenses.
INTEREST EXPENSE. Interest expense increased approximately $79,000 (or
336%) to $103,000 for the three months ended March 31, 2000 from $24,000 for the
three months ended March 31, 1999. We used the proceeds of our January 1998
initial public offering and our October 1998 private stock sale to KG
Investment, LLC to substantially reduce our use of factors, which reduced our
cost of funds. We intend to continue to limit our use of factors in the future
and intend to rely upon the increased bank line of credit that we renewed in
October 1999 for our short-term financing needs.
PROVISION FOR INCOME TAXES (BENEFIT). The provision for income taxes
increased approximately $34,000 to $71,000 for the three months ended March 31,
2000 as compared to $37,000 for the three months ended March 31, 1999. Income
taxes increased primarily due to increased operating income, offset by the use
of net operating loss carry forwards from AGS Stationery, Inc. of approximately
$430,000 that were available to offset our taxable income during 1999.
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NET INCOME. Net income was $262,000 for the three months ended March 31,
2000 as compared to net income of $187,000 for the three months ended March 31,
1999, due to the factors set forth above.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1999, 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. As of December 31, 1998, we terminated the use of domestic
factoring arrangements with Heller and Safcor, and use Heller's factoring
services only for our Hong Kong subsidiary's sales. During 1999, we satisfied
our working capital requirements primarily through cash flows generated from
operations and borrowings under our credit agreement with Sanwa Bank.
Pursuant to the terms of our factoring agreement for our Hong Kong
subsidiary's sales, our factor purchases our eligible accounts receivable and
assumes the credit risk with respect to those accounts for which the factor has
given its prior approval. As of March 31, 2000, the amount factored without
recourse was approximately $161,000 and the amount due from the factor and
recorded as a current asset was approximately $ 161,000. 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. There were no outstanding advances from the factor as of March 31,
2000 and December 31, 1999.
In October 1999, we extended our credit facility with Sanwa Bank to May 31,
2000 and increased the amount available under the line of credit from $3.0
million to $5.0 million, and obtained a $500,000 equipment line. 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 March 31, 2000, we
were in compliance with these covenants. As of March 31, 2000, our outstanding
balance on the bank facility was $5,014,000 and the interest rate was 9.0%.
As of March 31, 2000, we had outstanding related party debt of
approximately $394,000 at a weighted average interest rate of 8.2%, and
additional non-related party debt of $25,200 at a weighted average interest of
10%. The majority of related-party debt is due and payable on the fifteenth day
following the date of delivery of written demand for payment.
Our receivables decreased from $5.5 million at March 31, 1999 to $5.0
million at March 31, 2000. This decrease was due primarily to a decrease in
related party receivables. Of the $5.0 million in receivables at March 31, 2000,
$1.9 million was due from related parties as compared to $2.4 million due from
related parties at March 31, 1999.
Net cash provided by operating activities was approximately $447,000 for
the three months ended March 31, 2000 compared to $1.7 million used in operating
activities for the three months ended March 31, 1999. Cash provided by
operations for the three months ended March 31, 2000 resulted primarily from
decreases in receivables and an increase in net income, partially offset by a
decrease in accounts payable and income taxes payable. Cash used in operations
for the three months ended March 31, 1999 resulted primarily from decreased
accounts payable related party.
Net cash used in investing activities was $ 390,000 for the three months
ended March 31, 2000 and 1999, respectively. Net cash used in investing
activities consisted primarily of capital expenditures for computer equipment
upgrades and procurement of production equipment.
Net cash used in financing activities was approximately $125,000 for the
three months ended March 31, 2000 compared to $263,000 provided by financing
activities for the three months ended March 31, 1999. Net cash used financing
activities for the three months ended March 31, 2000 primarily reflects
repayments on our capital leases and the bank line of credit. Net cash provided
by financing activities for the three months ended March 31, 1999 results from
proceeds from the bank line of credit, offset by reductions in loans from
related parties.
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As of March 31, 2000, we had cash of approximately $32,000, as well as
$486,000 remaining on our credit facility with Sanwa Bank. On April 20, 2000,
Sanwa Bank increased our credit facility from $ 5.5 million to $ 10.0 million.
Our new exclusive license and distribution arrangement with GICISA for the Talon
product will require additional cash resources for the increased operating
expenses associated with that product line. Therefore, based on our projected
sales volumes and related cash flows, and our current balance sheet, we believe
that 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. See "- Cautionary Statements and Risk
Factors -- If we are unable to raise additional funds, we may be required to
defer implementation of our growth strategy."
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.
Statement of Financial Accounting Standard No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 ("SFAS 137"), is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS 137 defers the effective
date of SFAS 133. We do not expect adoption of SFAS 137 to have a material
impact, if any, on our consolidated results of operations.
YEAR 2000 UPDATE
We have not experienced any difficulties resulting from the Year 2000
problem, which is the processing of date-sensitive information by the
information technology systems used by us and our key customers and vendors. The
Year 2000 problem is the result of computer programs being written using two
digits to define the applicable year, which could result in computer programs
recognizing a date using "00" as the year 1900 rather than 2000, thereby causing
miscalculations or system failures. We do not currently anticipate any future
Year 2000 problems in the future.
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 report, readers should carefully consider the
following cautionary statements and risk factors.
IF WE LOSE ANY OF OUR THREE LARGEST CUSTOMERS, OUR SALES AND OPERATING
RESULTS WILL BE ADVERSELY AFFECTED. Our three largest customers, Tarrant Apparel
Group, Swank, which is a licensee of Yves Saint Laurent, Kenneth Cole, Geoffrey
Beene and Pierre Cardin, and Guess? accounted for approximately 47.9%, 5.2% and
3.2%, respectively, of our net sales, on a consolidated basis, for the year
ended December 31, 1999, and approximately 3%, 12.5% and 16.3%, respectively, of
our net sales, on a consolidated basis, for the year ended December 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 significantly reduce our revenue.
IF WE ARE NOT ABLE TO MANAGE OUR RAPID EXPANSION AND GROWTH, OUR REVENUES
WILL BE ADVERSELY AFFECTED. Our subsidiaries have been operated under family
management since they were formed and have recently significantly expanded their
operations. The growth of our operations and activities has placed and will
continue to place a significant strain on our management, operational, financial
and accounting resources. If we cannot implement and improve our financial and
management information and reporting systems, we will not be able to implement
our growth strategies and
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our revenues will be adversely affected. In addition, we will not be able to
manage future growth, if any, and increase production levels and continue to
market and distribute our products, if we cannot hire, train, motivate and
manage new employees, including management and operating personnel, and
integrate them into our overall operations and culture.
FLUCTUATIONS IN OPERATING RESULTS MAY RESULT IN UNEXPECTED REDUCTIONS IN
REVENUE AND STOCK PRICE VOLATILITY. We operate in an industry that is subject to
significant fluctuations in operating results from quarter to quarter, which may
lead to unexpected reductions in revenues and stock price volatility. Factors
that may influence our quarterly operating results include:
o the volume and timing of customer orders received during the quarter;
o the timing and magnitude of customers' marketing campaigns;
o the loss or addition of a major customer;
o the availability and pricing of materials for our products;
o the increased expenses incurred in connection with the introduction of
new products;
o currency fluctuations; and
o changes in our product mix or in the relative contribution to sales of
our subsidiaries.
Due to these factors, it is possible that in some quarters our operating
results may be below the expectations of public market analysts and investors.
If this occurs, the price of our common stock would likely be adversely
affected.
CYCLICAL BUYING PATTERNS MAY RESULT IN PERIODS OF LOW SALES VOLUME. Most of
our customers are in the apparel industry. The apparel industry historically has
been subject to substantial cyclical variations. Our business has experienced,
and we expect our business to continue to experience, significant cyclical
fluctuations due, in part, to customer buying patterns, which may result in
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 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.
BECAUSE WE DO NOT ENTER INTO LONG-TERM SALES CONTRACTS WITH OUR CUSTOMERS,
OUR SALES MAY DECLINE IF OUR EXISTING CUSTOMERS CHOOSE NOT TO BUY OUR PRODUCTS
OR SERVICES. Our customers are not required to purchase our products. Our sales
are generally evidenced by a purchase order and similar documentation limited to
a specific sale. As a result, a customer from whom we generate substantial
revenue in one period may not be a substantial source of revenue in a future
period. In addition, our customers generally have the right to terminate their
relationships with us without penalty and on little or no notice. Without
long-term contracts with our customers, we cannot be certain that our existing
customers will continue to engage us to design and produce products.
Accordingly, we cannot guarantee that we will be able to maintain a consistent
level of sales.
WE DEPEND ON KEY MANAGEMENT, 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
nor is he 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.
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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 December 31, 1999, our officers and
directors and their affiliates owned approximately 19.4% of the outstanding
shares of our common stock. The Dyne family, which includes Mark Dyne, Colin
Dyne, Larry Dyne, Jonathan Burstein and the estate of Harold Dyne, owned
approximately 27.2% of the outstanding shares of our common stock. KG
Investments, LLC, a significant stockholder, owned approximately 35.3% of the
outstanding shares of our common stock with certain transfer and voting
restrictions. As a result, our officers and directors, the Dyne family and KG
Investments, LLC are able to exert influence over the outcome of all matters
submitted to a vote of the holders of our common stock, including the election
of our board of directors. The voting power of these stockholders could also
discourage others from seeking to acquire control of us through the purchase of
our common stock, which might depress the price of our common stock.
IF WE EXPERIENCE DISRUPTIONS AT ANY OF OUR FOREIGN PRODUCTION FACILITIES,
WE WILL NOT BE ABLE TO MEET OUR PRODUCTION OBLIGATIONS AND MAY LOSE SALES AND
CUSTOMERS. Some of our products are assembled or finished at our foreign
assembly facilities. Currently, we do not operate duplicate facilities in
different geographic areas. Therefore, in the event of a disruption in the
region, in which we maintain our facilities, we cannot shift manufacturing
operations to a different geographic region and we may be required to cease or
limit our assembly or finishing operations. This may cause us to lose sales and
customers. The types of disruptions that may occur include:
o foreign trade disruptions;
o import restrictions;
o labor disruptions;
o embargoes;
o government intervention; and
o natural disaster.
BECAUSE WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS, WE MAY NOT BE ABLE TO
ALWAYS OBTAIN MATERIALS WHEN WE NEED THEM AND WE MAY LOSE SALES AND CUSTOMERS.
Generally, we do not have long-term agreements with our key sources of supply.
Lead times for materials we order can vary significantly and depend on many
factors, including the specific supplier, the contract terms and the demand for
particular materials at a given time. From time to time, we experience
fluctuations in the prices, and disruptions in the supply, of materials.
Shortages or disruptions in the supply of materials, or our inability to procure
materials from alternate sources at acceptable prices in a timely manner, could
lead us to miss deadlines for orders and lose sales and customers.
WE ARE SUBJECT TO FLUCTUATING PAPER COSTS, WHICH MAY ADVERSELY AFFECT OUR
PROFITS. The cost of paper is a principal component of the price we charge for
our paper products, including our high quality paper boxes, custom shopping
bags, hang tags and packaging. Historically, we have been able to pass on to our
customers any increase or decrease in the cost of paper, which has allowed us to
maintain our gross margins on paper products during fluctuations in the cost of
paper. If our customers are unwilling to absorb these price increases in the
future, our gross margins may decrease, which will lower our profits.
IF THERE IS A PAPER SHORTAGE, WE MAY NOT BE ABLE TO SELL SOME OF OUR PAPER
PRODUCTS. The capacity in the paper industry has remained relatively stable in
recent years. During periods of high demand for paper, certain grades of paper,
including grades that we use in our paper products, have been unavailable or
only available in limited quantities. If we cannot acquire the paper we use to
produce our products, our sales will be lower and we may lose customers.
Although we actively manage our paper supplies and have established strong
relationships with our paper suppliers, we do not have long-term agreements with
our key paper suppliers. We cannot be certain that our sources of paper supply
will be
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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, Universal
Button, Inc. and Scovill Fasteners, Inc., have greater name recognition, longer
operating histories and, in many cases, substantially greater financial and
other resources than us.
PRODUCT RETURNS THAT EXCEED OUR ANTICIPATED RESERVES COULD RESULT IN WORSE
THAN EXPECTED OPERATING RESULTS. We incur expenses when customers return our
products. Product returns or price protection concessions that exceed our
reserves could result in worse than expected operating results. Generally,
returned items have limited or no value and we are forced to bear the cost of
their return. Product returns also could result in lost revenue, delays in
market acceptance, diversion of development resources, increased service and
warranty costs and damage to our reputation. Products are returned for a number
of reasons, including as a result of:
o sale or return arrangements;
o defective goods;
o inadequate performance relative to customer expectations;
o shipping errors; and
o other causes which are outside of our control.
BECAUSE WE CONDUCT A SUBSTANTIAL PORTION OF OUR BUSINESS OUTSIDE OF THE
UNITED STATES, WE ARE SUBJECT TO MANY RISKS RELATING TO INTERNATIONAL BUSINESS
THAT MAY ADVERSELY AFFECT OUR OPERATING RESULTS. For the year ended December 31,
1999 and 1998, approximately 35% and 40%, respectively, 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 that could result in lost sales, increased costs and worse than expected
operating results, including:
o the need to comply with a wide variety of foreign and United States
export and import laws;
o changes in export or import controls, tariffs and other regulatory
requirements;
o the imposition of governmental controls;
o political and economic instability;
o trade restrictions;
o the difficulty of administering business overseas; and
o the general economic conditions of the countries in which we do
business.
If any of the above risks were to render the conduct of business in a
particular country undesirable or impractical, we may not be able to deliver
products to our customers and our sales will be lower.
IF OUR OVERSEAS SUPPLIERS DO NOT SHIP ORDERS TO US IN A TIMELY MANNER, WE
MAY LOSE SALES OR BE FORCED TO REDUCE SALES PRICES OF OUR PRODUCTS. We could
miss our customers' delivery requirements if our overseas contractors or
suppliers do not ship orders to us in a timely manner. If we fail to deliver
products on time, our customers could cancel orders, refuse to accept deliveries
or require us to reduce the sales price of the delivered products.
OUR PROPRIETARY TECHNOLOGY MAY NOT BE ADEQUATELY PROTECTED FROM
UNAUTHORIZED USE BY OTHERS, WHICH COULD INCREASE OUR LITIGATION COSTS AND
ADVERSELY AFFECT OUR SALES. We rely on trademark, trade secret and copyright
laws to protect our designs and other proprietary property. We cannot be certain
that these laws will be sufficient to protect our property. If litigation is
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the proprietary
rights of others, such litigation could result in substantial costs and
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<PAGE>
diversion of resources. This could have a material adverse effect on our
operating results and financial condition. Ultimately, we may be unable, for
financial or other reasons, to enforce our rights under intellectual property
laws, which could result in lost sales. The laws of certain countries in which
our products are distributed or may be distributed in the future may not protect
our products and intellectual rights to the same extent as the laws of the
United States.
IF OUR PRODUCTS INFRINGE ANY PROPRIETARY RIGHTS OF OTHERS, A LAWSUIT MAY BE
BROUGHT AGAINST US THAT COULD REQUIRE US TO PAY LARGE LEGAL EXPENSES AND
JUDGMENTS AND REDESIGN OR DISCONTINUE SELLING OUR PRODUCTS. We believe that our
products do not infringe any valid existing proprietary rights of third parties.
Although we have received no communications from third parties alleging
infringement of any of their proprietary rights, we cannot be certain that any
infringement claims will not be made in the future. Any infringement claims,
whether or not meritorious, could result in costly litigation or require us to
enter into royalty or licensing agreements. If we are found to have infringed
the proprietary rights of others, we could be required to pay damages, cease
sales of the infringing products and redesign the products or discontinue their
sale. Any of these outcomes, individually or collectively, could have a material
adverse effect on our operating results and financial condition.
WE HAVE ADOPTED A NUMBER OF ANTI-TAKE OVER MEASURES THAT MAY DEPRESS THE
PRICE OF OUR COMMON STOCK. Our adoption of a stockholder's rights plan, our
ability to issue up to 2,750,000 shares of preferred stock and some provisions
of our certificate of incorporation and bylaws and of Delaware law could make it
more difficult for a third party to make an unsolicited takeover attempt of us.
These anti-takeover measures may depress the price of our common stock by making
third parties less able to acquire us by offering to purchase shares of our
stock at a premium to its market price. Our board of directors can issue up to
2,750,000 shares of preferred stock and determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders. Our board of
directors could issue the preferred stock with voting, liquidation, dividend and
other rights superior to the rights of our common stock. The rights of holders
of our common stock will be subject to, and may be adversely affected by, the
rights of holders of the share purchase rights and of any preferred stock that
may be issued in the future. 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.
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<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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
quarterly report.
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 11, 2000 TAG-IT PACIFIC, INC.
/S/ MICHAEL DODO
---------------------------------
By: Michael Dodo
Its: Vice President, Administration
(Principal Financial & Accounting
Officer)
Page 16
<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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 32,244
<SECURITIES> 0
<RECEIVABLES> 5,129,890
<ALLOWANCES> 125,299
<INVENTORY> 10,060,742
<CURRENT-ASSETS> 16,256,264
<PP&E> 5,065,494
<DEPRECIATION> 2,067,527
<TOTAL-ASSETS> 19,517,920
<CURRENT-LIABILITIES> 10,044,549
<BONDS> 0
0
0
<COMMON> 6,778
<OTHER-SE> 9,116,803
<TOTAL-LIABILITY-AND-EQUITY> 19,517,920
<SALES> 8,190,824
<TOTAL-REVENUES> 8,190,824
<CGS> 5,682,670
<TOTAL-COSTS> 7,754,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103,119
<INCOME-PRETAX> 333,090
<INCOME-TAX> 70,983
<INCOME-CONTINUING> 262,107
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 262,107
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
