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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the quarterly period
ended September 30, 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)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, par value $0.001
per share, 6,787,556 shares issued and outstanding as of November 14, 2000.
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
<TABLE>
TAG-IT PACIFIC, INC.
INDEX TO FORM 10-QSB
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited) as of September 30, 2000
and December 31, 1999........................................................ 3
Consolidated Statements of Income (unaudited) for the
Three Months and Nine Months Ended September 30, 2000 and 1999............... 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 2000 and 1999............................... 5
Notes to Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 9
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................ 17
</TABLE>
Page 2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
TAG-IT PACIFIC, INC.
Consolidated Balance Sheets
<CAPTION>
Assets September 30, December 31,
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 100,798
Due from factor, net 72,498 180,767
Accounts receivable, trade, net 7,632,139 2,905,866
Due from related parties 8,220,016 2,397,511
Inventories 15,821,277 10,102,115
Prepaid expenses and other current assets 1,054,206 1,133,324
------------- ------------
Total current assets 32,800,136 16,820,381
Property and equipment, net of
accumulated depreciation and amortization 3,741,339 2,815,308
Other assets 1,488,377 219,332
------------- ------------
Total assets $ 38,029,852 $ 19,855,021
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdraft $ 770,133 $ -
Line of credit 8,888,846 5,067,259
Accounts payable 11,663,888 4,225,661
Accrued expenses 1,552,784 401,789
Income taxes payable 379,861 219,310
Notes payable 25,200 25,200
Notes payable to related parties 265,001 405,149
Current portion of capital lease obligations 243,303 254,023
------------ ------------
Total current liabilities 23,789,016 10,598,391
Capital lease obligations, less current portion 182,186 346,337
Subordinated note payable to related party 2,558,024 -
Deferred income tax liability 48,818 48,818
------------- ------------
Total liabilities 26,578,044 10,993,546
Commitments and Contingencies
Stockholders' Equity:
Preferred stock Series A, $0.001 par value; 250,000 shares
authorized; no shares outstanding - -
Preferred stock Series B, $0.001 par value; 3,000,000 shares
authorized; 850,000 shares issued and outstanding at
September 30, 2000 1,400,000 -
Common stock; $0.001 par value; 30,000,000 shares authorized;
6,787,556 shares issued and outstanding at September 30,
2000; 6,777,556 shares issued and outstanding at December 31,
1999 6,788 6,778
Additional paid-in capital 8,784,861 8,748,157
Retained earnings 1,260,159 106,540
------------- ------------
Total stockholders' equity 11,451,808 8,861,475
------------- ------------
Total liabilities and stockholders' equity $ 38,029,852 $ 19,855,021
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
<TABLE>
TAG-IT PACIFIC, INC.
Consolidated Statements of Income
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2000 1999 2000 1999
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $17,514,988 $ 10,226,746 $ 37,064,439 $24,039,238
Cost of goods sold 13,329,945 6,796,930 27,077,844 15,933,153
----------- ------------ ------------ ------------
Gross profit 4,185,043 3,429,816 9,986,595 8,106,085
Selling expenses 741,312 418,265 1,526,954 1,407,063
General and administrative expenses 2,497,979 2,128,645 6,477,247 5,141,361
--------- ------------- ------------ ---------
Total operating expenses 3,239,291 2,546,910 8,004,201 6,548,424
Income from operations 945,752 882,906 1,982,394 1,557,661
Interest expense, net 187,710 72,849 412,150 138,616
--------- ------------- ------------ ---------
Income before income taxes 758,042 810,057 1,570,244 1,419,045
Provision for income taxes 211,981 163,589 416,625 221,600
--------- ------------ ----------- ---------
Net Income $ 546,061 $ 646,468 $ 1,153,619 $ 1,197,445
========== ============ =========== ===========
Basic earnings per share $ 0.08 $ 0.10 $ 0.17 $ 0.18
========== ============ =========== ===========
Diluted earnings per share $ 0.08 $ 0.09 $ 0.16 $ 0.17
========== ============ =========== ===========
Weighted average number of common shares outstanding:
Basic 6,781,904 6,726,677 6,779,016 6,726,677
========= ============ =========== ===========
Diluted 7,202,436 7,276,318 7,259,067 7,271,335
========= ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
<TABLE>
TAG-IT PACIFIC, INC.
Consolidated Statements of Cash Flows
(unaudited)
<CAPTION>
Nine Months Ended
September 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents: Cash flows from operating
activities:
Net income $ 1,153,619 $ 1,197,445
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 738,352 443,906
Increase in allowance for doubtful accounts 470,444 -
Gain on sale of assets (14,927) -
Stock issued for services 32,813 -
Translation loss - (24,877)
Changes in operating assets and liabilities:
Receivables, including related parties (10,557,342) (2,711,674)
Inventories (3,161,138) (3,202,110)
Other assets 60,955 581
Prepaid expenses and other current assets 79,118 (140,031)
Accounts payable 7,438,227 3,324,846
Accounts payable, related party - (1,747,858)
Accrued expenses 1,150,994 62,418
Income taxes payable 160,553 -
----------- -----------
Net cash used in operating activities (2,448,332) (2,797,354)
----------- -----------
Cash flows from investing activities:
Additional loans to related parties (353,611) -
Proceeds from sale of assets 19,260 -
Acquisition of property and equipment (1,598,716) (1,091,808)
---------- ----------
Net cash used in investing activities (1,933,067) (1,091,808)
---------- ----------
Cash flows from financing activities:
Bank overdraft 770,133 -
Proceeds from stock issuance 3,900 1,300
Proceeds from bank line of credit, net 3,821,587 2,010,000
Repayment of capital lease obligations (174,871) -
Repayment of long-term debt - (5,916)
Repayment of notes payable to related parties (140,148) (155,367)
---------- ----------
Net cash provided by financing activities 4,280,601 1,850,017
---------- ----------
Net decrease in cash (100,798) (2,039,145)
Cash at beginning of period 100,798 2,065,331
---------- ----------
Cash at end of period $ - $ 26,186
---------- ----------
Supplemental disclosures of cash flow information: Cash paid (received) during
the period for:
Interest paid $ 472,430 $ 138,616
Interest received (12,220) -
Income taxes 223,224 16,903
Preferred stock issued in exchange for distribution rights 1,400,000 -
Subordinated note payable to related party issued in exchange for 2,558,024 -
inventory
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE>
TAG-IT PACIFIC, INC.
Notes to the Consolidated Financial Statements
(unaudited)
1. PRESENTATION OF INTERIM INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited consolidated financial
statements reflect all adjustments that, in the opinion of the management 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. 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 SEPTEMBER 30, 2000: (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EARNINGS PER SHARE:
<S> <C> <C> <C>
Income available to common stockholders $ 546,061 6,781,904 $ 0.08
EFFECT OF DILUTIVE SECURITIES:
Options 364,556
Warrants 55,976
----------- ------------- ---------
Income available to common stockholders $ 546,061 7,202,436 $ 0.08
----------- ------------- ---------
THREE MONTHS ENDED SEPTEMBER 30, 1999: INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
BASIC EARNINGS PER SHARE:
Income available to common stockholders $ 646,468 6,726,677 $ 0.10
EFFECT OF DILUTIVE SECURITIES:
Options 442,833
Warrants 106,808
----------- ------------- ----------
Income available to common stockholders $ 646,468 7,276,318 $ 0.09
----------- ------------- ----------
</TABLE>
Page 6
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000: INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EARNINGS PER SHARE:
<S> <C> <C> <C>
Income available to common stockholders $ 1,153,619 6,779,016 $ 0.17
EFFECT OF DILUTIVE SECURITIES:
Options 422,547
Warrants 57,504
---------- ------------ --------
Income available to common stockholders $ 1,153,619 7,259,067 $ 0.16
========== ============ ========
NINE MONTHS ENDED SEPTEMBER 30, 1999: INCOME SHARES PER SHARE
(NUMERATOR (DENOMINATOR) AMOUNT
---------- ------------ --------
BASIC EARNINGS PER SHARE:
Income available to common stockholders $ 1,197,445 6,726,677 $ 0.18
EFFECT OF DILUTIVE SECURITIES:
Options 440,854
Warrants 103,804
---------- ------------ --------
Income available to common stockholders $ 1,197,445 7,271,335 $ 0.17
========== ============ ========
</TABLE>
Options to purchase 80,000 and 143,000 shares of common stock at $6.00 and
$4.63 and warrants to purchase 110,000 shares of common stock at $4.80 were
outstanding for the three months ended September 30, 2000 but were not included
in the computation of diluted earnings per share because the effect of exercise
would have an antidilutive effect on earnings per share.
Options and warrants to purchase 80,000 and 110,000 shares of common stock
at $6.00 and $4.80, respectively, were outstanding for the nine months ended
September 30, 2000 and 1999 and for the three months ended September 30, 1999,
but were not included in the computations of diluted earnings per share because
the effect of the exercise would have an antidulitive effect on earnings per
share.
3. 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 would have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
4. PREFERRED STOCK
On April 3, 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"). Under this agreement, Tag-It Pacific, Inc. is 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 and has the exclusive license to market trim products under the
"Talon" brand name. In exchange for these exclusive distribution rights, the
Company agreed to issue 850,000 shares of Series B Convertible Preferred Stock
to Talon's parent company GICISA. After a period of 30 months, the shares will
be convertible into the Company's common stock once the average price per share
of the Company's common stock reaches or exceeds $8.00 for a 30-day consecutive
period. The preferred stock is automatically convertible into shares of the
Company's common stock based on a rate of one minus the fraction of $2.50 over
the average per share closing price of the Company's common stock for the 30-day
period preceding the conversion.
The Series B Convertible 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 Company's
common stock and may be redeemed by the Company under certain conditions as
outlined in the agreement.
In conjunction with the agreement, the Company purchased inventory from
GICISA in exchange for an unsecured note payable in the amount of $2,803,024.
The note payable is non-interest bearing and is due April 1, 2002. The Company
has imputed interest for the holding period of the note amounting to $272,000.
The note is subordinate to the obligations due under the credit facility with
Sanwa Bank.
Page 7
<PAGE>
5. SUBSEQUENT EVENT
In October 2000, in connection with the renewal of the line of credit
agreement with Sanwa, the Company borrowed $500,000 from its Chairman in the
form of a convertible secured subordinated promissory note. The note bears
interest at 11% per annum, is due on demand and convertible into the Company's
common stock at the market price of the stock on the date of the agreement. The
note is secured by substantially all of the Company's assets and is subordinate
to the Company's obligations and pledge of substantially all of its assets under
its line of credit agreement with Sanwa Bank.
Page 8
<PAGE>
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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30,
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 Tarrant Apparel Group, Calvin
Klein, Tommy Hilfiger, A\X Armani Exchange, Warner Bros., Express, Lerner and
Swank, among others.
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.
On April 3, 2000, the Company entered into a ten-year exclusive license and
distribution agreement with Talon, Inc. Talon is a leading manufacturer of
band-name zippers with an eighty-year history of international operations. This
has allowed the brand to hold the position as the second largest world market
share in zippers. These exclusive license and distribution rights give Tag-it
the right to distribute zippers and trim products under the Talon brand name in
the United States, Mexico, Canada and the Pacific Rim. The Company began
shipping products under the Talon brand name in July 2000.
We have developed and expanded the use of TAG-IT TURNKEY TM, 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 have assembled a team of creative design personnel, sales
representatives, assembly workers, program managers and global production and
distribution coordinators in our various facilities located throughout the
United States and Mexico, Hong Kong, Guatamala and the Dominican Republic. 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.
Revenues for all of our product lines are recognized at the time of product
shipment. Cost of goods sold consists primarily of raw material and finished
good purchases, direct labor, certain overhead, art and design costs associated
with product development, 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.
Page 9
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
------ -------- --------- --------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 76.1 66.5 73.1 66.3
------ ------- -------- -----
Gross profit 23.9 33.5 26.9 33.7
Selling expenses 4.2 4.1 4.1 5.8
General and administrative expenses 14.3 20.8 17.5 21.4
------ ------- -------- -----
Operating Income 5.4 8.6 % 5.3 % 6.5 %
====== ======= ======== =====
</TABLE>
NET SALES. Net sales increased approximately $7.3 million (or 71.3%) to
$17.5 million for the three months ended September 30, 2000 from $10.2 million
for the three months ended September 30, 1999. The increase in net sales was
primarily the result of an increase in trim related sales under our exclusive
license and distribution agreement of Talon products which accounted for a
significant increase in sales during the three months ended September 30, 2000.
Sales of Talon products began in July 2000.
Net sales increased approximately $13.0 million (or 54.2%) to $37.1 million
for the nine months ended September 30, 2000 from $24.0 million for the nine
months ended September 30, 1999. The increase in net sales was the result of an
increase in sales from our Tlaxcala, Mexico, operation and the sale of Talon
products under our exclusive license and distribution agreement during the nine
months ended September 30, 2000.
GROSS PROFIT. Gross profit increased approximately $755,000 to $4.2 million
(or 22.0%) for the three months ended September 30, 2000 from $3.4 million for
the three months ended September 30, 1999. Gross margin as a percentage of net
sales decreased to 23.9% for the three months ended September 30, 2000 as
compared to 33.5% for the three months ended September 30, 1999. The reduction
was primarily due to an increase in sales of trim products with lower gross
margins that were included within the complete trim package we offered to our
customers through the TAG-IT TURNKEY system, which accounted for in excess of
75% of net sales for the three months ended September 30, 2000 and sales of
Talon products with lower gross margins, which accounted for a significant
percentage of net sales for the three months ended September 30, 2000.
Gross profit increased approximately $1.9 million to $10.0 million (or
23.2%) for the nine months ended September 30, 2000 from $8.1 million for the
nine months ended September 30, 1999. Gross margin as a percentage of net sales
decreased to 26.9% for the nine months ended September 30, 2000 as compared to
33.7% for the nine months ended September 30, 1999 due to the reasons stated
above.
SELLING EXPENSES. Selling expenses increased approximately $323,000 (or
77.2%) to $741,000 for the three months ended September 30, 2000 from $418,000
for the three months ended September 30, 1999. As a percentage of net sales,
these expenses increased to 4.2% for the three months ended September 30, 2000
compared to 4.1% for the three months ended September 30, 1999. This slight
increase was due to additional selling expenses incurred related to the
introduction of Talon products, offset by a reduction of selling expenses
associated with the increased sales volume under the TAG-IT TURNKEY SYSTEM.
Selling expenses increased approximately $120,000 (or 8.5%) to $1.5 million
for the nine months ended September 30, 2000 from $1.4 for the nine months ended
September 30, 1999. As a percentage of net sales, these expenses decreased to
4.1% for the nine months ended September 30, 2000 compared to 5.8% for the nine
months ended September 30, 1999, due to the reason stated above. This decrease
was due to a reduction of selling expenses associated with the increased sales
volume under the TAG-IT TURNKEY SYSTEM.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $369,000 to $2.5 million for the three months ended
September 30, 2000 from $2.1 million for the three month ended September 30,
1999. The increase in these expenses was due to additional staffing (including
the addition of customer service and marketing personnel) and other expenses
related to our exclusive license and distribution agreement of Talon products
and the growth in our Tlaxcala, Mexico, and Hong Kong facilities. As a
percentage of net sales, these expenses decreased to 14.3% for the three months
ended September 30, 2000 compared to 20.8% for the three months ended September
1999, due to an increase in net sales that exceeded the rate of increase in
general and administrative expenses.
Page 10
<PAGE>
General and administrative expenses increased approximately $1.3 million to
$6.5 million for the nine months ended September 30, 2000 from $5.1 million for
the nine months ended September 30, 1999. As a percentage of net sales, these
expenses decreased to 17.5% for the nine months ended September 30, 2000
compared to 21.4% for the nine months ended September 30, 1999, due to the
reason stated above.
INTEREST EXPENSE. Interest expense increased approximately $115,000 (or
157.7%) to $188,000 for the three months ended September 30, 2000 from $73,000
for the three months ended September 30, 1999, and approximately $274,000 (or
197.3%) to $412,000 for the nine months ended September 30, 2000 from $139,000
for the nine months ended September 30, 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 and bank borrowings during 1999. Increased borrowings under our
credit facility due to expanded operations also contributed to the increase in
interest expense for the three months and nine months ended September 30, 2000,
compared to the same periods in 1999. We intend to continue to rely upon the
increased credit facility for our short-term financing needs.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
approximately $48,000 to $212,000 for the three months ended September 30, 2000
as compared to $164,000 for the three months ended September 30, 1999, and
approximately $195,000 to $417,000 for the nine months ended September 30, 2000
as compared to $222,000 for the nine months ended September 30, 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 taxable income during 1999.
NET INCOME. Net income was approximately $546,000 for the three months
ended September 30, 2000 as compared to net income of $646,000 for the three
months ended September 30, 1999, and approximately $1,154,000 for the nine
months ended September 30, 2000 as compared to $1,197,000 for the nine months
ended September 30, 1999, due to the factors set forth above.
Page 11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company currently satisfies its working capital requirements primarily
through cash flows generated from operations and borrowings under its credit
agreement with Sanwa Bank. On September 30, 2000, the amount available under the
line of credit was increased to $9.4 million, plus an additional $600,000
equipment line. The bank has renewed the credit agreement through December 31,
2000. The line of credit interest rate is equal to the bank's reference rate
plus 2%, and the line of credit agreement requires that the Company meet certain
financial covenants relating to net worth, debt to net worth, current ratio,
cash flow and profitability. At September 30, 2000, the Company was in
compliance with these financial covenants.
In October 2000, in connection with the renewal of the line of credit
agreement with Sanwa, the Company borrowed $500,000 from its Chairman in the
form of a convertible secured subordinated promissory note. The note bears
interest at 11% per annum, is due on demand and convertible into the Company's
common stock at the market price of the stock on the date of the agreement. The
note is secured by substantially all of the Company's assets and is subordinate
to the Company's obligations and pledge of substantially all of its assets under
its line of credit agreement with Sanwa Bank.
As of September 30, 2000, we had outstanding related party debt of
approximately $265,000 and $2.6 million at weighted average interest rates of
8.2% and 0%, respectively, and additional non-related party debt of $25,200 at
an interest rate of 10%. The majority of related-party debt is due and payable
on April 1, 2002 with the remainder due on the fifteenth day following the date
of delivery of written demand for payment.
Our receivables increased from $6.8 million at September 30, 1999 to $15.9
million at September 30, 2000. This increase was due primarily to an increase in
related party trade receivables and receivables from Talon product sales.
Net cash used in operating activities was approximately $2.4 million for
the nine months ended September 30, 2000 compared to $2.8 million for the nine
months ended September 30, 1999. Cash used in operations for the nine months
ended September 30, 2000 resulted primarily from increases in accounts
receivable and inventories, offset by increases in accounts payable and accrued
expenses. Cash used in operations for the nine months ended September 30, 1999
resulted primarily from increases in accounts receivable and inventory, offset
by decreased accounts payable due to a related party.
Net cash used in investing activities was approximately $1.9 million and
$1.1 million for the nine months ended September 30, 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 provided by financing activities was approximately $4.3 million
for the nine months ended September 30, 2000 compared to $1.9 million for the
nine months ended September 30, 1999. Net cash provided by financing activities
for the nine months ended September 30, 2000 and 1999 primarily relates to
additional borrowings under the line of credit facility with the bank.
As of September 30, 2000, we had a cash overdraft of approximately
$770,000, with $1,111,000 remaining on our credit facility with Sanwa Bank. In
October 2000, in connection with the renewal of the line of credit agreement
with Sanwa, we borrowed $500,000 from our Chairman as described above. We are
working to obtain replacement financing with another lender and have executed a
commitment letter with a major lending institution for a larger facility which
would include a $22 million revolving credit facility and a $3 million capital
equipment facility. However, we cannot assure you that we will be able to obtain
financing from this lender or a replacement lender on such terms. See
"-Cautionary Statements and Risk Factors - Need to Obtain Replacement
Financing." Our need for additional financing includes the integration of our
new exclusive license and distribution arrangement with GICISA for Talon
products which continue to 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. In addition to obtaining replacement lender financing, 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."
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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 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 forecasted 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 LARGEST CUSTOMER, OUR SALES AND OPERATING RESULTS
WILL BE ADVERSELY AFFECTED. Our largest customer accounted for approximately
47.9% of our net sales, on a consolidated basis, for the year ended December 31,
1999, and approximately 46.6% of our net sales, on a consolidated basis, for the
nine months ended September 30, 2000. We may not be able to derive the same
level of sales from this customer in the future. The termination of our business
relationship or a material reduction in sales to this 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. The growth of our operations and activities has
placed and will continue to place a significant strain on our management,
operational, financial and accounting resources. If we cannot implement and
improve our financial and management information and reporting systems, we will
not be able to implement our growth strategies and our revenues will be
adversely affected. In addition, we will not be able to manage future growth, if
any, and increase production levels and continue to market and distribute our
products, if we cannot hire, train, motivate and manage new employees, including
management and operating personnel, and integrate them into our overall
operations and culture.
FLUCTUATIONS IN OPERATING RESULTS MAY RESULT IN UNEXPECTED REDUCTIONS IN
REVENUE AND STOCK PRICE VOLATILITY. We operate in an industry that is subject to
significant fluctuations in operating results from quarter to quarter, which may
lead to unexpected reductions in revenues and stock price volatility. Factors
that may influence our quarterly operating results include:
o the volume and timing of customer orders received during the quarter;
o the timing and magnitude of customers' marketing campaigns;
o the loss or addition of a major customer;
o the availability and pricing of materials for our products;
o the increased expenses incurred in connection with the introduction of
new products;
o currency fluctuations; and
o changes in our product mix.
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.
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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. We must continue to
consolidate and centralize the management of our subsidiaries and significantly
expand and improve our financial and operating controls. Additionally, we must
effectively integrate all 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 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.
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.
NEED TO OBTAIN ADDITIONAL LENDER FINANCING. We obtained a renewal of our
Sanwa Bank credit facility currently in the amount of $9.4 million, plus an
additional $600,000 equipment line until December 31, 2000. However, this credit
facility is not adequate for our working capital needs as we integrate the Talon
product line and otherwise execute our business plan. We are seeking alternative
financing and have on November 6, 2000 executed a commitment letter with a major
lending institution for a larger line of credit. The proposed line includes a
$22 million revolving credit facility and a $3 million capital equipment line.
The commitment letter is subject to the lender's due diligence, negotiation and
execution of definitive loan documents and other customary conditions. We can
give no assurances that the loan will be consummated with this lender. We will,
in such event, seek alternative lender financing. However, we cannot assure you
that alternative financing will be available, or that if available, it will be
on terms favorable to the Company.
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 the Company's 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:
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o foreign trade disruptions;
o import restrictions;
o labor disruptions;
o embargoes;
o government intervention; and
o natural disaster.
BECAUSE WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS, WE MAY NOT BE ABLE TO
ALWAYS OBTAIN MATERIALS WHEN WE NEED THEM AND WE MAY LOSE SALES AND CUSTOMERS.
Generally, we do not have long-term agreements with our key sources of supply.
Lead times for materials we order can vary significantly and depend on many
factors, including the specific supplier, the contract terms and the demand for
particular materials at a given time. From time to time, we experience
fluctuations in the prices, and disruptions in the supply, of materials.
Shortages or disruptions in the supply of materials, or our inability to procure
materials from alternate sources at acceptable prices in a timely manner, could
lead us to miss deadlines for orders and lose sales and customers.
WE ARE SUBJECT TO FLUCTUATING PAPER COSTS, WHICH MAY ADVERSELY AFFECT OUR
PROFITS. The cost of paper is a principal component of the price we charge for
our paper products, including our high quality paper boxes, custom shopping
bags, hang tags and packaging. Historically, we have been able to pass on to our
customers any increase or decrease in the cost of paper, which has allowed us to
maintain our gross margins on paper products during fluctuations in the cost of
paper. If our customers are unwilling to absorb these price increases in the
future, our gross margins may decrease, which will lower our profits.
IF THERE IS A PAPER SHORTAGE, WE MAY NOT BE ABLE TO SELL SOME OF OUR
PAPER PRODUCTS. The capacity in the paper industry has remained relatively
stable in recent years. During periods of high demand for paper, certain grades
of paper, including grades that we use in our paper products, have been
unavailable or only available in limited quantities. If we cannot acquire the
paper we use to produce our products, our sales will be lower and we may lose
customers. Although we actively manage our paper supplies and have established
strong relationships with our paper suppliers, we do not have long-term
agreements with our key paper suppliers. We cannot be certain that our sources
of paper supply will be adequate or, if they are not adequate, that we will be
able to develop alternative sources of paper supply in a timely manner.
THERE ARE MANY COMPANIES THAT OFFER SOME OR ALL OF THE PRODUCTS AND
SERVICES WE SELL. We compete in highly competitive and fragmented industries
with numerous local and regional companies that provide some or all of the
products and services we offer. We compete with United States and international
design companies, distributors and manufacturers of tags, packaging products and
trims. Some of our competitors, including Paxar, Inc., RVL, Inc, 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;
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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
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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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
10.1 Consignment Inventory Purchase Agreement
(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: November 14, 2000 TAG-IT PACIFIC, INC.
/S/ RONDA SALLMEN
-----------------------
By: Ronda Sallmen
Its: Chief Financial Officer
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