SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended June 30, 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)
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 August __, 2000.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- ---
<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 June 30, 2000
and December 31, 1999........................................... 3
Consolidated Statements of Income (unaudited) for the
Three Months and Six Months Ended June 30, 2000 and 1999........ 4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 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....................................... 8
PART II OTHER INFORMATION
Item 2. Changes in Securities............................................. 16
Item 6. Exhibits and Reports on Form 8-K.................................. 16
Page 2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
TAG-IT PACIFIC, INC.
Consolidated Balance Sheets
June 30,
Assets -------------- December 31,
2000 1999
(unaudited) --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 494,120 $ 100,798
Due from factor, net 76,366 180,767
Accounts receivable, trade, net 3,151,214 2,905,866
Due from related parties 4,942,944 2,397,511
Inventories 11,419,272 10,102,115
Prepaid expenses and other current assets 995,269 1,133,324
--------------- --------------
Total current assets 21,079,185 16,820,381
Property and equipment, net of accumulated depreciation and amortization 3,341,119 2,815,308
Other assets 1,542,651 219,332
--------------- --------------
Total assets $ 25,962,955 $ 19,855,021
--------------- --------------
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ 6,313,962 $ 5,067,259
Accounts payable 6,909,166 4,225,661
Accrued expenses 795,687 401,789
Income taxes payable 181,767 219,310
Notes payable 25,200 25,200
Notes payable to related parties 335,883 405,149
Current portion of capital lease obligations 239,098 254,023
--------------- --------------
Total current liabilities 14,800,763 10,598,391
Capital lease obligations, less current portion 244,342 346,337
Deferred income tax liability 48,818 48,818
--------------- --------------
Total liabilities 15,093,923 10,993,546
Commitments and Contingencies (Notes 4)
Stockholders' Equity:
Preferred stock, $0.001 par value; 3,000,000 shares authorized; 850,000
shares issued and outstanding at June 30, 2000 1,400,000 -
Common stock; $0.001 par value; 30,000,000 shares authorized; 6,777,556
shares issued and outstanding at June 30, 2000 and December 31, 1999 6,778 6,778
Additional paid-in capital 8,748,157 8,748,157
Retained earnings 714,097 106,540
--------------- --------------
Total stockholders' equity 10,869,032 8,861,475
--------------- --------------
Total liabilities and stockholders' equity $ 25,962,955 $ 19,855,021
--------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
TAG-IT PACIFIC, INC.
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 31,
------------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 11,358,627 $ 8,179,479 $ 19,549,451 $ 13,812,492
Cost of goods sold 8,065,229 5,513,179 13,747,899 9,136,223
------------- ------------- ------------ ------------
Gross profit 3,293,398 2,666,300 5,801,552 4,676,269
Selling expenses 424,793 462,974 785,642 988,798
General and administrative expenses 2,268,172 1,777,028 3,979,268 3,012,716
------------- ------------- ------------ ------------
Total operating expenses 2,692,965 2,240,002 4,764,910 4,001,514
Income from operations 600,433 426,298 1,036,642 674,755
Interest expense, net 121,321 42,089 224,440 65,767
------------- ------------- ------------ ------------
Income before income taxes 479,112 384,209 812,202 608,988
Provision for income taxes 133,661 20,726 204,644 58,011
------------- ------------- ------------ ------------
Net Income $ 345,451 $ 363,483 $ 607,558 $ 550,977
------------- ------------- ------------ ------------
Basic earnings per share $ 0.05 $ 0.05 $ 0.09 $ 0.08
------------- ------------- ------------ ------------
Diluted earnings per share $ 0.05 $ 0.05 $ 0.08 $ 0.08
------------- ------------- ------------ ------------
------------ ------------
Weighted average number of common shares outstanding:
Basic 6,777,556 6,726,677 6,777,556 6,726,677
------------ ------------
------------- ------------- ------------ ------------
Diluted 7,264,966 7,275,318 7,284,287 7,288,442
------------- ------------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
<TABLE>
<CAPTION>
TAG-IT PACIFIC, INC.
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended June 30,
--------------------------------
2000 1999
------------- ------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 607,558 $ 550,977
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 458,328 283,236
Increase in allowance for doubtful accounts 156,122 -
Gain on sale of assets (14,584) -
Translation gain - 20,912
Changes in operating assets and liabilities:
Receivables, including related parties (2,560,027) (1,779,325)
Inventories (1,317,157) (788,580)
Other assets 41,682 (49,661)
Prepaid expenses and other current assets 138,055 (31,607)
Accounts payable 2,683,505 1,408,052
Accounts payable, related party - (1,588,827)
Accrued expenses 393,896 10,654
Income taxes payable (37,543) -
------------- ------------
Net cash provided by (used in) operating activities 549,835 (1,964,169)
------------- ------------
Cash flows from investing activities:
Additional loans to related parties (282,475) -
Proceeds from sale of assets 17,000 -
Acquisition of property and equipment (951,555) (871,375)
------------- ------------
Net cash used in investing activities (1,217,030) (871,375)
------------- ------------
Cash flows from financing activities:
Bank overdraft - 231,107
Proceeds from bank line of credit, net 1,246,703 720,000
Repayment of capital lease obligations (116,920) -
Proceeds from long-term debt - 19,091
Repayment of long-term debt - (2,382)
Repayment of notes payable to related parties (69,266) (197,603)
------------- ------------
Net cash provided by financing activities 1,060,517 770,213
------------- ------------
Net increase (decrease) in cash 393,322 (2,065,331)
Cash at beginning of period 100,798 2,065,331
------------- ------------
Cash at end of period $ 494,120 $ -
============= ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 246,468 $ 85,815
Income taxes 223,017 6,053
Preferred stock issued in exchange for distribution rights 1,400,000 -
</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 JUNE 30, 2000: (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ----------------- -----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income available to common stockholders $ 345,451 6,777,556 $ 0.05
EFFECT OF DILUTIVE SECURITIES:
Options 429,894
Warrants 57,516
Shares issued -
-------------- ----------------- -----------
Income available to common stockholders $ 345,451 7,264,966 $ 0.05
-------------- ----------------- -----------
</TABLE>
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
THREE MONTHS ENDED JUNE 30, 1999: (NUMERATOR) (DENOMINATOR) AMOUNT
---------------------------------
-------------- ----------------- ------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income available to common stockholders $ 363,483 6,726,677 $ 0.05
EFFECT OF DILUTIVE SECURITIES:
Options - 441,833 -
Warrants - 106,808 -
Shares issued - - -
-------------- ----------------- ------------
Income available to common stockholders $ 363,483 7,275,318 $ 0.05
-------------- ----------------- ------------
</TABLE>
Page 6
<PAGE>
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
SIX MONTHS ENDED JUNE 30, 2000: (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ----------------- -----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income available to common stockholders $ 607,558 6,777,556 $ 0.09
EFFECT OF DILUTIVE SECURITIES:
Options 446,400
Warrants 60,331
Shares issued -
-------------- ----------------- -----------
Income available to common stockholders $ 607,558 7,284,287 $ 0.08
-------------- ----------------- -----------
</TABLE>
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
SIX MONTHS ENDED JUNE 30, 1999: (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ----------------- -----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income available to common stockholders $ 550,977 6,726,677 $ 0.08
EFFECT OF DILUTIVE SECURITIES:
Options 447,047
Warrants 114,718
Shares issued -
-------------- ----------------- -----------
Income available to common stockholders $ 550,977 7,288,442 $ 0.08
-------------- ----------------- -----------
</TABLE>
Warrants to purchase 80,000 shares of common stock at $6.00 were
outstanding for the six months ended June 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.
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 June 30,
2000 and 1999 and for the six months ended June 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.
Page 7
<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 SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 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 Guess?, Calvin Klein, Tommy
Hilfiger, A\X Armani Exchange, Warner Bros., Chorus Line, Tarrant Apparel Group
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.
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 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 8
<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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
2000 1999 2000 1999
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 71.0 67.4 70.3 66.1
--------- ---------- ---------- ---------
Gross profit 29.0 32.6 29.7 33.9
Selling expenses 3.7 5.7 4.0 7.2
General and administrative expenses 20.0 21.7 20.4 21.8
--------- ---------- ---------- ---------
Operating Income 5.3 5.2 % 5.3 % 4.9 %
========= ========== ========== =========
</TABLE>
NET SALES. Net sales increased approximately $3.2 million (or 38.9%) to
$11.4 million for the three months ended June 30, 2000 from $8.2 million for the
three months ended June 30, 1999. The increase in net sales was primarily the
result of an increase in trim related sales from our Tehuacan, Mexico, operation
which accounted for approximately $5.7 million of net sales (or 50.2%) during
the three months ended June 30, 2000, as compared to net sales of $ 4.5 million
(or 55.0 %) for the three months ended June 30, 1999.
Net sales increased approximately $5.7 million (or 41.5%) to $19.5
million for the six months ended June 30, 2000 from $13.8 million for the six
months ended June 30, 1999. The increase in net sales was primarily the result
of an increase in sales from our Tehuacan, Mexico, operation which accounted for
approximately $9.5 million of net sales (or 48.6%) for the six months ended June
30, 2000 compared to $6.1 million (or 44.1%) for the six months ended June 30,
1999.
GROSS PROFIT. Gross profit increased approximately $627,000 to $3.3
million (or 23.5%) for the three months ended June 30, 2000 from $2.7 million
for the three months ended June 30, 1999. Gross margin as a percentage of net
sales decreased to 29.0% for the three months ended June 30, 2000 as compared to
32.6% for the three months ended June 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 65% of net sales for
the three months ended June 30, 2000.
Gross profit increased approximately $1,125,000 to $5.8 million (or
24.1%) for the six months ended June 30, 2000 from $4.7 million for the six
months ended June 30, 1999. Gross margin as a percentage of net sales decreased
to 29.7% for the six months ended June 30, 2000 as compared to 33.9% for the six
months ended June 30.1999 due to the reason stated above.
SELLING EXPENSES. Selling expenses decreased approximately $38,000 (or
8.2%) to $424,000 for the three months ended June 30, 2000 from $463,000 for the
three months ended June 30, 1999. As a percentage of net sales, these expenses
decreased to 3.7% for the three months ended June 30, 2000 compared to 5.7% for
the three months ended June 30, 1999. This decrease was due to a reduction of
selling expenses associated with the increased sales volume under the TAG-IT
TURNKEY SYSTEM, which accounted for in excess of 65% of net sales for the three
months ended June 30, 2000.
Selling expenses decreased approximately $203,000 (or 20.5%) to
$786,000 for the six months ended June 30, 2000 from $989,000 for the six months
ended June 30, 1999. As a percentage of net sales, these expenses decreased to
4.0% for the six months ended June 30, 2000 compared to 7.2% for the six months
ended June 30, 1999, due to the reason stated above.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased approximately $491,000 to $2.3 million for the three months
ended June 30, 2000 from $1.8 million for the three month ended June 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 growth in our Tehuacan, Mexico and Hong Kong facilities. As a percentage of
net sales, these expenses decreased to 20.0% for the three months ended June 30,
2000 compared to 21.7% for the three months ended June 1999, due to an increase
in net sales that exceeded the rate of increase in general and administrative
expenses.
Page 9
<PAGE>
General and administrative expenses increased approximately $967,000 to
$4.0 million for the six months ended June 30, 2000 from $3.0 million for the
six months ended June 30, 1999. As a percentage of net sales, these expenses
decreased to 20.4% for the six months ended June 30, 2000 compared to 21.8% for
the six months ended June 30, 1999, due to the reason stated above.
INTEREST EXPENSE. Interest expense increased approximately $79,000 (or
188.2%) to $121,000 for the three months ended June 30, 2000 from $42,000 for
the three months ended June 30, 1999, and approximately $159,000 (or 241.3%) to
$224,000 for the six months ended June 30, 2000 from $66,000 for the six months
ended June 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 six months ended June 30, 2000, compared to the same
periods in 1999. We intend to continue to limit our use of factors in the future
and intend to continue to rely upon the increased credit facility for our
short-term financing needs.
PROVISION FOR INCOME TAXES (BENEFIT). The provision for income taxes
increased approximately $113,000 to $134,000 for the three months ended June 30,
2000 as compared to $21,000 for the three months ended June 30, 1999, and
approximately $147,000 to $205,000 for the six months ended June 30, 2000 as
compared to $58,000 for the six months ended June 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 $345,000 for the three months ended June 30,
2000 as compared to net income of $363,000 for the three months ended June 30,
1999, and $608,000 for the six months ended June 30, 2000 as compared to
$551,000 for the six months ended June 30, 1999, due to the factors set forth
above.
Page 10
<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 April 20, 2000, the amount available under
the line of credit was increased from $5 million to $10 million, which includes
a $1 million equipment line. The line of credit interest rate is equal to the
bank's reference rate, 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 June 30, 2000, the Company
was in compliance with these covenants. The bank has extended the credit
agreement through August 31, 2000 and the Company is currently negotiating with
the bank to renew its credit facility.
As of June 30, 2000, we had outstanding related party debt of
approximately $336,000 at a weighted average interest rate of 8.2%, 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 the fifteenth day following
the date of delivery of written demand for payment.
Our receivables increased from $5.4 million at June 30, 1999 to $8.1
million at June 30, 2000. This increase was due primarily to an increase in
related party trade receivables.
Net cash provided by operating activities was approximately $550,000
for the six months ended June 30, 2000 compared to $2.0 million used in
operating activities for the six months ended June 30, 1999. Cash provided by
operations for the six months ended June 30, 2000 resulted primarily from
increases in accounts payable, accrued expenses and net income, offset by
increases in accounts receivable and inventories. Cash used in operations for
the six months ended June 30, 1999 resulted primarily from decreased accounts
payable due to a related party.
Net cash used in investing activities was $1,217,000 and $871,000 for
the six months ended June 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 $1,061,000
for the six months ended June 30, 2000 compared to $770,000 for the six months
ended June 30, 1999. Net cash provided by financing activities for the six
months ended June 30, 2000 primarily relates to additional borrowings under the
line of credit facility with the bank. Net cash provided by financing activities
for the six months ended June 30, 1999 resulted primarily from the proceeds from
the bank line of credit, offset by the repayment of loans from related parties.
As of June 30, 2000, we had cash of approximately $494,000, as well as
$2,686,000 remaining on our credit facility with Sanwa Bank. 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."
Page 11
<PAGE>
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 THREE LARGEST CUSTOMERS, OUR SALES AND OPERATING
RESULTS WILL BE ADVERSELY AFFECTED. Our three largest customers accounted for
approximately 47.9%, 5.2% and 3.2% of our net sales, on a consolidated basis,
for the year ended December 31, 1999, and approximately 48.6%, 2.4% and 3.6% of
our net sales, on a consolidated basis, for the six months ended June 30, 2000.
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. 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.
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:
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
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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;
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.
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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 2. CHANGES IN SECURITIES
In accordance with the license and distribution agreement entered
into by the Company on April 3, 2000, the Company issued 850,000
shares of Series B Convertible Preferred Stock. After a period of
30 months, the preferred stock is 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Certificate of Designations of Series B Convertible
Preferred Stock of Tag-it Pacific, Inc.
10.1 Series B Convertible Preferred Stock Agreement.
10.2 Talon License and Distribution Agreement 1.
27.1 Financial Data Schedule.
1 Confidential treatment has been requested for this
agreement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the period covered by
this quarterly report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August __, 2000 TAG-IT PACIFIC, INC.
/S/ RONDA SALLMEN
--------------------------------
By: Ronda Sallmen
Its: Chief Financial Officer
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