SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended March 31, 2001.
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 Issuer as Specified in its Charter)
DELAWARE 95-4654481
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
21900 BURBANK BOULEVARD, SUITE 270,
WOODLAND HILLS, CALIFORNIA 91367
(Address of Principal Executive Offices)
(818) 444-4100
(Issuer's Telephone Number)
Indicate by check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No __
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, par value $0.001
per share, 8,003,244 shares issued and outstanding as of May 15, 2001.
TAG-IT PACIFIC, INC.
INDEX TO FORM 10-Q
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements...................................3
Consolidated Balance Sheets as of
March 31, 2001 (unaudited) and December 31, 2000....................3
Consolidated Statements of Operations (unaudited) for the
Three Months ended March 31, 2001 and March 2000....................4
Consolidated Statements of Cash Flows (unaudited) for
the Three Months Ended March 31, 2001 and 2000......................5
Notes to the Consolidated Financial Statements......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................8
Item 3 Quantitative and Qualitative Disclosures About Market Risk.........19
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................19
Item 2. Changes in Securities and Use of Proceeds..........................19
Item 4. Submission of Matters to a Vote of Security Holders................19
Item 6. Exhibits and Reports on Form 8-K...................................20
Page 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TAG-IT PACIFIC, INC.
Consolidated Balance Sheets
March 31, December 31,
2001 2000
--------------- -------------
Assets
Current Assets: (unaudited)
Cash and cash equivalents............................................. $ 25,097 $ 128,093
Due from factor....................................................... 34,540 25,140
Trade accounts receivable, net........................................ 4,521,101 3,466,314
Trade accounts receivable, related parties............................ 7,009,740 9,041,752
Due from related parties.............................................. 631,781 513,614
Inventories........................................................... 20,393,120 19,868,160
Prepaid expenses and other current assets............................. 734,510 738,735
--------------- -------------
Total current assets............................................ 33,349,889 33,781,808
Property and Equipment, net of accumulated depreciation and
amortization........................................................ 3,480,008 3,755,127
Other assets.......................................................... 1,977,943 1,562,539
--------------- -------------
Total assets.......................................................... $ 38,807,840 $ 39,099,474
=============== =============
Liabilities and Stockholders' Equity
Current Liabilities:
Bank overdraft...................................................... $ - $ 584,831
Line of credit...................................................... 9,677,427 9,956,436
Accounts payable.................................................... 8,339,931 8,228,677
Accrued expenses.................................................... 1,662,568 1,484,765
Accrued restructuring charges....................................... 808,703 -
Income taxes payable................................................ - 66,942
Notes payable....................................................... 25,200 25,200
Notes payable to related parties.................................... 966,924 882,970
Current portion of capital lease obligations........................ 318,140 250,403
--------------- -------------
Total current liabilities..................................... 21,798,893 21,480,224
Capital lease obligations, less current portion....................... 66,731 113,046
Deferred income tax liability......................................... 113,335 113,335
Subordinated note payable to related party............................ 2,645,654 2,601,470
--------------- -------------
Total liabilities............................................. 24,624,613 24,308,075
--------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, Series A $0.001 par value; 2,500,000 shares
authorized, no shares issued or outstanding....................... - -
Convertible preferred stock Series B, $0.001 par value; 850,000
shares authorized; 850,000 shares issued and outstanding.......... 1,400,000 1,400,000
Common stock, $0.001 par value, 30,000,000 shares authorized;
8,003,244 shares issued and outstanding at March 31, 2001;
7,863,244 at December 31, 2000.................................. 8,004 7,864
Additional paid-in capital.......................................... 12,274,570 11,737,810
Retained earnings................................................... 500,653 1,645,725
--------------- -------------
Total stockholders' equity ........................................... 14,183,227 14,791,399
--------------- -------------
Total liabilities and stockholders' equity ........................... $ 38,807,840 $ 39,099,474
=============== =============
See accompanying notes to consolidated financial statements
Page 3
TAG-IT PACIFIC, INC.
Consolidated Statements of Operations
(unaudited)
Three Months Ended March 31,
------------------------------------
2001 2000
------------------ -----------------
Net sales................................................ $ 10,138,579 $ 8,190,824
Cost of goods sold....................................... 7,295,051 5,682,670
------------------ -----------------
Gross profit.......................................... 2,843,528 2,508,154
Selling expenses......................................... 480,081 360,849
General and administrative expenses...................... 2,038,520 1,711,096
Restructuring charges (Note 4) .......................... 1,257,598 -
------------------ -----------------
Total operating expenses.............................. 3,776,199 2,071,945
(Loss) income from operations........................... (932,671) 436,209
Interest expense......................................... 513,799 103,119
------------------ -----------------
(Loss) income before income taxes........................ (1,446,470) 333,090
(Benefit) provision for income taxes..................... (301,398) 70,983
------------------ -----------------
Net (loss) income .................................... $ (1,145,072) $ 262,107
================== =================
Basic earnings per share................................. $ (0.14) $ 0.04
================== =================
Diluted earnings per share............................... $ (0.14) $ 0.04
================== =================
Weighted average number of common shares outstanding:
Basic................................................. 7,995,133 6,777,556
================== =================
Diluted............................................... 7,995,133 7,287,789
================== =================
See accompanying notes to consolidated financial statements.
Page 4
TAG-IT PACIFIC, INC.
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
------------------------------
2001 2000
--------------- -------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net (loss) income............................................. $ (1,145,072) $ 262,107
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization................................. 356,879 207,777
Increase in allowance for doubtful accounts................... 67,218 -
Loss on sale of assets........................................ 27,141 -
Changes in operating assets and liabilities:
Receivables, including related parties...................... 900,607 479,553
Inventories................................................. (524,960) 41,373
Other assets................................................ 4,225 (44,357 )
Prepaid expenses and other current assets................... 47,096 (25,363 )
Accounts payable............................................ 111,254 (279,206 )
Accrued restructuring charges............................... 808,703 -
Accrued expenses............................................ 432,089 (1,289 )
Income taxes payable........................................ (303,829) (193,960 )
--------------- -------------
Net cash provided by operating activities....................... 781,351 446,635
--------------- -------------
Cash flows from investing activities:
Additional loans to related parties........................... (118,167) -
Acquisition of property and equipment......................... (146,097) (390,436 )
Proceeds from sale of fixed assets............................ 118,880 -
--------------- -------------
Net cash used in investing activities............................ (145,384) (390,436 )
--------------- -------------
Cash flows from financing activities:
Bank overdraft................................................ (584,831) -
Repayments on bank line of credit, net........................ (279,009) (53,297 )
Proceeds from exercise of stock options....................... 19,500 -
Proceeds from capital leases.................................. 87,556 -
Repayment of capital leases................................... (91,333) (35,090 )
Proceeds from notes payable to related parties................ 180,000 -
Repayment of notes payable to related parties................. (70,846) (36,366 )
--------------- -------------
Net cash used in financing activities............................ (738,963) (124,753 )
--------------- -------------
Net decrease in cash............................................. (102,996) (68,554 )
Cash at beginning of period...................................... 128,093 100,798
--------------- -------------
Cash at end of period............................................ $ 25,097 $ 32,244
=============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................... $ 513,799 $ 122,651
Income taxes................................................ $ 2,430 $ 223,017
Non-cash financing activity:
Common stock issued in acquisition of assets................ $ 500,000 $ -
See accompanying notes to consolidated financial statements.
Page 5
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 accounting principles generally accepted in the
United States for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles in the United States 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-K for the year ended December 31, 2000.
2. EARNINGS PER SHARE
The Company has adopted Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
THREE MONTHS ENDED MARCH 31, 2001: INCOME SHARES PER SHARE
- ---------------------------------- ------------- -------------- ------------
BASIC EARNINGS PER SHARE:
Loss available to common stockholders $ (1,145,072) 7,995,133 $ (0.14)
EFFECT OF DILUTIVE SECURITIES:
Options -
Warrants -
------------- --------------- ------------
Loss available to common stockholders $ (1,145,072) 7,995,133 $ (0.14)
============= =============== ============
THREE MONTHS ENDED MARCH 31, 2000:
BASIC EARNINGS PER SHARE:
Income available to common stockholders $ 262,107 6,777,556 $ 0.04
EFFECT OF DILUTIVE SECURITIES:
Options 446,342
Warrants 63,891
------------- --------------- ------------
Income available to common stockholders $ 262,107 7,287,789 $ 0.04
============= =============== ============
Warrants to purchase 80,000, 110,000, 39,235 and 35,555 shares of common
stock at $6.00, $4.80, $0.71 and $1.50, options to purchase 1,262,500 shares of
common stock at between $1.30 and $4.63, convertible debt of $500,000
convertible at $4.50 per share and 850,000 shares of preferred Series B stock
convertible when the average trading price of the Company's stock for a 30-day
consecutive period is equal to or greater than $8.00 per share were outstanding
for the three months ended March 31, 2001, but were not included in the
computation of diluted earnings per share because exercise or conversion would
have an antidilutive effect on earnings per share.
Page 6
Warrants to purchase 80,000 shares of common stock at $6.00 were
outstanding for the three months ended March 31, 2000 but were not included in
the computations of diluted earnings per share because exercise would have an
antidilutive effect on earnings per share.
3. ACQUISITION OF ASSETS
Effective January 2, 2001, the Company entered into an asset purchase
agreement with Arzee Holdings, Inc., a Florida based corporation. The agreement
provided for the acquisition of certain assets of Arzee Holdings, Inc.,
including customer lists, fixed assets, general intangibles, among others, in
exchange for 125,000 shares of the Company's common stock. The stock was issued
at the market value of the Company's common stock on the closing date of the
transaction.
4. RESTRUCTURING CHARGES
During the first quarter of 2001, the Company implemented a plan to
restructure certain business operations. In accordance with the restructuring
plan, the Company closed one of its Tijuana, Mexico, facilities and relocated
its TALON brand operations to Medley, Florida. In addition, the Company incurred
costs related to the reduction of its Hong Kong operations, the relocation of
its corporate headquarters from Los Angeles, California, to Woodland Hills,
California, and the downsizing of its corporate operations by eliminating
certain corporate expenses related to sales and marketing, customer service and
general and administrative expenses. Total restructuring charges for the three
months ended March 31, 2001 amounted to $1,257,598.
5. CONTINGENCIES
The Company is subject to certain legal proceedings and claims arising
in connection with its business. In the opinion of management, there are
currently no claims that will have a material adverse effect on the Company's
consolidated financial position, results of operation or cash flows.
6. SUBSEQUENT EVENTS
The Company's working capital facility with Sanwa Bank expired on
December 31, 2000. From January 1, 2001 to April 3, 2001, Sanwa Bank extended
the credit facility on a daily basis. On April 4, 2001, Sanwa Bank agreed to
extend the credit facility through April 30, 2001. Since May 1, 2001, Sanwa Bank
has extended the credit facility on a daily basis. The Company is currently
negotiating with a major financial institution as a potential senior lender to
replace Sanwa Bank.
Page 7
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, Inc. and the notes to the
Consolidated Financial Statements included elsewhere in this Form 10-Q.
THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF TAG-IT PACIFIC, INC. FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31,
2000. 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
We specialize in the distribution of trim items to manufacturers of
fashion apparel, licensed consumer products, specialty retailers and mass
merchandisers. We act as an outsourced trim management department for
manufacturers of fashion apparel such as Tarrant Apparel Group and Azteca
Production International. We also serve as a supplier of trim items to specific
brands, brand licensees and retailers, including Tommy Hilfiger, A/X Armani
Exchange, Express, The Limited, Lerner and Swank, among others.
We have positioned ourselves as a fully integrated single-source
supplier of a full range of trim items for manufacturers of fashion apparel. Our
business focus is on servicing all of the trim requirements of our customers at
the manufacturing and retail brand name level of the fashion apparel industry.
We offer customers complete management of ordering, production, inventory
management and just-in-time distribution of their trim and packaging
requirements. We provide our customers with a full range of trim items including
thread, zippers, labels, buttons, rivets, printed marketing material, polybags,
packing cartons and hangers. We also provide customers with printed marketing
materials including hang tags, bar-coded hang tags, pocket flashers, waistband
tickets and size stickers that are attached to products to identify and promote
the products, permit automated data collection, provide brand identification and
communicate consumer information such as a product's retail price, size, fabric
content and care instructions.
During 2000, we worked to further refine our proprietary
business-to-business e-commerce system. Renamed our MANAGED TRIM SOLUTION
(formerly called our TAG-IT TURNKEY SYSTEM), this solution allows us to provide
our customers with a customized, comprehensive system for the management of
various aspects of their trim programs. Our MANAGED TRIM SOLUTION provides
customers with assistance in their ordering, production, inventory management
and just-in-time distribution of their trim and packaging requirements.
We also serve as a specified supplier for a variety of major brand and
private label oriented companies. In each case, we seek to expand our services
as a supplier of select lines of trim items for such customers to being a
preferred or single source provider of all of such brand customer's authorized
trim requirements.
On April 3, 2000, we entered into a ten-year exclusive license and
distribution agreement with Talon, Inc. TALON is a leading brand of zippers with
an eighty-year history. These exclusive license and distribution rights give us
the right to distribute zippers and trim products under the TALON brand name in
the United States, Mexico, Canada and the Pacific Rim. In exchange for these
exclusive distribution rights, we issued 850,000 shares of our Series B
convertible preferred stock to Grupo Industrial Cierres Ideal, S.A. de C.V., or
GICISA. We began shipping products under the TALON brand name in July 2000.
On December 22, 2000, we entered into an exclusive supply agreement with
Hubert Guez, Paul Guez, Azteca Production International, Inc., AZT International
SA D RL, and Commerce Investment
Page 8
Group, LLC. Pursuant to this supply agreement we will provide all trim-related
products for certain programs manufactured by Azteca Production International.
The agreement provides for a minimum aggregate total of $10,000,000 in annual
purchases by Azteca Production International and its affiliates during each year
of the three-year term of the agreement, if and to the extent, we are able to
provide trim products on a basis that is competitive in terms of price and
quality. Azteca Production International has been a significant customer of the
Company for many years. This agreement is structured in a manner that is well
suited to allow us to utilize our MANAGED TRIM SOLUTION system to supply Azteca
Production International with its future trim program requirements. We currently
plan to expand our facilities in Tlaxcala, Mexico, to service Azteca Production
International's trim requirements.
During the first quarter of 2001, we implemented a plan to restructure
certain business operations. In accordance with the restructuring plan, we
closed one of our Tijuana, Mexico, facilities and relocated our TALON brand
operations to Medley, Florida. In addition, we incurred costs related to the
reduction of our Hong Kong operations, the relocation of our corporate
headquarters from Los Angeles, California, to Woodland Hills, California, and
the downsizing of our corporate operations by eliminating certain corporate
expenses related to sales and marketing, customer service and general and
administrative expenses. Total restructuring charges for the three months ended
March 31, 2001 amounted to $1,257,598. We believe these restructuring measures
will significantly reduce our overhead, sales and marketing and general and
administrative expenses in the future.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected
statements of operations data shown as a percentage of net sales.
THREE MONTHS ENDED MARCH 31,
MARCH 31,
----------------------------
2001 2000
-------------- ----------
Total net sales............................. 100.0 % 100.0 %
Cost of goods sold.......................... 72.0 69.4
-------------- ----------
Gross profit................................ 28.0 30.6
-------------- ----------
Selling expenses............................ 4.7 4.4
General and administrative expenses......... 20.1 20.9
Restructuring charges....................... 12.4 -
-------------- ----------
Income from operations...................... (9.2) % 5.3 %
============== ==========
TOTAL NET SALES. Net sales increased approximately $1,948,000 or 23.8%
to $10,139,000 for the three months ended March 31, 2001 from $8,191,000 for the
three months ended March 31, 2000. The increase in net sales was due to an
increase in trim-related sales under our exclusive license and distribution
agreement of TALON products, which began in July 2000, as well as to an increase
in trim-related sales from our Tlaxcala, Mexico operations to our largest
customer, Tarrant Apparel Group, and our newly acquired customer, Azteca
Production International.
COST OF GOODS SOLD. Cost of goods sold increased approximately
$1,612,000 or 28.4% to $7,295,000 for the three months ended March 31, 2001 from
$5,683,000 for the three months ended March 31, 2000. Cost of goods sold as a
percentage of net sales increased to approximately 72.0% for the three months
ended March 31, 2001 compared to 69.4% for the three months ended March 31,
2000. The Company shifted its product mix from single trim item sales to full
package sales under our MANAGED TRIM SOLUTION. Since full package sales under
our MANAGED TRIM SOLUTION have a lower margin than single trim item sales, the
shift in product mix from single trim item sales to full package sales under our
MANAGED TRIM SOLUTION resulted in an increase in cost of goods sold.
GROSS PROFIT. Gross profit increased approximately $335,000 or 13.4% to
$2,844,000 for the three months ended March 31, 2001 from $2,508,000 for the
three months ended March 31, 2000. Gross margin as a percentage of net sales
decreased to approximately 28.0% for the three months ended March 31, 2001 as
compared to 30.6% for the three months ended March 31, 2000. The reduction for
the three
Page 9
months ended March 31, 2001 was primarily due to an increase in the proportion
of sales of trim products with lower gross margins that were included within the
complete trim package we offered to our customers through our MANAGED TRIM
SOLUTION. In addition, sales of TALON products, with lower gross margins,
accounted for a portion of net sales for the three months ended March 31, 2001.
We began shipping TALON products in July 2000.
SELLING EXPENSES. Selling expenses increased approximately $119,000 or
33.0% to $480,000 for the three months ended March 31, 2001 from $361,000 for
the three months ended March 31, 2000. As a percentage of net sales, these
expenses increased to 4.7% for the three months ended March 31, 2001 compared to
4.4% for the three months ended March 31, 2000. This increase reflected
increased sales efforts for our new Florida operations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $327,000 or 19.1% to $2,039,000 for the three months
ended March 31, 2001 from $1,711,000 for the three months ended March 31, 2000.
The increase in these expenses was due to additional staffing and other expenses
related to our new Florida operations. As a percentage of net sales, these
expenses decreased to 20.1% for the three months ended March 31, 2001 compared
to 20.9% for the three months ended March 31, 2000, as the rate of increase in
net sales exceeded that of general and administrative expenses.
RESTRUCTURING CHARGES. Total restructuring charges for the three months
ended March 31, 2001 amounted to $1,257,598. During the first quarter of 2001,
the Company implemented a plan to restructure certain operation of its business.
In accordance with the restructuring plan, the Company closed one of its
Tijuana, Mexico, facilities and relocated its TALON brand operations to Medley,
Florida. In addition, the Company incurred costs related to the reduction of its
Hong Kong operations, the relocation of its corporate headquarters from Los
Angeles, California, to Woodland Hills, California, and the downsizing of its
corporate operations by eliminating certain corporate expenses related to sales
and marketing, customer service and general and administrative expenses.
INTEREST EXPENSE. Interest expense increased approximately $411,000 or
398.3% to $514,000 for the three months ended March 31, 2001 from $103,000 for
the three months ended March 31, 2000. Due to expanded operations, we have had
to increase our borrowing under our credit facility with Sanwa Bank, which
contributed to the increased interest expense for the three months ended March
31, 2001 as compared to the three months ended March 31, 2000. In addition, we
incurred other financing charges of approximately $150,000 in the first quarter
of 2001 related to our efforts to refinance our existing Sanwa credit facility.
Subsequent to March 31, 2001, we will be amortizing other expenses and fees
related to the refinancing of our existing credit facility. On April 4, 2001,
Sanwa Bank extended our credit facility to April 30, 2001. Since May 1, 2001,
Sanwa Bank has extended our credit facility on a daily basis. We are currently
negotiating with a major financial institution as a potential senior lender to
replace Sanwa Bank.
PROVISION FOR INCOME TAXES. The income tax benefit for the three months
ended March 31, 2001 amounted to approximately $301,000 compared to a provision
for income taxes of $71,000 for the three months ended March 31, 2001. Income
taxes decreased for the three months ended March 31, 2001 primarily due to
decreased taxable income. The Company was able to utilize net operating loss
carry forwards from its subsidiary, AGS Stationery, Inc. of approximately
$430,000 to offset taxable income during 2000, a portion of which was utilized
during the three months ended March 31, 2000.
NET (LOSS) INCOME. Net loss was approximately $1,145,000 for the three
months ended March 31, 2000 as compared to net income of $262,000 for the three
months ended March 31, 2000, due to the factors set forth above.
LIQUIDITY AND CAPITAL RESOURCES
We currently satisfy our working capital requirements primarily through
cash flows generated from operations and borrowings under our secured credit
facility with Sanwa Bank. On September 30, 2000, the amount available under the
Sanwa Bank credit facility was $9,400,000 under a working capital line and
$556,000 under an equipment finance line. On September 30, 2000, the Sanwa Bank
credit facility was renewed through December 31, 2000. From January 1, 2001 to
April 3, 2001, Sanwa Bank
Page 10
extended the Sanwa Bank credit facility on a daily basis. In connection with
this extension, interest rates were increased from the bank's reference rate
plus 2.0% to the bank's reference rate plus 5.0%. On April 4, 2001, Sanwa Bank
extended our credit facility through April 30, 2001 as part of a financing
package that included a factoring agreement with Capstone Business Credit, LLC.
In connection with this extension, interest rates were decreased from the bank's
reference rate plus 5.0% to the bank's reference rate plus 3.5%. The Sanwa Bank
credit facility requires that we maintain financial covenants related to net
worth, tangible net worth, current ratio and profitability. At March 31, 2001,
we were in compliance with these covenants.
As a result of the failure of Capstone Business Credit, LLC and Sanwa
Bank to come to an agreement in their negotiations of an intercreditor agreement
and a guarantee agreement, we have terminated our financing relationship with
Capstone Business Credit, LLC. Since May 1, 2001, Sanwa Bank has extended our
credit facility on a daily basis. In connection with this extension, interest
rates were increased from the bank's reference rate plus 3.5% to the bank's
reference rate plus 6.5%.
We are currently in negotiations with a major financial institution
regarding a senior credit facility to replace the existing Sanwa Bank credit
facility. The terms of this replacement facility have not been finalized.
We cannot be certain that we will successfully complete our negotiations
to replace the Sanwa Bank credit facility. We cannot be certain that additional
financing will be available or that, if available, we can obtain it on terms
favorable to our stockholders and us.
At March 31, 2001, outstanding borrowings under the working capital line
and the equipment loan amounted to $9,143,427 and $556,000. At March 31, 2000,
outstanding borrowings under the working capital line amounted to $5,067,259.
There were no open letters of credit at March 31, 2001 or 2000.
In October 2000, in connection with the amendment of the line of credit
agreement with Sanwa Bank, we borrowed $500,000 from Mark Dyne, our chairman, in
the form of a convertible secured subordinated promissory note. The note bears
interest at 11.0% per annum, is due on demand and is convertible at any time
into our common stock at the market price of the stock on the date of the
agreement. The note is secured by substantially all of our assets and is
subordinate to all of our other obligations, including our pledge of
substantially all of our assets under the credit facility with Sanwa Bank.
Inventories at March 31, 2001 and 2000 include goods that are subject to
buyback agreements with our customers. The buyback agreements contain provisions
related to the inventory purchased on behalf of our customers. In the event that
inventories remain with us in excess of six months from our receipt of the goods
from its vendors, the customer is required to purchase the inventories from us
under normal invoice and selling terms. The majority of the inventories at March
31, 2001 are subject to these buyback agreements.
Pursuant to the terms of a factoring agreement for our Hong Kong
subsidiary, Tag-It Pacific Limited, the factor purchases our eligible accounts
receivable and assumes the credit risk with respect to those accounts for which
the factor has given its prior approval. As of March 31, 2001, the amount
factored without recourse was approximately $34,540. If the factor does not
assume the credit risk for a receivable, the collection risk associated with the
receivable remains with us. If the factor determines, at its discretion, to
advance against the receivable, the customer's payment obligation is recorded as
our receivable and the advance from the factor is recorded as a current
liability. There were no outstanding advances from the factor as of March 31,
2001 and March 31, 2000.
As of March 31, 2001, we had outstanding related-party debt, excluding
the $500,000 convertible note mentioned above, of $496,924 and $2,645,654 at a
weighted average interest rate of between 9.5% and 10.5% and additional
non-related-party debt of $25,200 at an interest rate of 10.0%. 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. As of March 31, 2000, we had outstanding related-party debt of $394,000
at a weighted average interest rate of 8.2% and additional non-related-party
debt of $25,200 at a weighted average interest rate of 10.0%.
Page 11
Our receivables increased from approximately $4,844,000 at March 31,
2000 to $12,163,000 at March 31, 2001. This increase was due primarily to
increased sales, increased related-party trade receivables and receivables from
TALON product sales.
Net cash provided by operating activities was approximately $781,000 for
the three months ended March 31, 2001 and $447,000 for the three months ended
March 31, 2000. The increase in cash provided by operations for the three months
ended March 31, 2001 resulted primarily from decreases in accounts receivable
and increased in accounts payable and accrued expenses, which was offset by
increases in inventories and net losses. Cash provided by operations for the
three months ended March 31, 2000 resulted primarily from decreased accounts
receivables and an increase in net income, partially offset by a decrease in
accounts payable and income taxes payable.
Net cash used in investing activities was approximately $145,000 for the
three months ended March 31, 2001 and $390,000 for the three months ended March
31, 2000. Net cash used in investing activities for the three months ended March
31, 2001 and 2000 consisted primarily of capital expenditures for computer
equipment and for the procurement of production equipment.
Net cash used in financing activities was approximately $739,000 for the
three months ended March 31, 2001 and $125,000 for the three months ended March
31, 2000. Net cash used in financing activities for the three months ended March
31, 2001 primarily reflects repayment of a bank overdraft and decreased
borrowings under our credit facility. Net cash used in financing activities for
the three months ended March 31, 2000 primarily reflects repayment on capital
lease obligations and the bank line of credit.
Our need for additional financing includes the integration and expansion
of our operations to exploit our rights under our exclusive license and
distribution agreement with GICISA for TALON products and the expansion of our
operations in the Caribbean and Central America markets. We believe that we will
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 and the size and timing of future acquisitions. We cannot
be certain that additional financing will be available or that, if available, we
can obtain it on terms favorable to our stockholders and us. If we are unable to
replace and increase our financing facilities by July 31, 2001, we will be
required to severely limit the implementation of our current business plans and
growth strategies, and our revenues and net income will be adversely affected.
NEW ACCOUNTING PRONOUNCEMENTS
In October 2000, we adopted Financial Accounting Standards Board SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards requiring every
derivative instrument, including derivative instruments embedded in other
contracts, to be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The adoption of SFAS 133 did not have a material
impact on the consolidated financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin, or SAB, No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements filed with the SEC.
Subsequently, the SEC released SAB 101B, which delayed the implementation date
of SAB 101 for registrants with fiscal years that begin between December 16,
1999 and March 15, 2000. We were required to be in conformity with the
provisions of SAB 101, as amended by SAB 101B, no later than October 1, 2000. We
believe the adoption of SAB 101, as amended by SAB 101B, has not had a material
effect on our financial position, results of operations or cash flows for the
three months ended March 31, 2001.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, the Interpretation of APB
Opinion No. 25" (FIN 44). The Interpretation is intended to clarify certain
problems that have arisen in practice since the issuance of APB No. 25,
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"Accounting for Stock Issued to Employees." The effective date of the
Interpretation was July 1, 2000. The provisions of the Interpretation apply
prospectively, but they will also cover certain events occurring after December
15, 1998 and after January 12, 2000. The adoption of FIN 44 did not have a
material adverse affect on the current and historical consolidated financial
statements.
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain
forward-looking statements that involve risks and uncertainties. Factors
associated with the forward-looking statements that could cause actual results
to differ from those projected or forecast are included in the statements below.
In addition to other information contained in this report, readers should
carefully consider the following cautionary statements and risk factors.
IF WE DO NOT RESTRUCTURE OUR EXISTING CREDIT FACILITIES TO LOWER OUR EFFECTIVE
INTEREST RATES AND INCREASE OUR AVAILABLE DEBT FUNDING, OUR NET INCOME WILL BE
ADVERSELY AFFECTED.
On December 31, 2000, the Company's working capital facility with Sanwa Bank
expired. From January 1, 2001 to April 3, 2001, Sanwa Bank extended the credit
facility on a daily basis. On April 4, 2001, Sanwa Bank agreed to extend our
credit facility through April 30, 2001. Since May 1, 2001, Sanwa Bank has
extended our credit facility on a daily basis at an interest rate of the bank's
reference rate plus 6.5%. We are currently in negotiations with a major
financial institution for a new senior credit facility to replace our Sanwa Bank
credit facility. While we believe we will be able to continue to extend our
Sanwa Bank credit facility and replace our existing financing facilities, if we
are unable to do so, we may be unable to obtain debt financing and will be
required to severely limit the implementation of our current business plans and
growth strategies, and our revenues and net income will be adversely affected.
WE MAY RAISE FUNDS THROUGH ADDITIONAL EQUITY FINANCINGS, WHICH WOULD DILUTE OUR
STOCKHOLDERS' OWNERSHIP.
We anticipate that we may need to raise additional funds through equity
financings during the next twelve months. Such additional funds are expected to
assist us in expanding our borrowing base under our credit facilities and are
expected to help us to borrow at lower interest rates than we currently pay. We
cannot guarantee that additional equity financing will be available, or that if
available, we can obtain it on terms that we deem favorable. Our stockholders'
ownership may be diluted if we raise additional funds through the sale of our
stock.
IF WE LOSE OUR LARGEST CUSTOMERS OR THEY FAIL TO PURCHASE AT ANTICIPATED LEVELS,
OUR SALES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED.
Our largest customer, Tarrant Apparel Group, accounted for approximately 47.9%
and 48.1% of our net sales, on a consolidated basis, for the years ended
December 31, 1999 and 2000. We have recently entered into an exclusive supply
agreement with Hubert Guez, Paul Guez, Azteca Production International, AZT
International SA D RL, and Commerce Investment Group, LLC that provides for a
minimum of $10,000,000 in total annual purchases by Azteca Production
International and its affiliates during each year of the three-year term of the
agreement. However, Azteca Production International is required to purchase from
us only if we are able to provide trim products on a competitive basis in terms
of price and quality.
If Azteca Production International and Tarrant Apparel Group fail to purchase
our trim products at anticipated levels, or our relationship with Azteca
Production International or Tarrant Apparel Group terminates, it may have an
adverse affect on our results because:
o We will lose a primary source of revenue if either of Tarrant Apparel
Group or Azteca Production International choose not to purchase our
products or services;
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o We may not be able to reduce fixed costs incurred in developing the
relationship with Azteca Production International and Tarrant Apparel
Group in a timely manner;
o We may not be able to recoup setup and inventory costs;
o We may be left holding inventory; and
o We may not be able to collect our receivables from them.
CONCENTRATION OF RECEIVABLES FROM OUR LARGEST CUSTOMER MAKES RECEIVABLE BASED
FINANCING DIFFICULT AND INCREASES THE RISK THAT IF OUR LARGEST CUSTOMER FAILS TO
PAY US, OUR CASH FLOW WOULD BE SEVERELY AFFECTED.
Our business relies heavily on a relatively small number of customers, including
Tarrant Apparel Group. This concentration of our business adversely affects our
ability to obtain receivable based financing due to customer concentration
limitations customarily applied by financial institutions and factors. Given the
nature of our business, we do not expect our customer concentration to improve
significantly in the near future. Further, if we are unable to collect any large
receivables due us, our cash flow would be severely impacted.
IF WE ARE NOT ABLE TO MANAGE OUR RAPID EXPANSION AND GROWTH, WE COULD INCUR
UNFORESEEN COSTS OR DELAYS AND OUR REPUTATION AND RELIABILITY IN THE MARKETPLACE
AND OUR REVENUES WILL BE ADVERSELY AFFECTED.
We have recently experienced a significant expansion of our operations. The
growth of our operations and activities has placed and will continue to place a
significant strain on our management, operational, financial and accounting
resources. If we cannot implement and improve our financial and management
information and reporting systems, we will not be able to implement our growth
strategies successfully and our revenues will be adversely affected. In
addition, if we cannot hire, train, motivate and manage new employees, including
management and operating personnel in sufficient numbers, and integrate them
into our overall operations and culture, our ability to manage future growth,
increase production levels and effectively market and distribute our products
will be significantly impaired.
WE OPERATE IN AN INDUSTRY THAT IS SUBJECT TO SIGNIFICANT FLUCTUATIONS IN
OPERATING RESULTS THAT 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;
o Delays caused by third parties; and
o Changes in our product mix or in the relative contribution to sales of
our subsidiaries.
Due to these factors, particularly in light of our customer concentration, it is
possible that in some quarters our operating results may be below our
stockholders' expectations and those of public market analysts. If this occurs,
the price of our common stock would likely be adversely affected.
Page 14
OUR CUSTOMERS HAVE CYCLICAL BUYING PATTERNS WHICH MAY CAUSE US TO HAVE 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 usually in the first and fourth
quarters of our financial year. A recession in the general economy or
uncertainties regarding future economic prospects that affect consumer-spending
habits could also reduce our sales.
OUR BUSINESS MODEL IS DEPENDENT ON INTEGRATION OF INFORMATION SYSTEMS ON A
GLOBAL BASIS AND, TO THE EXTENT THAT WE FAIL TO SUPPORT IT, CAN RESULT IN LOST
REVENUES.
We must consolidate and centralize the management of our subsidiaries and
significantly expand and improve our financial and operating controls.
Additionally, we must effectively integrate the information systems of our
Mexico and Central America facilities with the information systems of our
principal offices in California and Florida. Our failure to do so could result
in lost revenues, delay financial reporting or adversely affect availability of
funds under our credit facilities.
BECAUSE WE GENERALLY DO NOT ENTER INTO LONG-TERM SALES CONTRACTS WITH ALL OF OUR
CUSTOMERS, OUR SALES MAY DECLINE IF OUR EXISTING CUSTOMERS CHOOSE NOT TO BUY OUR
PRODUCTS OR SERVICES.
Very few of our customers are required to purchase our products on a long-term
basis. We usually document sales by a purchase order or similar documentation
limited to the 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 with little or no
notice. Without long-term contracts with the majority of our customers, we
cannot be certain that our customers will continue to purchase our products or
that we will be able to maintain a consistent level of sales.
THE LOSS OF KEY MANAGEMENT, DESIGN AND SALES PERSONNEL COULD ADVERSELY AFFECT
OUR BUSINESS, INCLUDING OUR ABILITY TO OBTAIN AND SECURE ACCOUNTS AND GENERATE
SALES.
Our success has and will continue to depend to a significant extent upon 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 attract and retain personnel with a variety of
design, sales, operating and managerial skills.
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.
We assemble or finish some of our products at our foreign assembly facilities.
Currently, we do not operate duplicate facilities in different geographic areas.
Therefore, in the event of a regional disruption where we maintain one or more
of our facilities, it is unlikely that we could shift manufacturing operations
to a different geographic region and we may have to cease or curtail 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;
Page 15
o Embargoes;
o Government intervention; and
o Natural disasters.
BECAUSE WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS, WE MAY NOT ALWAYS BE ABLE TO
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. Some of our suppliers are also competitors
and may for competitive reasons elect to cease supplying us with their products.
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.
INTERNET-BASED SYSTEMS THAT HOST OUR MANAGED TRIM SOLUTION MAY EXPERIENCE
DISRUPTIONS AND AS A RESULT WE MAY LOSE REVENUES AND CUSTOMERS.
Our MANAGED TRIM SOLUTION is an Internet-based business-to-business e-commerce
system. To the extent that we fail to adequately continue to update and maintain
the hardware and software implementing the MANAGED TRIM SOLUTION, our customers
may experience interruptions in service due to defects in our hardware or our
source code. In addition, since our MANAGED TRIM SOLUTION is Internet-based,
interruptions in Internet service generally can negatively impact our customers'
ability to use the MANAGED TRIM SOLUTION to monitor and manage various aspects
of their trim needs. Such defects or interruptions could result in lost revenues
and lost customers.
THERE ARE MANY COMPANIES THAT OFFER SOME OR ALL OF THE PRODUCTS AND SERVICES WE
SELL AND IF WE ARE UNABLE TO SUCCESSFULLY COMPETE OUR BUSINESS WILL BE ADVERSELY
AFFECTED.
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 national and international design companies, distributors
and manufacturers of tags, packaging products and trims. Some of our
competitors, including Paxar Corporation, YKK, Universal Button, Inc., Avery
Dennison Corporation and Scovill Fasteners, Inc., have greater name recognition,
longer operating histories and, in many cases, substantially greater financial
and other resources than we do.
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.
Page 16
IF CUSTOMERS DEFAULT ON BUYBACK AGREEMENTS WITH US, WE WILL BE LEFT HOLDING
UNSALABLE INVENTORY.
The majority of our inventories are subject to buyback agreements with our
customers. Under these buyback agreements, the customer must purchase the
inventories from us under normal invoice and
selling terms, if any inventory which we purchase on their behalf remains in our
hands longer than six months after the time we received the goods from our
vendors. If any customer defaults on these buyback provisions, we may incur a
charge in connection with our holding significant amounts of unsalable
inventory.
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.
We sold, assembled or finished a substantial portion of our products in fiscal
2000 and 1999 outside of the United States, principally in Hong Kong and Mexico.
We currently intend to continue to purchase, assemble 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 may be reduced.
UNAUTHORIZED USE OF OUR PROPRIETARY TECHNOLOGY MAY 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 worldwide. We cannot be certain that these laws will
be sufficient to protect our property. In particular, the laws of some 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 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.
IF OUR PRODUCTS INFRINGE ANY OTHER PERSON'S PROPRIETARY RIGHTS, WE MAY BE SUED
AND HAVE TO PAY LARGE LEGAL EXPENSES AND JUDGMENTS AND REDESIGN OR DISCONTINUE
SELLING OUR PRODUCTS.
From time to time in our industry, third parties allege infringement of their
proprietary rights. Any infringement claims, whether or not meritorious, could
result in costly litigation or require us to enter into royalty or licensing
agreements as a means of settlement. 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.
Page 17
OUR STOCK PRICE MAY DECREASE, WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND
CAUSE OUR STOCKHOLDERS TO SUFFER SIGNIFICANT LOSSES.
The following factors could cause the market price of our common stock to
decrease, perhaps substantially:
o The failure of our quarterly operating results to meet expectations of
investors or securities analysts;
o Adverse developments in the financial markets, the apparel industry
and the worldwide or regional economies;
o Interest rates;
o Changes in accounting principles;
o Sales of common stock by existing shareholders or holders of options;
o Announcements of key developments by our competitors; and
o The reaction of markets and securities analysts to announcements and
developments involving our company.
IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK OR ASSUME
ADDITIONAL DEBT TO FINANCE FUTURE GROWTH, OUR STOCKHOLDERS' OWNERSHIP COULD BE
DILUTED OR OUR EARNINGS COULD BE ADVERSELY IMPACTED.
Our business strategy may include expansion through internal growth, by
acquiring complementary businesses or by establishing strategic relationships
with targeted customers and suppliers. In order to do so or to fund our other
activities, we may issue additional equity securities that could dilute our
stockholders' stock ownership. We may also assume additional debt and amortize
expenses related to goodwill and other tangible assets if we acquire another
company and this could negatively impact our results of operations.
WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE PRICE OF
OUR COMMON STOCK.
Our stockholders' rights plan, our ability to issue additional 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 it more difficult for third
parties to acquire us by offering to purchase shares of our stock at a premium
to its market price.
WE MAY NOT BE ABLE TO REALIZE THE ANTICIPATED BENEFITS OF ACQUISITIONS.
We may consider strategic acquisitions as opportunities arise, subject to the
obtaining of any necessary financing. Acquisitions involve numerous risks,
including diversion of our management's attention away from our operating
activities. We cannot assure our stockholders that we will not encounter
unanticipated problems or liabilities relating to the integration of an acquired
company's operations, nor can we assure our stockholders that we will realize
the anticipated benefits of any future acquisitions.
INSIDERS OWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHICH COULD LIMIT OUR
STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS.
As of December 31, 2000, our officers and directors and their affiliates owned
approximately 44.7% 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, beneficially owned approximately 41.7% of the
outstanding shares of our common stock. The number of shares beneficially owned
by the Dyne family includes the shares of common stock held by Azteca Production
International, which are voted by
Page 18
Colin Dyne pursuant to a voting agreement. The Azteca Production International
shares constitute approximately 12.7% of the outstanding shares of common stock.
KG Investment, LLC, a significant stockholder, owns approximately 30.4% of the
outstanding shares of our common stock. As a result, our officers and directors,
the Dyne family and KG Investment, LLC are able to exert considerable influence
over the outcome of any 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.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of our sales are denominated in U.S. dollars or the currency of the country
of origin and, accordingly, we do not enter into hedging transactions with
regard to any foreign currencies. Currency fluctuations can, however, increase
the price of our products to its foreign customers which can adversely impact
the level of our export sales from time to time. The majority of our cash
equivalents are held in bank accounts and we do not believe we have significant
market risk exposure with regard to our investments.
We are also exposed to the impact of interest rate changes. For example, based
on average bank borrowings of $10 million during a three-month period, if the
interest rate indices on which our bank borrowing rates are based were to
increase 100 basis points in the three-month period, interest incurred would
increase and cash flows would decrease by $25,000.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We currently have pending a number of claims, suits and complaints that arise in
the ordinary course of our business. We believe that we have meritorious
defenses to these claims and the claims are covered by insurance or, after
taking into account the insurance in place, would not have a material effect on
our consolidated financial condition if adversely determined against us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 2, 2001, we issued 125,000 shares of our common stock to Jeffrey
Robinson and Steven Zambito in consideration for the purchase of certain assets
from Arzee Holdings, Inc., a Florida-based distributor of apparel trim related
products.
The issuances of shares to Jeffrey Robinson and Steven Zambito were exempt from
registration pursuant to Section 4(2) of the Securities Act as a transaction not
involving any public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Page 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(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: May 15, 2001 TAG-IT PACIFIC, INC.
/S/ RONDA SALLMEN
---------------------------------
By: Ronda Sallmen
Its: Chief Financial Officer
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