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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 June 30, 2002.
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, 9,307,909 shares issued and outstanding as of August 14, 2002.
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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
June 30, 2002 (unaudited) and December 31, 2001................... 3
Consolidated Statements of Operations (unaudited)
for the Three Months and Six Months Ended
June 30, 2002 and 2001............................................ 4
Consolidated Statements of Cash Flows (unaudited)
for the Six Months Ended June 30, 2002 and 2001................... 5
Notes to the Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk........ 26
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 27
Item 4. Submission of Matters to a Vote of Security Holders............... 27
Item 6. Exhibits and Reports on Form 8-K.................................. 27
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
TAG-IT PACIFIC, INC.
Consolidated Balance Sheets
June 30, December 31,
2002 2001
----------- -----------
Assets (unaudited)
Current Assets:
Cash and cash equivalents ........................ $ 61,032 $ 46,948
Due from factor .................................. 704,313 105,749
Trade accounts receivable, net ................... 3,823,449 3,037,034
Trade accounts receivable, related parties ....... 16,348,542 7,914,838
Refundable income taxes .......................... 259,605 259,605
Due from related parties ......................... 841,787 814,219
Inventories ...................................... 23,596,638 20,450,740
Prepaid expenses and other current assets ........ 635,260 408,146
Deferred income taxes ............................ 107,599 107,599
----------- -----------
Total current assets ...................... 46,378,225 33,144,878
Property and Equipment, net of accumulated
depreciation and amortization .................. 2,284,988 2,592,965
Tradename ........................................ 4,110,750 4,110,750
Other assets ..................................... 1,442,657 944,912
----------- -----------
Total assets ..................................... $54,216,620 $40,793,505
=========== ===========
Liabilities, Convertible Redeemable
Preferred Stock and Stockholders' Equity
Current Liabilities:
Line of credit ................................ 15,248,558 $ 9,660,581
Accounts payable .............................. 9,431,356 5,176,436
Accrued expenses .............................. 3,135,456 1,609,378
Note payable .................................. 25,200 25,200
Subordinated notes payable to related
parties ................................... 849,971 849,971
Current portion of capital lease
obligations ................................ 63,592 180,142
Current portion of subordinated note
payable ................................... 1,200,000 1,100,000
----------- -----------
Total current liabilities ................. 29,954,133 18,601,708
Capital lease obligations, less current
portion ....................................... 30,241 69,030
Subordinated note payable, less current
portion ....................................... 3,200,000 3,800,000
----------- -----------
Total liabilities ......................... 33,184,374 22,470,738
----------- -----------
Convertible redeemable preferred stock
Series C, $0.001 par value; 759,494
shares authorized; 759,494 shares issued
and outstanding at June 30, 2002 and
December 31, 2001 (stated value $3,000,000) ... 2,895,001 2,895,001
Stockholders' equity:
Preferred stock, Series A $0.001 par
value; 250,000 shares authorized,
no shares issued or outstanding ........... -- --
Convertible preferred stock Series B,
$0.001 par value; 850,000 shares
authorized; no shares issued or
outstanding ............................... -- --
Common stock, $0.001 par value, 30,000,000
shares authorized; 9,307,909 shares
issued and outstanding at June 30,
2002; 8,769,910 at December 31, 2001 ...... 9,309 8,771
Additional paid-in capital .................... 16,747,597 15,048,971
Retained earnings ............................. 1,380,339 370,024
----------- -----------
Total stockholders' equity ...................... 18,137,245 15,427,766
----------- -----------
Total liabilities, convertible redeemable
preferred stock and stockholders' equity ...... $54,216,620 $40,793,505
=========== ===========
See accompanying notes to consolidated financial statements.
3
TAG-IT PACIFIC, INC.
Consolidated Statements of Operations
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales ................. $19,793,344 $14,619,136 $29,118,400 $24,757,715
Cost of goods sold ........ 14,816,081 10,615,402 21,506,794 17,910,453
----------- ----------- ----------- -----------
Gross profit ........... 4,977,263 4,003,734 7,611,606 6,847,262
Selling expenses .......... 578,051 401,043 972,918 881,124
General and administrative
expenses ............... 2,691,781 2,369,550 4,596,912 4,408,070
Restructuring Charges
(Note 3) ............... -- -- -- 1,257,598
----------- ----------- ----------- -----------
Total operating expenses 3,269,832 2,770,593 5,569,830 6,546,792
Income from operations .... 1,707,431 1,233,141 2,041,776 300,470
Interest expense, net ..... 306,528 325,650 568,271 839,449
----------- ----------- ----------- -----------
Income (loss) before income
taxes .................. 1,400,903 907,491 1,473,505 (538,979)
Provision (benefit) for
income taxes ........... 354,600 198,030 373,190 (103,368)
----------- ----------- ----------- -----------
Net income (loss) ...... $ 1,046,303 $ 709,461 $ 1,100,315 $ (435,611)
=========== =========== =========== ===========
Less: Preferred stock
dividends .............. 45,000 -- 90,000 --
----------- ----------- ----------- -----------
Net income (loss) to common
shareholders ........... $ 1,001,303 $ 709,461 $ 1,010,315 $ (435,611)
=========== =========== =========== ===========
Basic earnings per share .. $ 0.11 $ 0.09 $ 0.11 $ (0.05)
=========== =========== =========== ===========
Diluted earnings per share $ 0.10 $ 0.09 $ 0.11 $ (0.05)
=========== =========== =========== ===========
Weighted average number
of common shares
outstanding:
Basic .................. 9,282,365 8,003,244 9,148,681 7,999,211
=========== =========== =========== ===========
Diluted ................ 9,591,984 8,304,188 9,448,223 7,999,211
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
TAG-IT PACIFIC, INC.
Consolidated Statements of Cash Flows
(unaudited)
Six months Ended June 30,
--------------------------
2002 2001
----------- -----------
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net income (loss) ............................. $ 1,100,315 $ (435,611)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization ................. 575,006 716,710
Increase in allowance for doubtful accounts ... 23,315 148,852
Loss on sale of assets ........................ -- 312,418
Changes in operating assets and liabilities:
Receivables, including related parties ..... (9,841,998) (2,118,374)
Inventories ................................ (3,145,898) 760,497
Other assets ............................... (46,439) (455,165)
Prepaid expenses and other current assets .. (227,113) (1,547)
Accounts payable ........................... 4,254,920 599,384
Accrued restructuring charges .............. -- 386,678
Accrued expenses ........................... 1,081,768 172,518
Income taxes payable ....................... 369,008 (119,484)
----------- -----------
Net cash used in operating activities ............ (5,857,116) (33,124)
----------- -----------
Cash flows from investing activities:
Additional loans to related parties .......... -- (283,003)
Acquisition of property and equipment ........ (140,835) (206,608)
Proceeds from sale of fixed assets ........... -- 118,880
----------- -----------
Net cash used in investing activities ............ (140,835) (370,731)
----------- -----------
Cash flows from financing activities:
Bank overdraft ............................... -- (584,831)
Proceeds from bank line of credit, net ....... 5,587,977 1,033,821
Proceeds from private placement transactions . 1,029,997 --
Proceeds from exercise of stock options ...... 49,400 19,500
Proceeds from capital leases ................. -- 87,556
Repayment of capital leases .................. (155,339) (127,559)
Proceeds from notes payable .................. -- 180,000
Repayment of notes payable ................... (500,000) (135,100)
----------- -----------
Net cash provided by financing activities ........ 6,012,035 473,387
----------- -----------
Net increase in cash ............................. 14,084 69,532
Cash at beginning of period ...................... 46,948 128,093
----------- -----------
Cash at end of period ............................ $ 61,032 $ 197,625
=========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest ................................... $ 519,156 $ 839,449
Income taxes ............................... $ 4,814 $ 2,430
Non-cash financing activity:
Common stock issued in acquisition of
assets ................................... $ -- $ 500,000
Common stock issued in acquisition of
license rights ........................... $ 577,500 $ --
See accompanying notes to consolidated financial statements.
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, 2001.
2. 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 JUNE 30, 2002: INCOME SHARES PER SHARE
- --------------------------------- ---------- ---------- ----------
Basic earnings per share:
Income available to common
stockholders .................. $1,001,303 9,282,365 $ 0.11
Effect of Dilutive Securities:
Options .......................... 254,634
Warrants ......................... 54,985
---------- ---------- ----------
Income available to common
stockholders .................. $1,001,303 9,591,984 $ 0.10
========== ========== ==========
THREE MONTHS ENDED JUNE 30, 2001:
Basic earnings per share:
Income available to common
stockholders .................. $ 709,461 8,003,244 $ 0.09
Effect of Dilutive Securities:
Options .......................... 248,086
Warrants ......................... 52,858
---------- ---------- ----------
Income available to common
stockholders .................. $ 709,461 8,304,188 $ 0.09
========== ========== ==========
6
SIX MONTHS ENDED JUNE 30, 2002: (LOSS) SHARES PER SHARE
- ------------------------------- ---------- ---------- ----------
Basic earnings per share:
Income available to common
stockholders .................. $1,010,315 9,148,681 $ 0.11
Effect of dilutive securities:
Options .......................... 245,101
Warrants ......................... 54,441
---------- ---------- ----------
Income available to common
stockholders .................. $1,010,315 9,448,223 $ 0.11
========== ========== ==========
SIX MONTHS ENDED JUNE 30, 2001:
Basic earnings per share:
Loss available to common
stockholders .................. $ (435,611) 7,999,211 $ (0.05)
Effect of dilutive securities:
Options .......................... --
Warrants ......................... --
---------- ---------- ----------
Loss available to common
stockholders .................. $ (435,611) 7,999,211 $ (0.05)
========== ========== ==========
Warrants to purchase 523,332 shares of common stock at between $4.34 and
$6.00, options to purchase 646,000 shares of common stock at between $4.00 and
$4.63, convertible debt of $500,000 convertible at $4.50 per share and 759,494
shares of preferred Series C stock convertible at $4.94 per share were
outstanding for the three and six months ended June 30, 2002, 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.
Warrants to purchase 80,000 and 110,000 shares of common stock at $6.00 and
$4.80, options to purchase 1,002,500 shares of common stock at between $3.75 and
$4.63, convertible debt of $500,000 convertible at $4.50 per share were
outstanding for the three months ended June 30, 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. During the three months
ended June 30, 2001, 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, but were not
included in the computation of diluted earnings per share because the conversion
contingency related to these preferred shares was not met.
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 1,384,500 shares of
common stock at between $1.30 and $4.63, convertible debt of $500,000
convertible at $4.50 per share were outstanding for the six months ended June
30, 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. During the six months ended June 30, 2001, 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, but were not included in the computation of diluted earnings per
share because the conversion contingency related to these preferred shares was
not met.
7
3. 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 its Tijuana, Mexico, facilities and relocated its TALON
brand operations to Miami, 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 first
and fourth quarters of 2001 amounted to $1,257,598 and $304,025, including
$355,769 of benefits paid to terminated employees. Included in accrued expenses
at December 31, 2001 was $114,554 of accrued restructuring charges consisting of
future payments to former employees paid in the first quarter of 2002.
4. PRIVATE PLACEMENTS
In a series of sales on December 28, 2001, January 7, 2002 and January 8,
2002, the Company entered into Stock and Warrant Purchase Agreements with three
private investors, including Mark Dyne, the chairman of the Company's board of
directors. Pursuant to the Stock and Warrant Purchase Agreements, the Company
issued an aggregate of 516,665 shares of common stock at a price per share of
$3.00 for aggregate proceeds of $1,549,995. The Stock and Warrant Purchase
Agreements also include a commitment by one of the private investors to purchase
an additional 400,000 shares of common stock at a price per share of $3.00 at
second closings (subject of certain conditions) on or prior to October 1, 2002
for additional proceeds of $1,200,000. Pursuant to the Stock and Warrant
purchase agreements, 258,332 warrants to purchase common stock were issued at
the first closing of the transactions and 200,000 warrants are to be issued at
the second closings. The warrants are exercisable immediately after closing, one
half of the warrants at an exercise price of 110% and the second half at an
exercise price of 120% of the market value of the Company's common stock on the
date of closing. The exercise price for the warrants shall be adjusted upward by
25% of the amount, if any, that the market price of the Company's common stock
on the exercise date exceeds the initial exercise price (as adjusted) up to a
maximum exercise price of $5.25. The warrants have a term of four years. The
shares contain restrictions related to the sale or transfer of the shares,
registration and voting rights. Total shares and warrants issued during the year
ended December 31, 2001 amount to 266,666 and 133,332. Total shares and warrants
issued in January 2002 amounted to 249,999 and 125,000.
In March 2002, one of the private investors purchased an additional 100,000
shares of common stock at a price per share of $3.00 pursuant to the second
closing provisions of the related agreement for total proceeds of $300,000. The
remaining commitment under this agreement is for an additional 300,000 shares
with aggregate proceeds of $900,000. Pursuant to the second closing provisions
of the Stock and Warrant Purchase Agreement, 50,000 warrants were issued to the
investor.
5. EXCLUSIVE LICENSE AND INTELLECTUAL PROPERTY RIGHTS AGREEMENT
On April 2, 2002, the Company entered into an Exclusive License and
Intellectual Property Rights Agreement (the "Agreement") with Pro-Fit Holdings
Limited ("Pro-Fit"). The Agreement gives the Company the exclusive rights to
sell or sublicense waistbands manufactured under patented technology developed
by Pro-Fit for garments manufactured anywhere in the world for the United States
market and all United States brands. In accordance with the Agreement, the
Company issued 150,000 shares of its common stock which were recorded at the
market value of the stock on the date of the Agreement. The shares contain
restrictions related to the transfer of the shares and registration rights. The
Agreement has an indefinite term that extends for the duration of the trade
secrets licensed under the agreement.
8
Future minimum annual royalty payments due under the Agreement are as
follows:
Years ending December 31, Amount
------------------------- ------------
2002 (six months)............................... $ 100,000
2003............................................ 75,000
2004............................................ 200,000
2005............................................ 400,000
2006............................................ 225,000
------------
Total minimum royalties......................... $ 1,000,000
============
6. EXCLUSIVE SUPPLY AGREEMENT
On July 12, 2002, the Company entered into an exclusive supply agreement
with Levi Strauss & Co. ("Levi"). In accordance with the supply agreement, the
Company is to supply Levi with various trim products, garment components,
equipment, services and technological know-how. The supply agreement has an
exclusive term of two years and provides for minimum purchases of various trim
products, garment components and services from the Company of $10 million over
the two-year period. The supply agreement also appoints Talon(R) as an approved
zipper supplier to Levi.
7. 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 operations or cash flows.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, BUSINESS COMBINATIONS (SFAS 141), and No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142.
The Company has adopted SFAS 141 and 142 effective January 1, 2002. The
Company's previous business combinations were accounted for using the purchase
method and there are no intangible assets acquired in connection with the
business combinations that are required to be recognized separately from
goodwill. The Company ceased amortization of goodwill effective as of January 1,
2002. As
9
provided by SFAS 142, the initial testing of goodwill for possible impairment
was completed and no impairment was identified. As of June 30, 2002, the net
carrying amount of goodwill is $450,000.
Another intangible asset, totaling $4,110,750 at January 1, 2002, consists
of the Talon tradename and trademarks acquired on December 21, 2001 under an
asset purchase agreement with Talon, Inc. and Grupo Industrial Cierres Ideal,
S.A. de C.V. The Company has determined that this intangible asset has an
indefinite life and therefore, ceased amortization in accordance with SFAS 142
beginning January 1, 2002. The impairment test was completed as of January 1,
2002 and did not result in an impairment charge.
In accordance with SFAS 142, prior period amounts were not restated. The
June 30, 2001 net loss adjusted for the exclusion of amortization of goodwill
would have been $25,000 less than reported and there would have been no
difference in basic or diluted earnings per share.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, is to be applied
prospectively. The adoption of this Statement had no material impact on the
Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement eliminates the current requirement that gains and
losses on debt extinguishment must be classified as extraordinary items in the
income statement. Instead, such gains and losses will be classified as
extraordinary items only if they are deemed to be unusual and infrequent, in
accordance with the current GAAP criteria for extraordinary classification. In
addition, SFAS 145 eliminates an inconsistency in lease accounting by requiring
that modifications of capital leases that result in reclassification as
operating leases be accounted for consistent with sale-leaseback accounting
rules. The statement also contains other nonsubstantive corrections to
authoritative accounting literature. The changes related to debt extinguishment
will be effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for transactions occurring after
May 15, 2002. Adoption of this standard will not have any immediate effect on
the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will
adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of a company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized.
10
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 and six months ended June 30, 2002 and
2001. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to our valuation of inventory and our allowance for uncollectable
accounts receivable. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
o Inventory is evaluated on a continual basis and reserve adjustments are
made based on management's estimate of future sales value, if any, of
specific inventory items. Reserve adjustments are made for the difference
between the cost of the inventory and the estimated market value and
charged to operations in the period in which the facts that give rise to
the adjustments become known. Certain inventories 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 our vendors, the customer is required to purchase the
inventories from us under normal invoice and selling terms. These buyback
agreements are considered in management's estimate of future market value
of inventories.
o Accounts receivable balances are evaluated on a continual basis and
allowances are provided for potentially uncollectable accounts based on
management's estimate of the collectability of customer accounts. If the
financial condition of a customer were to deteriorate, resulting in an
impairment of its ability to make payments, an additional allowance may be
required. Allowance adjustments are charged to operations in the period in
which the facts that give rise to the adjustments become known.
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 a full service 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 Levi Strauss & Co., Tommy Hilfiger, A/X
Armani, Express, The Limited, A&F, Lerner, among others. In addition, we
distribute zippers under our TALON brand name to apparel brands
11
and manufacturers such as VF Corporation, Savane International, Tropical
Sportswear, Target Stores, Abercrombie & Fitch, 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
focuses on servicing all of the trim requirements of our customers at the
manufacturing and retail brand level of the fashion apparel industry. Trim items
include thread, zippers, labels, buttons, rivets, printed marketing material,
polybags, packing cartons, and hangers. Trim items comprise a relatively small
part of the cost of most apparel products but comprise the vast majority of
components necessary to fabricate a typical apparel product. We offer customers
what we call our MANAGED TRIM SOLUTION(TM), which is an Internet-based
supply-chain management system covering the complete management of development,
ordering, production, inventory management and just-in-time distribution of
their trim and packaging requirements. Traditionally, manufacturers of apparel
products have been required to operate their own apparel trim departments,
requiring the manufacturers to maintain a significant amount of infrastructure
to coordinate the buying of trim products from a large number of vendors. By
acting as a single source provider of a full range of trim items, we allow
manufacturers using our MANAGED TRIM SOLUTION(TM) to eliminate the added
infrastructure, trim inventory positions, overhead costs and inefficiencies
created by in-house trim departments that deal with a large number of vendors
for the procurement of trim items. We also seek to leverage our position as a
single source supplier of trim items as well as our extensive expertise in the
field of trim distribution and procurement to more efficiently manage the trim
assembly process resulting in faster delivery times and fewer production delays
for our manufacturing customers. Our MANAGED TRIM SOLUTION(TM) also helps to
eliminate a manufacturer's need to maintain a trim purchasing and logistics
department.
We also serve as a specified supplier for a variety of major retail brand
and private label oriented companies. We seek to expand our services as a vendor
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.
Our ability to offer brand name and private label oriented customers a full
range of trim products is attractive because it enables our customers to address
their quality and supply needs for all of their trim requirements from a single
source, avoiding the time and expense necessary to monitor quality and supply
from multiple vendors and manufacturer sources. In addition, by becoming a
specified supplier to brand customers, we have an opportunity to become the
preferred or sole vendor of trim items for all contract manufacturers of apparel
under that brand name.
On July 12, 2002, we entered into an exclusive supply agreement with Levi
Strauss & Co. In accordance with the supply agreement, Levi is to purchase a
minimum of $10 million of various trim products, garment components and services
over the next two years. Certain proprietary products, equipment and
technological know-how will be supplied to Levi on an exclusive basis during
this period. The supply agreement also appoints Talon(R) as an approved zipper
supplier to Levi.
On April 2, 2002, we entered into an exclusive license and intellectual
property rights agreement with Pro-Fit Holdings Limited. This agreement gives us
the exclusive rights to sell or sublicense waistbands manufactured under
patented technology developed by Pro-Fit Holdings for garments manufactured
anywhere in the world for the United States market and for all United States
brands. The new technology allows pant manufacturers to build a stretch factor
into standard waistbands that does not alter the appearance of the garment, but
allows the waist to stretch out and back by as much as two waist sizes. Through
our trim package business, and our TALON line of zippers, we are already focused
on the North American bottoms market. This product compliments our existing
product line and we intend to integrate the production of the waistbands into
our existing infrastructure. The exclusive license and intellectual property
rights agreement has an indefinite term that extends for the duration of the
trade secrets licensed under the agreement.
12
On December 21, 2001, we entered into an asset purchase agreement with
Talon, Inc. and Grupo Industrial Cierres Ideal, S.A. de C.V. whereby we
purchased certain TALON zipper assets, including the TALON(R) zipper brand name,
trademarks, patents, technical field equipment and inventory. Since July 2000,
we have been the exclusive distributor of TALON brand zippers. TALON is an
American brand with significant name recognition and brand equity. TALON was the
original pioneer of the formed wire metal zipper for the jeans industry and is a
specified zipper brand for manufacturers in the sportswear and outerwear
markets. The TALON acquisition is an important step in our strategy to offer a
complete high quality trim package to apparel manufacturers. Our transition from
a distributor to an owner of the TALON brand name better positions us to
revitalize the TALON brand name and capture increased market share in the
industry. As the owner of the TALON brand name, we believe we will be able to
more effectively respond to customer needs and better maintain the quality and
value of the TALON products.
On September 20, 2001, we entered into a ten-year co-marketing and supply
agreement with Coats American, Inc., an affiliate of Coats plc, as well as a
preferred stock purchase agreement with Coats North America Consolidated, Inc.,
also an affiliate of Coats plc. The co-marketing and supply agreement provides
for selected introductions into Coats' customer base and has the potential to
accelerate our growth plans and to introduce our MANAGED TRIM SOLUTION(TM) to
apparel manufacturers on a broader basis. Pursuant to the terms of the
co-marketing and supply agreement, our trim packages will exclusively offer
thread manufactured by Coats. Coats was selected for its quality, service, brand
recognition and global reach. Prior to entering into the co-marketing and supply
agreement, we were a long-time customer of Coats, distributing their thread to
sewing operations under our MANAGED TRIM SOLUTION(TM) program. This exclusive
agreement will allow Coats to offer its customer base of contractors in Mexico,
Central America and the Caribbean full-service trim management under our MANAGED
TRIM SOLUTION(TM) program.
Pursuant to the terms of the preferred stock purchase agreement, we
received a cash investment of $3 million from Coats North America Consolidated
in exchange for 759,494 shares of series C convertible redeemable preferred
stock. London-based Coats, plc is the world's largest manufacturer of industrial
thread and textile-related craft products. Coats has operations in 65 countries
and has a North American presence in the United States, Canada, Mexico, Central
America and the Caribbean.
We have entered into an exclusive supply agreement with Azteca Production
International, Inc., AZT International SA D RL and Commerce Investment Group,
LLC. Pursuant to this supply agreement, we provide all trim-related products for
certain programs manufactured by Azteca Production International. The agreement
provides for a minimum aggregate total of $10 million 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. The
first contract year used to compute the minimum sales requirement is for a
period of eighteen months. Azteca Production International has been a
significant customer of ours for many years. This agreement is structured in a
manner that has allowed us to utilize our MANAGED TRIM SOLUTION(TM) system to
supply Azteca Production International with all of its trim program
requirements. We expanded oUR facilities in Tlaxcala, Mexico, to service Azteca
Production International's trim requirements.
We also have an exclusive supply agreement with Tarrant Apparel Group and
have been supplying Tarrant Apparel Group with all of its trim requirements
under our MANAGED TRIM SOLUTION(TM) system since 1998.
Sales under our exclusive supply agreements with Azteca Production
International and Tarrant Apparel Group amounted to approximately 63% of our
total sales for the year ended December 2001. We will continue to rely on these
two customers for a significant amount of our sales for the year ended December
2002. Our results of operations will depend to a significant extent upon the
commercial success of Azteca Production International and Tarrant Apparel Group.
If Azteca Production International and Tarrant Apparel Group fail to purchase
our trim products at anticipated levels, or our relationship with
13
Azteca Production International or Tarrant Apparel Group terminates, it may have
an adverse affect on our 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
2002 2001 2002 2001
------ ------ ------ ------
Net sales .......................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ................. 74.9 72.6 73.9 72.3
------ ------ ------ ------
Gross profit ....................... 25.1 27.4 26.1 27.7
Selling expenses ................... 2.9 2.7 3.3 3.6
General and administrative
expenses ......................... 13.6 16.2 15.8 17.8
Restructuring Charges .............. -- -- -- 5.1
------ ------ ------ ------
Operating Income ................... 8.6% 8.5% 7.0% 1.2%
====== ====== ====== ======
RESTRUCTURING PLAN
During the first quarter of 2001, we implemented a plan to restructure
certain of our business operations. In accordance with the restructuring plan,
we closed our Tijuana, Mexico, facilities and relocated our TALON brand
operations to Miami, 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 first and fourth
quarters of 2001 amounted to $1,257,598 and $304,025, including $355,769 of
benefits paid to terminated employees.
RESULTS OF OPERATIONS
Net sales increased approximately $5,174,000, or 35.4%, to $19,793,000 for
the three months ended June 30, 2002 from $14,619,000 for the three months ended
June 30, 2001. The increase in net sales was primarily due to an increase in
trim-related sales from our Tlaxcala, Mexico operations under our MANAGED TRIM
SOLUTION(TM) trim package program. The increase in net sales was also
attributable to an increase in zipper sales under our TALON brand name to our
MANAGED TRIM SOLUTION(TM) customers in Mexico and our other Talon customers in
Mexico and Asia. TALON has been successful in becoming an approved zipper vendor
for major brands and retailers which has allowed us to increase our sales to
these customers. Our purchase of the TALON brand name and trademarks in December
2001 has enabled us to better control our product offerings, selling prices and
profit margins.
Net sales increased approximately $4,360,000, or 17.6%, to $29,118,000 for
the six months ended June 30, 2002 from $24,758,000 for the six months ended
June 30, 2001. The increase in net sales was primarily due to an increase in
trim-related sales from our Tlaxcala, Mexico operations under our MANAGED TRIM
SOLUTION(TM) trim package program. The increase in net sales was also
attributable, for the reasons discussed above, to an increase in zipper sales
under our TALON brand name to our MANAGED TRIM SOLUTION(TM) customers in Mexico
and our other Talon customers in Mexico and Asia.
14
Gross profit increased approximately $973,000, or 24.3%, to $4,977,000 for
the three months ended June 30, 2002 from $4,004,000 for the three months ended
June 30, 2001. Gross margin as a percentage of net sales decreased to
approximately 25.1% for the three months ended June 30, 2002 as compared to
27.4% for the three months ended June 30, 2001. The decrease in gross profit as
a percentage of net sales for the three months ended June 30, 2002 was primarily
due to an increase in zipper sales under our TALON brand name to our MANAGED
TRIM SOLUTION(TM) customers in Mexico during the quarter. Talon products have a
lower gross margin thAN other products included within the complete trim
packages we offer to our customers through our MANAGED TRIM SOLUTION(TM).
Gross profit increased approximately $765,000, or 11.2%, to $7,612,000 for
the six months ended June 30, 2002 from $6,847,000 for the six months ended June
30, 2001. Gross margin as a percentage of net sales decreased to approximately
26.1% for the six months ended June 30, 2002 as compared to 27.7% for the six
months ended June 30, 2001. The decrease in gross profit as a percentage of net
sales for the six months ended June 30, 2002 was primarily due to an increase in
zipper sales under our TALON brand name to our MANAGED TRIM SOLUTION(TM)
customers in Mexico during the period. Talon products have a lower gross margin
than other products included within the complete trim packages we offer to our
customers through our MANAGED TRIM SOLUTION(TM). The decrease in gross margin as
a percentage of net sales for the six months ended June 30, 2002 was offset by a
further reduction of manufacturing and facility costs which was a direct result
of the implementation of our restructuring plan in the first quarter of 2001.
Selling expenses increased approximately $177,000, or 44.1%, to $578,000
for the three months ended June 30, 2002 from $401,000 for the three months
ended June 30, 2001. As a percentage of net sales, these expenses increased to
2.9% for the three months ended June 30, 2002 compared to 2.7% for the three
months ended June 30, 2001. This increase was due to our efforts to obtain
approval from major brands and retailers of the TALON brand zipper and the
implementation of our new sales and marketing plan for the TALON brand. In
addition, we hired additional personnel to support the exclusive waistband
license agreement we entered into in April 2002.
Selling expenses increased approximately $92,000, or 10.4%, to $973,000 for
the six months ended June 30, 2002 from $881,000 for the six months ended June
30, 2001. As a percentage of net sales, these expenses decreased to 3.3% for the
six months ended June 30, 2002 compared to 3.6% for the six months ended June
30, 2001. The increase in selling expenses during the period was due to our
efforts to obtain approval from major brands and retailers of the TALON brand
zipper and the implementation of our new sales and marketing plan for the TALON
brand. The increase in these selling expenses was partially offset by a
reduction of our sales force under our MANAGED TRIM SOLUTION(TM) program, which
was part of our restructuring plan that we implemented in the first quarter of
2001. For the period, selling expenses increased at a slower rate than the
increase in net sales, resulting in a decrease in selling expenses as a
percentage of net sales.
General and administrative expenses increased approximately $322,000, or
13.6%, to $2,692,000 for the three months ended June 30, 2002 from $2,370,000
for the three months ended June 30, 2001. The increase in these expenses was due
primarily to additional staffing and other expenses incurred related to our
Tlaxcala, Mexico operations. As a percentage of net sales, these expenses
decreased to 13.6% for the three months ended June 30, 2002 compared to 16.2%
for the three months ended June 30, 2001, because the rate of increase in net
sales exceeded that of general and administrative expenses.
General and administrative expenses increased approximately $189,000, or
4.3%, to $4,597,000 for the six months ended June 30, 2002 from $4,408,000 for
the six months ended June 30, 2001. The increase in these expenses was due
primarily to additional staffing and other expenses related to our Tlaxcala,
Mexico operations. As a percentage of net sales, these expenses decreased to
15.8% for the six months ended June 30, 2002 compared to 17.8% for the six
months ended June 30, 2001, because the rate of increase in net sales exceeded
that of general and administrative expenses.
15
Interest expense decreased approximately $19,000, or 5.8%, to $307,000 for
the three months ended June 30, 2002 from $326,000 for the three months ended
June 30, 2001. On May 30, 2001, we replaced our credit facility with a new
facility with UPS Capital Global Trade Finance Corporation, which provides for
increased borrowing availability of up to $20,000,000 and a more favorable
interest rate of prime plus 2%. We incurred financing charges of approximately
$570,000, including legal, consulting and closing costs, in the first two
quarters of 2001 related to our efforts to replace our existing credit facility.
Our borrowings under the new UPS Capital credit facility increased during the
second quarter of 2002 due to increased sales and expanded operations in Mexico
and Asia. The increase in interest expense due to increased borrowings during
the quarter was offset by decreases in the prime rate from prior periods.
Interest expense decreased approximately $271,000, or 32.3%, to $568,000
for the six months ended June 30, 2002 from $839,000 for the six months ended
June 30, 2001. As discussed above, we incurred financing charges and were
charged less favorable interest rates during the first two quarters of 2001
under our former credit facility.
The provision for income taxes for the three months ended June 30, 2002
amounted to approximately $355,000 compared to $198,000 for the three months
ended June 30, 2001. Income taxes increased for the three months ended June 30,
2002 primarily due to increased taxable income.
The provision for income taxes for the six months ended June 30, 2002
amounted to approximately $373,000 compared to an income tax benefit of $103,000
for the six months ended June 30, 2001. Income taxes increased for the six
months ended June 30, 2002 primarily due to increased taxable income.
Net income was approximately $1,046,000 for the three months ended June 30,
2002 as compared to net income of $709,000 for the three months ended June 30,
2001, due primarily to increased net sales during the quarter.
Net income was approximately $1,100,000 for the six months ended June 30,
2002 as compared to a net loss of $436,000 for the six months ended June 30,
2001, due primarily to increased net sales during the period and restructuring
charges incurred during the first quarter of 2001 of approximately $1.3 million.
LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS
Cash and cash equivalents increased to $61,000 at June 30, 2002 from
$47,000 at December 31, 2001. The increase resulted from $6,012,000 of cash
provided by financing activities, offset by $5,857,000 and $141,000 of cash used
in operating and investing activities, respectively.
Net cash used in operating activities was approximately $5,857,000 and
$33,000 for the six months ended June 30, 2002 and 2001, respectively. The
decrease in cash provided by operating activities for the six months ended June
30, 2002 resulted primarily from increases in inventories and receivables, which
was partially offset by increases in accounts payable, accrued expenses and net
income. The increase in inventories during the period was due to increased
customer orders for future sales. Cash used in operating activities for the six
months ended June 30, 2001 resulted primarily from increased accounts
receivable, other assets and net losses, which were offset by increased
inventories, accounts payable and accrued expenses.
Net cash used in investing activities was approximately $141,000 and
$371,000 for the six months ended June 30, 2002 and 2001, respectively. Net cash
used in investing activities for the six months ended June 30, 2002 consisted
primarily of capital expenditures for computer equipment and upgrades. Net cash
used in investing activities for the six months ended June 30, 2001 consisted
primarily of capital expenditures for computer equipment and upgrades and
additional loans to related parties.
16
Net cash provided by financing activities was approximately $6,012,000 and
$473,000 for the six months ended June 30, 2002 and 2001, respectively. Net cash
provided by financing activities for the six months ended June 30, 2002
primarily reflects increased borrowings under our credit facility and funds
raised from private placement transactions, offset by the repayment of notes
payable. Net cash provided by financing activities for the six months ended June
30, 2001 primarily reflects increased borrowings under our credit facility,
offset by the repayment of a bank overdraft.
We currently satisfy our working capital requirements primarily through
cash flows generated from operations and borrowings under our credit facility
with UPS Capital. Our maximum availability under the credit facility is $20
million. At June 30, 2002 and 2001, outstanding borrowings under our UPS Capital
credit facility amounted to approximately $15,249,000 and $10,990,000,
respectively. Open letters of credit amounted to approximately $287,000 at June
30, 2002. There were no open letters of credit at June 30, 2001.
The initial term of our agreement with UPS Capital is three years and the
facility is secured by substantially all of our assets. The interest rate of the
credit facility is at the prime rate plus 2%. The credit facility requires that
we comply with certain financial covenants including net worth, fixed charge
ratio and capital expenditures. At June 30, 2002, we were in compliance with all
applicable financial covenants. The amount we can borrow under the credit
facility is determined based on a defined borrowing base formula related to
eligible accounts receivable and inventories. Our borrowing base availability
ranged from approximately $9,921,000 to $16,319,000 from July 1, 2001 to June
30, 2002. A significant decrease in eligible accounts receivable and inventories
due to customer concentration levels and the aging of inventories, among other
factors, can have an adverse effect on our borrowing capabilities under our
credit facility, which thereafter, may not be adequate to satisfy our working
capital requirements. Eligible accounts receivable are reduced if our accounts
receivable customer balances are concentrated in excess of the percentages
allowed under our agreement with UPS Capital. In addition, we have typically
experienced seasonal fluctuations in sales volume. These seasonal fluctuations
result in sales volume decreases in the first and fourth quarters of each year
due to the seasonal fluctuations experienced by the majority of our customers.
During these quarters, borrowing availability under our credit facility may
decrease as a result of decreases in eligible accounts receivables generated
from our sales. As a result of our concentration of business with Tarrant
Apparel Group and Azteca Production International, our eligible receivables have
been limited under the UPS Capital facility to various degrees over the prior
six months. If our business becomes further dependant on one or a limited number
of customers or if we experience future significant seasonal reductions in
receivables, our availability under the UPS Capital credit facility would be
correspondingly reduced. If this were to occur, we would be required to seek
additional financing which may not be available on attractive terms and, if such
financing is unavailable, we may be unable to meet our working capital
requirements.
Pursuant to the terms of a foreign factoring agreement under our UPS
Capital credit facility, UPS Capital purchases our eligible accounts receivable
and assumes the credit risk with respect to those foreign accounts for which UPS
Capital has given its prior approval. If UPS Capital does not assume the credit
risk for a receivable, the collection risk associated with the receivable
remains with us. We pay a fixed commission rate and may borrow up to 85% of
eligible accounts receivable under our credit facility. As of June 30, 2002, the
amount factored without recourse was approximately $501,000. There were no
receivables factored with UPS Capital at June 30, 2001.
The UPS Capital credit facility contains customary covenants restricting
our activities as well as those of our subsidiaries, including limitations on
certain transactions related to the disposition of assets; mergers; entering
into operating leases or capital leases; entering into transactions involving
subsidiaries and related parties outside of the ordinary course of business;
incurring indebtedness or granting liens or negative pledges on our assets;
making loans or other investments; paying dividends or repurchasing stock or
other securities; guarantying third party obligations; repaying subordinated
debt; and making changes in our corporate structure.
17
In a series of sales on December 28, 2001, January 7, 2002 and January 8,
2002, we entered into stock and warrant purchase agreements with three private
investors, including Mark Dyne, the chairman of our board of directors. Pursuant
to the stock and warrant purchase agreements, we issued an aggregate of 516,665
shares of common stock at a price per share of $3.00 for aggregate proceeds of
$1,549,995. The stock and warrant purchase agreements also include a commitment
by one of the private investors to purchase an additional 400,000 shares of
common stock at a price per share of $3.00 at second closings (subject of
certain conditions) on or prior to October 1, 2002 for additional proceeds of
$1,200,000. In March 2002, this private investor purchased 100,000 shares of
common stock at a price per share of $3.00 pursuant to the second closing
provisions of the stock and warrant purchase agreement for total proceeds of
$300,000. The remaining commitment under the stock and warrant purchase
agreement is for an additional 300,000 shares with aggregate proceeds of
$900,000. Pursuant to the second closing provisions of the stock and warrant
purchase agreement, 50,000 warrants were issued to the investor.
In accordance with the series C preferred stock purchase agreement entered
into by us and Coats North America Consolidated, Inc. on September 20, 2001, we
issued 759,494 shares of series C convertible redeemable preferred stock to
Coats North America Consolidated, Inc. in exchange for an equity investment from
Coats North America Consolidated of $3 million cash. The series C preferred
shares are convertible at the option of the holder after one year at the rate
$4.94 per share. The series C preferred shares are redeemable at the option of
the holder after four years. If the holders elect to redeem the series C
preferred shares, we have the option to redeem for cash at the stated value of
$3 million or in the form of the our common stock at 85% of the market price of
our common stock on the date of redemption. If the market price of our common
stock on the date of redemption is less than $2.75 per share, we must redeem for
cash at the stated value of the series C preferred shares. We can elect to
redeem the series C preferred shares at any time for cash at the stated value.
The preferred stock purchase agreement provides for cumulative dividends at a
rate of 6% of the stated value per annum, payable in cash or our common stock.
Each holder of the series C preferred shares has the right to vote with our
common stock based on the number of our common shares that the series C
preferred shares could then be converted into on the record date.
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. If the factor does not assume the
credit risk for a receivable, the collection risk associated with the receivable
remains with us. We pay a fixed commission rate and may borrow up to 80% of
eligible accounts receivable. Interest is charged at 1.5% over the Hong Kong
Dollar prime rate. As of June 30, 2002 and 2001, the amount factored without
recourse was approximately $203,000 and $123,000 and the amount due from the
factor and recorded as a current asset was approximately $203,000 and $123,000.
There were no outstanding advances from the factor as of June 30, 2002 and 2001.
As of June 30, 2002, we had outstanding related-party debt of approximately
$850,000 at a weighted average interest rate of 10.5%, and additional
non-related-party debt of $25,200 at an interest rate of 10%. The majority of
related-party debt is due on demand, with the remainder due and payable on the
fifteenth day following the date of delivery of written demand for payment. As
of June 30, 2001, we had outstanding related-party debt, of approximately
$3,618,000 at a weighted average interest rate of between 0% and 11%, and
additional non-related-party debt of $25,200 at an interest rate of 10%. The
majority of related-party debt was cancelled in connection with the TALON
trademark purchase agreement dated December 21, 2001, with the remainder due on
the fifteenth day following the date of delivery of written demand for payment.
Our receivables increased to $20,172,000 at June 30, 2002 from $14,379,000
at June 30, 2001. This increase was due primarily to increased related-party
trade receivables of approximately $5.8 million resulting from increased related
party sales during the three months ended June 30, 2002.
18
In October 1998, we entered into a supply agreement with Tarrant Apparel
Group. In accordance with the supply agreement, we issued 2,390,000 shares of
our common stock to KG Investment, LLC. KG Investment is owned by Gerard Guez
and Todd Kay, executive officers and significant shareholders of Tarrant Apparel
Group. Commencing in December 1998, we began to provide trim products to Tarrant
Apparel Group for its operations in Mexico. Pricing is consistent with
competitive vendors and terms are net 60 days.
On December 22, 2000, we entered into a supply agreement with Azteca
Production International, Inc., AZT International SA D RL and Commerce
Investment Group, LLC. The term of the supply agreement is three years, with
automatic renewals of consecutive three-year terms, and provides for a minimum
of $10 million in sales for each contract year beginning April 1, 2001. The
first contract year used to compute the minimum sales requirement is for a
period of eighteen months. In accordance with the supply agreement, we issued
1,000,000 shares of our common stock to Commerce Investment Group, LLC.
Commencing in December 2000, we began to provide trim products to Azteca
Production International, Inc for its operations in Mexico. Pricing is
consistent with competitive vendors and terms are net 60 days.
We believe that our existing cash and cash equivalents and anticipated cash
flows from our operating activities and available financing will be sufficient
to fund our minimum working capital and capital expenditure needs through fiscal
2002. In addition, we expect to receive quarterly cash payments of a minimum of
$1.25 million under our supply agreement with Levi Strauss & Co. and an
additional private placement of $900,000 by October 1, 2002 pursuant to the
remaining commitment due under the stock warrant and purchase agreement we
entered into with a private investor. If our cash from operations is less than
anticipated or our working capital requirements and capital expenditures are
greater than we expect, we will need to raise additional debt or equity
financing in order to provide for our operations. 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, future
demand for our products, the size and timing of future acquisitions, our
borrowing base availability limitations related to eligible accounts receivable
and inventories and our expansion into foreign markets. There can be no
assurance that additional debt or equity financing will be available on
acceptable terms or at all. If we are unable to secure additional financing, we
may not be able to execute our plans for expansion, including expansion into
foreign markets to promote our TALON brand tradename, and we may need to
implement additional cost savings initiatives.
Our need for additional long-term financing includes the integration and
expansion of our operations to exploit our rights under our TALON trade name and
the expansion of our operations in the Asian, Caribbean and Central American
markets.
19
CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at June 30, 2002 and
the effects such obligations are expected to have on liquidity and cash flow in
future periods:
PAYMENTS DUE BY PERIOD
------------------------------------------------------
LESS THAN 1-3 4-5 AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ----------------------- ----------- ----------- ---------- ------ -------
Subordinated notes
payable ............. $ 4,400,000 $ 1,200,000 $3,200,000 $ -- $ --
Capital lease
obligations ......... $ 93,833 $ 63,592 $ 30,241 $ -- $ --
Subordinated notes
payable To related
parties (1) ......... $ 849,971 $ 849,971 $ -- $ -- $ --
Operating leases ...... $ 1,760,829 $ 616,095 $1,144,734 $ -- $ --
Line of credit ........ $15,248,558 $15,248,558 $ -- $ -- $ --
Note payable .......... $ 25,200 $ 25,200 $ -- $ -- $ --
Royalty payments ...... $ 1,000,000 $ 150,000 $ 850,000 $ -- $ --
(1) The majority of subordinated notes payable to related parties are due on
demand with the remainder due and payable on the fifteenth day following
the date of delivery of written demand for payment.
NEW ACCOUNTING PRONOUNCEMENT
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. We believe the adoption of this Statement will have no material
impact on our financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, are to be applied
prospectively. The adoption of this Statement had no material impact on the
Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement eliminates the current requirement that gains and
losses on debt extinguishment must be classified as extraordinary items in the
income statement. Instead, such gains and losses will be classified as
extraordinary items only if they are deemed to be unusual and infrequent, in
accordance with the current GAAP criteria for extraordinary classification. In
addition, SFAS 145 eliminates an inconsistency in lease accounting by requiring
that modifications of capital leases that result in reclassification as
operating leases be accounted for consistent with sale-leaseback accounting
rules. The statement also contains other nonsubstantive corrections to
authoritative accounting literature. The changes related to debt
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extinguishment will be effective for fiscal years beginning after May 15, 2002,
and the changes related to lease accounting will be effective for transactions
occurring after May 15, 2002. Adoption of this standard will not have any
immediate effect on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will
adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of a company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized.
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain forward-looking
statements that involve risks and uncertainties. Factors associated with the
forward-looking statements that could cause actual results to differ from those
projected or forecast are included in the statements below. In addition to other
information contained in this report, readers should carefully consider the
following cautionary statements and risk factors.
IF WE LOSE 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 42.0% and 48.1% of
our net sales, on a consolidated basis, for the years ended December 31, 2001
and 2000. In December 2000, we entered into an exclusive supply agreement with
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. 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.
Our results of operations will depend to a significant extent upon the
commercial success of Azteca Production International and Tarrant Apparel Group.
If Azteca and Tarrant fail to purchase our trim products at anticipated levels,
or our relationship with Azteca or Tarrant terminates, it may have an adverse
affect on our results because:
o We will lose a primary source of revenue if either of Tarrant or Azteca
choose not to purchase our products or services;
o We may not be able to reduce fixed costs incurred in developing the
relationship with Azteca and Tarrant in a timely manner;
o We may not be able to recoup setup and inventory costs;
o We may be left holding inventory that cannot be sold to other customers;
and
o We may not be able to collect our receivables from them.
CONCENTRATION OF RECEIVABLES FROM OUR LARGEST CUSTOMERS MAKES RECEIVABLE
BASED FINANCING DIFFICULT AND INCREASES THE RISK THAT IF OUR LARGEST CUSTOMERS
FAIL 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 and Azteca Production International. This concentration of our business
adversely affects our ability to obtain receivable based financing due to
customer concentration limitations customarily
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applied by financial institutions, including UPS Capital and factors. Further,
if we are unable to collect any large receivables due us, our cash flow would be
severely impacted.
OUR REVENUES MAY BE HARMED IF GENERAL ECONOMIC CONDITIONS CONTINUE TO
WORSEN. Our revenues depend on the health of the economy and the growth of our
customers and potential future customers. When economic conditions weaken,
certain apparel manufacturers and retailers, including some of our customers,
have experienced in the past, and may experience in the future, financial
difficulties which increase the risk of extending credit to such customers.
Customers adversely affected by economic conditions have also attempted to
improve their own operating efficiencies by concentrating their purchasing power
among a narrowing group of vendors. There can be no assurance that we will
remain a preferred vendor to our existing customers. A decrease in business from
or loss of a major customer could have a material adverse effect on our results
of operations. Further, if the economic conditions in the United States worsen
or if a wider or global economic slowdown occurs, we may experience a material
adverse impact on our business, operating results, and financial condition.
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. 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 may 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 may 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, 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.
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.
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OUR BUSINESS MODEL IS DEPENDENT ON INTEGRATION OF INFORMATION SYSTEMS ON A
GLOBAL BASIS AND, TO THE EXTENT THAT WE FAIL TO MAINTAIN AND SUPPORT OUR
INFORMATION SYSTEMS, 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 Mexican and Caribbean 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.
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 FACILITIES, WE WILL NOT
BE ABLE TO MEET OUR OBLIGATIONS AND MAY LOSE SALES AND CUSTOMERS. 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 our operations to a different
geographic region and we may have to cease or curtail our 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 disasters.
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, zippers and other trim items. 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.
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IF CUSTOMERS DEFAULT ON BUYBACK AGREEMENTS WITH US, WE WILL BE LEFT HOLDING
UNSALABLE INVENTORY. Inventories include goods that 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
agreed by the customer from 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.
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.
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 incur
24
impairment losses related to goodwill and other tangible assets if we acquire
another company and this could negatively impact our results of operations.
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.
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.
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, 2001, our officers and directors and their affiliates owned
approximately 42.4% 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, beneficially owned approximately 40.4% 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 Colin Dyne pursuant to a voting agreement. The
Azteca Production International shares constitute approximately 11.4% of the
outstanding shares of common stock at December 31, 2001. KG Investment, LLC, a
significant stockholder, owns approximately 27.2% of the outstanding shares of
our common stock at December 31, 2001. 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.
WE MAY FACE INTERRUPTION OF PRODUCTION AND SERVICES DUE TO INCREASED
SECURITY MEASURES IN RESPONSE TO TERRORISM. Our business depends on the free
flow of products and services through the channels of commerce. Recently, in
response to terrorists' activities and threats aimed at the United States,
transportation, mail, financial and other services have been slowed or stopped
altogether. Further delays or stoppages in transportation, mail, financial or
other services could have a material adverse effect on our business, results of
operations and financial condition. Furthermore, we may experience an increase
in operating costs, such as costs for transportation, insurance and security as
a result of the activities and potential activities. We may also experience
delays in receiving payments from payers that have been affected by the
terrorist activities and potential activities. The United States economy in
general is being adversely affected by the terrorist activities and potential
activities and any economic downturn could adversely impact our results of
operations, impair our ability to raise capital or otherwise adversely affect
our ability to grow our business.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of our sales are denominated in United States dollars or the currency
of the country in which our products originate 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 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 United States 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 on our
outstanding borrowings. At June 30, 2002, we had approximately $19.6 million of
indebtedness subject to interest rate fluctuations. These fluctuations may
increase our interest expense and decrease our cash flows from time to time. 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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We currently have pending 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on June 14, 2002, our
stockholders (a) elected Michael Katz and Jonathan Burstein to serve as Class II
Directors of Registrant for three years and until their respective successors
have been elected, and (b) approved an amendment to our 1997 Stock Plan to
increase from 2,077,500 to 2,277,500 the maximum number of shares of common
stock that may be issued pursuant to awards granted under the Plan. Each Class
II Director was elected by a vote of 8,246,359 shares in favor, 44,400 shares
voted against, and no shares were withheld from voting for the directors. At the
annual meeting, 8,232,940 shares were voted in favor of, 57,819 shares were
voted against, and no shares were withheld from voting on the amendment to our
1997 Stock Plan. There were no broker non-votes at the annual meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Report on Form 8-K:
Report on Form 8-K, filed July 26, 2002, reporting under Item 5, our
entering into an exclusive supply agreement with Levi Strauss & Co. on
July 12, 2002.
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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 14, 2002 TAG-IT PACIFIC, INC.
` /s/ Ronda Sallmen
--------------------------------
By: Ronda Sallmen
Its: Chief Financial Officer
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