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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2002
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-13669
TAG-IT PACIFIC, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-4654481
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
21900 BURBANK BLVD., SUITE 270
WOODLAND HILLS, CALIFORNIA 91367
(Address of Principal Executive Offices) (Zip Code)
(818) 444-4100
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $.001 PAR VALUE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 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 past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) Yes [ ] No [X]
The issuer's revenues for the fiscal year ended December 31, 2002 were
$60,073,170.
At June 30, 2002 the aggregate market value of the voting and
non-voting common stock held by non-affiliates of the registrant was
$14,682,838. At March 28, 2003 the issuer had 9,619,909 shares of Common Stock,
$.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's proxy statement with respect to its 2003
annual meeting of stockholders are incorporated by reference into Part III of
this report.
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TAG-IT PACIFIC, INC.
INDEX TO FORM 10-K
PAGE
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PART I
Item 1. Business..................................................... 1
Item 2. Properties................................................... 7
Item 3. Legal Proceedings............................................ 7
Item 4. Submission of Matters to a Vote of Security Holders.......... 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................... 7
Item 6. Selected Financial Data...................................... 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk ............................................ 27
Item 8. Financial Statements and Supplementary Data:
Report of Independent Certified Public Accountants........... 29
Consolidated Balance Sheets.................................. 30
Consolidated Statements of Operations........................ 31
Consolidated Statements of Stockholders' Equity and
Convertible Redeemable Preferred Stock.................. 32
Consolidated Statements of Cash Flows........................ 33
Notes to Consolidated Financial Statements................... 34
Independent Certified Public Accountants' Report on
Schedule II............................................. 57
Schedule II - Valuation and Qualifying Accounts and
Reserves................................................ 58
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..................... 59
PART III
Item 10. Directors and Executive Officers of the Registrant........... 59
Item 11. Executive Compensation....................................... 59
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters.............. 59
Item 13. Certain Relationships and Related Transactions............... 59
Item 14. Controls and Procedures...................................... 59
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................. 60
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Tag-It Pacific, Inc. is an apparel company that specializes in the
distribution of a full range of trim items to manufacturers of fashion apparel
and licensed consumer products, and 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 specified supplier of trim items to owners of
specific brands, brand licensees and retailers, including Abercrombie & Fitch,
Express, The Limited, Lerner and Miller's Outpost, among others. We also
distribute zippers under our TALON brand name to owners of apparel brands and
apparel manufacturers such as Levi Strauss & Co., VF Corporation and Tropical
Sportswear, among others. In 2002, we created a new division under the TEKFIT
brand name. This division develops and sells apparel components that utilize the
patented Pro-Fit technology, including a stretch waistband. We market these
products to the same customers targeted by our MANAGED TRIM SOLUTION and TALON
zipper divisions.
We were incorporated in Delaware in September 1997. We were formed to serve
as the parent holding company of Tag-It, Inc., a California corporation, Tag-It
Printing & Packaging Ltd., which changed its name in 1999 to Tag-It Pacific (HK)
LTD, a BVI corporation, Tagit de Mexico, S.A. de C.V., A.G.S. Stationery, Inc.,
a California corporation, and Pacific Trim & Belt, Inc., a California
corporation. All of these companies were consolidated under a parent limited
liability company in October 1997. These companies became our wholly owned
subsidiaries immediately prior to the effective date of our initial public
offering in January 1998. In 2000, we formed two wholly owned subsidiaries of
Tag-It Pacific, Inc, Tag-It Pacific Limited, a Hong Kong corporation, and Talon
International, Inc., a Delaware corporation.
BUSINESS STRATEGY
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, 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
manufacturer 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 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 also helps to eliminate a manufacturer's
need to maintain a trim purchasing and logistics department.
In December 2001, we purchased the TALON trademark and trade names for
TALON brand zippers. Previously, we were the exclusive distributor of TALON
brand zippers. TALON is a 100-year-old brand, which is well known for quality
and product innovation. TALON was the original pioneer of the formed wire metal
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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
will be able to more effectively respond to customer needs and better maintain
the quality and value of the Talon products. We intend to make a significant
investment in the TALON brand in order to re-build it to a position of
prominence in the apparel market place. We have introduced a completely revised
high quality line of zippers, broadened distribution to Asia and Mexico,
negotiated with new distributors and initiated a new sales and marketing effort
for this brand. TALON will be promoted both within our trim packages, as well as
a stand-alone product line.
We also serve as a specified supplier for a variety of major retail brand
and private label oriented companies. A specified supplier is a suppler that has
been approved for quality and service by a major retail brand or private label
company. Contractors manufacturing for the major retail brand or private label
company must purchase their trim requirements from a supplier that has been
specified. 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. Becoming a specified supplier to brand customers gives us
an opportunity to become the preferred or sole vendor of trim items for all
manufacturers of apparel under that brand name.
We have assembled a team of sales representatives, program managers,
creative design personnel and global production and distribution coordinators at
our facilities located in the United States and Mexico, Hong Kong and the
Caribbean. We plan to continue to expand operations in Mexico and the Caribbean
to take advantage of the large apparel manufacturing markets in these regions.
We believe our marketing strategy and international distribution operations will
enable us to take advantage of and address the increasingly complicated
requirements of the large and expanding demand for complete trim packages.
A significant portion of a typical trim package is comprised of zippers and
thread. In order to secure a stable high-quality source of supply for thread
products, we entered into a supply and co-marketing agreement with Coats
America, an affiliate of Coats, plc, which is a leading thread company in the
apparel industry, in September of 2001. The supply and co-marketing agreement
was accompanied by an equity investment by Coats North America Consolidated,
Inc., also an affiliate of Coats, plc, in the amount of $3 million. Pursuant to
the supply and co-marketing agreement, we have agreed to exclusively promote
Coats brand thread in our trim packages. In addition, Coats America agreed to
introduce us and our services to selected Coats America customers worldwide.
Coats plc operates in more than 65 countries and is the largest manufacturer of
industrial thread and textile-related craft products in the world.
PRODUCTS
COMPLETE TRIM PACKAGES. We market and supply our customers with complete
trim packages on a per-garment basis which we assemble on behalf of our
customers. Each trim package includes all items of trim that a customer will
need in the manufacture of a particular item of apparel. Our complete trim
packages include a variety of trim items including thread, zippers, labels,
buttons, rivets, polybags, packing cartons and hangers. We also provide in our
complete trim packages 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.
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We consider a high level of customer service essential to our success. We
combine our high level of customer service with our MANAGED TRIM SOLUTION to
offer our customers a complete trim service product. We believe this
full-service product gives us a competitive edge over companies that only offer
selected trim components because our MANAGED TRIM SOLUTION saves our customers
time and employee work hours in ordering and managing trim orders from several
different suppliers. Our MANAGED TRIM SOLUTION is a business-to-business
e-commerce system that 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 is an Internet-based supply-chain management
system which provides customers with assistance in their ordering, production,
inventory management and just-in-time distribution of their trim and packaging
requirements. We are continuing to enhance and upgrade our MANAGED TRIM SOLUTION
software.
SEPARATE TRIM COMPONENTS. Separate from our marketing of complete trim
packages, we also provide individual items of trim to certain of our customers
who only need to source a portion of their trim requirements from us. Further,
for selected customers, we also produce customized woven, leather, synthetic,
embroidered and novelty labels and tapes, which can be printed on or woven into
a wide range of fabrics and other materials using various types of high-speed
equipment. As an additional service, we lease to our customers the machinery
used to attach the buttons, rivets and snaps we distribute.
TALON BRAND ZIPPERS. We offer a full line of metal and synthetic zippers
bearing the TALON brand name. TALON zippers are used primarily by manufacturers
in the apparel industry and are distributed through our distribution facilities
in Miami, Mexico and Hong Kong. In addition, we are negotiating with
distributors that service local apparel manufacturing regions in the United
States and overseas. We offer manufacturers technologically advanced equipment
for efficiently handling and applying TALON zippers into garments. The branded
apparel zipper market is dominated by one company; YKK (R). We are positioning
TALON to be a viable alternative to YKK (R), and to capture an increased market
share position. We also plan to leverage the brand equity in the TALON name by
branding other products in our line with the TALON name.
TEKFIT. We have entered into an Exclusive License and Intellectual Property
Rights agreement with Pro-Fit Holdings Limited. The agreement gives us the
exclusive rights to sell or sublicense stretch waistbands manufactured under the
patented technology developed by Pro-Fit for garments manufactured anywhere in
the world for the U.S. market and all U.S. brands, for the life of the patent
and related know-how. We now offer apparel manufacturers advanced, patented
fabric technologies to utilize in their garments under the TEKFIT name. This
revolutionary technology allows fabrics to be altered through the addition of
stretch characteristics resulting in greatly improved fit and comfort.
Currently, we are supplying Levi Strauss & Co. with TEKFIT waistbands for their
Dockers(R) programs. Our exclusive supply arrangement with Levi Strauss & Co. is
for twill type pants only. This new technology allows pant manufacturers to
build in a stretch factor into standard waistbands that does not alter the
appearance of the garment, but will allow the waist to stretch out and back by
as much as two waist sizes. We are actively working with other large apparel
manufacturers to develop and release the TEKFIT technology in other types of
garments.
RETAIL PACKAGING. Our retail packaging products include high-quality paper
boxes, metal tins, injection-molded packaging items and high-quality shopping
bags. We design and produce these products individually or as part of a program
involving an entire coordinated packaging line for a customer. Our retail
packaging is used for a wide variety of products, including wallets, watches,
sunglasses, belts, undergarments and gift sets.
DESIGN AND DEVELOPMENT
We have assembled an in-house creative team to produce products with
innovative designs that we believe distinguish our products from those of our
competitors. We support our skills and expertise in material procurement and
product-manufacturing coordination with product designs intended to meet fashion
demands, as well as functional and cost parameters. Many specialty design
companies with which we compete have limited sourcing or manufacturing
experience. These companies create designs that often
3
cannot be implemented due to difficulties in the manufacturing process, the
expenses of required materials, or a lack of functionality in the resulting
product. We attempt to design products to function within the limitations
imposed by the applicable manufacturing framework. Using our manufacturing and
sourcing experience, we attempt to minimize the time-consuming delays that often
arise in coordinating the efforts of independent design houses and manufacturing
facilities. By supporting our material procurement and product manufacturing
services with design services, we believe that we reduce development and
production costs and deliver products to our customers sooner than many of our
competitors. Our development costs are low, most of which are borne by our
customers.
CUSTOMERS
We have more than 800 customers. Our customers include well-known apparel
manufacturers, such as Levi Strauss & Co., Abercrombie & Fitch, The Limited
Group, Tarrant Apparel Group, Azteca Production International, VF Corporation
and Tropical Sportswear, among others. Our customers also include contractors
for specialty retailers such as Miller's Outpost and mass merchant retailers
such as Wal-Mart.
In July 2002, we entered into an exclusive supply contract with Levi
Strauss & Co. Under the terms of the supply agreement, Levi Strauss & Co. has
agreed to purchase a minimum of $10 million of various trim products, stretch
waistbands, garment components and services over the next two years. Levi
Strauss & Co. also appointed TALON as an approved zipper supplier.
Commencing in December 1998, we began to provide trim products to Tarrant
Apparel Group for its operations in Tlaxcala, Mexico. We opened a warehouse,
distribution and partial assembly facility in Tlaxcala, Mexico to service
Tarrant Apparel Group and the increasing number of other garment and apparel
manufacturers operating in the region. The Chairman and President of Tarrant
Apparel Group are among our significant stockholders. Tarrant Apparel Group
accounted for approximately 41.5% of our net sales for the year ended December
31, 2002.
On December 22, 2000, we 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. Azteca Production International has been a
significant customer of ours for many years. This agreement is structured in a
manner that allows us to utilize our MANAGED TRIM SOLUTION system to supply
Azteca Production International with its trim program requirements. We expanded
our facilities in Tlaxcala, Mexico to service Azteca Production International's
trim requirements.
SALES AND MARKETING
We sell our principal products through our own sales force based in Los
Angeles, New York City, various other cities in the United States, Hong Kong and
in Mexico. We also employ customer service representatives who are assigned to
key customers and provide in-house customer service support. Our senior
executives have developed relationships with our major customers at senior
levels. These executives actively participate in marketing and sales functions
and the development of our overall marketing and sales strategies. When we
become the outsourcing vendor for a customer's packaging or trim requirements,
we position ourselves as if we are an in-house department of the customer's trim
procurement operation.
4
A significant portion of our sales is to customers based in the United
States. For the year ended December 31, 2002, sales to United States based
customers for shipments to production facilities in Mexico, Asia and the
Dominican Republic accounted for 69.7%, 9.1% and 3.1%, of our revenues,
respectively. We also market our products to customers in Mexico, Asia, the
Caribbean basin and Central America.
SOURCING AND ASSEMBLY
We have developed expertise in identifying the best materials, prices and
vendors for particular products and raw materials. This expertise enables us to
produce a broad range of packaging and trim products at various price points.
The majority of products that we procure and distribute are purchased on a
finished good basis. Raw materials used in the assembly of our trim kits are
available from numerous sources and are in adequate supply. We purchase products
from several qualified material suppliers, including Coats North America and its
affiliates which accounted for 30.6% of our purchases in 2002.
We are able to create most product artwork and any necessary films, dies
and molds used to design and manufacture our products. All other products that
we design and sell are produced by third party vendors. We are confident in our
ability to secure high quality alternative manufacturing sources. We intend to
continue to outsource production to qualified vendors, particularly with respect
to manufacturing activities that require substantial investment in capital
equipment.
Through our Hong Kong facility, we distribute TALON zippers, bar-coded
hangtags, apparel packaging and coordinate the manufacture and distribution of
the full range of our products. Our Hong Kong facility supplies several
significant packaging programs, services customers located in Asia and the
Pacific Rim and sources products for our Los Angeles, Miami and Mexico based
operations.
Our Florida facility, which opened in January 2001, distributes zipper and
trim-related products to the East Coast of the United States, the Caribbean
Basin, Mexico and Central America.
INTELLECTUAL PROPERTY RIGHTS AND LICENSES
We have trademarks as well as copyrights, software copyrights and trade
names for which we rely on common law protection, including the TALON trademark.
Several of our other trademarks are the subject of applications for federal
trademark protection through registration with the United States Patent and
Trademark Office, including "Tag-It" and "Managed Trim Solution". We also rely
on our Exclusive License and Intellectual Property Rights agreement with Pro-Fit
Holdings Limited to sell our TEKFIT Stretch waistbands.
INVENTORIES
In order to meet the rapid delivery requirements of our MANAGED TRIM
SOLUTION customers, we are required to carry a substantial amount of inventory
on their behalf. Included in inventories at December 31, 2002 are inventories
that are subject to buyback arrangements with these customers. The buyback
arrangements contain provisions related to the inventory purchased on behalf of
these customers. In the event that inventories remain with us in excess of six
to nine months from our receipt of the goods from our vendors or the termination
of production of a customer's product line related to the inventories, the
customer is required to purchase the inventories from us under normal invoice
and selling terms.
COMPETITION
We compete in highly competitive and fragmented industries that include
numerous local and regional companies that provide some or all of the products
we offer. We also compete with United States and international design companies,
distributors and manufacturers of tags, trim, packaging products and
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zippers. Some of our competitors, including Paxar Corporation, YKK (R),
Universal Button, Inc., Avery Denison Corporation and Scovill Fasteners, Inc.
have greater name recognition, longer operating histories and, in many cases,
substantially greater financial and other resources.
Because of our integrated materials procurement and assembly capabilities
and our full service MANAGED TRIM SOLUTION, we believe that we are able to
effectively compete for our customers' business, particularly where our
customers require coordination of separately sourced production functions. We
believe that to successfully compete in our industry we must offer superior
product pricing, quality, customer service, design capabilities, delivery lead
times and complete supply-chain management. We also believe the TALON brand name
and the quality of our TALON brand zippers will allow us to gain market share in
the zipper industry. The unique stretch quality of our TEKFIT waistbands will
also allow us to compete effectively in the market for waistband components.
SEGMENT INFORMATION
We operate primarily in one industry segment, the distribution of a full
range of apparel trim products to manufacturers of fashion apparel and licensed
consumer products, and specialty retailers and mass merchandisers. For
information regarding the revenues and assets associated with our geographic
segments, see Note 16 of the Notes to the Consolidated Financial Statements
included elsewhere in this filing.
INTERNATIONAL
We sell the majority of our products to U.S. based brands, retailers and
manufacturers. The majority of these customers produce their products or
contract out the production of their products in manufacturing facilities
located outside of the U.S., primarily in Mexico, Hong Kong and the Dominican
Republic.
A summary of our domestic and international net revenue and net property,
plant and equipment is set forth in Note 16 to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference. Approximately
85% of our overall net revenue came from sales to U.S. based or contract
manufacturers' facilities located outside of the United States during the year
ended December 31, 2002.
For a discussion of risks attendant to our foreign operations, see "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.", in Item 7,
"Quantitative and Qualitative Disclosure about Market Risk" in Item 7A and Note
16 to the Consolidated Financial Statements in Item 8, which are incorporated
herein by reference.
EMPLOYEES
As of December 31, 2002, we had approximately 273 full-time employees, with
approximately 50 employees in Los Angeles, 7 employees in Miami, 2 employees in
New York, 8 employees in various other cities, 17 employees in Hong Kong, 1
employee in the Dominican Republic and 189 employees in Tlaxcala, Mexico. Our
Tijuana, Mexico, facility was closed in the first quarter of 2002. Our labor
forces in the United States and Hong Kong are non-union. The employees at our
Mexico facility are represented by a collective bargaining unit, the Federacion
De Trabajadores Del Estado de Tlaxcala. We believe that we have satisfactory
employee and labor relations.
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ITEM 2. PROPERTIES
Our headquarters is located in Woodland Hills, California, where we lease
approximately 8,800 square feet of administrative and product development space.
In addition to our Woodland Hills facility, we lease 2,600 square feet of office
space in New York, 2,500 square feet of warehouse space in Gardena, California,
21,500 square feet of office and warehouse space in Miami, Florida, 17,000
square feet of warehouse space in Dallas, North Carolina, 5,900 square feet of
office and warehouse space in Kwun Tong, Hong Kong, 4,100 square feet of
warehouse space in Santiago, Dominican Republic, and 22,000 square feet of
warehouse, distribution and administration space in Tlaxcala, Mexico.
ITEM 3. 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 that the claims are either 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
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
COMMON STOCK
Tag-It Pacific's Common Stock began trading on the American Stock Exchange
on January 23, 1998 under the symbol "TAG". The following table sets forth, for
the periods indicated, the high and low sales prices for the Common Stock as
reported by the American Stock Exchange.
HIGH LOW
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YEAR ENDED DECEMBER 31, 2001
First Quarter ......................... $ 4.25 $ 3.69
Second Quarter ........................ 4.05 3.25
Third Quarter ......................... 4.05 3.60
Fourth Quarter ........................ 3.99 3.60
YEAR ENDED DECEMBER 31, 2002
First Quarter ......................... $ 3.99 $ 3.50
Second Quarter ........................ 4.24 3.45
Third Quarter ......................... 4.20 3.60
Fourth Quarter ........................ 3.99 3.40
On March 25, 2003, the closing sales price of our Common Stock as reported
on the American Stock Exchange was $3.60 per share. As of March 26, 2003, there
were 39 record holders of our Common Stock.
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RECENT SALES OF UNREGISTERED SECURITIES
In a series of transactions 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 $1.55 million. The stock and warrant purchase agreements
also included a commitment by one of the two non-related investors to purchase
an additional 400,000 shares of common stock at a price per share of $3.00 at
second closing dates on or prior to March 1, 2003, as amended, for additional
proceeds of $1,200,000. Pursuant to the stock and warrant purchase agreements,
258,332 warrants to purchase common stock were issued. The warrants are
exercisable immediately after closing, one half of the warrants at $4.34 per
share and the second half at $4.73 per shares, representing 110% and 120%,
respectively, of the market value of our 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 our 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. In March 2002 and February 2003, one of the non-related investors
purchased 100,000 and 300,000 shares, respectively, 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 $1,200,000. Pursuant to the
second closing provisions of the stock and warrant purchase agreement, 50,000
and 150,000 warrants were issued to the investor in March 2002 and February
2003, respectively, under the same terms as stated above. There are no remaining
commitments due under the stock and warrant purchase agreements. The issuance
and sale of these securities was exempt from the registration and prospectus
delivery requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act as a transaction not involving any public offering.
DIVIDENDS
We have never paid dividends on our Common Stock. We intend to retain any
future earnings for use in our business. We are restricted from making cash
dividend payments on our common stock under our senior credit facility with UPS
Capital Global Trade Finance Corporation.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information as of December 31, 2002
regarding equity compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for issuance:
NUMBER OF SECURITIES
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE REMAINING AVAILABLE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF FOR FUTURE ISSUANCE
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
----------------------- -------------------- --------------------
Equity compensation
plans approved by
security holders ......... 1,733,500 $ 3.48 544,000
Equity compensation
plans not approved
by security holders ...... 608,122 $ 4.35 --
Total ................. 2,341,622 $ 3.71 544,000
See Note 13 to the Consolidated Financial Statements for information
regarding the material features of the above plans. Each of the above plans
provides that the number of shares with respect to which options and warrants
may be granted, and the number of shares of Common Stock subject to an
outstanding option or warrant, shall be proportionately adjusted in the event of
a subdivisions or consolidation of shares or the payment of a stock dividend on
Common Stock.
8
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with
our consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations, and should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included in Item 8, "Financial Statements and Supplementary
Data" of this Form 10-K in order to understand fully factors that may affect the
comparability of the financial data presented below.
TAG-IT PACIFIC, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
FISCAL YEARS ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
1998(1) 1999 2000 2001(2) 2002
-------- -------- -------- -------- --------
OPERATIONS:
Total Revenue...................................... $ 18,808 $ 32,385 $ 49,362 $ 43,568 $ 60,073
Income (loss) from operations...................... $ 824 $ 2,406 $ 2,547 $ (253) $ 3,044
Net Income (loss).................................. $ 527 $ 1,731 $ 1,539 $ (1,226) $ 1,496
Net income (loss) per share - basic................ $ 0.12 $ 0.26 $ 0.23 $ (0.16) $ 0.14
Net income (loss) per share - diluted.............. $ 0.11 $ 0.23 $ 0.21 $ (0.16) $ 0.14
Weighted average shares outstanding - basic........ 4,419 6,734 6,838 8,017 9,232
Weighted average sharesoutstanding - diluted....... 4,960 7,399 7,283 8,017 9,531
FINANCIAL POSITION (AT PERIOD END):
Cash, cash equivalents and short-term investments.. $ 2,065 $ 101 $ 128 $ 47 $ 285
Total assets....................................... $ 14,643 $ 19,855 $ 39,099 $ 40,794 $ 54,303
Capital lease obligations and notes payable........ $ 508 $ 1,031 $ 3,873 $ 6,024 $ 5,354
Convertible redeemable preferred stock............. $ - $ - $ - $ 2,895 $ 2,895
Stockholders' equity............................... $ 7,090 $ 8,861 $ 14,791 $ 15,428 $ 18,467
Total liabilities and stockholders' equity......... $ 14,643 $ 19,855 $ 39,099 $ 40,794 $ 54,303
PER SHARE DATA (AT END OF PERIOD):
Net book value per common share.................... $ 1.05 $ 1.31 $ 1.88 $ 1.76 $ 1.98
Common shares outstanding.......................... 6,727 6,778 7,863 8,770 9,320
- ----------
(1) We completed our initial public offering in January of 1998.
(2) We incurred restructuring charges of $1,561,623 during the year ended
December 31, 2001.
9
ITEM 7. 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-K.
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 fiscal years ended December 31, 2002, 2001 and
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.
APPLICATION OF 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. A substantial portion of our total
inventories is subject to buyback arrangements with our
customers. The buyback arrangements contain provisions related to
the inventory we purchase and warehouse on behalf of our
customers. In the event that inventories remain with us in excess
of six to nine months from our receipt of the goods from our
vendors or the termination of production of a customer's product
line related to the inventories, the customer is required to
purchase the inventories from us under normal invoice and selling
terms. If the financial condition of a customer were to
deteriorate, resulting in an impairment of its ability to
purchase inventories, an additional adjustment may be required.
These buyback arrangements 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.
10
o We record valuation allowances to reduce our deferred tax assets
to an amount that we believe is more likely than not to be
realized. We consider estimated future taxable income and ongoing
prudent and feasible tax planning strategies in accessing the
need for a valuation allowance. If we determine that we will not
realize all or part of our deferred tax assets in the future, we
would make an adjustment to the carrying value of the deferred
tax asset, which would be reflected as an income tax expense.
Conversely, if we determine that we will realize a deferred tax
asset, which currently has a valuation allowance, we would be
required to reverse the valuation allowance, which would be
reflected as an income tax benefit.
o Intangible assets are evaluated on a continual basis and
impairment adjustments are made based on management's valuation
of identified reporting units related to goodwill, the valuation
of intangible assets with indefinite lives and the reassessment
of the useful lives related to other intangible assets with
definite useful lives. Impairment adjustments are made for the
difference between the carrying value of the intangible asset and
the estimated valuation and charged to operations in the period
in which the facts that give rise to the adjustments become
known.
o Sales are recorded at the time of shipment, at which point title
transfers to the customer, and when collection is reasonably
assured.
BUSINESS OVERVIEW AND RECENT DEVELOPMENTS
Tag-it Pacific, Inc. is an apparel company that specializes in the
distribution of trim items to manufacturers of fashion apparel and licensed
consumer products, and 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 specified supplier of trim items to owners of specific brands,
brand licensees and retailers, including Abercrombie & Fitch, The Limited,
Express, Lerner and Miller's Outpost, among others. We also distribute zippers
under our TALON brand name to owners of apparel brands and apparel manufacturers
such as Levi Strauss & Co., VF Corporation and Tropical Sportswear, among
others. In 2002, we created a new division under the TEKFIT brand name. This
division develops and sells apparel components that utilize the patented Pro-Fit
technology, including a stretch waistband. We market these products to the same
customers targeted by our MANAGED TRIM SOLUTION and TALON zipper divisions.
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
11
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. A specified supplier is a suppler that has
been approved for quality and service by a major retail brand or private label
company. 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 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.
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.
RELATED PARTY SUPPLY AGREEMENTS
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
12
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.
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 have 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. The exclusive supply
agreement with Tarrant Apparel Group has an indefinite term.
Sales under our exclusive supply agreements with Azteca Production
International and Tarrant Apparel Group amounted to approximately 69.7% and
63.0% of our total sales for the years ended December 2002 and 2001,
respectively. We will continue to rely on these two customers for a significant
amount of our sales for the year ended December 2003. Sales under these
exclusive supply agreements as a percentage of total sales for the year ended
December 2003 are anticipated to be lower than the year ended December 2002 due
to an increase in sales to other customers. 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 Azteca Production International or Tarrant Apparel
Group terminates, it may have an adverse affect on our results of operations.
Included in trade accounts receivable, related parties at December 31, 2002, is
approximately $14.8 million due from Tarrant Apparel Group and Azteca Production
International.
Included in inventories at December 31, 2002 are inventories of
approximately $8.5 million that are subject to buyback arrangements with Tarrant
Apparel Group, Azteca Production International and other customers. The buyback
arrangements contain provisions related to the inventory purchased on behalf of
these customers. In the event that inventories remain with us in excess of six
to nine months from our receipt of the goods from our vendors or the termination
of production of a customer's product line related to the inventories, the
customer is required to purchase the inventories from us under normal invoice
and selling terms. If the financial condition of Tarrant Apparel Group and
Azteca Production International were to deteriorate, resulting in an impairment
of their ability to purchase inventories of pay receivables, it may have an
adverse affect on our results of operations.
13
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 amounted to $1,561,623 and
were charged to operations primarily in the first quarter of 2001.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated selected statements
of operations data shown as a percentage of net sales:
YEAR ENDED
DECEMBER 31,
------------------------
2002 2001 2000
----- ----- -----
Net sales ................................ 100.0% 100.0% 100.0%
Cost of goods sold ....................... 74.3 72.7 72.6
----- ----- -----
Gross profit ............................. 25.7 27.3 27.4
Selling expenses ......................... 3.5 3.8 4.2
General and administrative expenses ...... 17.1 20.5 18.0
Restructuring charges .................... -- 3.6 --
----- ----- -----
Operating income (loss) .................. 5.1% (0.6)% 5.2%
===== ===== =====
Net sales increased approximately $16,500,000 (or 37.8%) to $60,100,000 for
the year ended December 31, 2002 from $43,600,000 for the year ended December
31, 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 decreased approximately $5,800,000 (or 11.7%) to $43,600,000 for
the year ended December 31, 2001 from $49,400,000 for the year ended December
31, 2000. The decrease in net sales was primarily a result of a reduction of
sales from our Hong Kong operations. Our restructuring plan, implemented in the
first quarter of 2001, included the reduction of our sales force and operations
in our Hong Kong facility in order to increase profitability and also included
the reduction of the number of small dollar volume customers with lower gross
margins. The decrease in net sales was also due to a decrease in zipper sales
under our exclusive license and distribution agreement of TALON products, which
began in July 2000. Our exclusive vendor of TALON products discontinued
manufacturing these products in December 2000. We have successfully negotiated
with alternative vendors for TALON products and do not anticipate any further
reductions of TALON sales from present levels. The decrease in net sales for the
year was partially offset by an increase in sales as a result of our January
2001 acquisition of a Florida-based distributor of trim products in the apparel
industry. The overall decrease in sales compared to the prior year was due to a
general slow down of the economy and consumer spending and a further slow down
as a result of the terrorist attacks on September 11, 2001.
14
Gross profit increased approximately $3,500,000 (or 29.4%) to $15,400,000
for the year ended December 31, 2002 from $11,900,000 for the year ended
December 31, 2001. Gross margin as a percentage of net sales decreased to
approximately 25.7% for the year ended December 31, 2002 as compared to 27.3%
for the year ended December 31, 2001. The decrease in gross profit as a
percentage of net sales for the year ended December 31, 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 year. 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 year ended December 31, 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.
Gross profit decreased approximately $1,600,000 (or 11.9%) to $11,900,000
for the year ended December 31, 2001 from $13,500,000 for the year ended
December 31, 2000. Gross margin as a percentage of net sales decreased to
approximately 27.3% for the year ended December 31, 2001 as compared to 27.4%
for the year ended December 31, 2000. The decrease in gross profit as a
percentage of net sales for the year ended December 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. The decrease in gross margin for
the year ended December 31, 2001 was offset by a decrease in manufacturing and
facility costs which was a direct result of the implementation of our
restructuring plan in the first quarter of 2001. The decrease in gross profit as
a percentage of net sales for the year ended December 31, 2001 was also offset
by an increase in gross profit due to a decrease in net sales of TALON products
during the year. Talon products have a lower gross margin than the overall
margin for products included within the complete trim packages we offer to our
customers through our MANAGED TRIM SOLUTION(TM).
Selling expense increased approximately $490,000 (or 29.9%) to $2,130,000
for the year ended December 31, 2002 from $1,640,000 for the year ended December
31, 2001. As a percentage of net sales, these expenses decreased to 3.5% for the
year ended December 31, 2002 compared to 3.8% for the year ended December 31,
2001. The increase in selling expenses 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. 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 year ended December 31, 2002, 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.
Selling expense decreased approximately $460,000 (or 21.9%) to $1,640,000
for the year ended December 31, 2001 from $2,100,000 for the year ended December
31, 2000. As a percentage of net sales, these expenses decreased to 3.8% for the
year ended December 31, 2001 compared to 4.2% for the year ended December 31,
2000. This decrease was due to a reduction of our sales force which was part of
our restructuring plan that was implemented in the first quarter of 2001.
General and administrative expenses increased approximately $1,330,000 (or
14.9%) to $10,270,000 for the year ended December 31, 2002 from $8,940,000 for
the year ended December 31, 2001. The increase in these expenses was due
primarily to additional staffing and other expenses incurred related to our
Tlaxcala, Mexico operations, the amortization of intangible assets incurred as a
result of the exclusive waistband technology license rights we acquired in April
2002 and additional adjustments for bad debts of approximately $633,000 recorded
during the year. As a percentage of net sales, these expenses decreased to 17.1%
for the year ended December 31, 2002 compared to 20.5% for the year ended
December 31, 2001, as the rate of increase in net sales exceeded that of general
and administrative expenses.
15
General and administrative expenses increased approximately $50,000 (or
0.6%) to $8,940,000 for the year ended December 31, 2001 from $8,890,000 for the
year ended December 31, 2000. The increase in these expenses was due to
additional staffing and other expenses related to our new Florida operation,
offset by the reduction of general and administrative expenses in accordance
with the implementation of our first quarter 2001 restructuring plan. As a
percentage of net sales, these expenses increased to 20.5% for the year ended
December 31, 2002 compared to 18.0% for the year ended December 31, 2000, as the
rate of increase in net sales did not exceed that of general and administrative
expenses.
Interest expense decreased approximately $128,000 (or 9.2%) to $1,269,000
for the year ended December 31, 2002 from $1,397,000 for the year ended December
31, 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 year ended
December 31, 2002 due to increased sales and expanded operations in Mexico and
Asia. The increase in interest expense due to increased borrowings during the
year was offset by decreases in the prime rate from prior periods.
Interest expense increased approximately $644,000 (or 85.5%) to $1,397,000
for the year ended December 31, 2001 from $753,000 for the year ended December
31, 2000. Due to expanded operations, we increased our borrowing under our
credit facility with Sanwa Bank, which contributed to the increased interest
expense for the year ended December 31, 2001 as compared to the year ended
December 31, 2000. On May 30, 2001, we replaced our credit facility with Sanwa
Bank with a new facility with UPS Capital Global Trade Finance Corporation. 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 amounted to approximately $279,000 for the
year ended December 31, 2002 as compared to a benefit for income taxes of
$423,000 for the year ended December 31, 2001. Income taxes increased for the
year ended December 31, 2002 primarily due to the increased taxable income as a
result of the net loss incurred for the year ended December 31, 2001.
The benefit for income taxes amounted to approximately $423,000 for the
year ended December 31, 2001 as compared to a provision for income taxes of
$255,000 for the year ended December 31, 2000. Income taxes decreased for the
year ended December 31, 2001 primarily due to the decreased taxable income as a
result of the net loss incurred for the year ended December 31, 2001. We were
able to utilize net operating loss carry forwards from our subsidiary, AGS
Stationery, Inc. of approximately $430,000 to offset taxable income during 2000.
Net income was $1,496,000 for the year ended December 31, 2002 as compared
to a net loss of $1,226,000 for the year ended December 31, 2001, due primarily
to an increase in net sales, offset by increases in selling and general and
administrative expenses and a decrease in gross margin, as discussed above.
Net loss was $1,226,000 for the year ended December 31, 2001 as compared to
net income of $1,539,000 for the year ended December 31, 2000, due primarily to
the restructuring charges incurred during 2001 of $1.6 million and the reduction
of sales from the prior year of $5.8 million, as discussed above.
16
LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS
Cash and cash equivalents increased to $285,000 at December 31, 2002 from
$47,000 at December 31, 2001. The increase resulted from $6,947,000 of cash
provided by financing activities, offset by $5,440,000 and $1,268,000 of cash
used in operating and investing activities, respectively.
Net cash used in operating activities was approximately $5,440,000,
$2,100,000 and $3,659,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. The increase in cash used by operating activities for the year
ended December 31, 2002 resulted primarily from increases in inventories and
receivables, which was partially offset by increases in accounts payable and
accrued expenses and net income. The increase in inventories during the year was
due primarily to increased customer orders for future sales. The increase in
accounts receivable during the year was due primarily to increased sales during
the fourth quarter of 2002 and slower customer collections. Cash used in
operating activities for the year ended December 31, 2001 resulted primarily
from increased inventories, other assets and net losses, and decreased accounts
payable and accrued expenses. Cash used in operations for the year ended
December 31, 2000 resulted primarily from increased accounts receivables and
inventories, offset by increased accounts payable from accrued expenses.
Net cash used in investing activities was approximately $1,268,000,
$667,000 and $2,033,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. Net cash used in investing activities for the year ended December
31, 2002 consisted primarily of capital expenditures for machinery and
equipment. Net cash used in investing activities for the year ended December 31,
2001 consisted primarily of capital expenditures for computer equipment and
upgrades and additional loans to related parties. Net cash used in investing
activities for the year ended December 31, 2000 consisted primarily of capital
expenditures for computer equipment and upgrades.
Net cash provided by financing activities was approximately $6,947,000,
$2,687,000 and $5,719,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. Net cash provided by financing activities for the year ended
December 31, 2002 primarily reflects increased borrowings under our credit
facility and funds raised from private placement transactions, offset by the
repayment of notes payable. The increase in borrowings under our credit facility
during the year was due primarily to working capital requirements related to
increases in accounts receivable and inventories. Net cash provided by financing
activities for the year ended December 31, 2001 primarily reflects funds raised
from private placement transactions and proceeds from the issuance of Series C
Convertible Redeemable preferred stock, offset by the repayment of a bank
overdraft. Net cash provided by financing activities for the year ended December
31, 2000 primarily reflects increased borrowings under our credit facility and
borrowings from related parties.
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 December 31, 2002 and 2001, outstanding borrowings under our UPS
Capital credit facility amounted to approximately $16,182,000 and $9,661,000,
respectively. Open letters of credit amounted to approximately $1,537,000 at
December 31, 2002. There were no open letters of credit at December 31, 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 December 31, 2002, we were not in compliance
with our capital expenditure covenant due to additional equipment requirements
for our exclusive supply agreement with Levi Strauss & Co. UPS Capital waived
the noncompliance as of December 31, 2002. We were in compliance with all other
financial covenants at December 31, 2002. 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
17
borrowing base availability ranged from approximately $9,921,000 to $18,829,000
from January 1, 2002 to December 31, 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 past year. 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 December 31, 2002,
the amount factored without recourse was approximately $292,000. There were no
receivables factored with UPS Capital at December 31, 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.
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 included 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 on or prior to
March 1, 2003, as amended, for additional proceeds of $1,200,000. In March 2002
and February 2003, this private investor purchased 100,000 and 300,000 shares,
respectively, 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 $1,200,000. Pursuant to the second closing provisions of the stock
and warrant purchase agreement, 50,000 and 150,000 warrants were issued to the
investor in March 2002 and February 2003, respectively. There are no remaining
commitments due under the stock and warrant purchase agreements.
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
18
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 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 December 31, 2002 and 2001, the amount factored without
recourse was approximately $241,000 and $106,000.
As of December 31, 2002, we had outstanding related-party debt of
approximately $1,350,000 at interest rates ranging from 4% to 11%, 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. On October 4, 2002, we entered into a note payable agreement with a
related party in the amount of $500,000 to fund additional working capital
requirements. The note payable was unsecured, due on demand, accrued interest at
4% and was subordinated to UPS Capital. This note was re-paid on February 28,
2003. As of December 31, 2001, we had outstanding related-party debt, of
approximately $850,000 at interest rates ranging from 7% to 11%, 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.
Our receivables increased to $20,227,000 at December 31, 2002 from
$10,952,000 at December 31, 2001. This increase was due primarily to increased
related-party trade receivables of approximately $6.8 million resulting from
increased related party sales during the year ended December 31, 2002 of
approximately $14.4 million. The increase in receivables also resulted from an
increase in sales to non-related parties during 2002.
In October 1998, we entered into a supply agreement with Tarrant Apparel
Group. In October 1998, we also 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 and terms are consistent
with competitive vendors.
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. 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 and terms are consistent with competitive vendors.
19
Included in inventories at December 31, 2002 are inventories of
approximately $8.5 million that are subject to buyback arrangements with Tarrant
Apparel Group, Azteca Production International and other customers. The buyback
arrangements contain provisions related to the inventory purchased on behalf of
these customers. In the event that inventories remain with us in excess of six
to nine months from our receipt of the goods from our vendors or the termination
of production of a customer's product line related to the inventories, the
customer is required to purchase the inventories from us under normal invoice
and selling terms. If the financial condition of Tarrant Apparel Group and
Azteca Production International were to deteriorate, resulting in an impairment
of their ability to purchase inventories of pay receivables, it may have an
adverse affect on our results of operations.
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 for the next
twelve months. In addition, we expect to receive quarterly cash payments of a
minimum of $1.25 million under our supply agreement with Levi Strauss & Co.
through August 2004. We also received additional funds of $900,000 in February
2003 pursuant to the remaining commitment due under the stock warrant and
purchase agreement we entered into with a private investor. We used a portion of
these funds to repay a subordinated note payable to a related party of $500,000
in February 2003. The extent of our future capital requirements will depend 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. 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. 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,
the expansion of our operations in the Asian and Caribbean markets and the
further development of our waistband technology.
20
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The following summarizes our contractual obligations at December 31, 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 note payable ... $ 3,800,000 $ 1,200,000 $ 2,600,000 $ -- $ --
Capital lease obligations ... $ 179,235 $ 71,928 $ 107,307 $ -- $ --
Subordinated notes payable to
related parties (1) ......... $ 1,349,971 $ 1,349,971 $ -- $ -- $ --
Operating leases ............ $ 1,559,103 $ 641,373 $ 917,730 $ -- $ --
Line of credit .............. $16,182,061 $16,182,061 $ -- $ -- $ --
Note payable ................ $ 25,200 $ 25,200 $ -- $ -- $ --
Royalty Payments ............ $ 900,000 $ 75,000 $ 825,000 $ -- $ --
- ------------------------------------------------------------------------------------------
(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.
On December 31, 2002, we indirectly guaranteed the indebtedness of two of
its suppliers through the issuance by a related party of letters of credit to
purchase goods and equipment totaling $1.5 million. Financing costs due to the
related party amounted to approximately $15,000. The letters of credit expire on
March 27, 2003 and June 26, 2003.
NEW ACCOUNTING PRONOUNCEMENTS
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
September 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 was 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 our
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
our consolidated financial statements.
21
In September 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.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002. The expected impact of the Statement on our future financial position
is not reasonably estimable. The disclosure requirements are effective for
financial statements of interim and annual periods ending after December 15,
2002.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of Accounting Research
Bulletins ("ARB") No. 51, Consolidated Financial Statements ("FIN 46"). FIN 46
clarifies the application of ARB No. 51 to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. We do not
believe the adoption of FIN 46 will have a material impact on our financial
position and results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based compensation Transition and Disclosure." SFAS No. 148 requires
certain disclosures related to stock-based compensation plans. At December 31,
2002, we had one stock-based employee compensation plan that is described in
Note 12. We have applied the recognition and measurement provisions of APB 25
and related interpretations in accounting for those plans. No stock-based
employee compensation expense is reflected in net income in 2002, 2001 or 2000,
as all options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The initial
disclosure provisions of SFAS 148 are applicable to fiscal years ending after
December 15, 2002 and are not expected to have a material effect on our
financial statements.
22
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 41.5% and 42.3% of
our net sales, on a consolidated basis, for the years ended December 31, 2002
and 2001. 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 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 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.
23
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.
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 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 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. 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 sales, operating and managerial skills.
24
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.
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.
25
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 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.
26
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, 2002, our officers and directors and their affiliates owned
approximately 36.2% 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 41.1% 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 10.7% of the
outstanding shares of common stock at December 31, 2002. Gerard Guez and Todd
Kay, significant stockholders of Tarrant Apparel Group, own approximately 12.8%
of the outstanding shares of our common stock at December 31, 2002,
respectively. 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.
ITEM 7A. 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 December 31 2002, we had approximately $20.0 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.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
PAGE
----
Report of Independent Certified Public Accountants....................... 29
Consolidated Balance Sheets.............................................. 30
Consolidated Statements of Operations.................................... 31
Consolidated Statements of Stockholders' Equity and
Convertible Redeemable Preferred Stock.............................. 32
Consolidated Statements of Cash Flows.................................... 33
Notes to Consolidated Financial Statements............................... 34
Independent Certified Public Accountants' Report on Schedule II.......... 57
Schedule II - Valuation and Qualifying Accounts and Reserves............. 58
28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Tag-It Pacific, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Tag-It
Pacific, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and convertible
redeemable preferred stock and cash flows for each of the three years in the
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tag-It
Pacific, Inc. and subsidiaries at December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Notes 1 and 7 to the consolidated financial statements,
effective January 1, 2002, Tag-It Pacific, Inc. and subsidiaries adopted the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" for its
goodwill and tradename.
/s/ BDO Seidman, LLP
Los Angeles, California
March 14, 2003
29
TAG-IT PACIFIC, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2002 2001
----------- -----------
Assets
Current assets:
Cash and cash equivalents ................... $ 285,464 $ 46,948
Due from factor ............................. 532,672 105,749
Trade accounts receivable, net .............. 5,456,517 3,037,034
Trade accounts receivable, related
parties ................................... 14,770,466 7,914,838
Refundable income taxes ..................... 212,082 259,605
Inventories, net ............................ 23,105,267 20,450,740
Prepaid expenses and other current
assets .................................... 599,543 408,146
Deferred income taxes ....................... 90,928 107,599
----------- -----------
Total current assets ........................... 45,052,939 32,330,659
Property and equipment, net of
accumulated depreciation
and amortization ............................. 2,953,701 2,592,965
Tradename ...................................... 4,110,750 4,110,750
Due from related parties ....................... 870,251 814,219
Other assets ................................... 1,314,981 944,912
----------- -----------
Total assets ................................... $54,302,622 $40,793,505
=========== ===========
Liabilities, Convertible Redeemable
Preferred Stock and Stockholders' Equity
Current liabilities:
Line of credit ............................... $16,182,061 $ 9,660,581
Accounts payable and accrued expenses ........ 10,375,987 6,785,814
Deferred income .............................. 1,027,984 --
Note payable ................................. 25,200 25,200
Subordinated demand notes payable to
related parties ........................... 1,349,971 849,971
Current portion of capital lease
obligations ............................... 71,928 180,142
Current portion of subordinated note
payable ................................... 1,200,000 1,100,000
----------- -----------
Total current liabilities ...................... 30,233,131 18,601,708
Capital lease obligations, less current
portion ...................................... 107,307 69,030
Subordinated note payable, less current
portion ...................................... 2,600,000 3,800,000
----------- -----------
Total liabilities .............................. 32,940,438 22,470,738
----------- -----------
Commitments and contingencies (Note 15)
Convertible redeemable preferred stock
Series C, $0.001 par value; 759,494
shares authorized; 759,494 shares
issued and outstanding at
December 31, 2002 and 2001(stated
value $3,000,001) ............................ 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;
9,319,909 shares issued and
outstanding at December 31, 2002;
8,769,910 at December 31, 2001 ............ 9,321 8,771
Additional paid-in capital ................... 16,776,012 15,048,971
Retained earnings ............................ 1,681,850 370,024
----------- -----------
Total stockholders' equity ..................... 18,467,183 15,427,766
----------- -----------
Total liabilities, convertible
redeemable preferred stock and
stockholders' equity ......................... $54,302,622 $40,793,505
=========== ===========
See accompanying notes to consolidated financial statements.
30
TAG-IT PACIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Net sales to unrelated parties ... $ 18,179,970 $ 16,114,039 $ 23,723,666
Net sales to related parties ..... 41,893,200 27,453,591 25,638,000
------------ ------------ ------------
Total net sales .................. 60,073,170 43,567,630 49,361,666
Cost of goods sold ............... 44,633,195 31,678,663 35,821,097
------------ ------------ ------------
Gross profit ..................... 15,439,975 11,888,967 13,540,569
Selling expenses ................. 2,126,227 1,639,263 2,104,614
General and administrative
expenses ...................... 10,269,672 8,940,593 8,889,272
Restructuring charges (Note 19) .. -- 1,561,623 --
------------ ------------ ------------
Total operating expenses ......... 12,395,899 12,141,479 10,993,886
Income (loss) from operations .... 3,044,076 (252,512) 2,546,683
Interest expense, net ............ 1,269,365 1,396,612 752,902
------------ ------------ ------------
Income (loss) before income
taxes ......................... 1,774,711 (1,649,124) 1,793,781
Provision (benefit) for
income taxes .................. 278,685 (423,373) 254,596
------------ ------------ ------------
Net income (loss) ................ $ 1,496,026 $ (1,225,751) $ 1,539,185
============ ============ ============
Less: Preferred stock dividends .. (184,200) (49,950) --
------------ ------------ ------------
Net income (loss) to common
shareholders .................. $ 1,311,826 $ (1,275,701) $ 1,539,185
============ ============ ============
Basic earnings (loss) per share .. $ 0.14 $ (0.16) $ 0.23
============ ============ ============
Diluted earnings (loss) per share $ 0.14 $ (0.16) $ 0.21
============ ============ ============
Basic weighted average shares
outstanding ................... 9,232,405 8,017,134 6,838,345
============ ============ ============
Diluted weighted average shares
outstanding ................... 9,531,301 8,017,134 7,283,261
============ ============ ============
See accompanying notes to consolidated financial statements.
31
TAG-IT PACIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND CONVERTIBLE REDEEMABLE PREFERRED STOCK
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Preferred Stock Preferred Stock
Common Stock Series A Series B Additional
-------------------- --------------- ---------------------- Paid-In Retained
Shares Amount Shares Amount Shares Amount Capital Earnings
--------- ------- ------ ------ -------- ----------- ----------- ----------
BALANCE, JANUARY 1, 2000 6,777,556 $ 6,778 -- $ -- -- $ -- $ 8,748,157 $ 106,540
Preferred stock issued for
distribution rights -- -- -- -- 850,000 1,400,000 -- --
Common stock issued for supply
agreement and inventory 1,000,000 1,000 -- -- -- -- 2,799,000 --
Common stock issued for
settlement agreement 12,999 13 -- -- -- -- 57,546 --
Common stock issued upon
exercise of options and
warrants 72,689 73 -- -- -- -- 3,827 --
Tax benefit from exercise of
stock options -- -- -- -- -- -- 129,280 --
Net income -- -- -- -- -- -- -- 1,539,185
--------- ------- ------ ------ -------- ----------- ----------- ----------
BALANCE, DECEMBER 31, 2000 7,863,244 7,864 -- -- 850,000 1,400,000 11,737,810 1,645,725
Preferred stock issued for
equity investment -- -- -- -- -- -- -- --
Common stock issued upon
exercise of options 15,000 15 -- -- -- -- 19,485 --
Issuance of warrants -- -- -- -- -- -- 5,170 --
Common stock issued in
acquisition of assets 125,000 125 -- -- -- -- 499,875 --
Acquisition of trademarks 500,000 500 -- -- (850,000) (1,400,000) 1,969,500 --
Common stock issued in private
placement transactions 266,666 267 -- -- -- -- 799,731 --
Tax benefit from exercise of
stock options -- -- -- -- -- -- 17,400 --
Preferred stock dividends -- -- -- -- -- -- -- (49,950)
Net loss -- -- -- -- -- -- -- (1,225,75)
--------- ------- ------ ------ -------- ----------- ----------- ----------
BALANCE, DECEMBER 31, 2001 8,769,910 8,771 -- -- -- -- 15,048,971 370,024
Common stock issued upon
exercise of options 50,000 50 -- -- -- -- 64,948 --
Acquisition of license rights 150,000 150 -- -- -- -- 577,350 --
Common stock issued in private
placement transactions 349,999 350 -- -- -- -- 1,029,647 --
Tax benefit from exercise of
stock options -- -- -- -- -- -- 55,096 --
Preferred stock dividends -- -- -- -- -- -- -- (184,200)
Net income -- -- -- -- -- -- -- 1,496,026
--------- ------- ------ ------ -------- ----------- ----------- ----------
BALANCE, DECEMBER 31, 2002 9,319,909 $ 9,321 -- $ -- -- $ -- $16,776,012 $1,681,850
========= ======= ====== ====== ======== =========== =========== ==========
Preferred Stock
Series C
---------------------
Total Shares Amount
----------- -------- ----------
BALANCE, JANUARY 1, 2000 $ 8,861,475 -- $ --
Preferred stock issued for
distribution rights 1,400,000 -- --
Common stock issued for supply
agreement and inventory 2,800,000 -- --
Common stock issued for
settlement agreement 57,559 -- --
Common stock issued upon
exercise of options and
warrants 3,900 -- --
Tax benefit from exercise of
stock options 129,280 -- --
Net income 1,539,185 -- --
----------- -------- ----------
BALANCE, DECEMBER 31, 2000 14,791,399 -- --
Preferred stock issued for
equity investment -- 759,494 2,895,001
Common stock issued upon
exercise of options 19,500 -- --
Issuance of warrants 5,170 -- --
Common stock issued in
acquisition of assets 500,000 -- --
Acquisition of trademarks 570,000 -- --
Common stock issued in private
placement transactions 799,998 -- --
Tax benefit from exercise of
stock options 17,400 -- --
Preferred stock dividends (49,950) -- --
Net loss (1,225,751) -- --
----------- -------- ----------
BALANCE, DECEMBER 31, 2001 15,427,766 759,494 2,895,001
Common stock issued upon
exercise of options 64,998
Acquisition of license rights 577,500 -- --
Common stock issued in private
placement transactions 1,029,997 -- --
Tax benefit from exercise of
stock options 55,096 -- --
Preferred stock dividends (184,200) -- --
Net income 1,496,026 -- --
----------- -------- ----------
BALANCE, DECEMBER 31, 2002 $18,467,183 759,494 $2,895,001
=========== ======== ==========
See accompanying notes to consolidated financial statements.
32
TAG-IT PACIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2000
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) ............................................ $ 1,496,026 $(1,225,751) $ 1,539,185
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization .............................. 1,169,247 1,478,055 1,039,027
Decrease (increase) in deferred income taxes ............... 16,671 (220,934) 64,517
Loss (gain) on sale of assets .............................. 20,804 684,391 (14,584)
Stock and warrants issued for services ..................... -- 5,170 57,559
(Decrease) increase in allowance for doubtful accounts ..... (167,140) (80,599) 244,226
Changes in operating assets and liabilities:
Receivables, including related parties ..................... (9,534,894) 788,022 (7,622,086)
Inventories ................................................ (2,654,527) (2,497,580) (4,408,021)
Prepaid expenses and other current assets .................. (191,396) 330,588 454,338
Other assets ............................................... (75,580) (447,618) (48,207)
Accounts payable and accrued expenses ...................... 3,197,895 (604,798) 5,058,534
Deferred income ............................................ 1,027,984 -- --
Income taxes payable ....................................... 254,663 (309,147) (23,088)
----------- ----------- -----------
Net cash used in operating activities ........................... (5,440,247) (2,100,201) (3,658,600)
----------- ----------- -----------
Cash flows from investing activities:
Additional loans to related parties .......................... -- (251,489) (217,107)
Acquisition of property and equipment ........................ (1,290,087) (534,873) (1,832,816)
Proceeds from sale of equipment .............................. 22,312 118,880 17,000
----------- ----------- -----------
Net cash used in investing activities ........................... (1,267,775) (667,482) (2,032,923)
----------- ----------- -----------
Cash flows from financing activities:
Bank overdraft ............................................... -- (584,831) 584,831
Proceeds from preferred stock issuance ....................... -- 2,895,001 --
Proceeds from common stock issuance .......................... 1,029,997 799,998 --
Proceeds from exercise of stock options and warrants ......... 64,998 19,500 3,900
Proceeds (repayment) from bank line of credit, net ........... 6,521,480 (295,855) 4,889,178
Proceeds from capital lease obligations ...................... 125,000 207,240 --
Payment of capital lease obligations ......................... (194,937) (321,516) (236,912)
Proceeds from notes payable .................................. 500,000 180,000 685,000
Repayment of notes payable ................................... (1,100,000) (212,999) (207,179)
----------- ----------- -----------
Net cash provided by financing activities ....................... 6,946,538 2,686,538 5,718,818
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ............ 238,516 (81,145) 27,295
Cash and cash equivalents, beginning of year .................... 46,948 128,093 100,798
----------- ----------- -----------
Cash and cash equivalents, end of year .......................... $ 285,464 $ 46,948 $ 128,093
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest paid .............................................. $ 1,203,663 $ 1,312,805 $ 746,433
Interest received .......................................... $ (180) (2,430) --
Income taxes paid .......................................... $ 7,984 $ 22,780 $ 237,415
Income taxes received ...................................... $ -- $ (10,389) $ (21,400)
Non-cash financing activity:
Common stock issued in acquisition of assets ............... $ -- $ 500,000 $ --
Common stock issued in acquisition of license rights ....... $ 577,500 $ -- $ --
Preferred stock issued in exchange for distribution rights . $ -- $ -- $ 1,400,000
Note to related party issued in exchange for inventory of
$2,830,024, less imputed interest of $272,000 .............. $ -- $ -- $ 2,558,024
Common stock issued in exchange for inventory .............. $ -- $ -- $ 2,800,000
Acquisition of trademarks:
Common stock issued ................................... $ -- $ 1,970,000 $ --
Preferred stock cancelled ............................. $ -- $ 1,400,000 $ --
Net assets acquired ................................... $ -- $ 670,000 $ --
Cash paid ............................................. $ -- $ 100,000 $ --
See accompanying notes to consolidated financial statements.
33
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Tag-It Pacific, Inc. (the "Company") is the parent holding company of
Tag-It, Inc., a California corporation, Tag-It Pacific (HK) Ltd., a BVI
corporation (formerly Tag-it Printing & Packaging Ltd.), Tag-it de Mexico, S.A.
de C.V., A.G.S. Stationery, Inc., a California corporation ("AGS Stationery")
and Pacific Trim & Belt, Inc., a California corporation (collectively, the
"Subsidiaries"), all of which were consolidated under a parent limited liability
company on October 17, 1997 (the "Consolidation") and became wholly-owned
subsidiaries of the Company immediately prior to the effective date of the
Company's initial public offering in January 1998 (the "Offering"). Immediately
prior to the Offering, the outstanding membership units of Tag-It Pacific LLC
were converted to 2,470,001 shares of Common Stock of the Company (the Exchange
and such conversions are referred to as the "Conversion"). In November 1998, the
Company formed a wholly-owned subsidiary, Pacific Trim, SA de CV located in
Tlaxcala, Mexico (now included in "Subsidiaries"). All the activities of this
company were merged into Tag-It de Mexico, SA de CV, in 1999. In January 2000,
the Company formed Tag-it Pacific Limited, a Hong Kong corporation, and in April
2000, the Company formed Talon International, Inc., a Delaware corporation. Both
newly formed corporations are 100% wholly-owned Subsidiaries of Tag-it Pacific,
Inc. Pacific Trim & Belt, Inc. was dissolved during 2000.
The accompanying consolidated financial statements consist of the Company
and its Subsidiaries presented on a consolidated basis to give effect to the
Conversion as of the earliest period presented. The Conversion is treated as a
reorganization of entities under common control and was accounted for in a
manner similar to a pooling of interest. Accordingly, all references to shares
of Common Stock and related share prices have assumed the effects of the
Conversion. Effective in 1997, the Company changed its fiscal year-end from
August 31 to December 31. On July 8, 1999, the Company changed the number of
authorized common shares from 15,000,000 to 30,000,000.
All significant intercompany accounts and transactions have been eliminated
in consolidation. Assets and liabilities of foreign subsidiaries are translated
at rates of exchange in effect at the close of the period. Revenues and expenses
are translated at the weighted average of exchange rates in effect during the
year. The resulting translation gains and losses are deferred and are shown as a
separate component of stockholders' equity and transaction gains and losses are
recorded in the consolidated statement of income in the period incurred. During
2002, 2001 and 2000, foreign currency translation and transaction gains and
losses were not material.
NATURE OF BUSINESS
The Company specializes in the distribution of a full range of trim items
to manufacturers of fashion apparel and licensed consumer products, and
specialty retailers and mass merchandisers. The Company acts as a full service
outsourced trim management department for manufacturers of fashion apparel such
as Tarrant Apparel Group and Azteca Production International. The Company also
serves as a specified supplier of trim items to specific brands, brand licensees
and retailers, including Abercrombie & Fitch, The Limited, Lerner and Miller's
Outpost, among others. In addition, the Company distributes zippers under our
TALON brand name to apparel brands and manufacturers such as Levi Strauss & Co.,
VF Corporation and Tropical Sportswear, among others. In 2002, the Company
created a new division under the TEKFIT brand name. This division develops and
sells apparel components that utilize the patented Pro-Fit technology, including
a stretch waistband. These products are sold to the same customers that are
targeted by the Company's MANAGED TRIM SOLUTION and TALON zipper divisions.
34
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
Sales are recorded at the time of shipment, at which point title transfers
to the customer, and when collection is reasonably assured.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Standard No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), issued by the FASB and effective for
financial statements with fiscal years beginning after December 15, 1997. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. There were
no additional comprehensive income items for the years ended December 31, 2002,
2001 and 2000.
SEGMENTS OF AN ENTERPRISE
The Company has adopted Statement of Financial Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), issued by the FASB and effective for financial statements with fiscal
years beginning after December 15, 1997. SFAS 131 requires that public companies
report certain information about operating segments, products, services and
geographical areas in which they operate and their major customers. The Company
believes that it operates within one segment as there is not enough difference
between the types of products developed and distributed by the Company to
justify segmented reporting by product type. Management decisions regarding the
allocation of resources and the assessment of performance are made on a
company-wide basis and are not specific to the type of product. Adoption of SFAS
131 resulted in expanded disclosures regarding geographical regions (Note 16).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred. Upon retirement or other disposition of property
and equipment, applicable cost and accumulated depreciation and amortization are
removed from the accounts and any gains or losses are included in results of
operations. The Company capitalizes the cost of films, dies, molds and art
designs. The costs capitalized include direct material and direct labor costs.
Depreciation of property and equipment is computed using the straight-line
method based on estimated useful lives ranging from five to ten years. Leasehold
improvements are amortized using the straight-line method over the term of the
lease or the estimated life of the related improvements, whichever is shorter.
35
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPAIRMENT OF LONG-LIVED ASSETS
On January 1, 2002, the Company adopted SFAS 142 which requires, among
other things, that the Company 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. The Company's previous business combinations were
accounted for using the purchase method. As of December 31, 2002, the net
carrying amount of goodwill is $450,000, tradename is $4,110,750 and other
intangible assets is $490,875. Management has determined that goodwill and
tradename have indefinite lives. Amortization expense related to other
intangibles amounted to $86,625 for the year ended December 31, 2002.
RECLASSIFICATION
Certain reclassifications have been made to the prior year financial
statements to conform with 2002 presentation.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Deferred income taxes are recognized based on the differences between
financial statement and income tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable or benefit for the period and the change
during the year in deferred tax assets and liabilities.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which a
company acquires goods or services from non-employees in exchange for equity
instruments. SFAS 123 also gives the option to account for employee stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock issued to Employees," or SFAS 123. The Company has
chosen to account for stock-based compensation for employees utilizing the
intrinsic value method prescribed in APB 25 and not the fair value method
established by SFAS 123. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the measurement date over the amount an employee must pay to acquire stock.
All stock options issued to employees had an exercise price not less than the
fair market value of the Company's Common Stock on the date of grant, and in
accounting for such options utilizing the intrinsic value method there is no
related compensation expense recorded in the Company's financial statements for
the years ended December 31, 2002, 2001 and 2000.
Under SFAS 123, the Company presents in a footnote the effect of measuring
the cost of stock-based employee compensation at the grant date based on the
fair value of the award and recognizes this cost over the service period. The
value of the stock-based award is determined using a pricing model whereby
compensation cost is the fair value of the option as determined by the model at
grant date or other measurement date.
36
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INFORMATION
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. ACCOUNTS RECEIVABLE AND DUE FROM FACTOR: Due to the short-term
nature of the receivables, the fair value approximates the carrying value. DUE
FROM RELATED PARTIES AND NOTES PAYABLE TO RELATED PARTIES: Due to the short-term
nature and current market borrowing rates of the loans and notes, the fair value
approximates the carrying value. LINE OF CREDIT AND NOTES PAYABLE: Estimated to
approximate fair value based upon current market borrowing rates for loans with
similar terms and maturities.
NEW ACCOUNTING PRONOUNCEMENTS
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
September 15, 2002. The Company believes the adoption of this Statement will
have no material impact on its 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 was 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 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 September 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.
37
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002. The expected impact of the Statement on the Company's future financial
position is not reasonably estimable. The disclosure requirements are effective
for financial statements of interim and annual periods ending after December 15,
2002.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of Accounting Research
Bulletins ("ARB") No. 51, Consolidated Financial Statements ("FIN 46"). FIN 46
clarifies the application of ARB No. 51 to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
Company does not believe the adoption of FIN 46 will have a material impact on
its financial position and results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation Transition and Disclosure." SFAS No. 148 requires
certain disclosures related to stock-based compensation plans of the Company. At
December 31, 2002, the Company had one stock-based employee compensation plan
that is described in Note 12. The Company has applied the recognition and
measurement provisions of APB 25 and related interpretations in accounting for
those plans. No stock-based employee compensation expense is reflected in net
income in 2002, 2001 or 2000, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The initial disclosure provisions of SFAS 148 are applicable to
fiscal years ending after December 15, 2002 and are not expected to have a
material effect on the Company's financial statements. The Company intends to
continue accounting for its stock-based employee compensation plan under the
recognition and measurement provisions of APB 25.
38
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
December 31, 2002 December 31, 2001 December 31, 2000
-------------------------------- --------------------------------- --------------------------------
Per Per Per
Income Shares Share Loss Shares Share Income Shares Share
Years ended: (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- --------------------- --------- ----------- ------- --------- ----------- -------- --------- ----------- -------
Basic earnings per
share:
Income (loss)
available
to common
stockholders... 1,311,826 9,232,405 $ 0.14 $(1,275,70) 8,017,134 $ (0.16) $1,539,185 6,838,345 $ 0.23
Effect of dilutive
securities:
Options........ 244,706 -- 386,903
Warrants....... 54,191 -- 58,013
--------- ----------- ------- ---------- ----------- ------- ---------- ----------- -------
Income (loss)
available to
common
stockholders....... 1,311,826 9,531,302 $ 0.14 $(1,275,70) 8,017,134 $ (0.16) $1,539,185 7,283,261 $ 0.21
========= =========== ======= ========== =========== ======= ========== =========== =======
Warrants to purchase 523,332 shares of common stock at between $4.34 and
$6.00, options to purchase 643,000 shares of common stock at between $4.00 and
$4.63, 759,494 shares of preferred Series C stock convertible at $4.94 per
share, and convertible debt of $500,000 convertible at $4.50 per share were
outstanding for the year ended December 31, 2002, but were not included in the
computation of diluted earnings per share because the effect of exercise or
conversion would have an antidilutive effect on earnings per share.
Warrants to purchase 433,122 shares of common stock at between $0.71 and
$6.00, options to purchase 1,546,000 shares of common stock at between $1.30 and
$4.63, 759,494 shares of preferred Series C stock convertible at $4.94 per
share, and convertible debt of $500,000 convertible at $4.50 per share were
outstanding for the year ended December 31, 2001, but were not included in the
computation of diluted earnings per share because the effect of 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 797,000 shares of common stock at between $4.125 and
$4.50 and convertible debt of $500,000 convertible at $4.50 per share were
outstanding for the year ended December 31, 2000, but were not included in the
computation of diluted earnings per share because the effect of exercise or
conversion would have an antidilutive effect on earnings per share. For the year
ended December 31, 2000, 850,000 shares of preferred Series B stock convertible
when the average trading price of the Company's common stock for a 30-day
consecutive period is equal to or greater than $8.00 per share were not included
in the computation of diluted earnings per share because the conversion
contingency related to these preferred shares was not met.
NOTE 3--DUE FROM FACTOR
The Company has entered into a factoring agreement with East Asia Heller
for the purchase of eligible receivables from its Hong Kong subsidiary, Tag-it
Pacific Limited. The Company's factor purchases eligible accounts receivable and
assumes the credit risk with respect to those accounts for which they have given
their prior approval. If the factor does not assume the credit risk for a
receivable, the collection risk associated with the receivable remains with the
Company. The Company pays a fixed commission rate and may borrow up to 80% of
its eligible accounts receivable. Interest is charged at 1.5% over the Hong Kong
Dollar prime rate (5% and 5.125% at December 31, 2002 and 2001). Factored
accounts receivable, without recourse, amounted to $241,138 and $105,749 at
December 31, 2002 and 2001. There were no outstanding advances from the factor
at December 31, 2002 and 2001.
39
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also has a factoring agreement with UPS Capital Global Trade
Finance Corporation, whereby 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. The Company pays a fixed commission rate and may
borrow up to 85% of eligible accounts receivable under our credit facility. As
of December 31, 2002, the amount factored without recourse was approximately
$291,534.
NOTE 4--ACCOUNTS RECEIVABLE, TRADE, NET
Accounts receivable, trade is net of an allowance for doubtful accounts and
subsequent returns. For the years ended December 31, 2002 and 2001, the
allowance for doubtful accounts and subsequent returns was $401,485 and
$568,625.
NOTE 5--INVENTORIES
Inventories consist of the following:
Year Ended December 31,
--------------------------------
2002 2001
----------- -----------
Raw materials ........................ $ 10,937 $ 41,957
Work-in-process ...................... 83,105 3,220,518
Finished goods ....................... 23,011,225 17,188,265
----------- -----------
Total inventories .................... $23,105,267 $20,450,740
=========== ===========
Inventories at December 31, 2002 and 2001 include goods that are subject to
buy back agreements with the Company's customers. The buyback agreements contain
provisions related to the inventory purchased on behalf of the Company's
customers. In the event that inventories remain with the Company in excess of
six to nine months from the Company's receipt of the goods from its vendors, the
customer is required to purchase the inventories from the Company under normal
invoice and selling terms. Included in inventories at December 31, 2002 are
inventories of approximately $8.5 million that are subject to buyback
arrangements with Tarrant Apparel Group, Azteca Production International (Note
18) and other customers.
NOTE 6--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Year Ended December 31,
-------------------------
2002 2001
---------- ----------
Furniture and fixtures ........................... $ 571,923 $ 547,152
Machinery and equipment .......................... 4,003,402 2,924,301
Leasehold improvements ........................... 168,785 197,355
Films, dies, molds and art designs ............... 1,838,364 1,708,964
---------- ----------
6,582,474 5,377,772
Accumulated depreciation and amortization ........ 3,628,773 2,784,807
---------- ----------
Net property and equipment ....................... $2,953,701 $2,592,965
========== ==========
40
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist of goodwill, tradename and exclusive license and
intellectual property rights. In accordance with SFAS No. 142, all of the
Company's intangible assets that have definite lives are being amortized on a
straight-line basis over their estimated useful lives. Goodwill and other
intangible assets with indefinite lives are evaluated to determine if the fair
value of the asset has decreased below its carrying value. At December 31, 2002,
the Company evaluated its goodwill and tradename assets and determined that no
impairment adjustment was necessary. Amortization expense of $50,000 recognized
in 2001, would not have been recognized under SFAS No. 142. Goodwill and other
intangible assets as of December 31, 2002 and 2001 are as follows:
Year Ended December 31,
-----------------------------
2002 2001
----------- -----------
Goodwill ................................... $ 500,000 $ 500,000
Accumulated amortization ................... (50,000) (50,000)
----------- -----------
Goodwill, net .............................. 450,000 450,000
----------- -----------
Tradename .................................. 4,110,750 4,110,750
Accumulated amortization ................... -- --
----------- -----------
Tradename, net ............................. 4,110,750 4,110,750
----------- -----------
Exclusive license and intellectual
property rights .......................... 577,500 --
Accumulated amortization ................... (86,625) --
----------- -----------
Exclusive license and intellectual
property rights, net ..................... 490,875 --
----------- -----------
Intangible assets, net ..................... $ 5,051,625 $ 4,560,750
=========== ===========
There were no changes in the net carrying amounts of goodwill and tradename
for the years ended December 31, 2002 and 2001.
Amortization expense consists of the following:
Year Ended December 31,
----------------------------------
2002 2001 2000
-------- -------- --------
Goodwill ................................ $ -- $ 50,000 $ --
Tradename ............................... -- -- --
Exclusive license and intellectual
property rights ....................... 86,625 -- --
Other intangible assets ................. -- 128,333 105,000
-------- -------- --------
$ 86,625 $178,333 $105,000
======== ======== ========
41
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average amortization period for intangible assets with
definite lives is five years. The following table shows the estimated
amortization expense for these assets for each of the succeeding years:
Years ending December 31, Amount
------------------------- --------
2003 .............................................. $115,500
2004 .............................................. 115,500
2005 .............................................. 115,500
2006 .............................................. 115,500
2007 .............................................. 28,875
--------
Total amortization expense ........................ $490,875
========
Had SFAS No. 142 been in effect prior to January 1, 2002, the Company's
reported net income (loss) and net income (loss) per share would have been as
follows:
Year Ended December 31,
-------------------------------------
2002 2001 2000
---------- ---------- ----------
Net income (loss):
Reported............................ $1,496,026 $(1,225,751) $1,539,185
Goodwill amortization............... -- 50,000 --
---------- ---------- ----------
Adjusted............................ $1,496,026 $(1,175,751) $1,539,185
========== ========== ==========
Basic net income (loss) per common
share:
Reported............................ $ 0.14 $ (0.16) $ 0.23
Effect of goodwill amortization..... -- 0.01 --
---------- ----------- ----------
Adjusted............................ $ 0.14 $ (1.15) $ 0.23
========== =========== ==========
Diluted net income (loss) per common
share:
Reported............................ $ 0.14 $ (0.16) $ 0.21
Effect of goodwill amortization..... -- 0.01 --
---------- ----------- ----------
Adjusted............................ $ 0.14 $ (0.15) $ 0.21
========== =========== ==========
NOTE 8--LINE OF CREDIT
On May 30, 2001, the Company entered into a loan and security agreement
with UPS Capital Global Trade Finance Corporation, providing for a working
capital credit facility with a maximum available amount of $20,000,000. The
initial term of the Agreement is three years and the facility is secured by all
assets of the Company. The interest rate for the credit facility is at the prime
rate plus 2% (6.25% at December 31, 2002). The credit facility requires the
compliance with certain financial covenants including net worth, fixed charge
coverage ratio and capital expenditures. At December 31, 2002, we were not in
compliance with our capital expenditure covenant due to additional equipment
requirements for our exclusive supply agreement with Levi Strauss & Co. UPS
Capital waived the noncompliance as of December 31, 2002. We were in compliance
with all other financial covenants at December 31, 2002. Availability under the
UPS Capital credit facility is determined based on a defined formula related to
eligible accounts receivable and inventory. Open letters of credit amounted to
$1,537,416 at December 31, 2002. There were no open letters of credit at
December 31, 2001.
42
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--NOTE PAYABLE
Note payable to an unrelated party is unsecured, bears interest at 10% and
is due on demand.
NOTE 10--SUBORDINATED NOTES PAYABLE TO RELATED PARTIES
Subordinated notes payable to related parties consist of the following:
Year Ended December 31,
-------------------------
2002 2001
---------- ----------
Six notes payable issued in 1996, four
notes payable issued in 1997, and two
notes payable issued in 1998 to officers
and directors of the Company with no
monthly payments and interest rates
ranging from 7.5% to 10% annually, due
and payable on the fifteenth day following
delivery of written demand for payment ........ $ 85,176 $ 85,176
Convertible secured note payable to the
Company's Chairman bears interest at
11%, payable quarterly, is due on demand
and convertible into common stock at
the election of the holder at a rate of
$4.50 per share, the market value of
the Company's common stock on the date
of approval by the Company's Board of
Directors. The note is secured by
substantially all of the Company's assets ..... 500,000 500,000
Unsecured notes payable to shareholders,
directors and officers of the Company
accrue interest at 4%, 7%, 7.5% and 11%
per annum, principal and interest due
on demand and fifteen days from demand ........ 764,795 264,795
---------- ----------
$1,349,971 $ 849,971
========== ==========
The notes are subordinate to UPS Capital Global Trade Finance Corporation
under the Company's line of credit facility. Interest expense related to the
subordinated notes payable to related parties for the years ended December 31,
2002, 2001 and 2000 amounted to $88,102, $88,103and $46,335. Included in accrued
expenses at December 31, 2002 and 2001 was $285,428 and $197,326 of accrued
interest related to these notes. Interest paid during the years ended December
31, 2002 and 2001 amounted to $0 and $87,938.
On February 28, 2003, the Company re-paid an unsecured note payable to a
shareholder in the amount of $500,000.
43
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--CAPITAL LEASE OBLIGATIONS
The Company financed equipment purchases through various capital lease
obligations expiring through June 2006. These obligations bear interest at
various rates ranging from 8% and 15% per annum. Future minimum annual payments
under these capital lease obligations are as follows:
Years ending December 31, Amount
- ------------------------- ---------
2003 ...................................................... $ 87,960
2004 ...................................................... 63,184
2005 ...................................................... 40,567
2006 ...................................................... 20,284
---------
Total payments ............................................ 211,995
Less amount representing interest ......................... (32,760)
---------
Balance at December 31, 2002 .............................. 179,235
Less current portion ...................................... 71,928
---------
Long-term portion ......................................... $ 107,307
=========
At December 31, 2002, total equipment, included in property and equipment
(Note 6), under capital lease obligations and related accumulated depreciation
amounted to $729,342 and $482,414. At December 31, 2001, total equipment,
included in property and equipment, under capital lease obligations and related
accumulated depreciation amounted to $714,887 and $303,976.
NOTE 12--STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK
PREFERRED STOCK
SERIES C PREFERRED STOCK PURCHASE AGREEMENT AND CO-MARKETING AND SUPPLY
AGREEMENT
In accordance with the Series C Preferred Stock Purchase Agreement entered
into by the Company and Coats North America Consolidated, Inc. ("Coats") on
September 20, 2001, the Company issued 759,494 shares of Series C Convertible
Redeemable Preferred Stock (the "Shares") to Coats North America Consolidated,
Inc. in exchange for an equity investment from Coats of $3,000,001 cash. The
Shares are convertible at the option of the holder after one year at the rate of
the closing price multiplied by 125% of the ten-day average closing price prior
to closing. The Shares are redeemable at the option of the holder after four
years. If the holders elect to redeem the Shares, the Company has the option to
redeem for cash at the stated value of $3,000,001 or in the form of the
Company's common stock at 85% of the market price of the Company's common stock
on the date of redemption. If the market price of the Company's common stock on
the date of redemption is less than $2.75 per share, the Company must redeem for
cash at the stated value of the Shares. The Company can elect to redeem the
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 the Company's common stock. The dividends are
payable at the earlier of the declaration of the Board, conversion or
redemption. Each Preferred Share has the right to vote for each of the Company's
common shares that the Shares could then be converted into on the record date.
Total legal and other costs associated with this transaction of $105,000 were
netted against the $3,000,001 proceeds received from Coats. Dividends accrued
but unpaid at December 31, 2002 and 2001 amounted to $234,150 and $49,950.
In connection with the Series C Preferred Stock Purchase Agreement, the
Company also entered into a 10-year Co-Marketing and Supply Agreement with
Coats. The Co-Marketing and Supply Agreement provides for selected introductions
into Coats' customer base and the Company's trim packages will exclusively offer
thread manufactured by Coats.
44
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SERIES B PREFERRED STOCK PURCHASE AGREEMENT, DISTRIBUTION AGREEMENT AND
TRADENAME PURCHASE AGREEMENT
On April 3, 2000, the Company entered into a ten-year exclusive license and
distribution agreement with Talon, Inc. and its parent company, Grupo Industrial
Cierres Ideal, S.A. de C.V. ("GICISA"). Under this agreement, Tag-It Pacific,
Inc. was the exclusive sales, marketing, distribution and e-commerce arm for
"Talon" products for all customers in the United States, Mexico-based
maquiladores, Canada and the Pacific Rim and had the exclusive license to market
trim products under the "Talon" brand name. In exchange for these exclusive
distribution rights, the Company issued 850,000 shares of Series B Convertible
Preferred stock to GICISA. After a period of 30 months, the shares were
convertible into the Company's common stock once the average price per share of
the Company's common stock reached or exceeded $8.00 for a 30-day consecutive
period. The preferred stock was automatically convertible into shares of the
Company's common stock based on a rate of one minus the fraction of $2.50 over
the average per share closing price of the Company's common stock for the 30-day
period preceding the conversion.
The Series B Convertible Preferred stock had a liquidation preference of
$.001 per share, and was entitled to receive non-cumulative dividends on an as
converted basis, if and when, such dividends were declared on the Company's
common stock and was redeemable by the Company under certain conditions as
outlined in the agreement.
The estimated fair value of the Series B Convertible Preferred stock on
April 3, 2000 was $1,400,000. The Company recorded the value of the license and
distribution rights as a long-term asset, which was being amortized over the
ten-year period of the agreement. The unamortized balance of the long-term asset
at December 21, 2001 was $1,166,667.
On September 30, 2000, the Company purchased inventory from GICISA in
exchange for an unsecured note payable in the amount of $2,830,024. The note
payable was non-interest bearing and was due April 1, 2002. The Company imputed
interest for the holding period of the note amounting to $272,000. The note was
subordinate to the obligations due under the credit facility with UPS Capital.
The note payable balance at December 21, 2001 was $2,767,182, net of imputed
interest of $62,842.
On December 21, 2001, the Company entered into an Asset Purchase Agreement
with Talon, Inc. and GICISA. Pursuant to the Asset Purchase Agreement, the
Company acquired from Talon, Inc. and GICISA: (1) certain inventory and
equipment, (2) all patent rights held by Talon, Inc. and (3) all of Talon's
rights to its trade names and trademarks bearing the TALON (R) name. In
addition, the Asset Purchase Agreement terminated the exclusive 10-year license
and distribution agreement, dated as of April 3, 2000 by and among the Company,
GICISA and Talon, Inc.
Under the Asset Purchase Agreement, the Company issued to Talon, Inc.
500,000 shares of common stock, par value $0.001 per share, a promissory note in
the amount of $4,900,000 and $100,000 in cash held in escrow. The Asset Purchase
Agreement required Talon, Inc. to place 50,000 shares of the Company's common
stock and $100,000 in escrow for a period of 12 months to satisfy any
indemnification claims the Company may have under the Asset Purchase Agreement.
The common stock was valued at the market value of the Company's stock on the
date of closing. The promissory note is unsecured, bears interest at prime plus
2% (6.25% at December 31, 2002) and is subordinated to the Company's obligations
under its senior credit facility with UPS Capital Global Trade Finance
Corporation. In connection with the Asset Purchase Agreement, the Company also
entered into a mutual release with Talon, Inc. and GICISA pursuant to which
Talon, Inc. and GICISA released the Company from its obligations under the
unsecured note payable of $2,830,024 dated September 30, 2000 and other current
liabilities under the Exclusive License and Distribution Agreement. Further,
850,000 shares of the Company's series B convertible preferred stock held by
GICISA were cancelled at the closing of the Asset Purchase Agreement.
45
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum annual payments under the subordinated note payable are as
follows:
Years ending December 31, Amount
------------------------- ----------
2003 ............................................. $1,200,000
2004 ............................................. 1,200,000
2005 ............................................. 1,400,000
----------
Balance at December 31, 2002 ..................... 3,800,000
Less current portion ............................. 1,200,000
----------
Long-term portion ................................ $2,600,000
==========
COMMON STOCK
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. The Company has recorded an intangible
asset amounting to $577,500 and is amortizing this asset on a straight-line
basis over its estimated useful life of five years.
Future minimum annual royalty payments due under the Agreement are as
follows:
Years ending December 31, Amount
------------------------- --------
2003 ............................................. $ 75,000
2004 ............................................. 200,000
2005 ............................................. 400,000
2006 ............................................. 225,000
--------
Total minimum royalties .......................... $900,000
========
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 included a commitment by one of the two non-related investors to
purchase an additional 400,000 shares of common stock at a price per share of
$3.00 at a second closing (subject of certain conditions) on or prior to March
1, 2003, as amended, 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 closing. 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 our
common stock on the
46
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In March 2002 and February 2003, one of the non-related investors purchased
an additional 100,000 and 300,000 shares, respectively, 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 $1,200,000. Pursuant to the second
closing provisions of the Stock and Warrant Purchase Agreement, 50,000 and
150,000 warrants were issued to the investor in March 2002 and February 2003,
respectively. There are no remaining commitments due under the stock and warrant
purchase agreements.
ACQUISITION OF ASSETS
On January 2, 2001, the Company entered into an asset purchase agreement
with a Florida based corporation. The agreement provided for the acquisition of
certain assets, 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 and recorded at the market value of the Company's common stock
on the closing date of the transaction.
SUPPLY AGREEMENT
On December 22, 2000, the Company entered into a supply agreement with
Azteca Production International, Inc., AZT International SA D RL and Commerce
Investment Group, LLC (collectively "Azteca"). 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, if and to the extent, the Company is able to provide trim
products on a basis that is competitive in terms of price and quality. In
accordance with the agreement, the Company purchased existing inventory from
Azteca in exchange for 1,000,000 shares of the Company's common stock. The
shares contain restrictions related to the sale or transfer of the shares,
registration and voting rights. The value of the restricted shares was estimated
at $2,800,000.
NOTE 13--STOCK OPTION INCENTIVE PLAN AND WARRANTS
STOCK OPTION INCENTIVE PLAN
On October 1, 1997, the Company adopted the 1997 Stock Incentive Plan ("the
1997 Plan"), which authorized the granting of a variety of stock-based incentive
awards. A total of 562,500 shares of Common Stock were reserved for issuance
under the 1997 Plan. The 1997 Plan is administered by the Board of Directors, or
a committee appointed by the Board of Directors, which determine the recipients
and terms of the awards granted. In 1997 and 1998, the Company granted options
to purchase 195,000 and 65,000 shares of Common Stock, respectively, at an
exercise price of $3.20 per share, the estimated fair value of the Common Stock
on the grant date. The options vested over four years and are exercisable
through their expiration dates in 2007 and 2008.
Effective October 10, 1998, the Company's Board of Directors approved an
option exchange program. Under the program, holders of options to purchase
189,500 shares of Common Stock at an exercise price of $3.20 per share (which
represented all of the options outstanding on the date the program was approved)
could exchange these options for new options to purchase shares of Common Stock
at an exercise price of $1.30 per share, which exercise price was above the
$1.1875 closing sales price of a share of Common Stock on the American Stock
Exchange on October 9, 1998. Upon the exchange, the existing options were
canceled and became available for future grant under the 1997 Plan. Each new
option was for the same or fewer number of shares and/or had a longer vesting
schedule than did the option for which it
47
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was exchanged. The new options are exercisable through their expiration dates in
2007 and 2008, which expiration dates correspond to the expiration dates of the
options for which they were exchanged. At October 10, 1998, options to purchase
70,500 shares of Common Stock previously granted under the 1997 Plan had been
canceled in accordance with the terms of the respective option agreements.
Effective October 10, 1998, the Company granted options to purchase 392,000
shares of Common Stock at an exercise price of $1.30 per share, which exercise
price was above the $1.1875 closing sales price of a share of Common Stock on
the American Stock Exchange on October 9, 1998. The options have vesting
schedules from immediate to four years and are exercisable through their
expiration in 2008.
In 1999, the Company's Board of Directors further amended its 1997 Stock
Incentive Plan to provide for a total of 1,177,500 shares of common stock to be
reserved for issuance under the Plan. On October 20, 1999, the Company granted
393,000 options to purchase common stock at an exercise price of $4.31 per
share, the closing sales price of a share of the Company's common stock on that
date.
In 2000, the Company's Board of Directors further amended its 1997 Stock
Incentive Plan to provide for a total of 1,777,500 shares of common stock to be
reserved for issuance under the Plan. During the year ended December 31, 2000,
the Company granted 401,500 options to purchase common stock at exercise prices
ranging between $3.75 and $4.625 per share, the closing price of the Company's
common stock on the date of grant.
In 2001, the Company's Board of Directors further amended its 1997 Stock
Incentive Plan to provide for a total of 2,077,500 shares of common stock to be
reserved for issuance under the Plan. During the year ended December 31, 2001,
the Company granted 485,000 options to purchase common stock at exercise prices
ranging between $3.64 and $4.32 per share, the closing price of the Company's
common stock on the date of grant.
In 2002, the Company's Board of Directors further amended its 1997 Stock
Incentive Plan to provide for a total of 2,277,500 shares of common stock to be
reserved for issuance under the Plan. During the year ended December 31, 2002,
the Company granted 270,000 options to purchase common stock at an exercise
price of $3.63 per share, the closing price of the Company's common stock on the
date of grant.
The following table summarizes the activity in the 1997 Plan:
48
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Average
Number of Exercise
Shares Price
---------- --------
Options outstanding -
January 1, 2000 ............................. 904,500 $ 2.57
Granted .................................. 401,500 4.23
Exercised ................................ (72,689) 1.30
Canceled ................................. (72,811) 2.10
---------- --------
Options outstanding -
December 31, 2000 ........................... 1,160,500 3.37
Granted .................................. 485,000 3.82
Exercised ................................ (15,000) 1.30
Canceled ................................. (84,500) 4.24
---------- --------
Options outstanding -
December 31, 2001 ........................... 1,546,000 3.39
Granted .................................. 270,000 3.63
Exercised ................................ (50,000) 1.30
Canceled ................................. (32,500) 3.40
---------- --------
Options outstanding -
December 31, 2002 ........................... 1,733,500 $ 3.48
========== ========
STOCK BASED COMPENSATION
All stock options issued to employees had an exercise price not less than
the fair market value of the Company's Common Stock on the date of grant, and in
accounting for such options utilizing the intrinsic value method there is no
related compensation expense recorded in the Company's financial statements for
the years ended December 31, 2002, 2001 and 2000. If compensation cost for
stock-based compensation had been determined based on the fair market value of
the stock options on their dates of grant in accordance with SFAS 123, the
Company's net income (loss) and income (loss) per share for the years ended
December 31, 2002, 2001 and 2000 would have amounted to the pro forma amounts
presented below:
2002 2001 2000
- ------------------------------------------------- ------------ ----------- --------------
Net income (loss), as reported................. $ 1,496,026 $(1,225,751) $ 1,539,185
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects ...................... - - -
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects ...................... (121,073) (295,898) (515,534)
------------ ----------- --------------
Pro forma net income (loss).................... $ 1,374,953 $(1,521,649) $ 1,023,651
============ =========== ==============
Earnings (loss) per share:
Basic - as reported....................... $ 0.14 $ (0.16) $ 0.23
Basic - pro forma......................... $ 0.13 $ (0.19) $ 0.15
Diluted - as reported..................... $ 0.14 $ (0.16) $ 0.21
Diluted - pro forma....................... $ 0.13 $ (0.19) $ 0.14
49
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of option grants is estimated on the date of grant utilizing
the Black-Scholes option-pricing model with the following weighted average
assumptions for options granted during 2002, 2001 and 2000; expected life of
option of 1.5 years, expected volatility of 19% for 2002, 17% for 2001 and 60%
for 2000, risk free interest rate of 3% for 2002, 5% for 2001 and 6% for 2000
and a 0% dividend yield. The weighted average fair value at the grant date for
such options is $.38, $.37 and $1.33 per option for the years ended December 31,
2002, 2001 and 2000.
Additional information relating to stock options and warrants outstanding
and exercisable at December 31, 2002, summarized by exercise price is as
follows:
Exercisable
Outstanding Weighted Average Weighted Average
--------------------------------- ----------------------
Life Exercise Exercise
Exercise Price Per Share Shares (years) Price Shares Price
- ----------------------------- --------- ------- -------- --------- --------
$ 0.71 (warrants) 39,235 5.0 $ 0.71 39,235 $ 0.71
$ 1.30 324,500 5.5 $ 1.30 324,500 $ 1.30
$ 1.50 (warrants) 35,555 0.1 $ 1.50 35,555 $ 1.50
$ 4.31 357,000 7.0 $ 4.31 357,000 $ 4.31
$ 4.80 (warrants) 110,000 0.1 $ 4.80 110,000 $ 4.80
$ 6.00 (warrants) 80,000 0.1 $ 6.00 80,000 $ 6.00
$ 4.63 105,000 7.0 $ 4.63 105,000 $ 4.63
$ 3.78 126,000 8.5 $ 3.78 126,000 $ 3.78
$ 4.25 166,000 7.5 $ 4.25 151,000 $ 4.25
$ 4.50 15,000 7.5 $ 4.50 9,375 $ 4.50
$ 3.75 156,000 8.0 $ 3.75 156,000 $ 3.75
$ 3.63 270,000 10.0 $ 3.63 100,000 $ 3.63
$ 3.64 214,000 9.0 $ 3.64 214,000 $ 3.64
$ 3.65 (warrants) 10,000 1.6 $ 3.65 10,000 $ 3.65
$ 5.00 (warrants) 20,000 1.5 $ 5.00 20,000 $ 5.00
$ 4.57 (warrants) 5,000 1.5 $ 4.57 5,000 $ 4.57
$ 4.34 (warrants) (1) 154,166 3.0 $ 4.34 154,166 $ 4.34
$ 4.73 (warrants) (1) 154,166 3.0 $ 4.73 154,166 $ 4.73
--------- ---------
$ 3.48 2,341,622 6.2 $ 3.71 2,150,997 $ 3.71
========= =========
- ----------
(1) The exercise price of these warrants includes an upward adjustment of 25%
of the amount, if any, that the market price of the Company's common stock
on the exercise date exceeds the stated exercise price, up to a maximum of
$5.25.
50
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14--INCOME TAXES
The components of the provision (benefit) for income taxes included in the
consolidated statements of operations are as follows:
Year Ended December 31,
---------------------------------------------
2002 2001 2000
--------- --------- ---------
Current:
Federal .............. $ 222,713 $(172,073) $ 161,567
State ................ 39,301 (30,366) 28,512
--------- --------- ---------
262,014 (202,439) 190,079
Deferred:
Federal .............. 14,170 (187,794) 54,839
State ................ 2,501 (33,140) 9,678
--------- --------- ---------
16,671 (220,934) 64,517
--------- --------- ---------
$ 278,685 $(423,373) $ 254,596
========= ========= =========
A reconciliation of the statutory Federal income tax rate with the
Company's effective income tax rate is as follows:
Year Ended December 31,
--------------------------
2002 2001 2000
------ ------ ------
Current:
Federal statutory rate ....................... 34.0% (34.0)% 34.0%
State taxes net of Federal benefit ........... 6.0 (6.0) 6.0
Income earned from foreign subsidiaries ...... (18.2) 1.2 (15.0)
Utilization of NOL benefit ................... -- 15.7 (9.6)
Exercise of stock options .................... (3.1) 1.1 (7.2)
Other ........................................ (3.0) (3.7) 6.0
------ ------ ------
15.7% (25.7)% 14.2%
====== ====== ======
Income (loss) before income taxes are as follows:
Year Ended December 31,
-----------------------------------------------
2002 2001 2000
----------- ----------- -----------
Domestic ........ $ 428,473 $(1,400,553) $ 654,555
Foreign ......... 1,346,238 (248,571) 1,139,226
----------- ----------- -----------
$ 1,774,711 $(1,649,124) $ 1,793,781
=========== =========== ===========
51
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The primary components of temporary differences which give rise to the
Company's deferred tax assets and deferred tax liabilities are as follows:
Year Ended December 31,
-------------------------
2002 2001
--------- ---------
Net deferred tax asset:
Net operating loss carryforwards .......... $ 334,292 $ 374,356
Dies, film and art library ................ (37,766) (86,944)
Depreciation and amortization ............. 42,951 (183,457)
Intangible assets ......................... (173,620) --
Bad debt reserve .......................... (75,737) --
Other ..................................... 808 3,644
--------- ---------
$ 90,928 $ 107,599
========= =========
At December 31, 2002, Tag-it Pacific, Inc. had Federal and state NOL
carryforwards of approximately $890,000 and $507,000, respectively. The Federal
NOL is available to offset future taxable income through 2016, and the state NOL
expires in 2011. The Company's ability to utilize NOL carryforwards are
dependent upon the Company's ability to generate taxable income in the future.
Deferred tax assets are initially recognized for differences between the
financial statement carrying amount and the tax bases of assets and liabilities
which will result in future deductible amounts and operating loss and tax credit
carryforwards. A valuation allowance is then established to reduce that deferred
tax asset to the level at which it is "more likely than not" that the tax
benefits will be realized. Realization of tax benefits of deductible temporary
differences and operating loss or credit carryforwards depends on having
sufficient taxable income of an appropriate character within the carryback and
carryforward periods. Sources of taxable income that may allow for the
realization of tax benefits include (i) taxable income in the current year or
prior years that is available through carryback, (ii) future taxable income that
will result from the reversal of existing taxable temporary difference, and
(iii) future taxable income generated by future operations. Based on an
evaluation of the realizability of the deferred tax asset, management has
determined that it is more likely than not that the Company will realize this
tax benefit.
NOTE 15--COMMITMENTS AND CONTINGENCIES
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 as an approved
zipper supplier to Levi.
The Company recognizes revenue at the time goods are shipped, at which
point title transfers to the customer, and collection is reasonably assured. The
Company received its first quarterly minimum payment due under the supply
agreement of $1.25 million from Levi in July 2002. Total deferred income at
December 31, 2002 amounted to $1,027,984.
52
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASES
The Company is a party to a number of non-cancelable operating lease
agreements involving buildings and equipment which expire at various dates
through June 2006. The future minimum lease commitments as of December 31, 2002
are as follows:
Years Ending December 31, Amount
------------------------- ----------
2003 ............................................ $ 641,373
2004 ............................................ 419,253
2005 ............................................ 346,031
2006 ............................................ 152,446
----------
Total minimum payments ....................... $1,559,103
==========
Total rental expense for the years ended December 31, 2002, 2001 and 2000
aggregated $820,194, $766,962 and $270,479, respectively.
PROFIT SHARING PLAN
In October 1999, the Company established a 401(k) profit-sharing plan for
the benefit of qualified employees. The Company may make annual contributions to
the plan as determined by the Board of Directors. There were no contributions
made during the years ended December 31, 2002, 2001 and 2000.
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.
On December 31, 2002, the Company indirectly guaranteed the indebtedness of
two of its suppliers thru the issuance by a related party of letters of credit
to purchase goods and equipment totaling $1.5 million. Financing costs due to
this related party amounted to approximately $15,000. The letters of credit
expire on March 27, 2003 and June 26, 2003.
NOTE 16--GEOGRAPHIC INFORMATION
The Company specializes in the distribution of a full range of trim items
to manufacturers of fashion apparel, licensed consumer products, specialty
retailers and mass merchandisers. There is not enough difference between the
types of products developed and distributed by the Company to account for these
products separately or to justify segmented reporting by product type.
53
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company distributes its products internationally and has reporting
requirements based on geographic regions. Revenues and long-lived assets are
attributed to countries based on the location of the customer as follows:
Year Ended December 31,
-------------------------------------------
2002 2001 2000
----------- ----------- -----------
Sales:
United States ............. $ 8,709,833 $14,494,035 $18,262,860
Asia ...................... 5,436,927 1,984,103 5,344,853
Mexico .................... 44,087,714 27,089,492 25,753,953
Dominican Republic ........ 1,838,696 -- --
----------- ----------- -----------
$60,073,170 $43,567,630 $49,361,666
=========== =========== ===========
Long-lived Assets:
United States ............. $ 6,998,595 $ 6,610,522
Asia ...................... 117,534 199,064
Mexico .................... 308,671 344,129
Dominican Republic ........ 580,526 --
----------- -----------
$ 8,005,326 $ 7,153,715
=========== ===========
NOTE 17--MAJOR CUSTOMER & VENDORS
Two major customers, both related parties, accounted for approximately
69.7% and 63.0% of the Company's net sales on a consolidated basis for the years
ended December 31, 2002 and 2001, and one major customer, a related party,
accounted for 48.1% of the Company's net sales on a consolidated basis for the
year ended December 31, 2000. Included in trade accounts receivable related
parties at December 31, 2002 and 2001 is $14,770,466 and $7,914,838 due from
these customers. Terms are net 60 days. The Company holds inventories of
approximately $8.5 million at December 31, 2002 that are subject to buyback
arrangements with its customers. The Company's results of operations will depend
to a significant extent upon the commercial success of these customers. If
either of these customers fails to purchase trim products at anticipated levels,
or the relationship terminates, it may have an adverse affect on the Company's
results of operations. If the financial condition of either of these customers
were to deteriorate, resulting in an impairment of their ability to purchase
inventories or repay receivables, it may also have an adverse affect on the
Company's results of operations.
One major vendor, a related party, accounted for approximately 30.6% and
57.6% of the Company's purchases for the years ended December 31, 2002 and 2001,
and two major vendors accounted for approximately 26.6% of the Company's
purchases for the year ended December 31, 2000. Included in accounts payable and
accrued expenses at December 31, 2002 and 2001 is $3,684,660 and $819,181 due to
these vendors. Terms are net 60 days.
NOTE 18--RELATED PARTY TRANSACTIONS
The estate of the former President and Director of the Company is the
general partner of D.P.S. Associates, a general partnership, which is the lessor
of the Company's former executive offices in Los Angeles, California, pursuant
to a lease agreement with the Company. The lease provided for base rent of
$9,072 on a month-to-month basis. The Company relocated its executive offices to
Woodland Hills, California in May 2001 and terminated its lease agreement with
D.P.S. Associates.
A former Director of the Company controls a financial advisory firm, Averil
Associates, Inc. ("Averil Associates"), which has performed various services for
the Company including investigation of strategic financing and other corporate
growth initiatives. As consideration for such services, AGS Stationery paid
Averil Associates the aggregate amount of $26,123, plus out of pocket expenses.
As additional compensation
54
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for such services, in 1997, AGS Stationery granted to Chloe Holdings, Inc., an
affiliate of Averil Associates, warrants to purchase up to 135 shares of Common
Stock of AGS Stationery. Effective upon the Conversion, the Chloe Warrants
became exercisable for 22,841 shares of the Common Stock of the Company at $0.76
per share and the Company also paid Averil Associates an additional $175,000
upon consummation of the Company's initial public offering for services rendered
in connection therewith. The Chloe warrants were exercised in November 1999. On
September 10, 2001, the Company issued an additional 20,000 warrants to Chloe
Holdings, Inc. for consulting services provided to the Company. The warrants are
exercisable at $5.00 per share and expire on July 18, 2004. Consulting fees paid
to Averil Associates for the years ended December 31, 2002, 2001 and 2000
amounted to $0, $366,000 and $18,655.
In October 1998, the Company sold 2,390,000 shares of Common Stock at a
purchase price per share of $1.125 to KG Investment, LLC. The Company used the
$2,688,750 raised in the private placement to fund a portion of its business
growth plans and operations. KG Investment is owned by Gerard Guez and Todd Kay,
executive officers and significant shareholders of Tarrant Apparel Group
("Tarrant"). KG Investment agreed that it would not seek to dispose of its
shares prior to October 16, 2000, except to certain affiliated parties, without
the Company's prior written consent. KG Investment also agreed to certain
additional restrictions on the transfer and voting of the shares it purchased
and has been granted piggyback registration rights.
Commencing in December 1998, the Company began to provide trim products to
Tarrant for its operations in Mexico. In connection therewith, the Company
purchased $2.25 million of Tarrant's existing inventory in December 1998 for
resale to Tarrant. Total sales to Tarrant for the years ended December 31, 2002,
2001 and 2000 amounted to approximately $24,947,000, $18,438,000 and
$23,760,000. As of December 31, 2002 and 2001, accounts receivable related
parties included approximately $9,362,000 and $4,995,000 due from Tarrant. Terms
are net 60 days.
Commencing in December 2000, the Company began to provide trim products to
Azteca Production International, Inc for its operations in Mexico. In connection
therewith, the Company purchased $4.0 million of Azteca's existing inventory in
December 2000 for resale to Azteca. Total sales to Azteca for the years ended
December 31, 2002, 2001 and 2000 amounted to approximately $16,946,000,
$9,016,000 and $1,878,000. As of December 31, 2002 and 2001, accounts receivable
related parties included approximately $5,408,000 and $2,920,000 due from
Azteca. Terms are net 60 days.
Transportation fees paid to a company that has common ownership with Azteca
for the years ended December 31, 2002 and 2001 amounted to $225,000 and $15,000.
Included in due from related parties at December 31, 2002 and 2001 is
$870,251 and $814,219, respectively, of unsecured notes and advances to
officers, members of the Board of Directors and stockholders of the Company. The
notes and advances bear interest at 7.5%, 8.5% and prime and are due on demand.
In August 1999, Mark Dyne, Chairman of the Board of Directors, loaned the
Company $160,000. This indebtedness is evidenced by an unsecured promissory note
dated August 17, 1999. The principal, which bears an interest rate at 7% per
annum, and interest are due and payable on demand. The Company repaid $95,205 of
the principal balance during the year ended December 31, 2001.
Consulting fees paid to Diversified Investments, a company owned by a
member of the Board of Directors of the Company, amounted to $150,000, $150,000
and $87,500 for the years ended December 31, 2002, 2001 and 2000.
Consulting fees paid for services provided by a member of the Board of
Directors amounted to $70,800, $64,900 and $87,200 for the years ended December
31, 2002, 2001 and 2000.
55
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 1, 2001, 15,000 options held by a former director of the
Company were exercised.
In October 1998, the Company adopted a stockholder's rights plan. Under the
rights plan the Company distributed one preferred share purchase right for each
outstanding share of Common Stock outstanding on November 6, 1998. Upon the
occurrence of certain triggering events related to an unsolicited takeover
attempt of the Company, each purchase right not owned by the party or parties
making the unsolicited takeover attempt will entitle its holder to purchase
shares of the Company's Series A Preferred Stock at a value below the then
market value of the Series A Preferred Stock. The rights of holders of the
Common Stock will be subject to, and may be adversely affected by, the rights of
holders of the share purchase rights, the Series A Preferred Stock and any other
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire a majority of the Company's outstanding voting stock.
NOTE 19 -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. A total of 221 employees were terminated or
resigned as part of the Company's restructuring plan. Total restructuring
charges for the year ended 2001 amounted to $1,561,623, 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.
NOTE 20 - QUARTERLY RESULTS (UNAUDITED)
Quarterly results for the years ended December 31, 2002 and 2001 are
reflected below:
FOURTH (1) THIRD SECOND FIRST (1)
- ------------------------------------------------------------------------------------------------
2002
- ----
Revenue ......................... $ 14,604,864 $ 16,349,906 $ 19,793,344 $ 9,325,056
Operating income ................ $ 198,519 $ 803,781 $ 1,707,431 $ 334,345
Net income ...................... $ 51,780 $ 343,931 $ 1,046,303 $ 54,012
Basic earnings per share ........ $ 0.00 $ 0.03 $ 0.11 $ 0.00
Diluted earnings per share ...... $ 0.00 $ 0.03 $ 0.10 $ 0.00
2001
- ----
Revenue ......................... $ 7,770,704 $ 11,039,211 $ 14,619,136 $ 10,138,579
Operating income (loss) ......... $ (611,524) $ 58,542 $ 1,233,141 $ (932,671)
Net income (loss) ............... $ (591,496) $ (198,644) $ 709,461 $ (1,145,072)
Basic earnings (loss) per share . $ (0.08) $ (0.03) $ 0.09 $ (0.14)
Diluted earnings (loss) per share $ (0.08) $ (0.03) $ 0.09 $ (0.14)
- ------------------------------------------------------------------------------------------------
(1) The Company recorded a Restructuring Charge of $1,257,598 and $304,025
during the first and fourth quarters of 2001.
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with the per share amounts for the year.
56
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT ON SCHEDULE II
To the Board of Directors
Tag-it Pacific, Inc.
Los Angeles, California
The audits referred to in our report, dated March 14, 2003, included the related
financial statement schedule as of December 31, 2002, and for each of the three
years in the period ended December 31, 2002, included in the annual report on
Form 10-K of Tag-it Pacific, Inc. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule presents fairly, in all material
respects, the information set forth therein.
/s/ BDO Seidman, LLP
Los Angeles, California
March 14, 2003
57
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ---------- ---------- ----------
Balance at Balance at
Beginning End of
DESCRIPTION of year Additions Deductions Year
----------- ---------- ---------- ---------- ----------
2002
- ----
Allowance for doubtful accounts deducted
from accounts receivable in the balance
sheet .................................. $ 568,625 $ 743,113 $ 910,253 $ 401,485
Reserve for obsolescence deducted from
inventories on the balance sheet ....... -- 155,500 -- 155,500
---------- ---------- ---------- ----------
$ 568,625 $ 898,613 $ 910,253 $ 556,985
========== ========== ========== ==========
2001
- ----
Allowance for doubtful accounts deducted
from accounts receivable in the balance
sheet .................................. $ 299,224 $ 600,200 $ 330,799 $ 568,625
Reserve for obsolescence deducted from
inventories on the balance sheet ....... -- 1,058,016 1,058,016 --
---------- ---------- ---------- ----------
$ 299,224 $1,658,216 $1,388,815 $ 568,625
========== ========== ========== ==========
2000
- ----
Allowance for doubtful accounts deducted
from accounts receivable in the balance
sheet .................................. $ 54,998 $ 445,176 $ 200,950 $ 299,224
Reserve for obsolescence deducted from
inventories on the balance sheet ....... 24,050 1,146,563 1,170,613 --
---------- ---------- ---------- ----------
$ 79,048 $1,591,739 $1,371,563 $ 299,224
========== ========== ========== ==========
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item 10 will appear in the proxy statement for
the 2003 Annual Meeting of Stockholders, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation will appear in the proxy
statement for the 2003 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management will appear in the proxy statement for the 2003 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions will
appear in the proxy statement for the 2003 Annual Meeting of Stockholders, and
is incorporated by reference.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures, which we have designed to
ensure that material information related to Tag-it Pacific, Inc., including our
consolidated subsidiaries, is disclosed in our public filings on a regular
basis. In response to recent legislation and proposed regulations, we reviewed
our internal control structure and our disclosure controls and procedures. We
believe our pre-existing disclosure controls and procedures are adequate to
enable us to comply with our disclosure obligations.
Within 90 days prior to the filing of this report, members of the Company's
management, including the Company's Chief Executive Officer, Colin Dyne, and
Chief Financial Officer, Ronda Sallmen, evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
upon that evaluation, Mr. Dyne and Ms. Sallmen concluded that the Company's
disclosure controls and procedures are effective in causing material information
to be recorded, processed, summarized and reported by management of the Company
on a timely basis and to ensure that the quality and timeliness of the Company's
public disclosures complies with its SEC disclosure obligations.
CHANGES IN CONTROLS AND PROCEDURES
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these internal controls after the
date of our most recent evaluation.
59
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS -- See Item 8 of this Form 10-K annual
report.
(2) REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -- See
Item 8 of this Form 10-K annual report.
(3) INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT ON
SCHEDULE II -- See Item 8 of this Form 10-K annual report.
(4) FINANCIAL STATEMENT SCHEDULE II -- See Item 8 of this Form
10-K annual report.
(5) EXHIBITS -- See Exhibit Index attached to this Form 10-K
annual report.
(b) Reports on Form 8-K:
None
(c) Exhibits:
See Exhibit Index on attached to this Form 10-K annual
report.
60
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TAG-IT PACIFIC, INC.
/S/ RONDA SALLMEN
--------------------------------
By: Ronda Sallmen
Its: Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Colin
Dyne and Ronda Sallmen, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ---
/S/ MARK DYNE Chairman of the Board March 26, 2003
- --------------------------- of Directors
Mark Dyne
/S/ COLIN DYNE Chief Executive Officer March 26, 2003
- --------------------------- and Director
Colin Dyne
/S/ RONDA SALLMEN Chief Financial Officer March 26, 2003
- ---------------------------
Ronda Sallmen
/S/ KEVIN BERMEISTER Director March 26, 2003
- ---------------------------
Kevin Bermeister
/S/ MICHAEL KATZ Director March 26, 2003
- ---------------------------
Michael Katz
/S/ JONATHAN BURSTEIN Director and Vice March 26, 2003
- --------------------------- President of Operations
Jonathan Burstein
/S/ BRENT COHEN Director March 26, 2003
- ---------------------------
Brent Cohen
/S/ DONNA ARMSTRONG Director March 26, 2003
- ---------------------------
Donna Armstrong
61
Certification of CEO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Colin Dyne, certify that:
1. I have reviewed this annual report on Form 10-K of Tag-It Pacific,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/S/ COLIN DYNE
-----------------------
Colin Dyne
Chief Executive Officer
62
Certification of CEO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Ronda Sallmen, certify that:
1. I have reviewed this annual report on Form 10-K of Tag-It Pacific,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/S/ RONDA SALLMEN
-----------------------
Ronda Sallmen
Chief Financial Officer
63
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
2.1 Exchange Agreement, dated October 17, 1997. Incorporated by
reference to Exhibit 2.1to Form SB-2 filed on October 21, 1997,
and the amendments thereto.
3.1 Certificate of Incorporation of Registrant. Incorporated by
reference to Exhibit 3.1 to Form SB-2 filed on October 21, 1997,
and the amendments thereto.
3.2 Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 to
Form SB-2 filed on October 21, 1997, and the amendments thereto.
3.3 Certificate of Designation of Rights, Preferences and Privileges
of Preferred Stock. Incorporated by reference to Exhibit A to the
Rights Agreement filed as Exhibit 4.1 to Current Report on Form
8-K filed as of November 4, 1998.
3.4 Certificate of Amendment of Certificate of Incorporation of
Registrant. Incorporated by reference to Exhibit 3.4 to Annual
Report on Form 10-KSB, filed March 28, 2000.
3.5 Certificate of Designation of Series B Convertible Preferred
Stock of Tag-It Pacific, Inc. Incorporated by reference to
Exhibit 3.1 to Form 10-QSB filed on August 14, 2000.
4.1 Specimen Stock Certificate of Common Stock of Registrant.
Incorporated by reference to Exhibit 4.1 to Form SB-2 filed on
October 21, 1997, and the amendments thereto.
4.2 Rights Agreement, dated as of November 4, 1998, between
Registrant and American Stock Transfer and Trust Company as
Rights Agent. Incorporated by reference to Exhibit 4.1 to Current
Report on Form 8-K filed as of November 4, 1998.
4.3 Form of Rights Certificate. Incorporated by reference to Exhibit
B to the Rights Agreement filed as Exhibit 4.1 to Current Report
on Form 8-K filed as of November 4, 1998.
10.1 Form of Indemnification Agreement. Incorporated by reference to
Exhibit 10.1to Form SB-2 filed on October 21, 1997, and the
amendments thereto.
10.2 Intentionally Left Blank.
10.3 Intentionally Left Blank.
10.4 Intentionally Left Blank.
10.5 Tax Indemnification Agreement between Pacific Trim & Belt, Inc.
and Harold Dyne, Jonathan Burstein, Raymond Spiro and Stan
Magnus. Incorporated by reference to Exhibit 10.12 to Form SB-2
filed on October 21, 1997, and the amendments thereto.
10.6 Promissory Note, dated September 30, 1996, provided by Tag-It,
Inc. to Harold Dyne. Incorporated by reference to Exhibit 10.21
to Form SB-2 filed on October 21, 1997, and the amendments
thereto.
10.7 Promissory Note, dated June 30, 1991, provided by Tag-It, Inc. to
Harold Dyne. Incorporated by reference to Exhibit 10.23 to Form
SB-2 filed on October 21, 1997, and the amendments thereto.
64
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.8 Promissory Note, dated January 31, 1997, provided by Tag-It Inc.
to Mark Dyne. Incorporated by reference to Exhibit 10.24 to Form
SB-2 filed on October 21, 1997, and the amendments thereto.
10.9 Promissory Note, dated February 29, 1996, provided by A.G.S.
Stationary, Inc. to Monto Holdings Pty. Ltd. Incorporated by
reference to Exhibit 10.25o Form SB-2 filed on October 21, 1997,
and the amendments thereto.
10.10 Promissory Note, dated January 19, 1995, provided by Pacific Trim
& Belt, Inc. to Monto Holdings Pty. Ltd. Incorporated by
reference to Exhibit 10.26 to Form SB-2 filed on October 21,
1997, and the amendments thereto.
10.11 Intentionally Left Blank.
10.12 Registrant's 1997 Stock Incentive Plan. Incorporated by reference
to Exhibit 10.29 to Form SB-2 filed on October 21, 1997, and the
amendments thereto.
10.13 Form of Non-statutory Stock Option Agreement. Incorporated by
reference to Exhibit 10.30 to Form SB-2 filed on October 21,
1997, and the amendments thereto.
10.14 Intentionally Left Blank.
10.15 Promissory Note, dated August 31, 1997, provided by Harold Dyne
to Pacific Trim & Belt, Inc. Incorporated by reference to Exhibit
10.32 to Form SB-2 filed on October 21, 1997, and the amendments
thereto.
10.16 Intentionally Left Blank.
10.17 Promissory Note, dated October 15, 1997, provided by Harold Dyne
to Pacific Trim & Belt, Inc. Incorporated by reference to Exhibit
10.34 to Form SB-2 filed on October 21, 1997, and the amendments
thereto.
10.18 Formation Agreement of AGS Holdings L.L.C., dated as of October
17, 1997. Incorporated by reference to Exhibit 10.35 to Form SB-2
filed on October 21, 1997, and the amendments thereto.
10.19 Intentionally Left Blank.
10.20 Warrant Agreement, dated June 1, 1994, between Jonathan Markiles
and Tag-It, Inc. Incorporated by reference to Exhibit 10.39 to
Form SB-2 filed on October 21, 1997, and the amendments thereto.
10.21 Form of Warrant Agreement between Registrant and Troop Meisinger
Steuber & Pasich, LLP. Incorporated by reference to Exhibit 10.41
to Form SB-2 filed on October 21, 1997, and the amendments
thereto.
10.22 Contract for Manufacturing Services between USA and Mexico,
between Tag-It, Inc. and Tagit de Mexico, S.A. de C.V.
Incorporated by reference to Exhibit 10.44 to Form SB-2 filed on
October 21, 1997, and the amendments thereto.
65
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.23 Intentionally Left Blank.
10.24 Intentionally Left Blank.
10.25 Promissory Note, dated October 15, 1997, provided by A.G.S.
Stationary Inc. to Monto Holdings Pty. Ltd. Incorporated by
reference to Exhibit 10.48 to Form SB-2 filed on October 21,
1997, and the amendments thereto.
10.26 Promissory Note, dated November 4, 1997, provided by Pacific Trim
& Belt, Inc. to Monto Holdings Pty. Ltd. Incorporated by
reference to Exhibit 10.49 to Form SB-2 filed on October 21,
1997, and the amendments thereto.
10.27 Intentionally Left Blank.
10.28 Intentionally Left Blank.
10.29 Intentionally Left Blank.
10.30 Intentionally Left Blank.
10.31 Intentionally Left Blank.
10.32 Binding Letter of Understanding, dated October 14, 1998.
Incorporated by reference to Exhibit 99.3 to Current Report on
Form 8-K filed as of October 29, 1998.
10.33 Side Letter Agreement, dated October 14, 1998. Incorporated by
reference to Exhibit 99.4 to Current Report Form 8-K filed as of
October 29, 1998.
10.34 Series B Convertible Preferred Stock Agreement, dated as of April
3, 2000, between the Registrant and Grupo Industrial Cierres
Ideal, S.A. de C.V. Incorporated by reference to Exhibit 10.1 to
Form 10-QSB filed on August 14, 2000.
10.35 Talon License and Distribution Agreement, dated April 3, 2000,
between the Registrant and Grupo Industrial Cierres Ideal, S.A.
de C.V. Incorporated by reference to Exhibit 10.2 to Form 10-QSB
filed on August 14, 2000.*
10.36 Consignment Inventory Purchase Agreement, dated September 30,
2000, between the Registrant and Grupo Industrial Cierres Ideal,
S.A. de C.V. Incorporated by reference to Exhibit 10.1 to Form
10-QSB filed on November 14, 2000.
10.37 Guaranty, dated as of October 4, 2000, by A.G.S. Stationery, Inc.
in favor or Mark I. Dyne. Incorporated by reference to Exhibit
10.40 to Form 10-K filed on April 4, 2001.
10.38 Guaranty, dated as of October 4, 2000, by Tag-It, Inc. in favor
of Mark I. Dyne. Incorporated by reference to Exhibit 10.41 to
Form 10-K filed on April 4, 2001.
10.39 Guaranty, dated as of October 4, 2000, by Talon International,
Inc. in favor of Mark I. Dyne. Incorporated by reference to
Exhibit 10.42 to Form 10-K filed on April 4, 2001.
10.40 Intercreditor Agreement, dated as of October 4, 2000, by and
among Mark I. Dyne, Sanwa Bank California, the Registrant,
Tag-It, Inc., Talon International, Inc. and A.G.S. Stationery,
Inc. Incorporated by reference to Exhibit 10.43 to Form 10-K
filed on April 4, 2001.
66
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.41 Security Agreement, dated as of October 4, 2000, between A.G.S.
Stationery, Inc. and Mark I. Dyne. Incorporated by reference to
Exhibit 10.44 to Form 10-K filed on April 4, 2001. Incorporated
by reference to Exhibit 10.44 to Form 10-K filed on April 4,
2001.
10.42 Security Agreement, dated as of October 4, 2000, between Tag-It,
Inc. and Mark I. Dyne. Incorporated by reference to Exhibit 10.45
to Form 10-K filed on April 4, 2001.
10.43 Security Agreement, dated as of October 4, 2000, between Talon
International Inc. and Mark I. Dyne. Incorporated by reference to
Exhibit 10.46 to Form 10-K filed on April 4, 2001.
10.44 Security Agreement, dated as of October 4, 2000, between Tag-It
Pacific, Inc. and Mark I. Dyne. Incorporated by reference to
Exhibit 10.47 to Form 10-K filed on April 4, 2001.
10.45 Convertible Secured Subordinated Promissory Note, dated October
4, 2000, provided by Mark I. Dyne to the Registrant. Incorporated
by reference to Exhibit 10.48 to Form 10-K filed on April 4,
2001.
10.46 Intentionally Left Blank.
10.47 Intentionally Left Blank.
10.48 Trim Handling Agreement, dated as of December 29, 1999, among the
Registrant, Tarrant Apparel Group, Inc. & Tagmex and Tag-It de
Mexico S.A. Incorporated by reference to Exhibit 10.51 to Form
10-K filed on April 4, 2001.
10.49 Intentionally Left Blank.
10.50 Supply Agreement entered into on December 22, 2000, by and
between the Company, Hubert Guez, Paul Guez and Azteca Production
International, Inc., AZT International SA D RL, and Commerce
Investment Group, LLC.* Incorporated by reference to Exhibit
10.53 to Form 10-K filed on April 4, 2001.
10.51 Investor Rights Agreement entered into on December 22, 2000, by
and between the Company and Commerce Investment Group, LLC.
Incorporated by reference to Exhibit 10.54 to Form 10-K filed on
April 4, 2001.
10.52 Voting Agreement entered into on December 22, 2000, by and
between the Company, Hubert Guez, Paul Guez and Azteca Production
International, Inc., AZT International SA D RL, Commerce
Investment Group, LLC, and Colin Dyne. Incorporated by reference
to Exhibit 10.55 to Form 10-K filed on April 4, 2001.
10.53 Right of First Refusal and Sale Agreement entered into on
December 22, 2000, by and between the Company, Hubert Guez, Paul
Guez and Azteca Production International, Inc., AZT International
SA D RL, Commerce Investment Group, LLC, and Colin Dyne.
Incorporated by reference to Exhibit 10.56 to Form 10-K filed on
April 4, 2001.
10.54 Series C Preferred Stock Purchase Agreement, dated as of
September 20, 2001, between Tag-it Pacific, Inc. and Coats North
America Consolidated, Inc. Incorporated by reference to Exhibit
99.1 to Form 8-K filed on October 15, 2001.
67
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.55 Investor Rights Agreement, dated as of September 20, 2001,
between Tag-it Pacific, Inc. and Coats North America
Consolidated, Inc. Incorporated by reference to Exhibit 99.2 to
Form 8-K filed on October 15, 2001.
10.56 Co-Marketing and Supply Agreement, dated as of September 20,
2001, between Tag-it Pacific, Inc. and Coats America, Inc.
Incorporated by reference to Exhibit 99.3 to Form 8-K filed on
October 15, 2001.
10.57 Purchase Money Security Agreement, dated as of September 20,
2001, between Tag-it Pacific, Inc. and Coats America, Inc.
Incorporated by reference to Exhibit 99.4 to Form 8-K filed on
October 15, 2001.
10.58 Certificate of Designation of Series C Convertible Redeemable
Preferred Stock. Incorporated by reference to Exhibit 99.5 to
Form 8-K filed on October 15, 2001.
10.59 Asset Purchase Agreement, dated as of December 21, 2001, among
Tag-it Pacific, Inc., Groupo Industrial Cierres Ideal, S. A. de
C.V., Talon, Inc. and Industias Unidas, S.A. de C.V. Incorporated
by reference to Exhibit 99.1 to Form 8-K filed on January 7,
2002.
10.60 Promissory Note, dated as of December 21, 2001, by Tag-it
Pacific, Inc. for the benefit of Talon, Inc. Incorporated by
reference to Exhibit 99.2 to Form 8-K filed on January 7, 2002.
10.61 Stockholders Agreement, dated as of December 21, 2001, among
Tag-it Pacific, Inc. and Talon, Inc. Incorporated by reference to
Exhibit 99.3 to Form 8-K filed on January 7, 2002.
10.62 Mutual Release, dated as of December 21, 2001, among Tag-it
Pacific, Inc., Etic Art S.A. de C.V. and Cierres Ideal de Mexico,
S. A. de C.V. Incorporated by reference to Exhibit 99.4 to Form
8-K filed on January 7, 2002.
10.63 Escrow Agreement, dated as of December 21, 2001, among Tag-it
Pacific, Inc., Talon, Inc. and Wells Fargo Bank, National
Association. Incorporated by reference to Exhibit 99.5 to Form
8-K filed on January 7, 2002.
10.64 Form of Stock and Warrant Purchase Agreement dated December 28,
2001. Incorporated by reference to Exhibit 99.1 to Form 8-K filed
on January 23, 2002.
10.65 Form of Warrant to Purchase Common Stock Agreements dated
December 28, 2001. Incorporated by reference to Exhibit 99.2 to
Form 8-K filed on January 23, 2002.
10.66 Form of Stockholders Agreements dated December 28, 2001.
Incorporated by reference to Exhibit 99.3 to Form 8-K filed on
January 23, 2002.
10.67 Form of Investor Rights Agreements dated December 28, 2001.
Incorporated by reference to Exhibit 99.4 to Form 8-K filed on
January 23, 2002.
10.68 Form of Exclusive Supply Agreement dated July 12, 2002, among
Tag-it Pacific, Inc. and Levi Strauss & Co.* Incorporated by
reference to Exhibit 10.68 to Form 10-Q filed on November 15,
2002.
68
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.69 Intellectual Property Rights Agreement, dated April 2, 2002,
between the Company and Pro-Fit Holdings, Ltd.*
10.70 Amendment to Exclusive Supply Agreement, dated July 12, 2002,
between Tag-it Pacific, Inc. and Levi Strauss & Co.*
23.1 Consent of BDO Seidman, LLP.
24.1 Power of Attorney (included on signature page).
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Certain portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for an order
granting confidential treatment pursuant to Rule 406 of the General Rules and
Regulations under the Securities Act of 1933, as amended.
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