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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended March 31, 2003.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to _______________.
Commission file number 1-13669
TAG-IT PACIFIC, INC.
(Exact Name of Issuer as Specified in its Charter)
DELAWARE 95-4654481
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
21900 BURBANK BOULEVARD, SUITE 270
WOODLAND HILLS, CALIFORNIA 91367
(Address of Principal Executive Offices)
(818) 444-4100
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: Common Stock, par value
$0.001 per share, 9,619,909 shares issued and outstanding as of May 15, 2003.
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TAG-IT PACIFIC, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.................................... 3
Consolidated Balance Sheets as of March 31, 2003
(unaudited) and December 31, 2002.................................... 3
Consolidated Statements of Income (unaudited) for
the Three Months Ended March 31, 2003 and 2002....................... 4
Consolidated Statements of Cash Flows (unaudited)
for the Three Months Ended March 31, 2003 and 2002................... 5
Notes to the Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........26
Item 4. Controls and Procedures..............................................27
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................27
Item 6. Exhibits and Reports on Form 8-K.....................................27
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
TAG-IT PACIFIC, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
----------- -----------
Assets (unaudited)
Current Assets:
Cash and cash equivalents ....................... $ 154,561 $ 285,464
Due from factor ................................. 656,308 532,672
Trade accounts receivable, net .................. 6,858,036 5,456,517
Trade accounts receivable, related parties ...... 13,399,559 14,770,466
Refundable income taxes ......................... -- 212,082
Inventories ..................................... 24,632,717 23,105,267
Prepaid expenses and other current assets ....... 883,491 599,543
Deferred income taxes ........................... 90,928 90,928
----------- -----------
Total current assets ......................... 46,675,600 45,052,939
Property and Equipment, net of accumulated
depreciation and amortization ................... 3,405,563 2,953,701
Tradename .......................................... 4,110,750 4,110,750
Due from related parties ........................... 884,128 870,251
Other assets ....................................... 1,239,165 1,314,981
----------- -----------
Total assets ....................................... $56,315,206 $54,302,622
=========== ===========
Liabilities, Convertible Redeemable Preferred
Stock and Stockholders' Equity
Current Liabilities:
Line of credit .................................. $15,403,486 $16,182,061
Accounts payable and accrued expenses ........... 12,796,562 10,401,187
Deferred income ................................. 1,027,984 1,027,984
Subordinated notes payable to related parties ... 849,971 1,349,971
Current portion of capital lease obligations .... 72,804 71,928
Current portion of subordinated note payable .... 1,200,000 1,200,000
----------- -----------
Total current liabilities .................... 31,350,807 30,233,131
Capital lease obligations, less current portion .... 88,447 107,307
Subordinated note payable, less current portion .... 2,300,000 2,600,000
----------- -----------
Total liabilities ............................ 33,739,254 32,940,438
----------- -----------
Convertible redeemable preferred stock Series C,
$0.001 par value; 759,494 shares authorized;
759,494 shares issued and outstanding at
March 31, 2003 and December 31, 2002
(stated value $3,000,000) ....................... 2,895,001 2,895,001
Stockholders' equity:
Preferred stock, Series A $0.001 par value;
250,000 shares authorized, no shares issued
or outstanding ................................ -- --
Convertible preferred stock Series B, $0.001
par value; 850,000 shares authorized; no
shares issued or outstanding .................. -- --
Common stock, $0.001 par value, 30,000,000
shares authorized; 9,619,909 shares issued
and outstanding at March 31, 2003;
9,319,909 at December 31, 2002 ................ 9,621 9,321
Additional paid-in capital ...................... 17,675,712 16,776,012
Retained earnings ............................... 1,995,618 1,681,850
-----------
Total stockholders' equity ........................ 19,680,951 18,467,183
----------- -----------
Total liabilities, convertible redeemable
preferred stock and stockholders' equity......... $56,315,206 $54,302,622
=========== ===========
See accompanying notes to consolidated financial statements.
3
TAG-IT PACIFIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2003 2002
----------- -----------
Net sales .................................... $14,358,833 $ 9,325,056
Cost of goods sold ........................... 10,059,252 6,690,713
----------- -----------
Gross profit ............................ 4,299,581 2,634,343
Selling expenses ............................. 829,144 394,867
General and administrative expenses .......... 2,698,504 1,905,131
----------- -----------
Total operating expenses ................ 3,527,648 2,299,998
Income from operations ....................... 771,933 334,345
Interest expense, net ........................ 320,848 261,743
----------- -----------
Income before income taxes ................... 451,085 72,602
Provision for income taxes ................... 90,217 18,590
----------- -----------
Net income .............................. $ 360,868 $ 54,012
=========== ===========
Less: Preferred stock dividends ............. 47,100 45,000
----------- -----------
Net income available to common
shareholders .............................. $ 313,768 $ 9,012
=========== ===========
Basic earnings per share ..................... $ 0.03 $ 0.00
=========== ===========
Diluted earnings per share ................... $ 0.03 $ 0.00
=========== ===========
Weighted average number of common
shares outstanding:
Basic ................................... 9,423,242 9,013,511
=========== ===========
Diluted ................................. 9,686,457 9,327,641
=========== ===========
See accompanying notes to consolidated financial statements.
4
TAG-IT PACIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
--------------------------
2003 2002
----------- -----------
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net income ................................... $ 360,868 $ 54,012
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization ................ 308,364 274,505
Increase in allowance for doubtful accounts .. 94,965 --
Changes in operating assets and liabilities:
Receivables, including related parties ..... (249,213) (513,240)
Inventories ................................ (1,527,450) (1,201,336)
Other assets ............................... (2,592) (9,323)
Prepaid expenses and other current assets .. (283,948) (35,826)
Accounts payable and accrued expenses ...... 2,247,601 874,186
Accrued restructuring charges .............. -- (114,554)
Income taxes payable ....................... 298,879 18,782
----------- -----------
Net cash provided (used) by operating activities . 1,247,474 (652,794)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment ........ (681,818) (49,129)
----------- -----------
Cash flows from financing activities:
Repayment of bank line of credit, net ........ (778,575) (31,840)
Proceeds from private placement transactions . 900,000 1,029,996
Proceeds from exercise of stock options ...... -- 8,450
Repayment of capital leases .................. (17,984) (86,291)
Repayment of notes payable ................... (800,000) (200,000)
----------- -----------
Net cash (used) provided by financing activities . (696,559) 720,315
----------- -----------
Net (decrease) increase in cash .................. (130,903) 18,392
Cash at beginning of period ...................... 285,464 46,948
----------- -----------
Cash at end of period ............................ $ 154,561 $ 65,340
=========== ===========
Supplemental disclosures of cash flow
information:
Cash received (paid) during the period for:
Interest paid .............................. $ (314,009) $ (221,834)
Income taxes paid .......................... $ (2,566) $ (439)
Income taxes received ...................... $ 212,082 $ --
See accompanying notes to consolidated financial statements.
5
TAG-IT PACIFIC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRESENTATION OF INTERIM INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The accompanying unaudited consolidated financial statements reflect
all adjustments that, in the opinion of the management of Tag-It Pacific, Inc.
and Subsidiaries (collectively, the "Company"), are considered necessary for a
fair presentation of the financial position, results of operations, and cash
flows for the periods presented. The results of operations for such periods are
not necessarily indicative of the results expected for the full fiscal year or
for any future period. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
included in the Company's Form 10-K for the year ended December 31, 2002.
2. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
PER
THREE MONTHS ENDED MARCH 31, 2003: INCOME SHARES SHARE
- --------------------------------- --------- --------- ------
Basic earnings per share:
Income available to common stockholders $ 313,768 9,423,242 $0.03
Effect of Dilutive Securities:
Options ............................... 210,718
Warrants .............................. 52,497
--------- --------- -----
Income available to common stockholders $ 313,768 9,686,457 $0.03
========= ========= =====
THREE MONTHS ENDED MARCH 31, 2002:
- ---------------------------------
Basic earnings per share:
Income available to common stockholders $ 9,012 9,013,511 $0.00
Effect of Dilutive Securities:
Options ............................... 260,253
Warrants .............................. 53,877
--------- --------- -----
Income available to common stockholders $ 9,012 9,327,641 $0.00
========= ========= =====
Warrants to purchase 683,332 shares of common stock at between $3.65
and $6.00, options to purchase 925,000 shares of common stock at between $3.75
and $4.63, convertible debt of $500,000 convertible at $4.50 per share and
759,494 shares of preferred Series C stock convertible at $4.94 per share were
outstanding for the three months ended March 31, 2003, but were not included in
the computation of diluted earnings per share because exercise or conversion
would have an antidilutive effect on earnings per share.
6
Warrants to purchase 523,332 shares of common stock at between $4.34
and $6.00, options to purchase 646,000 shares of common stock at between $4.00
and $4.63, convertible debt of $500,000 convertible at $4.50 per share and
759,494 shares of preferred Series C stock convertible at $4.94 per share were
outstanding for the three months ended March 31, 2002, but were not included in
the computation of diluted earnings per share because exercise or conversion
would have an antidilutive effect on earnings per share.
3. 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 three months ended March 31, 2003 and 2002. 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 and earnings per share for the three months ended March 31,
2003 and 2002 would have amounted to the pro forma amounts presented below:
Three Months Ended March 31,
2003 2002
----------- ----------
Net income, as reported ........................... $ 360,868 $ 54,012
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 .......................... (5,282) (30,268)
----------- ----------
Pro forma net income .............................. $ 355,586 $ 23,744
=========== ==========
Earnings per share:
Basic - as reported ........................ $ 0.03 $ 0.00
Basic - pro forma .......................... $ 0.03 $ 0.00
Diluted - as reported ...................... $ 0.03 $ 0.00
Diluted - pro forma ........................ $ 0.03 $ 0.00
7
4. PRIVATE PLACEMENTS
In a series of sales on December 28, 2001, January 7, 2002 and January
8, 2002, the Company entered into Stock and Warrant Purchase Agreements with
three private investors, including Mark Dyne, the chairman of the Company's
board of directors. Pursuant to the Stock and Warrant Purchase Agreements, the
Company issued an aggregate of 516,665 shares of common stock at a price per
share of $3.00 for aggregate proceeds of $1,549,995. The Stock and Warrant
Purchase Agreements also 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 were issued at the second closings. The warrants are
exercisable immediately after closing, one half of the warrants at an exercise
price of 110% and the second half at an exercise price of 120% of the market
value of the Company's common stock on the date of closing. The exercise price
for the warrants shall be adjusted upward by 25% of the amount, if any, that the
market price of 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 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.
5. GUARANTEES AND CONTINGENCIES
In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others - and interpretation of FASB Statements No. 5, 57 and 107
and rescission of FIN 34." The following is a summary of the Company's
agreements that it has determined are within the scope of FIN 45:
In accordance with the bylaws of the Company, officers and directors
are indemnified for certain events or occurrences arising as a result of the
officer or director's serving in such capacity. The term of the indemnification
period is for the lifetime of the officer or director. The maximum potential
amount of future payments the Company could be required to make under the
indemnification provisions of its bylaws is unlimited. However, the Company has
a director and officer liability insurance policy that reduces its exposure and
enables it to recover a portion of any future amounts paid. As a result of its
insurance policy coverage, the Company believes the estimated fair value of the
indemnification provisions of its bylaws is minimal and therefore, the Company
has not recorded any related liabilities.
The Company enters into indemnification provisions under its agreements
with investors and its agreements with other parties in the normal course of
business, typically with suppliers, customers and landlords. Under these
provisions, the Company generally indemnifies and holds harmless the indemnified
party for losses suffered or incurred by the indemnified party as a result of
the Company's activities or, in some cases, as a result of the indemnified
party's activities under the agreement. These indemnification provisions often
include indemnifications relating to representations made by the Company with
regard to intellectual property rights. These indemnification provisions
generally survive termination of the underlying agreement. The maximum potential
amount of future payments the
8
Company could be required to make under these indemnification provisions is
unlimited. The Company has not incurred material costs to defend lawsuits or
settle claims related to these indemnification agreements. As a result, the
Company believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has not recorded any related liabilities.
As of March 31, 2003, we indirectly guaranteed the indebtedness of two
of our suppliers through the issuance by a related party of letters of credit to
purchase goods and equipment totaling $3.3 million. Financing costs due to the
related party amounted to approximately $328,000. The letters of credit expire
on various dates thru July 2003.
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.
6. SUBSEQUENT EVENT
On April 3, 2003, the Company entered into a financing agreement for
the purchase and implementation of computer equipment and software. The capital
lease obligation bears interest at 6% and expires in March 2006. Future minimum
annual payments under the capital lease obligation are as follows:
Years ending December 31, Amount
- ------------------------- -----------
2003 .................................................... $ 423,660
2004 .................................................... 564,880
2005 .................................................... 466,756
2006 .................................................... 152,117
-----------
Total payments .......................................... 1,607,413
Less amount representing interest ....................... (133,360)
-----------
Balance at April 3, 2003 ................................ 1,474,053
Less current portion .................................... 376,287
-----------
Long-term portion ....................................... $ 1,097,766
===========
7. 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 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
9
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. 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 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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read together with the
Consolidated Financial Statements of Tag-It Pacific, Inc. and the notes to the
Consolidated Financial Statements included elsewhere in this Form 10-Q.
This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity and cash flows
of Tag-It Pacific, Inc. for the three months ended March 31, 2003 and 2002.
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.
11
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
12
in faster delivery times and fewer production delays for our manufacturing
customers. Our MANAGED TRIM SOLUTION(TM) also helps to eliminate a
manufacturer's need to maintain a trim purchasing and logistics department.
We also serve as a specified supplier for a variety of major retail
brand and private label oriented companies. 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 waistbands, various trim products, garment
components and services over the two-year term of the agreement. 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
13
provides for selected introductions into Coats' customer base and has the
potential to accelerate our growth plans and to introduce our MANAGED TRIM
SOLUTION(TM) to apparel manufacturers on a broader basis. Pursuant to the terms
of the co-marketing and supply agreement, our trim packages will exclusively
offer thread manufactured by Coats. Coats was selected for its quality, service,
brand recognition and global reach. Prior to entering into the co-marketing and
supply agreement, we were a long-time customer of Coats, distributing their
thread to sewing operations under our MANAGED TRIM SOLUTION(TM) program. This
exclusive agreement will allow Coats to offer its customer base of contractors
in Mexico, Central America and the Caribbean full-service trim management under
our MANAGED TRIM SOLUTION(TM) program.
Pursuant to the terms of the preferred stock purchase agreement, we
received a cash investment of $3 million from Coats North America Consolidated
in exchange for 759,494 shares of series C convertible redeemable preferred
stock. London-based Coats, plc is the world's largest manufacturer of industrial
thread and textile-related craft products. Coats has operations in 65 countries
and has a North American presence in the United States, Canada, Mexico, Central
America and the Caribbean.
We have entered into an exclusive supply agreement with Azteca
Production International, Inc., AZT International SA D RL and Commerce
Investment Group, LLC. Pursuant to this supply agreement, we provide all
trim-related products for certain programs manufactured by Azteca Production
International. The agreement provides for a minimum aggregate total of $10
million in annual purchases by Azteca Production International and its
affiliates during each year of the three-year term of the agreement, if and to
the extent, we are able to provide trim products on a basis that is competitive
in terms of price and quality. 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, and 51.4%
of our total sales for the three months ended March 31, 2003. 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 March 31, 2003, is approximately $13.4 million
due from Tarrant Apparel Group and Azteca Production International.
Included in inventories at March 31, 2003 are inventories of
approximately $11 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
14
invoice and selling terms. During the three months ended March 31, 2003, we sold
approximately $688,000 in inventory to Tarrant Apparel Group and Azteca
Production International pursuant to these buyback arrangements. 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 or pay receivables, it may have an adverse affect on our results of
operations.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected
statements of operations data shown as a percentage of net sales:
THREE MONTHS ENDED
MARCH 31,
-----------------
2003 2002
----- -----
Net sales .................................... 100.0% 100.0%
Cost of goods sold ........................... 70.1 71.7
----- -----
Gross profit ................................. 29.9 28.3
Selling expenses ............................. 5.7 4.2
General and administrative expenses .......... 18.8 20.4
----- -----
Operating income ............................. 5.4% 3.7%
===== =====
Net sales increased approximately $5,034,000, or 54.0%, to $14,359,000
for the three months ended March 31, 2003 from $9,325,000 for the three months
ended March 31, 2002. The increase in net sales was primarily due to an increase
in sales under our TEKFIT stretch waistband division. In late 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 sold under our exclusive supply agreement with Levi Strauss &
Co. The increase in net sales was also attributable to an increase in
trim-related sales from our Tlaxcala, Mexico operations under our MANAGED TRIM
SOLUTION(TM) trim package program and 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. The increase in net sales was further
attributable to an increase in sales from our Hong Kong subsidiary for programs
related to major U.S. retailers.
Gross profit increased approximately $1,666,000, or 63.2%, to
$4,300,000 for the three months ended March 31, 2003 from $2,634,000 for the
three months ended March 31, 2002. Gross margin as a percentage of net sales
increased to approximately 29.9% for the three months ended March 31, 2003 as
compared to 28.3% for the three months ended March 31, 2002. The increase in
gross profit as a percentage of net sales for the three months ended March 31,
2003 was due to a change in our product mix during the current quarter.
Selling expenses increased approximately $434,000, or 109.9%, to
$829,000 for the three months ended March 31, 2003 from $395,000 for the three
months ended March 31, 2002. As a percentage of net sales, these expenses
increased to 5.7% for the three months ended March 31, 2003 compared to 4.2% for
the three months ended March 31, 2002. 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 sales and marketing plan for the
complete trim packages we offer to our customers through our MANAGED TRIM
SOLUTION. In addition, we hired additional sales personnel for our TEKFIT
division, formed in the second half of 2002, and we also incurred royalty
expenses related to the exclusive license and intellectual property rights
agreement with Pro-Fit Holdings Limited during the period.
15
General and administrative expenses increased approximately $794,000,
or 41.7%, to $2,699,000 for the three months ended March 31, 2003 from
$1,905,000 for the three months ended March 31, 2002. The increase in these
expenses was due primarily to additional staffing and other expenses incurred
related to our exclusive waistband license agreement, the amortization of
intangible assets incurred as a result of the exclusive waistband technology
license rights we acquired in April 2002 and the relocation of our Hong Kong
office during the period. As a percentage of net sales, these expenses decreased
to 18.8% for the three months ended March 31, 2003 compared to 20.4% for the
three months ended March 31, 2002, because the rate of increase in general and
administrative expenses did not exceed that of net sales.
Interest expense increased approximately $59,000, or 22.5%, to $321,000
for the three months ended March 31, 2003 from $262,000 for the three months
ended March 31, 2002. Borrowings under our UPS Capital credit facility increased
during the period ended March 31, 2003 due to increased sales and expanded
operations in Mexico, the Dominican Republic and Asia.
The provision for income taxes for the three months ended March 31,
2003 amounted to approximately $90,000 compared to $19,000 for the three months
ended March 31, 2002. Income taxes increased for the three months ended March
31, 2003 primarily due to increased taxable income.
Net income was approximately $361,000 for the three months ended March
31, 2003 as compared to $54,000 for the three months ended March 31, 2002, due
primarily to an increase in net sales and gross margin, offset by increases in
selling and general and administrative expenses, as discussed above.
Preferred stock dividends amounted to $47,000 for the three months
ended March 31, 2003 as compared to $45,000 for the three months ended March 31,
2002. Preferred stock dividends represent earned dividends at 6% of the stated
value per annum of the Series C convertible redeemable preferred stock. Net
income available to common shareholders amounted to $314,000 for the three
months ended March 31, 2003 compared to $9,000 for the three months ended March
31, 2002 and basic and diluted earnings per share were $0.03 and $0.00 for the
three months ended March 31, 2003 and 2002.
LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS
Cash and cash equivalents decreased to $155,000 at March 31, 2003 from
$285,000 at December 31, 2002. The decrease resulted from approximately
$1,247,000 of cash provided by operating activities, offset by $682,000 and
$697,000 of cash used by investing and financing activities.
Net cash provided by operating activities was approximately $1,247,000
for the three months ended March 31, 2003 as compared to net cash used in
operating activities of approximately $653,000 for the three months ended March
31, 2002. The increase in cash provided by operating activities for the three
months ended March 31, 2003 resulted primarily from increases in accounts
payable and accrued expenses, which were partially offset by increases in
inventories and receivables. The increase in inventories during the period was
due primarily to increased customer orders for future sales. The increase in
accounts receivable during the period was due primarily to increased sales
during the first quarter of 2003 and slower customer collections. Cash used in
operating activities for the three months ended March 31, 2002 resulted
primarily from increases in inventories and receivables, which were offset by
increases in accounts payable and accrued expenses.
Net cash used in investing activities was approximately $682,000 and
$49,000 for the three months ended March 31, 2003 and 2002, respectively. Net
cash used in investing activities for the three months ended March 31, 2003
consisted primarily of capital expenditures for equipment related to the
exclusive supply agreement we entered into with Levi Strauss & Co. Net cash used
in investing activities
16
for the three months ended March 31, 2002 consisted primarily of capital
expenditures for computer equipment and upgrades.
Net cash used in financing activities was approximately $697,000 for
the three months ended March 31, 2003 as compared to net cash provided by
financing activities of approximately $720,000 for the three months ended March
31, 2002. Net cash used in financing activities for the three months ended March
31, 2003 primarily reflects the repayment of borrowings under our credit
facility and subordinated notes payable of approximately $1,579,000, offset by
funds raised from a private placement transaction of 900,000. Net cash provided
by financing activities for the three months ended March 31, 2002 primarily
reflects funds raised from private placement transactions of approximately
$1,030,000, offset by the repayment of subordinated notes payable of $200,000.
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 March 31, 2003 and 2002, outstanding borrowings under our UPS
Capital credit facility amounted to approximately $15,403,000 and $9,629,000,
respectively. Open letters of credit amounted to approximately $500,000 and
$50,000 at March 31, 2003 and 2002, respectively.
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 March 31, 2003, 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 March 31, 2003. We were in compliance
with all other financial covenants at March 31, 2003. The amount we can borrow
under the credit facility is determined based on a defined borrowing base
formula related to eligible accounts receivable and inventories. Our borrowing
base availability ranged from approximately $10,768,000 to $18,829,000 from
April 1, 2002 to March 31, 2003. 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 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.
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
17
stock or other securities; guarantying third party obligations; repaying
subordinated debt; and making changes in our corporate structure.
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 March 31, 2003,
the amount factored without recourse was approximately $399,000. There were no
receivables factored with UPS Capital at March 31, 2002.
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 March 31, 2003 and 2002, the amount factored without
recourse was approximately $257,000 and $134,000.
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 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.
As of March 31, 2003 and 2002, 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
18
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.
Our receivables increased to $20,258,000 at March 31, 2003 from
$11,437,000 at March 31, 2002. This increase was due primarily to increased
related-party trade receivables of approximately $5.2 million resulting from
increased related party sales during the period and an increase in the days
outstanding. The increase in receivables also resulted from an increase in sales
to non-related parties during the period.
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.
Included in inventories at March 31, 2003 are inventories of
approximately $11 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. During the three months ended March 31, 2003, we sold
approximately $688,000 in inventory to Tarrant Apparel Group and Azteca
Production International pursuant to these buyback arrangements. 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 or 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
19
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.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The following summarizes our contractual obligations at March 31, 2003
and the effects such obligations are expected to have on liquidity and cash flow
in future periods:
Payments Due by Period
-----------------------------------------------------------
After
Contractual Less than 1-3 4-5 5
Obligations Total 1 Year Years Years Years
- ------------------ ----------- ----------- ---------- --------- ------
Subordinated note
payable .......... $ 3,500,000 $ 1,200,000 $2,300,000 $ -- $ --
Capital lease
obligations ...... $ 1,768,664 $ 496,464 $1,272,200 $ -- $ --
Subordinated notes
payable to related
parties (1) ...... $ 849,971 $ 849,971 $ -- $ -- $ --
Operating leases . $ 1,532,472 $ 634,699 $ 890,835 $ 6,938 $ --
Line of credit ... $15,403,486 $15,403,486 $ -- $ -- $ --
Note payable ..... $ 25,200 $ 25,200 $ -- $ -- $ --
Royalty payments . $ 725,000 $ -- $ 725,000 $ -- $ --
- ----------
(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.
As of March 31, 2003, we indirectly guaranteed the indebtedness of two
of our suppliers through the issuance by a related party of letters of credit to
purchase goods and equipment totaling $3.3 million. Financing costs due to the
related party amounted to approximately $328,000. The letters of credit expire
on various dates thru July 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 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
20
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.
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 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.
21
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, and 22.4% of our total sales for the three months
ended March 31, 2003. 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.
BECAUSE WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS, WE MAY NOT BE ABLE
TO ALWAYS OBTAIN MATERIALS WHEN WE NEED THEM AND WE MAY LOSE SALES AND
CUSTOMERS. Lead times for materials we order can vary significantly and depend
on many factors, including the specific supplier, the contract terms and the
demand for particular materials at a given time. From time to time, we may
experience fluctuations in the prices, and disruptions in the supply, of
materials. Shortages or disruptions in the supply of materials, or our inability
to procure materials from alternate sources at acceptable prices in a timely
manner, could lead us to miss deadlines for orders and lose sales and customers.
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
22
increase the risk of extending credit to such customers. Customers adversely
affected by economic conditions have also attempted to improve their own
operating efficiencies by concentrating their purchasing power among a narrowing
group of vendors. There can be no assurance that we will remain a preferred
vendor to our existing customers. A decrease in business from or loss of a major
customer could have a material adverse effect on our results of operations.
Further, if the economic conditions in the United States worsen or if a wider or
global economic slowdown occurs, we may experience a material adverse impact on
our business, operating results, and financial condition.
IF WE ARE NOT ABLE TO MANAGE OUR RAPID EXPANSION AND GROWTH, WE COULD
INCUR UNFORESEEN COSTS OR DELAYS AND OUR REPUTATION AND RELIABILITY IN THE
MARKETPLACE AND OUR REVENUES WILL BE ADVERSELY AFFECTED. The growth of our
operations and activities has placed and will continue to place a significant
strain on our management, operational, financial and accounting resources. If we
cannot implement and improve our financial and management information and
reporting systems, we may not be able to implement our growth strategies
successfully and our revenues will be adversely affected. In addition, if we
cannot hire, train, motivate and manage new employees, including management and
operating personnel in sufficient numbers, and integrate them into our overall
operations and culture, our ability to manage future growth, increase production
levels and effectively market and distribute our products may be significantly
impaired.
WE OPERATE IN AN INDUSTRY THAT IS SUBJECT TO SIGNIFICANT FLUCTUATIONS
IN OPERATING RESULTS FROM QUARTER TO QUARTER, THAT MAY RESULT IN UNEXPECTED
REDUCTIONS IN REVENUE 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.
23
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.
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.
24
UNAUTHORIZED USE OF OUR PROPRIETARY TECHNOLOGY MAY INCREASE OUR
LITIGATION COSTS AND ADVERSELY AFFECT OUR SALES. We rely on trademark, trade
secret and copyright laws to protect our designs and other proprietary property
worldwide. We cannot be certain that these laws will be sufficient to protect
our property. In particular, the laws of some countries in which our products
are distributed or may be distributed in the future may not protect our products
and intellectual rights to the same extent as the laws of the United States. If
litigation is necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others, such litigation could result in substantial
costs and diversion of resources. This could have a material adverse effect on
our operating results and financial condition. Ultimately, we may be unable, for
financial or other reasons, to enforce our rights under intellectual property
laws, which could result in lost sales.
IF OUR PRODUCTS INFRINGE ANY OTHER PERSON'S PROPRIETARY RIGHTS, WE MAY
BE SUED AND HAVE TO PAY LARGE LEGAL EXPENSES AND JUDGMENTS AND REDESIGN OR
DISCONTINUE SELLING OUR PRODUCTS. From time to time in our industry, third
parties allege infringement of their proprietary rights. Any infringement
claims, whether or not meritorious, could result in costly litigation or require
us to enter into royalty or licensing agreements as a means of settlement. If we
are found to have infringed the proprietary rights of others, we could be
required to pay damages, cease sales of the infringing products and redesign the
products or discontinue their sale. Any of these outcomes, individually or
collectively, could have a material adverse effect on our operating results and
financial condition.
OUR STOCK PRICE MAY DECREASE, WHICH COULD ADVERSELY AFFECT OUR BUSINESS
AND CAUSE OUR STOCKHOLDERS TO SUFFER SIGNIFICANT LOSSES. The following factors
could cause the market price of our common stock to decrease, perhaps
substantially:
o The failure of our quarterly operating results to meet
expectations of investors or securities analysts;
o Adverse developments in the financial markets, the apparel
industry and the worldwide or regional economies;
o Interest rates;
o Changes in accounting principles;
o Sales of common stock by existing shareholders or holders of
options;
o Announcements of key developments by our competitors; and
o The reaction of markets and securities analysts to
announcements and developments involving our company.
IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK OR ASSUME
ADDITIONAL DEBT TO FINANCE FUTURE GROWTH, OUR STOCKHOLDERS' OWNERSHIP COULD BE
DILUTED OR OUR EARNINGS COULD BE ADVERSELY IMPACTED. Our business strategy may
include expansion through internal growth, by acquiring complementary businesses
or by establishing strategic relationships with targeted customers and
suppliers. In order to do so or to fund our other activities, we may issue
additional equity securities that could dilute our stockholders' stock
ownership. We may also assume additional debt and incur 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.
25
WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE
PRICE OF OUR COMMON STOCK. Our stockholders' rights plan, our ability to issue
additional shares of preferred stock and some provisions of our certificate of
incorporation and bylaws and of Delaware law could make it more difficult for a
third party to make an unsolicited takeover attempt of us. These anti-takeover
measures may depress the price of our common stock by making it more difficult
for third parties to acquire us by offering to purchase shares of our stock at a
premium to its market price.
INSIDERS OWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHICH COULD
LIMIT OUR STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS. As
of December 31, 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, each own approximately
12.8% of the outstanding shares of our common stock at December 31, 2002. As a
result, our officers and directors, the Dyne family and Messrs. Kay and Guez 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
All of our sales are denominated in United States dollars or the
currency of the country in which our products originate and, accordingly, we do
not enter into hedging transactions with regard to any foreign currencies.
Currency fluctuations can, however, increase the price of our products to
foreign customers which can adversely impact the level of our export sales from
time to time. The majority of our cash equivalents are held in United States
bank accounts and we do not believe we have significant market risk exposure
with regard to our investments.
We are also exposed to the impact of interest rate changes on our
outstanding borrowings. At March 31 2003, we had approximately $19.0 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.
26
ITEM 4. 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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We currently have pending claims, suits and complaints that arise in
the ordinary course of our business. We believe that we have meritorious
defenses to these claims and the claims are covered by insurance or, after
taking into account the insurance in place, would not have a material effect on
our consolidated financial condition if adversely determined against us.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Report on Form 8-K.
None.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 15, 2003 TAG-IT PACIFIC, INC.
` /s/ Ronda Sallmen
--------------------------------
By: Ronda Sallmen
Its: Chief Financial Officer
28
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 quarterly report on Form 10-Q of Tag-It
Pacific, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 quarterly 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: May 15, 2003
/s/ Colin Dyne
-----------------------
Colin Dyne
Chief Executive Officer
29
Certification of CFO 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 quarterly report on Form 10-Q of Tag-It
Pacific, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 quarterly 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: May 15, 2003
/s/ Ronda Sallmen
-----------------------
Ronda Sallmen
Chief Financial Officer
30