EXHIBIT 99.1
FOR IMMEDIATE RELEASE INVESTOR RELATIONS CONTACT:
Hayden Communications, Inc.
Matthew Hayden
Tel: 858-704-5065
matt@haydenir.com
www.haydenir.com
TAG-IT PACIFIC, INC. REPORTS SECOND QUARTER 2005 FINANCIAL RESULTS
Revenue Increases 24% for the Quarter
TrimNet Revenues Increase $3.8 Million, Talon Revenues up $1.2 Million,
vs. Second Quarter of 2004
Significant Reserves Recorded for the Quarter
Company Announces Restructuring Initiative; Reduction of $5 to $6 Million
in Annualized Expenses
LOS ANGELES, CA, AUGUST 15, 2005 --TAG-IT PACIFIC, INC. (AMEX: TAG), a full
service outsourced trim management department for manufacturers of fashion
apparel, today announced financial results for the Company's second quarter and
six-month period ended June 30, 2005. The Company also announced a strategic
restructuring initiative, including a reduction in its workforce and the
elimination of less profitable, inventory-intensive functions of the business,
which is expected to reduce its current operating costs by approximately 25
percent to 30 percent, or $5 to $6 million, on an annualized basis.
For the quarter, the Company reported revenue of $18.5 million, a 23.8 percent
increase compared to the $14.9 million reported for the second quarter of last
year and up 41.5 percent sequentially from the $13.1 million reported for the
Company's first fiscal quarter. Cost of goods sold were $16.5 million, up 49.6
percent compared to the $11.0 million reported for the same quarter last year.
Gross profit was $2.0 million, or 10.7 percent of sales, compared to gross
profit of $3.9 million, or 26.1 percent of sales, for the second quarter last
year. The decrease in gross profit as a percentage of net sales was due to an
increase in the Company's inventory obsolescence reserve of $1.55 million, and
additional charges associated with unabsorbed overhead costs incurred in the
Company's TALON manufacturing facility in North Carolina.
Total operating expenses were $11.7 million, inclusive of an increase of $6.4
million in the reserve for doubtful accounts recorded in the second quarter, the
hiring of additional employees for the expansion of the Company's Asian
operation and additional legal costs related to Tag-It's litigation with Pro-Fit
Holdings Limited. This compares to the $3.5 million reported for the second
quarter of last year. The operating expenses were also impacted by the planned
expansion of the Company's Talon division, which included costs associated with
the manufacturing facility in Kings Mountain, North Carolina and an increase in
sales people in the United States and Asia to support projected growth in this
segment. Inclusive of these expenses, the Company's loss from operations for the
quarter was $9.7 million compared to income from operations of $398,563 for the
second quarter one year ago. Net loss applicable to shareholders was $11.3
million, or $0.62 per basic and fully diluted share, compared to net income of
$170,319, or $0.01 per basic and fully diluted share for the second quarter last
year. Shares used in the calculation of diluted (loss) earnings per share were
18.2 million for the second quarter of 2005 and 18.8 million for the second
quarter of 2004.
The charges related to the inventory obsolescence reserve and the reserve for
doubtful accounts, as well as additional reserves of $1.5 million to primarily
reflect an increase in the Company's legal accruals, charges related to the
Company's Pro-Fit litigation and a reduction in certain other assets, totaled
$9.5 million. The reduction in the Company's net deferred tax asset increased
the provision for income taxes by $1.0 million. Exclusive of these charges, the
Company would have reported a net loss of approximately $806,000 or $0.04 per
basic and fully diluted share after incurring legal costs associated with the
Pro-fit litigation of approximately $700,000. A reconciliation of these non-GAAP
financial results to the GAAP results is provided in this release.
"The charges recorded as an increase in our reserve for doubtful accounts
reflect management's best estimates of our current ability to collect, the
nature of these accounts based on current market conditions, and our evaluation
of these accounts in light of our decision to shift our business to new
geographic regions as provided in our restructuring plan," commented Colin Dyne,
Tag-It's Chief Executive Officer. "Based
on the industry's ongoing shift to Asia-based manufacturing, and the economic
conditions in this industry throughout Mexico and Central America, we have
decided to significantly reduce the functions performed at our Mexico
facilities, convert our Guatemala facility from a manufacturing site to a
distributor, and close our North Carolina manufacturing facility. Upon
completion of this restructuring, we will operate with fewer employees and
significantly reduce associated operating and manufacturing expenses, and will
focus on business with little or no inventory requirements. As a result of the
restructuring, we expect to record a non-cash restructuring charge during the
third quarter of 2005 of between $4 and $5 million. We expect that the
restructuring, which should be completed by December 2005, will provide a more
streamlined, cost efficient organization that will match the cost of our growth
initiatives with our growth opportunities by providing higher margins and
lowering inventory and manufacturing carry costs, reducing our current fixed
operating costs by approximately 25 percent to 30 percent, or $5 to $6 million,
on an annualized basis. The net result of this initiative will be that Tag-It
will break even on approximately $47 to $50 million in revenues annually,
allowing us to profitably grow our Talon and TrimNet business segments."
For the six-month period, the Company reported revenue of $31.5 million, a 25.7
percent increase compared to the $25.1 million reported for the first six months
of fiscal 2004. Cost of goods sold were $26.3 million, up 44.5 percent compared
to the $18.2 million reported for the same period last year, inclusive of the
charges. Gross profit for the six months was $5.2 million, or 16.6 percent of
sales, compared to $6.9 million, or 27.4 percent of sales, for the first six
months of last year. Total operating expenses were $16.1 million, inclusive of
the charges described above and the legal expenses and costs related to the
Talon expansion, a 126.5 percent increase compared to the $7.1 million reported
for the first six months of last year. Loss from operations for the six months
was $10.9 million compared to a loss from operations of $239,000 for the same
period last year. Net loss applicable to shareholders was $12.9 million, or
$0.71 per basic and fully diluted share, compared to a net loss of $412,000, or
$0.02 per basic and fully diluted share for the first six months of last year.
Shares used in the calculation of earnings per share were 18.2 million for the
first six months of 2005 and 16.5 million for the same period last year.
Mr. Dyne continued, "We believe, based on a careful evaluation of our remaining
accounts receivable and inventories, as well as our restructuring initiative,
that Tag-It should emerge a stronger company with an infrastructure to support
profitable future growth and better gross margins. Excluding the additional
reserves, the second quarter was positive for the Company, with significant
sales growth and meaningful positive steps in our TrimNet and Talon divisions.
We are beginning a major retail launch with Beyonce Knowles' line of clothing
and merchandise where Tag-It will be the exclusive licensed provider of trim to
all manufacturers, representing a unique and exciting business opportunity and
has gained additional retailer and brand approvals on our Talon zipper brand. We
have made significant progress in building the foundation for Talon which will
support future growth and expansion and anticipate not only increasing revenues
through our current distribution network (previously discussed as franchisees),
but also signing additional distributors before year end. The transition from
Western Hemisphere to Asia has been challenging for the industry, and we are no
exception. Our Hong Kong and Asia operations continue to show strong double
digit growth and we are looking for this region to contribute significantly in
the next year. Going forward, we will have a diversified customer base, a
streamlined infrastructure with lower fixed expenses, and platforms for focused
growth which should enable us to deliver enhanced shareholder value."
The Company completed the quarter with $3.0 million in cash and cash equivalents
and $16.0 million in working capital, compared to $5.5 million and $29.3 million
as of December 31, 2004.
TELECONFERENCE INFORMATION
Management will host a conference call at 4:30 p.m. EST, today, Monday, August
22, 2005, to discuss 2005 second quarter results. To participate in the
conference call, please dial 877-297-4509 five to ten minutes prior to the
scheduled conference call time. International callers should dial 973-935-2404.
There is no pass code required for this call. If you are unable to listen to the
live teleconference at its scheduled time, there will be a replay available
through August 29, 2005, and can be accessed by dialing 877-519-4471 (U.S.),
973-341-3080 (Int'l), passcode 6349952. The call is being webcast by ViaVid
Broadcasting and can be accessed at Tag-It's website at http://www.tag-it.com.
The webcast may also be accessed at
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ViaVid's website at http://www.viavid.net. The webcast can be accessed through
September 22, 2005 on either site. To access the webcast, you will need to have
the Windows Media Player on your desktop. For the free download of the Media
Player please visit:
www.microsoft.com/windows/windowsmedia/en/download/default.asp.
ABOUT TAG-IT PACIFIC, INC.
Tag-It specializes in the distribution of a full range of trim items to
manufacturers of fashion apparel, specialty retailers and mass merchandiser.
Tag-It acts as a full service outsourced trim management department for
manufacturers of fashion apparel such as Kellwood and Azteca Production
International. Tag-it also serves as a specified supplier of trim items to
specific brands, brand licensees and retailers, including Levi Strauss & Co.,
Motherworks, Express, The Limited, Miller's Outpost and Lerner, among others. In
addition, Tag-It distributes zippers under its TALON brand name to manufacturers
for apparel brands and retailers such as Levi Strauss & Co., Wal-Mart and JC
Penny, among others. In 2002, Tag-It 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.
FORWARD LOOKING STATEMENTS:
With the exception of the historical information, this press release contains
forward-looking statements, as referenced in the Private Securities Litigation
Reform Act. Forward-looking statements are inherently unreliable and actual
results may differ materially. Examples of forward-looking statements in this
press release include projected revenue growth, operating income and gross
margins, revenue composition, the effects of the company's restructuring,
including estimated restructuring changes in the 2005 third quarter. Factors
which could cause actual results to differ materially from these forward-looking
statements include an unfavorable outcome in our litigation with Pro-Fit
Holdings relating to our stretch waistbands, the unanticipated loss of one or
more major customers, economic conditions, the availability and cost of
financing, the risk of a softening of customer acceptance of the Company's
products, risks of introduction by competitors of trim management systems with
similar or better functionality than our Managed Trim Solution, default by our
Talon franchisees in their obligations to us, pricing pressures and other
competitive factors, potential fluctuations in quarterly operating results, our
management of the restructuring plan and the risks of expansion into new
business areas. These and other risks are more fully described in the Company's
filings with the Securities and Exchange Commission including the Company's most
recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q,
which should be read in conjunction herewith for a further discussion of
important factors that could cause actual results to differ materially from
those in the forward-looking statements. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
RECONCILIATION OF NON-U.S. GAAP MEASURES TO U.S. GAAP
Tag-It Pacific, Inc. has prepared adjusted net (loss) data for the 2005 periods
to supplement the reporting of its results determined under applicable generally
accepted accounting principles (GAAP). As used in this press release, adjusted
net (loss) is a non-GAAP financial measure that reflects net (loss) excluding
charges relating to increases in allowance for doubtful accounts, reserves for
inventory obsolescence, the valuation allowance for our net deferred tax asset,
and reserves for other miscellaneous assets. The adjusted amounts are not meant
as a substitute for GAAP, but are included solely for informational purposes.
The following table illustrates the adjustments to net (loss) to calculate
adjusted net (loss), as described above, for the applicable periods and
reconciles the non-GAAP financial data to net loss determined in accordance with
GAAP:
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TAG-IT PACIFIC, INC.
CALCULATION OF ADJUSTED NET (LOSS) (NON-GAAP)
(Unaudited)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2005 2005
------------ ------------
Net (loss) ........................................ $(11,260,186) $(12,908,629)
Add back charges for:
Allowance for doubtful accounts .............. 6,381,000 6,381,000
Reserve for inventory obsolescence ........... 1,550,000 1,550,000
Valuation allowance for net deferred tax asset 1,000,000 1,000,000
Miscellaneous reserves(1) .................... 1,523,000 1,523,000
------------ ------------
ADJUSTED NET (LOSS) ............................... $ (806,186) $ (2,454,629)
============ ============
- ----------
(1) Reflects an increase in the company's legal accruals, charges relating
to the Pro-Fit litigation and a reduction in certain assets.
TABLES ATTACHED
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TAG-IT PACIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2005 2004
------------ ------------
Assets
Current Assets:
Cash and cash equivalents .................. $ 2,962,082 $ 5,460,662
Trade accounts receivable, net ............. 13,352,574 17,890,044
Trade accounts receivable, related party ... 3,375,000 4,500,000
Inventories, net ........................... 11,948,779 9,305,819
Prepaid expenses and other current assets .. 2,064,950 2,326,245
Deferred income taxes ...................... -- 1,000,000
------------ ------------
Total current assets ..................... 33,703,385 40,482,770
Property, plant & equipment, net of accumulated
depreciation and amortization .............. 9,988,844 9,380,026
Tradename ..................................... 4,110,751 4,110,750
Goodwill ...................................... 450,000 450,000
License rights ................................ 198,625 259,875
Due from related parties ...................... 578,406 556,550
Other assets .................................. 1,012,947 1,207,885
------------ ------------
Total assets .................................. $ 50,042,958 $ 56,447,856
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit ............................. $ 1,001,309 $ 614,506
Accounts payable and accrued expenses ...... 14,780,039 7,460,916
Demand notes payable to related parties .... 664,971 664,971
Current portion of capital lease obligations 844,231 859,799
Current portion of notes payable ........... 180,809 174,975
Note payable ............................... 200,000 1,400,000
------------ ------------
Total current liabilities ................ 17,671,359 11,175,167
Capital lease obligations, less current portion 1,049,982 1,220,969
Notes payable, less current portion ........... 1,355,969 1,447,855
Secured convertible promissory notes .......... 12,424,491 12,408,623
------------ ------------
Total liabilities ........................ 32,501,801 26,252,614
------------ ------------
Guarantees and Contingencies (Note 4)
Stockholders' equity:
Preferred stock, Series A $0.001 par value;
250,000 shares authorized,
no shares issued or outstanding .......... -- --
Common stock, $0.001 par value, 30,000,000
shares authorized; 18,241,045 shares
issued and outstanding at June 30, 2005;
18,171,301 at December 31, 2004 .......... 18,243 18,173
Additional paid-in capital ................. 51,327,873 51,073,402
Accumulated deficit ........................ (33,804,959) (20,896,333)
------------ ------------
Total stockholders' equity .................... 17,541,157 30,195,242
------------ ------------
Total liabilities and stockholders' equity .... $ 50,042,958 $ 56,447,856
============ ============
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TAG-IT PACIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales ........................................... $ 18,473,236 $ 14,923,121 $ 31,528,513 $ 25,083,419
Cost of goods sold .................................. 16,500,664 11,030,867 26,304,118 18,199,115
------------ ------------ ------------ ------------
Gross profit ..................................... 1,972,572 3,892,254 5,224,395 6,884,304
Selling expenses .................................... 655,295 702,482 1,397,629 1,474,598
General and administrative expenses ................. 11,008,446 2,791,209 14,735,706 5,648,349
------------ ------------ ------------ ------------
Total operating expenses ......................... 11,663,741 3,493,691 16,133,335 7,122,947
(Loss) income from operations ....................... (9,691,169) 398,563 (10,908,940) (238,643)
Interest expense, net ............................... 268,021 144,355 536,676 331,074
------------ ------------ ------------ ------------
(Loss) income before income taxes ................... (9,959,190) 254,208 (11,445,616) (569,717)
Provision (benefit) for income taxes ................ 1,300,996 83,889 1,463,013 (188,007)
------------ ------------ ------------ ------------
Net (loss) income ................................ $(11,260,186) $ 170,319 $(12,908,629) $ (381,710)
============ ============ ============ ============
Less: Preferred stock dividends .................... -- -- -- 30,505
------------ ------------ ------------ ------------
Net (loss) income to common shareholders ............ $(11,260,186) $ 170,319 $(12,908,629) $ (412,215)
============ ============ ============ ============
Basic (loss) earnings per share ..................... $ (0.62) $ 0.01 $ (0.71) $ (0.02)
============ ============ ============ ============
Diluted (loss) earnings per share ................... $ (0.62) $ 0.01 $ (0.71) $ (0.02)
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic ............................................ 18,241,045 18,061,778 18,210,406 16,491,684
============ ============ ============ ============
Diluted .......................................... 18,241,045 18,779,239 18,210,406 16,491,684
============ ============ ============ ============
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