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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended March 31, 1998.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 1-13669
TAG-IT PACIFIC, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 95-4654481
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3820 SOUTH HILL STREET
LOS ANGELES, CALIFORNIA 90037
(Address of Principal Executive Offices)
(213) 234-9606
(Issuer's Telephone Number)
Indicate by check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes No X
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State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, par value $0.001
per share, 4,070,011 shares issued and outstanding as of May 4, 1998.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TAG-IT PACIFIC, INC.
INDEX TO FORM 10-QSB
<TABLE>
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PART I FINANCIAL INFORMATION PAGE
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Item 1. Condensed Financial Statements:
Condensed Consolidated Balance Sheets (unaudited) as
of March 31, 1998 and December 31, 1997.................. 3
Condensed Consolidated Statements of Operations
(unaudited) for the Three Months Ended March 31,
1998 and 1997............................................ 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Three Months Ended March 31,
1998 and 1997............................................ 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds.................. 17
Item 5 Other Information.......................................... 18
Item 6 Exhibits and Reports on Form 8-K........................... 18
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TAG-IT PACIFIC, INC.
Condensed Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1998 1997
----------- ------------
<S> <C> <C>
Current Assets:
Cash................................................................................. $ 736,593 $ 44,109
Due from factor, net................................................................. 762,884 -
Accounts receivable, trade........................................................... 2,063,848 3,017,391
Due from related parties............................................................. 146,735 138,418
Inventories.......................................................................... 2,576,502 2,331,131
Prepaid expenses and other current assets............................................ 493,141 273,468
----------- -----------
Total current assets................................................................. 6,779,703 5,804,517
Property and Equipment (net of accumulated 1,015,183 974,309
Depreciation and amortization).......................................................
Other assets............................................................................ 103,002 392,238
----------- -----------
Total Assets............................................................................ $ 7,897,888 $ 7,171,064
=========== ===========
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities:
Bank overdrafts...................................................................... $ - $ 306,565
Due to factor, net................................................................... - 1,404,133
Accounts payable..................................................................... 2,205,848 3,977,568
Accrued expenses..................................................................... 723,993 628,086
Current portion of long-term debt.................................................... 143,050 463,708
Current portion notes payable to related parties..................................... 1,271,285 277,003
----------- -----------
Total current liabilities.......................................................... 4,344,176 7,057,063
Long-term debt, less current portion.................................................... 29,811 55,315
Notes payable to related parties, less current portion.................................. - 1,249,698
----------- -----------
Total Liabilities....................................................................... 4,373,987 8,362,076
----------- -----------
Commitments and Contingencies (Note 4)
Stockholders' Equity (Deficiency):
Preferred stock...................................................................... - -
Common stock......................................................................... 4,070 2,470
Additional paid-in capital........................................................... 5,741,106 957,530
Accumulated deficit.................................................................. (2,221,275) (2,151,012)
----------- -----------
Total Stockholders' Equity (Deficiency)............................................ 3,523,901 (1,191,012)
----------- -----------
Total Liabilities and Stockholders' Equity (Deficiency)................................. $ 7,897,888 $ 7,171,064
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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TAG-IT PACIFIC, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1998 1997
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Net sales............................................................. $ 3,467,713 $ 4,251,048
Cost of goods sold.................................................... 2,253,268 2,671,147
----------- -----------
Gross profit......................................................... 1,214,445 1,579,901
Selling expenses...................................................... 207,870 410,645
General and administrative expenses................................... 984,358 848,811
Write-off of printing division........................................ 0 116,000
----------- -----------
Total operating expenses............................................. 1,192,228 1,375,456
Income (loss) from operations......................................... 22,217 204,445
Interest expense...................................................... 105,604 194,346
----------- -----------
Income (loss) before income taxes..................................... (83,387) 10,099
Provision for Income Taxes............................................ (13,124) 57,000
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Net Income (Loss).................................................... $ (70,263) $ (46,901)
=========== ===========
Basic earnings per share.............................................. $ (0.02) $ (0.02)
=========== ===========
Diluted earnings per share............................................ $ (0.02) $ (0.02)
=========== ===========
</TABLE>
*
See accompanying notes to condensed consolidated financial statements.
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TAG-IT PACIFIC, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1998 1997
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Increase (decrease) in cash
Cash flows from operating activities:
Net income (loss)................................................. $ (70,263) $ (46,901)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation................................................... 94,893 63,121
Changes in operating assets and liabilities:
Accounts receivable........................................... 190,659 (211,500)
Inventories................................................... (245,370) 116,029
Other assets.................................................. 289,236 (164,087)
Prepaid expenses and other current assets..................... (219,672) 293,768
Accounts payable.............................................. (1,771,720) 215,816
Accrued expenses.............................................. 95,907 253,101
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Net cash provided (used in) operating activities.................. (1,636,331) 519,249
Cash Flows From Investing Activities:
Loans to related parties........................................... (8,317) (81,193)
Acquisition of property and equipment.............................. (135,768) (58,861)
----------- -----------
Net cash used in investing activities.............................. (144,085) (140,054)
Cash Flows from Financing Activities:
Bank overdraft..................................................... (306,565) (247,475)
Net advances from factor........................................... (1,404,133) (284,163)
Proceeds from IPO, net............................................. 4,785,176 -
Proceeds from long-term debt....................................... (346,162) (209,736)
Proceeds from notes payable to related parties..................... (255,416) 474,575
----------- -----------
Net cash provided (used in) financing activities..................... 2,472,900 (266,799)
----------- -----------
Net increase (decrease) in cash...................................... 692,484 112,396
Cash at beginning of period.......................................... 44,109 5,057
----------- -----------
Cash at end of period................................................ $ 736,593 $ 117,453
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest........................................................ $ 105,604 $ 194,346
Income taxes.................................................... $ 3,270 $ 7,418
Non-cash financing activity:
Note payable converted to equity................................ $ 0 $ 0
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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TAG-IT PACIFIC, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. PRESENTATION OF INTERIM INFORMATION
In the opinion of the management of Tag-It Pacific, Inc. and
Subsidiaries (collectively, the "Company"), the accompanying unaudited
condensed consolidated financial statements include all normal adjustments
considered necessary to present fairly the financial position as of March 31,
1998, and the results of operation and cash flows for the three months ended
March 31, 1998 and 1997. Interim results are not necessarily indicative of
results for a full year.
The condensed consolidated financial statements and notes are presented
as permitted by Form 10-QSB, and do not contain certain information included
in the Company's audited consolidated financial statements and notes for the
year ended August 31, 1997.
2. NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("Statement 129"), which is effective for financial
statements ending after December 15, 1997. Statement 129 reinstates various
securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by Statement 128.
The Company does not expect adoption of Statement 129 to have a material
effect, if any, on its consolidated financial position or results of
operation.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("Statement 130"), which is effective for financial statements with
fiscal years beginning after December 15, 1997. Statement 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
Company has not determined the effect on its consolidated financial position
or results of operations, if any, from the adoption of this statement.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("Statement 131"), which
is effective for financial statements with fiscal years beginning after
December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to stockholders. It also requires that
public business enterprises report certain information about their products
and services, the geographic areas in which they operate and their major
customers. The Company does not expect adoption of Statement 131 to have a
material effect, if any, on its consolidated results of operation.
3. EARNINGS PER SHARE
The Company has adopted Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("Statement 128"), which is effective for financial statements issued for the
periods after December 15, 1997, including interim periods. Statement 128
requires the restatement of all prior period earnings per share ("EPS") data
presented.
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
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<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ---------------- -------------
FOR THE THREE MONTHS ENDED MARCH 31, 1998:
- ------------------------------------------
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BASIC EARNINGS PER SHARE:
Income available to common stockholders...................... $(70,263) 3,661,122 $(0.02)
EFFECT OF DILUTIVE SECURITIES:
Options...................................................... 41,910
Warrants..................................................... 60,808
Shares Issued................................................ -
--------------- ---------------- -------------
Income available to common stockholders...................... $(70,263) 3,763,840 $(0.02)
</TABLE>
For the three months ended March 31, 1997 basic and diluted earning per
share are the same amount based on weighted average shares of 2,085,609.
Warrants to purchase 80,000 and 110,000 shares of common stock at $6.00 and
$4.80 were outstanding for the three months ended March 31, 1998 but were not
included in the computations of diluted earnings per share because the effect of
exercise would have an antidilutive effect on earnings per share.
On January 23, 1998 the Company completed its initial public offering
(the "IPO") and issued 1,600,000 shares of common stock at price of $4.00 per
share. In conjunction with the IPO the Company issued options to directors to
purchase 65,000 shares of common stock at $3.20, warrants to legal counsel to
purchase 35,555 shares of common stock at $3.60, warrants to underwriters to
purchase 110,000 shares of common stock at $4.80, and warrants in connection
with bridge financing to purchase 80,000 shares of common stock at $6.00.
4. CONTINGENCIES
The Company is subject to certain legal proceedings and claims arising
in connection with its business. In the opinion of management, there are
currently no claims that will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Tag-It Pacific, Inc. (the "Company") is a single-source provider of
complete brand identity programs to manufacturers of fashion apparel and
accessories as well as specialty retailers and mass merchandisers. Such
programs communicate a certain lifestyle, image or identity and enable the
Company's customers to promote and differentiate their product line or brand.
The Company also designs and produces high-quality paper, metal and injection
molded boxes, woven and leather labels, paper-hanging and bar-coded tags,
metal jean buttons, and custom shopping bags. In addition, the Company
designs and produces specialty private label and licensed stationery as well
as related accessories and backpacks.
The Company is the parent holding company of Tag-It, Inc., a California
corporation, Tag-It Printing & Packaging Ltd., a BVI corporation, Tagit de
Mexico, SA de CV, A.G.S. Stationery, Inc., a California corporation ("AGS
Stationery") and Pacific Trim & Belt, Inc., a California corporation
(collectively, the "Subsidiaries"), all of which were consolidated under a
parent limited liability company on October 17, 1997 (the "Consolidation")
and became wholly-owned subsidiaries of the Company immediately prior to the
effective date of the Company's initial public offering in January 1998 (the
"Offering").
The following discussion and analysis, which should be read in
connection with the Company's Financial Statements and accompanying
footnotes, contain forward-looking statements that involve risks and
uncertainties. Important factors that could cause actual results to differ
materially from the Company's expectations are set forth in "Factors That May
Affect Future Results" below as well as those discussed elsewhere in this
Form 10-QSB. All subsequent written or oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the "Factors That May Affect Future Results."
Those forward-looking statements relate to, among other things, the Company's
working capital requirements and need for additional financing.
RESULTS OF OPERATIONS
Net Sales. Net sales decreased approximately $783,000 to $3.5 million
(or 18.4%) for the three months ended March 31, 1998 from $4.3 million for
the three months ended March 31, 1997. The decrease in net sales was
primarily the result of $840,000 decrease in sales of tags and specialty
packaging, partially offset by an increase of $225,000 of apparel trim
products, plus $180,000 in returns of specialty licensed stationery products
shipped in 1997. The sales decrease in tags and specialty packaging was due,
in part, to management's efforts relating to the initial public offering
(IPO), including the effect of an approximate 5-week delay of the IPO from
December 1997 to January 1998, a period when substantial management focus on
development of customer programs was required. In January 1998, the Company
also started focusing on private label specialty stationery and
de-emphasizing its specialty licensed products. The Company expects that
de-emphasizing specialty licensed products will reduce occurrences of product
returns in the future. We expect the factors that impacted the Company's
revenue during the first quarter to continue to impact second quarter 1998,
with the result that the Company expects revenues for the second quarter of
1998 be in the range of revenues for the second quarter of 1997. While sales
momentum is building, the Company does not expect to experience the benefits
of this momentum until the third quarter of 1998.
Gross Profit. Gross profit was decreased approximately $400,000 to $1.2
million (or 23.1%) for the three months ended March 31, 1998 from $1.6
million for the three months ended March 31, 1997. Gross margin as a
percentage of net sales decreased to approximately 35.0% as compared to 37.2%
for the three months ended March 31, 1997. The decrease in gross margin was
primarily attributable to the return of $180,000 higher margin specialty
licensed stationery products, and secondarily to lower overhead absorption,
offset by labor and other cost savings associated with normalized production
at the Company's Mexico facility and lower overhead resulting from
termination of printing operations in November 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately $70,000 to $1.2 million for
the three months ended March 31, 1998 from $1.3 million for the three months
ended March 31, 1997. As a percentage of net sales, these expenses increased
to 34.4% in the three months ended March 31, 1998 compared to 29.6% for the
three months ended March 31, 1997 due to lower net sales for the quarter
ended March 31, 1998. A one-time incentive bonus of approximately $38,000 was
paid to two salesmen in the quarter ended March 31, 1998 which the Company
does not anticipate providing in the future.
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Printing Division Expense. In the three months ended March 31, 1997, the
Company incurred approximately $116,000 of incremental printing costs
associated with its captive printing division which was closed in February
1997.
Interest Expense. Interest expense decreased approximately $89,000 (or
45.7%) to $106,000 for the three months ending March 31, 1998 from $194,000
for the three months ended March 31, 1997. This decrease is attributable to
decreased factoring expenses associated with decreased borrowings under the
factoring arrangements due to proceeds received from the initial public
offering in January. During the three months ended March 31, 1998, the
Company substantially reduced its use of factors, a trend which the Company
intends to continue. The Company intends in future periods to rely upon its
$2 million line of credit which was established in April 1998.
Provision for Income Taxes. The provision for income taxes decreased
approximately $70,000 to ($13,000) for the three months ended March 31,
1998 as compared to a $57,000 tax provision for the three months ended March
31, 1997. Provision for income taxes has been made for each Subsidiary
through October 17, 1997, the date of the consummation of the Consolidation.
Notwithstanding the Consolidation, operating losses from AGS Stationery were
not available to offset taxable income of the Company's other Subsidiaries
and in future periods may only be used to offset future AGS Stationery
profits. Management has established a valuation allowance on the deferred tax
asset because it is more likely than not that the deferred tax asset will not
be realized.
Net Loss. Net loss was $70,000 for the three months ended March 31, 1998
as compared to a net loss of $47,000 for the three months ended March 31,
1997, due to the factors set forth above.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997 the Company satisfied its working capital
requirements primarily through cash flows generated from operations,
borrowings under factoring agreements with Heller Financial, Inc. ("Heller
Financial") and Safcor, Inc. ("Safcor") and related party borrowings.
Generally, the Company's borrowing requirements have been somewhat seasonal,
with peak working capital need occurring at the end of the year. The Company
has substantially reduced its use of factoring arrangements with Heller and
Safcor.
Pursuant to the terms of its factoring agreement, the Company's factors
purchase the Company's eligible accounts receivable and assume the credit
risk only with respect to those accounts for which the factors have given
prior approval. Where the Company's factors do not assume the credit risk for
a receivable, the collection risk associated with the receivable remains with
the Company and if the factor, in its discretion, determines to advance
against the receivable, the customer's payment obligation is recorded as a
Company receivable and the advance from the factor is recorded as a current
liability. As of March 31, 1998, the amount factored without recourse was
$530,000 and the amount due from the factor recorded as a current asset was
$700,000.
The Company's initial public offering resulted in net proceeds to the
Company of approximately $4,785,000. As of March 31, 1998, $3,852,000 had
been applied and the remaining $933,000 was available for working capital and
other purposes. Effective May 1, 1998, the Company entered into a line of
credit agreement with a bank for $2 million to be used for working capital
purposes. The line of credit expires on May 31, 1999. The line of credit
interest rate is equal to the bank's reference rate and includes certain
financial covenants relating to net worth, debt to net worth, current ratio,
and profitability. The Company used a portion of the net proceeds from its
public offering to satisfy the majority of its obligations existing under the
Heller Financial and Safcor factoring arrangements.
As of March 31, 1998, the Company had outstanding related party debt of
$1.27 million (the "Related Party Indebtedness") and non-related party debt
of $170,000. All Related Party Indebtedness is due and payable on the
fifteenth day following the date of delivery of written demand for payment
which may be delivered at any time after December 31, 1998. As of March 31,
1998, the Cruttenden Roth Bridge Fund, LLC and Beta Research Corporation
purchased for $323,125 and $226,875, respectively, of the Company's Senior
Subordinated Secured Notes (the "Bridge Notes"), were repaid.
Net cash (used in) provided by operating activities was approximately
($1,636,000) and $519,000 for the three months ended March 31, 1998 and 1997,
respectively. Cash provided in the three months ended March 31, 1997 resulted
primarily from increased prepaid expenses, accounts payable, and accrued
expenses partially offset by decreases in inventory. Cash used in operations
in the three months ended March 31, 1998 resulted primarily from decreased
accounts payable, increased inventory and expenses related to the Offering.
9
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Net cash used in investing activities was $144,000 and $140,000 for the
three months ended March 31, 1998 and 1997, respectively. Those activities
related primarily to capital expenditures related to the leasing of equipment
and expenditures for office and assembly equipment in connection with the
Mexico facility.
Net cash (used in) provided by financing activities was approximately
$2,473,000 and ($267,000) for the three months ending March 31, 1998 and
1997, respectively. Net cash provided by financing activities for the three
months ended March 31, 1998 reflects proceeds from the IPO. Net cash used for
the three months ending March 31, 1997 resulted from net advances from
related parties, offset by reductions in factor and non-related party
borrowings.
The Company believes that it will be required to obtain additional
financing in order to provide adequate liquidity to funds its business growth
plans and operations during the next 12 months. The Company is continually
evaluating various financing strategies to be utilized in expanding its
business and to fund future growth or acquisitions. The extent of the
Company's future capital requirements will depend, however, on many factors,
including but not limited to, results of operations, the size and timing of
future acquisitions, if any, and the availability of additional financing. No
assurance can be given that such additional financing will be available or
that, if available, it can be obtained on terms favorable to the Company and
its stockholders. The Company's inability to obtain adequate funds would
adversely affect the Company's operations and ability to implements its
strategy. In addition, any equity financing could result in dilution to the
Company's stockholders. See "Factors That May Affect Future Results - Future
Capital Needs; Uncertainty of Additional Funding".
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("Statement 129"), which is effective for financial
statements ending after December 15, 1997. Statement 129 reinstates various
securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by Statement 128.
The Company does not expect adoption of Statement 129 to have a material
effect, if any, on its consolidated financial position or results of
operation.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("Statement 130"), which is effective for financial statements with
fiscal years beginning after December 15, 1997. Statement 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
Company has not determined the effect on its consolidated financial position
or results of operations, if any, from the adoption of this statement.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("Statement 131"), which
is effective for financial statements with fiscal years beginning after
December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to stockholders. It also requires that
public business enterprises report certain information about their products
and services, the geographic areas in which they operate and their major
customers. The Company does not expect adoption of Statement 131 to have a
material effect, if any, on its consolidated results of operation.
10
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FACTORS THAT MAY AFFECT FUTURE RESULTS
The following is a discussion of certain factors that may affect the
Company's financial condition and results of operations.
Management of Business Changes; Potential Growth; Potential
Acquisitions. The Subsidiaries have been operated under family management
since inception and have recently significantly expanded their operations.
Such expansion has placed, and any future expansion, internally or through
acquisitions, will place, significant demands on the Company's management,
operational, administrative, financial and accounting resources. Successful
management of the Company's operations will require the Company to continue
to implement and improve its financial and management information and
reporting systems and procedures on a timely basis. The Company's ability to
manage its future growth, if any, will also require it to hire and train new
employees, including management and operating personnel, and motivate and
manage its new employees and integrate them into its overall operations and
culture. The Company recently has made additions to its management team and
is in the process of expanding its accounting staff and improving its
financial and management information and reporting systems to adapt to its
new role as a public company, a process which is expected to continue. The
Company's failure to manage implementation of its growth strategies and to
implement and improve its financial and management information and reporting
systems would have a material adverse effect on the Company's results of
operations and its ability to implement its growth strategy.
In the future, the Company may acquire complementary companies, products
or technologies, although no specific acquisitions currently are pending or
under negotiation. Acquisitions involve numerous risks, including adverse
short-term effects on the combined business' reported operating results,
impairments of goodwill and other intangible assets, the diversion of
management's attention, the dependence on retention, hiring and training of
key personnel, the amortization of intangible assets and risks associated
with unanticipated problems or legal liabilities.
Potential Fluctuations in Quarterly Operating Results; Seasonality. The
Company may in the future experience significant quarterly fluctuations in
sales, operating income and cash flows as a result of certain factors,
including the volume and timing of customer orders received during the
quarter, the timing and magnitude of customers' marketing campaigns, the loss
of a major customer, the availability and pricing of materials for the
Company's products, increased selling, general and administrative expenses
incurred in connection with acquisitions or the introduction of new products,
the costs and timing of any future acquisitions, the timing and magnitude of
capital expenditures, and changes in the Company's product mix or in the
relative contribution to sales of the various Subsidiaries. Due to the
foregoing factors, it is possible that in some future quarter the Company's
operating results may be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would
likely be materially and adversely affected.
In addition, most of the Company's customers are in the apparel
industry, which historically has been subject to substantial cyclical
variations. The Company's business has experienced and is expected to
continue to experience significant seasonality, in part due to customer
buying patterns. A recession in the general economy or uncertainties
regarding future economic prospects that affect consumer spending habits
could have a material adverse effect on the Company's financial condition and
results of operations.
Requirement for Integrated Information System. The Consolidation and
resulting centralized management of the Subsidiaries, implementation of the
Company's growth strategies and the general strains of the Company's new role
as a public company will place significant demands on the Company's financial
and management information and reporting systems and require that the Company
significantly expand and improve its financial and operating controls.
Additionally, the Company must effectively integrate the information systems
of Hong Kong and Mexico with its principal offices in Los Angeles. There are
no assurances that the Company will be successful in implementing and
improving its financial and management information
11
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reporting systems and staff, and the Company's failure to do so could have a
material adverse effect on the Company's results of operations and its
ability to implement its business strategy.
Dependence on Key Customers; Absence of Long-Term Contracts with
Customers. The Company's two largest customers, Guess? and Swank (a licensee
of Yves Saint Laurent, Kenneth Cole, Geoffrey Beene and Pierre Cardin),
accounted for approximately 14.6% and 7.4%, respectively, of the Company's
net sales (on a consolidated basis) for the three months ended March 31,
1998, and approximately 16.3% and 12.5%, respectively, of the Company's net
sales (on a consolidated basis) for the year ended December 31, 1997. There
can be no assurance that the Company will be able to maintain the current
level of sales derived from these or any other customer in the future.
The Company generally does not enter into long-term sales contracts with
its customers requiring them to make purchases from the Company. The
Company's sales are generally evidenced by a purchase order and similar
documentation limited to a specific sale. As a result, a customer from whom
the Company generates substantial revenue in one period may not be a
substantial source of revenue in a subsequent period. In addition, the
Company's customers generally have the right to terminate their relationships
with the Company without penalty and on little or no notice. In the absence
of such long-term contracts, there can be no assurance that these customers
will continue to engage the Company to design and produce products, and thus
there can be no assurance that the Company will be able to maintain a
consistent level of sales.
The termination of the Company's business relationship with any of its
significant customers or a material reduction in sales to a significant
customer could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Key Personnel. The Company's success has and will
continue to depend to a significant extent upon certain key management and
design and sales personnel, many of whom would be difficult to replace,
particularly Colin Dyne, its Chief Executive Officer and Harold Dyne, its
President, neither of whom is bound by an employment agreement or the subject
of key man insurance. The Company has no current plan to enter into
employment agreements with Colin Dyne or Harold Dyne but does intend to
obtain $1 million key man life insurance on Colin Dyne. The loss of the
services of one or more of these key executives and other key employees could
have a material adverse effect on the Company, including the Company's
ability to establish and maintain client relationships. The Company's future
success will depend in large part upon its ability to identify, attract,
assimilate, retain and motivate personnel with a variety of design, sales,
operating and managerial skills. There can be no assurance that the Company
will be able to retain and motivate its managerial, design, sales and
operating personnel or attract additional qualified members to management,
design or sales staff.
Future Capital Needs; Uncertainty of Additional Funding. The Company
anticipates that it will need to raise additional capital to fund its
business growth plans and operations during the next 12 months. To the extent
that existing resources and future earnings are insufficient to fund the
Company's activities, the Company will need to raise additional funds through
debt or equity financings. No assurance can be given that such additional
financing will be available or that, if available, it can be obtained on
terms favorable to the Company and its stockholders. In addition, any equity
financing could result in dilution to the Company's stockholders. The
Company's inability to obtain adequate funds would adversely affect the
Company's operations and ability to implement its strategy.
Control by Existing Stockholders. The Company's officers and directors
(and their affiliates), own approximately 46.6% of the Company's outstanding
shares; and the Dyne family (Harold Dyne, Mark Dyne, Colin Dyne, Larry Dyne
and Jonathan Burstein) own approximately 46.2% of the Company's outstanding
shares. As a result, these stockholders, or the Dyne family acting as a
group, control the Company and its operations, including the election of at
least a majority of the Company's Board of Directors and thus the policies of
the Company. The voting power of these stockholders could also serve to
discourage potential acquirors from seeking to acquire control of the Company
through the purchase of the Common Stock, which might have a depressive
effect on the price of the Common Stock.
Access to Financing and Replacement of Factors. Historically, the
Company has been capital constrained. The Company's working capital has been
provided primarily through related party loans and factoring arrangements,
with both related and unrelated parties. Factoring of its receivables has
substantially increased the Company's cost of funds, restricted the Company's
ability to sell to customers not approved by the Company's factors, and, in
management's opinion, limited the Company's growth potential. Under the
Company's factoring arrangements, the amount of cash available to the Company
is tied directly to the level of
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the Company's shipments and the credit quality of the Company's customers.
The amount of cash available to the Company has been, and may continue to be,
adversely affected by delays in shipment, economic trends in the packaging
and garment industry, interest rate fluctuations and the lending policies of
the Company's factors. Many of these influences are beyond the Company's
control. The Company expects to replace its factoring relationships with more
cost effective bank line of credit financing. Even if the Company is able to
obtain alternative financing on acceptable terms, any decrease or material
limitation on the amount of capital available to the Company under such
arrangements will limit the ability of the Company to expand its sales levels
and, therefore, would have a material adverse effect on the Company's
financial position, operating results and cash flows. In addition, any
significant increases in interest rates will increase the cost of financing
to the Company and would have a material adverse effect on the Company's
financial position, operating results and cash flows.
Dependence on Limited Assembly Facilities. Certain of the Company's
products are assembled or finished at the foreign assembly facilities of the
Company. Since the Company does not currently operate duplicate facilities
in different geographic areas, a disruption of the Company's manufacturing
operations resulting from various factors, including human error, foreign
trade disruptions, import restrictions, labor disruptions, embargos,
government intervention or a natural disaster such as fire, earthquake or
flood, could cause the Company to cease or limit its assembly or finishing
operations and consequently could have a material adverse effect on the
Company's business, financial condition and results of operations.
Limited Sources of Supply. The Company generally does not have long-
term agreements with its key sources of supply. Lead times for materials
ordered by the Company can vary significantly and depend on factors such as
the specific supplier, contract terms and demand for particular materials at
a given time. From time to time, the Company has experienced fluctuations in
materials prices and disruptions in supply. Shortages or disruptions in the
supply of materials, or the inability of the Company to procure such
materials from alternate sources at acceptable prices in a timely manner,
could lead to the loss of customers due to the failure to timely meet orders
which in turn could result in a material adverse effect on the Company's
business, financial condition and results of operations.
Fluctuating Paper Costs and Paper Shortages. The cost of paper is a
principal component of the price the Company charges for its paper products,
including its high quality paper boxes, custom shopping bags, hang tags,
packaging and stationery products. Historically, the Company has been able
to pass on to its customers any increase or decrease in the cost of paper,
and therefore maintain its gross margins on paper products during
fluctuations in the cost of paper. There can be no assurance, however, that
the Company will continue to be able to pass increases in paper costs to its
customers. To the extent that the Company's customers are unwilling to
absorb increases in paper costs, the Company's results of operations could be
materially adversely affected.
While capacity in the paper industry has remained relatively stable in
recent years, increases or decreases in demand for paper have led to
corresponding pricing changes and, in periods of high demand, to limitations
on the availability of certain grades of paper, including grades utilized by
the Company. Any disruption in the Company's paper sources could cause
shortages in needed materials which could have a material adverse effect on
the Company's results of operations. Although the Company actively manages
its paper supply and has established strong relationships with its paper
suppliers, the Company does not have any long-term agreements with its key
paper suppliers and there can be no assurance that the Company's sources of
paper supply will be adequate or, in the event that such sources are not
adequate, that alternative sources can be developed in a timely manner.
Competition. The industries in which the Company competes are highly
competitive and fragmented and include numerous local and regional companies
that provide some or all of the services offered by the Company. The Company
also competes with United States and international design companies,
distributors and manufacturers of tags, packaging products and trims. Some
of the Company's competitors, including Paxar, Inc., RVL, Inc, Copac
International Packaging, Inc., Universal Button, Inc., and Scovill Fasteners,
Inc., have
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greater name recognition, longer operating histories and, in many cases,
substantially greater financial and other resources than the Company.
In addition, new competitors, potentially with substantially greater
resources than the Company, may arise and may develop products which compete
with the Company's products. Moreover, there can be no assurance that new or
proprietary technology will not be introduced by an existing or new
competitor that may make some of the Company's products or services obsolete.
To the extent that the Company is unable to compete successfully against its
existing and future competitors, its business, operating results and
financial condition would be materially adversely affected. While the Company
believes that it competes effectively within the value-added design and
packaging industry, there are numerous factors that could reduce the
Company's ability to compete effectively.
Dependence Upon Guess? License. The Company, through AGS Stationery,
manufactures Guess? stationery products pursuant to an exclusive license with
Guess? entered into as of March 1, 1996. Net sales of Guess? stationery
products accounted for (0.1%) and 5.5% of the Company's consolidated net
sales for the three months ended March 31, 1998 and 1997, respectively. The
Guess? license terminates on December 31, 2001, but may be renewed by the
Company through December 31, 2006 so long as the Company is not in breach of
the license and generates the required amount of minimum net sales for the
two contract years prior to renewal. Guess? may terminate the license before
its term expires upon the occurrence of certain events, including (i) if the
Company commits a breach of the license and fails to cure that breach within
any applicable cure period, (ii) if net sales for any contract year do not
meet or exceed the minimum net sales required for such contract year, (iii)
if, following any consolidation, sale or merger of AGS Stationery, Mark Dyne
(the Company's Chairman) and Colin Dyne do not retain, directly or
indirectly, the power to vote or direct the voting of more than fifty percent
of the outstanding voting securities of AGS Stationery, or (iv) if Colin Dyne
leaves the employment of AGS Stationery or otherwise fails to devote the vast
majority of his time and efforts to the daily management of AGS Stationery's
business, or Mark Dyne ceases to exert, on a regular basis, actual and bona
fide management control and oversight over AGS Stationery's business. The
termination of the Guess? license could have a material adverse effect on the
Company's business, operating results and financial condition. Additionally,
Guess? has certain approval rights over the various aspects of the design,
manufacture, marketing and distribution of products under the license and
consequently may delay the distribution of products bearing its proprietary
marks. There can be no assurance that the Company will not be subject to
delays resulting from disagreements with, or an inability to obtain approvals
from Guess?.
Risk of Product Returns. The Company incurs expenses as a result of the
return of products by customers, particularly in connection with customers of
the Company's licensed stationery business. Such returns may result from
sale or return arrangements, defective goods, inadequate performance relative
to customer expectations, shipping errors and other causes which are outside
the Company's control. Generally, returned items have limited or no value
and the Company will be forced to bear the cost of such returns. Product
returns could result in loss of revenue or delay in market acceptance,
diversion of development resources, damage to the Company's reputation, and
increases service and warranty costs. Any significant increase in the rate
of product returns could have a material adverse effect on the Company's
financial position, operating results, and cash flows.
International Business. For the year ended December 31, 1997,
approximately 40% of the Company's products were purchased, assembled or
finished outside the United States, principally in Hong Kong and Mexico, and
the Company intends to continue to purchase, assemble or finish a similar or
greater percentage of its products outside of the United States in the
future. The Company's international business is subject to numerous risks,
including the need to comply with a wide variety of foreign and United States
export and import laws, changes in export or import controls, tariffs and
other regulatory requirements, the imposition of governmental controls,
political and economic instability, trade restrictions, the difficulty of
administering business overseas and general economic conditions. The
inability of a contractor or supplier to ship orders in a timely manner could
cause the Company to miss the delivery date requirements of its customers for
those items,
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which could result in the cancellation of orders, refusal to accept
deliveries or a reduction in sales price. Although the Company's
international operations are denominated principally in United States
dollars, purchases from foreign vendors and sales to foreign customers may
also be affected by changes in demand resulting from fluctuations in interest
and currency exchange rates, including the recent Asian currency
fluctuations. There can be no assurance that these factors will not have a
material adverse effect on the Company's business and results of operations.
In addition, the Company cannot predict the effects the above risks will have
on its business arrangements with its customers, contractors or suppliers. If
any such risks were to render the conduct of business in a particular country
undesirable or impractical, or if the Company's current contractors or
suppliers were to cease doing business with the Company for any reason, the
Company's financial position, operating results and cash flows could be
adversely affected.
Sovereignty over Hong Kong was transferred from the United Kingdom to
The People's Republic of China on July 1, 1997. If the business climate in
Hong Kong were to experience an adverse change as a result of the transfer,
the Company believes it could relocate its production and sourcing facilities
outside Hong Kong and replace the products currently produced in Hong Kong
with products produced elsewhere without a material adverse effect on the
Company's financial condition or results of operations. Nevertheless, there
can be no assurance that the Company would be able to do so.
Shared Responsibilities of Chairman. The Company's Chairman, Mark Dyne,
also serves as Chief Executive Officer and Chairman of Brilliant Digital
Entertainment, Inc. ("Brilliant"), as the joint managing director of Sega
Ozisoft Pty., Limited ("Sega Ozisoft"), a director of Monto Holdings Pty.
Ltd. ("Monto Holdings") and Nu-Metro Multimedia Pty. Ltd. ("Nu-Metro"), and a
co-owner and director of Packard Bell Australia Pty. Ltd. ("Packard Bell NEC
Australia"). Mr. Dyne is a shareholder of Sega Enterprises (Australia) Pty.
Ltd., which operates a $70 million interactive indoor theme park in Darling
Harbor in Sydney, Australia. Brilliant is a production and development
studio involved in the production of a new generation of digital
entertainment that is being distributed over the internet and on CD-ROM.
Sega Ozisoft is an Australia-distributor of software products for many
leading publishers. Monto Holdings is a private investment holding company,
Nu-Metro is a South African based distributor of multi-media software
products and Packard Bell NEC Australia is one of the leading manufacturers
and distributors of personal computers through the Australian mass merchant
channel. Mr. Dyne is not required to spend a certain amount of time at the
Company nor is he able to devote his full time and resources to the Company.
Holding Company Structure. The Company is a holding company with no
substantial operations and, consequently, is dependent on dividends and other
payments from the Subsidiaries for virtually all of its cash flow, including
cash flow for management salaries and overhead, to service debt, to make
equity investments and to finance its growth.
No Earthquake Insurance. The Company's principal executive offices are
located in Los Angeles, California -- an area which often experiences
earthquakes. The Company faces the risks that it may experience uninsured
property damage and/or sustain interruption of its business and operations.
The Company does not currently carry insurance against earthquake-related
risks.
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Limited Proprietary Protection. The Company relies on trademark, trade
secret and copyright laws to protect its designs and other proprietary
property. The Company does not have United States or foreign patents or
patent applications currently pending. If litigation is necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's 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 and could have a material adverse effect on
the Company's business, operating results and financial condition.
Ultimately, the Company may be unable, for financial or other reasons, to
enforce its rights under intellectual property laws, and the laws of certain
countries in which the Company's products are or may be distributed may not
protect the Company's products and intellectual rights to the same extent as
the laws of the United States.
The Company believes that its products do not infringe any validly
existing proprietary rights of third parties. Although the Company has
received no communication from third parties alleging the infringement of
proprietary rights of such parties, there can be no assurance that third
parties will not assert infringement claims in the future and the Company
could be subject to such claims in the future. Any such third party claims,
whether or not meritorious, could result in costly litigation or require the
Company to enter into royalty or licensing agreements. There can be no
assurance that any such licenses would be available on acceptable terms, if
at all, or that the Company would prevail in any such litigation. If the
Company were found to have infringed upon the proprietary rights of third
parties, it could be required to pay damages, cease sales of the infringing
products and redesign or discontinue such products, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Absence of Prior Public Market; Possible Volatility of Stock Price;
Arbitrary Determination of Offering Price. Prior to the Offering in January
1998, there was no public market for the Common Stock. Although the
Company's Common Stock currently is trading on the American Stock Exchange,
there can be no assurance that an active trading market for the Common Stock
will continue or be sustained. In the absence of such a market, investors
may be unable readily to liquidate their investment in the Common Stock. The
trading price of the Common Stock is subject to wide fluctuations in response
to quarter to quarter variations in operating results, news announcements
relating to the Company's business (including innovations or new product
introductions by the Company or its competitors), changes in financial
estimates by securities analysts, the operating and stock price performance
of other companies that investors may deem comparable to the Company as well
as other developments affecting the Company or its competitors. In addition,
the market for equity securities in general has been volatile and the trading
price of the Common Stock could be subject to wide fluctuations in response
to general market trends, changes in general conditions in the economy or the
financial markets and other factors which may be unrelated to the Company's
operating performance.
Shares Eligible for Future Sale. Future sales of Common Stock by
existing stockholders could adversely affect the prevailing market price of
the Common Stock and the Company's ability to raise capital in the equity
markets. The Company has 4,070,011 shares of Common Stock outstanding. Of
those shares, 1,680,000 shares are freely tradeable without restriction or
further registration under the Securities Act, unless purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act ("Rule 144"). The remaining 2,390,011 shares of Common Stock
outstanding are "restricted securities," as that term is defined by Rule 144,
and are also subject to the holding period, volume and manner of sale
limitations of Rule 144. Under certain lock-up agreements, the officers,
directors and other stockholders, holding an aggregate of 2,277,894 shares of
Common Stock, have agreed that they will not, directly or indirectly, sell,
assign or otherwise transfer any shares of Common Stock owned by them until
January 1999, without the prior written consent of Cruttenden Roth
Incorporated. Upon expiration of the lock-up agreements, such 2,277,894
shares of Common Stock will become eligible for sale, subject to compliance
with the volume and manner of sale limitations of Rule 144. The Company also
intends to file a registration statement under the Securities Act to register
the shares of Common Stock reserved for issuance pursuant to the Company's
1997 Stock Incentive Plan (the "1997 Plan"). This registration statement will
become effective immediately upon filing. As of March 31, 1998, options to
purchase 260,000 shares of Common Stock and warrants to purchase 287,631
shares
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of Common Stock had been granted, none of which had been exercised. The
availability for sale, as well as actual sales, of currently outstanding
shares of Common Stock, and shares of Common Stock issuable upon the exercise
of options and warrants, may depress the prevailing market price for the
Common Stock and could adversely affect the terms upon which the Company
would be able to obtain additional equity financing.
Environmental Regulations. Certain of the Subsidiaries use hazardous
materials in their manufacturing operations. As a result, the Company is
subject to federal, state and local regulations governing the storage, use
and disposal of such materials. The use and disposal of hazardous materials
involves the risk that the Company could be required to incur substantial
expenditures for preventive or remedial action, reduction of chemical
exposure, or waste treatment or disposal. The liability in the event of an
accident or the costs of such actions could exceed the Company's resources or
otherwise have a material adverse effect on the Company's business, financial
condition or results of operations.
Effect of Certain Charter Provisions; Anti-Takeover Effects of
Certificate of Incorporation, Bylaws and Delaware Law. The Company's Board
of Directors has the authority to issue up to 3,000,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The Preferred Stock could be issued with
voting, liquidation, dividend and other rights superior to those of the
Common Stock. Following the Offering, no shares of Preferred Stock of the
Company will be outstanding, and the Company has no present intention to
issue any shares of Preferred Stock. However, the rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. Further, certain
provisions of the Company's Certificate of Incorporation and Bylaws and of
Delaware law could delay or make more difficult a merger, tender offer or
proxy contest involving the Company.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 1998, in connection with the purchase of $550,000 of Bridge
Notes, Cruttenden Roth Bridge Fund, LLC and Beta Research Corporation
received Bridge Warrants to purchase 47,000 shares and 33,000 shares,
respectively, of Common Stock. The Bridge Warrants will be exercisable for a
period of four year, commencing January 23, 1999, at an initial per share
exercise price of $6.00. The Bridge Warrants provide for demand and piggyback
registration rights. The issuance and sale of these securities was made in
reliance on, Section 4(2) of the Securities Act as a transaction not
involving any public offering.
Also in January 1998, in connection with the Company's initial public
offering, the Company granted to Cruttenden Roth Incorporated and Josephtal &
Co. Inc. (the "Representatives") warrrants to purchase up to 110,000 shares
of Common Stock (the "Representatives' Warrants). The Representatives'
Warrants will be exerciseable for a period of four years, commencing January
23, 1999, at an initial per share exercise price of $4.80. Neither the
Representatives' Warrants nor the share of Common Stock issuable upon
exercise thereof may be transferred, assigned or hypothecated until one year
from the date of the Offering, except that they may be assigned, in whole or
in part, (i) to individuals who are either officers or partners of the
Representatives, or (ii) by will or the laws of descent and distribution or
(iii) to certain successor of the Representatives. Any profit
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realized by the Representatives on the sale of securities issuable upon
exercise of the Representatives' Warrants may be deemed to be additional
compensation. The issuance and sale of these securities was made in reliance
on Section 4(2) of the Securities Act as a transaction not involving any
public offering.
The Company's Registration Statement on Form SB-2 (File No. 333-38397)
relating to the offer and sale (the "Offering") of an aggregate of 1,680,000
shares (the "Shares") of Common Stock, par value $0.001 per share (the
"Common Stock"), of the Company was declared effective by the Securities and
Exchange Commission (the "Commission") on January 23, 1998. Of the 1,680,000
shares of Common Stock registered under the Registration Statement, 1,600,000
shares were sold by the Company and 80,000 shares were sold by a stockholder
of the Company (the "Selling Stockholder").
The Offering commenced on January 23, 1998 and the sale of 1,680,000
shares closed on January 28, 1998. All of the Shares registered were sold in
the Offering at an aggregate price of $4.00 per share, for aggregate proceeds
of $6,400,000 and $320,000 to the Company and the Selling Stockholder,
respectively. After deducting underwriting discounts and commissions of $0.32
per share, the Selling Stockholder received net proceeds of $294,400 and the
Company received net proceeds equal to $5,888,000 less expenses of $1,102,824
incurred in connection with the Offering (all of which were paid or are
payable by the Company). Of the $1,102,824, $134,400 represents non-
accountable expenses payable to the underwriters. Cruttenden Roth
Incorporated and Josepthal & Co. Inc. were the co-managing underwriters.
The Offering resulted in net proceeds ("Net Proceed") to the Company of
approximately $4,785,000. As of March 31, 1998, the Company had applied an
aggregate of approximately $3,852,000 of the Net Proceeds as follows: (i)
$2,014,000 to repay certain indebtedness (of which approximately $264,000 was
paid to officers, directors, stockholders and/or other affilitates of the
Company), (ii) $108,000 to develop a national sales and marketing network,
including hiring additional sales personnel, (iii) $66,000 to acquire
computer & production equipment, (iii) $245,000 to purchase inventories, (v)
$1,419,000 for working capital. As of March 31, 1998, the Company had
invested the remaining $933,000 of the Net Proceeds in short-term interest
bearing securities.
As required by Rule 463 of the Securities Act, the Company will disclose
the application of the remaining Net Proceeds in the Company's periodic
report for the quarter ending June 30, 1998 and, to the extent necessary, in
subsequent periodic reports filed by the Company pursuant to Section 13(a)
or 15(d) of the Exchange Act.
ITEM 5. OTHER INFORMATION
Effective May 1, 1998, the Company entered into a Line of Credit
Agreement with a bank for $2 million to be used for working capital purposes
and expires on May 31, 1999. The Line of Credit interest rate is equal to
the bank's reference rate and includes certain financial covenants relating
to net worth, debt to net worth, current ratio, and profitability. The
Company expects to replace its factoring relationships with the more cost
effective Line of Credit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule
Exhibit 10.53 Line of Credit Agreement
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the period covered by this
transition report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1998 TAG-IT PACIFIC, INC.
By: /s/ Francis Shinsato
---------------------------------
Francis Shinsato
Chief Financial Officer
(Principal Financial & Accounting Officer)
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EXHIBIT 10.53
LINE OF CREDIT AGREEMENT
This Line of Credit Agreement ("Agreement") is made and entered into this 30th
day of April, 1998 by and between SANWA BANK OF CALIFORNIA (the "Bank") and TAG-
IT, INC. and PACIFIC TRIM & BELT, INC. (each a "Borrower" and collectively the
"Borrowers").
SECTION I
DEFINITIONS
1.0 CERTAIN DEFINED TERMS. Unless elsewhere defined in this Agreement the
following terms shall have the following meanings (such meanings to be generally
applicable to the singular and plural forms of the terms defined):
A. "ADVANCE" shall mean an advance to the Borrowers under any line of
credit facility or similar facility provided for in Section II of this
Agreement which provides for draws by the Borrowers against an established
credit line.
B. "BUSINESS DAY" shall mean a day, other than a Saturday or Sunday, on
which commercial banks are open for business in California.
C. "COLLATERAL" shall mean any personal or real property in which the Bank
may be granted a lien or security interest to secure payment of the
Obligations.
D. "DEBT" shall mean, with respect to each Borrower or all the Borrowers
collectively, as the case may be, all liabilities of the Borrowers less
Subordinated Debt.
E. "EFFECTIVE TANGIBLE NET WORTH" shall mean, with respect to each
Borrower or all the Borrowers collectively, as the case may be, the
Borrower's stated net worth plus Subordinated Debt but less all intangible
assets of the Borrower (i.e., goodwill, trademarks, patents, copyrights,
organization expense, notes and accounts receivables received from
shareholders related parties and similar intangible items).
F. "ENVIRONMENTAL CLAIMS" shall mean all claims, however asserted, by any
governmental authority or other person alleging potential liability or
responsibility for violation of any Environmental Law or for release or
injury to the environment or threat to public health, personal injury
(including sickness, disease or death), property damage, natural resources
damage, or otherwise alleging liability or responsibility for damages
(punitive or otherwise), cleanup, removal, remedial or response costs,
restitution, civil or criminal penalties, injunctive relief, or other type
of relief, resulting from or based upon (i) the presence, placement,
discharge, emission or release (including intentional and unintentional,
negligent and non-negligent, sudden or non-sudden, or accidental non-
accidental placement, spills, leaks, discharges, emissions or releases) of
any Hazardous
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Materials at, in, or from property owned, operated or
controlled by any Borrower, or (ii) any other circumstances forming the
basis of any violation, or alleged violation, of any Environmental Law.
G. "ENVIRONMENTAL LAWS" shall mean all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and codes,
together with all administrative orders, directed duties, requests,
licenses, authorizations and permits of, and agreements with, any
governmental authorities, in each case relating to environmental, health,
safety and land use matters; including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), the Clean Air
Act, the Federal Water Pollution Control Act of 1972, the Solid Waste
Disposal Act, the Federal Resource Conservation and Recovery Act, the Toxic
Substances Control Act, the Emergency Planning and Community Right-to-Know
Act, the California Hazardous Waste Control Law, the California Solid Waste
Management, Resource, Recovery and Recycling Act, the California Water Code
and the California Health and Safety Code.
H. "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, including (unless the context otherwise
requires) any rules or regulations promulgated thereunder.
I. "EVENT OF DEFAULT" shall have the meaning set forth in the section
herein entitled "Events of Default".
J. "HAZARDOUS MATERIALS" shall mean all those substances which are
regulated by, or which may form the basis of liability under any
Environmental Law, including all substances identified under any
Environmental Law as a pollutant, contaminant, hazardous waste, hazardous
constituent, special waste, hazardous substance, hazardous material, or
toxic substance, or petroleum or petroleum derived substance or waste.
K. "INDEBTEDNESS" shall mean, with respect to each Borrower or all the
Borrowers collectively, as the case may be, (i) all indebtedness for
borrowed money or for the deferred purchase price of property or services
in respect of which any Borrower is liable, contingently or otherwise, as
obligor, guarantor or otherwise, or in respect of which any Borrower
otherwise assures a creditor against loss and (ii) obligations under leases
which shall have been or should be, in accordance with generally accepted
accounting principles, reported as capital leases in respect of which any
Borrower is liable, contingently or otherwise, or in respect of which any
Borrower otherwise assures a creditor against loss.
L. "OBLIGATIONS" shall mean all amounts owing by the Borrowers to the Bank
pursuant to this Agreement including, but not limited to, the unpaid
principal amount of Advances.
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M. "PERMITTED LIENS" shall mean: (i) liens and security interests securing
indebtedness owed by the Borrowers to the Bank; (ii) liens for taxes,
assessments or similar charges either not yet due or being contested in
good faith, provided proper reserves are maintained therefor in accordance
with generally accepted accounting procedure; (iii) liens of materialmen,
mechanics, warehousemen, or carriers or other like liens arising in the
ordinary course of business and securing obligations which are not yet
delinquent; (iv) purchase money liens or purchase money security interests
upon or in any property acquired or held by any Borrower in the ordinary
course of business to secure Indebtedness outstanding on the date hereof or
permitted to be incurred pursuant to this Agreement; (v) liens and security
interests which, as of the date hereof, have been disclosed to and approved
by the Bank in writing; and (vi) those liens and security interests which
in the aggregate constitute an immaterial and insignificant monetary amount
with respect to the net value of the Borrowers' assets.
N. "REFERENCE RATE" shall mean an index for a variable interest rate which
is quoted, published or announced from time to time by the Bank as its
reference rate to which loans may be made by the Bank at, below or above
such reference rate.
O. "SUBORDINATED DEBT" shall mean, with respect to each Borrower or all
the Borrowers collectively, as the case may be, such liabilities of the
Borrowers which have been subordinated to those owed to the Bank in a
manner acceptable to the Bank.
1.02 ACCOUNTING TERMS. All references to financial statements, assets,
liabilities, and similar accounting items not specifically defined herein shall
mean such financing statements or such items prepared or determined in
accordance with generally accepted accounting principles consistently applied
and except where otherwise specified all financial data submitted pursuant to
this Agreement shall be prepared in accordance with such principles.
1.03 OTHER TERMS. Other terms not otherwise defined shall have the meanings
attributed to such terms in the California Uniform Commercial Code.
SECTION II
CREDIT FACILITIES
2.01 COMMITMENT TO LEND. Subject to the terms and conditions of this Agreement
and so long as no Event of Default occurs, the Bank agrees to extend to the
Borrowers the credit accommodations that follow.
2.02 LINE OF CREDIT FACILITY. The Bank agrees to make loans and Advances to the
Borrowers, upon the Borrowers' request therefor made prior to the Expiration
Date (as defined below in this Section 2.02), up to a total principal amount
from time to time outstanding of not more than
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$2,000,000.00. Within the foregoing limits, the Borrowers may borrow, partially
or wholly prepay, and may borrow under this Line of Credit facility.
A. PURPOSE. Advances made under this Line of Credit shall be used for
working capital purposes.
B. INTEREST RATE. Interest shall accrue on the outstanding principal
balance of Advances under this Line of Credit at a variable rate equal to
the Bank's. Reference Rate, per annum, as it may change from time to time.
(Such rate is referred to in this Section 2.02 as the "Variable Rate".)
The Variable Rate shall be adjusted concurrently with any change in the
Reference Rate. Interest shall be calculated on the basis of 360 days per
year but charged on the actual number of days elapsed.
C. PAYMENT OF INTEREST. The Borrowers hereby promise and agree, jointly
and severally, to pay interest monthly on the last day of each month,
commencing on May 31, 1998.
D. REPAYMENT OF PRINCIPAL. Unless sooner due in accordance with the terms
of this Agreement, on May 31, 1999 the Borrowers hereby promise and agree,
jointly and severally, to pay to the Bank in full the aggregate unpaid
principal balance of all Advances then outstanding, together with all
accrued and unpaid interest thereon.
Any payment received by the Bank shall, at the Bank's option, first be
applied to pay any late fees or other fees then due and unpaid, and then to
interest then due and unpaid and the remainder thereof (if any) shall be
applied to reduce principal.
E. LATE FEE. If any regularly scheduled payment of principal and/or
interest (exclusive of the final payment upon maturity), or any potion
thereof, under this Line of Credit is not paid within ten (10) calendar
days after it is due, a late payment charge equal to five percent (5 %) of
such past due payment may be assessed and shall be immediately payable.
F. MAKING LINE ADVANCES/NOTICE OF BORROWING. Each Advance made hereunder
shall be conclusively deemed to have been made at the request of and for
the benefit of the Borrowers (i) when credited to any deposit account of
any Borrower maintained with the Bank or (ii) when paid in accordance with
the Borrowers' written instructions. Subject to any other requirements set
forth in this Agreement, Advances shall be made by the Bank upon telephonic
or written notice received from any Borrower in form acceptable to the
Bank, which notice shall be received not later than 2:00 p.m. (California
Time) on the date specified for such Advance, which date shall be a
Business Day. Requests for Advances received after such time may, at the
Bank's option, be deemed to be a request for an Advance to be made on the
next succeeding Business Day.
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G. EXPIRATION OF THE LINE OF CREDIT FACILITY. Unless earlier terminated
in accordance with the terms of this Agreement, the Bank's commitment to
make Advances to the Borrowers hereunder shall automatically expire on May
31, 1999 (the "Expiration Date"), and the Bank shall be under no further
obligation to advance any monies thereafter.
H. LINE ACCOUNT. The Bank shall maintain on its books a record of account
in which the Bank shall make entries for each Advance and such other debits
as shall be appropriate in connection with the Line of Credit facility (the
"Line Account"). The Bank shall provide the Borrowers with a monthly
statement of the Borrowers' Line Account, which statement shall be
considered to be correct and conclusively binding on the Borrowers unless
the Bank is notified by the Borrowers to the contrary within thirty (30)
days after the Borrowers' receipt of any such statement which is deemed to
be incorrect.
I. AMOUNTS PAYABLE ON DEMAND. If the Borrowers fail to pay on demand any
amount so payable under this Agreement, the Bank may, at its option and
without any obligation to do so and without waiving any default occasioned
by the Borrowers' failure to pay such amount, create an Advance in an
amount equal to the amount so payable, which Advance shall thereafter bear
interest as provided under this Line of Credit facility.
In addition, the Borrowers hereby authorize the Bank, if and to the extent
payment owed to the Bank under this Line of Credit facility is not made
when due, to charge, from time to time, against any or all of the deposit
accounts maintained by any Borrower with the Bank any amount so due.
2.03 LETTER OF CREDIT FACILITY. The Bank agrees to issue commercial letters of
credit (each a "Letter of Credit") on behalf of the Borrowers; provided however,
that at no time shall the total face amount of all Letters of Credit
outstanding, less any partial draws paid by the Bank, exceed the sum of
$500,000.00; and provided further, that this Letter of Credit facility is a sub-
facility of the above $2,000,000.00 Line of Credit facility and at no time shall
the total amount outstanding under such facility together with the total face
amount of all Letters of Credit outstanding, less any partial draws paid by the
Bank, (plus any amounts outstanding under any sub-facilities of the above main
facility) exceed the sum of $2,000,000.00.
A. ISSUANCE FEES, COSTS AND COMMISSIONS. Upon the Bank's request, the
Borrowers shall promptly pay to the Bank issuance fees and such other fees,
commissions, costs and any out-of-pocket expenses charged or incurred by
the Bank with respect to any Letter of Credit.
B. EXPIRATION OF FACILITY. The commitment by the Bank to issue Letters of
Credit shall, unless earlier terminated in accordance with the terms of
this Agreement, automatically terminate on May 31, 1999 and no Letter of
Credit shall expire on a date which is after such date.
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C. LIMITATIONS ON LETTERS OF CREDIT. Each Letter of Credit shall, by its
terms, expire no more than 90 days after its date of issue. Further, each
Letter of Credit shall be in form and substance and in favor of
beneficiaries satisfactory to the Bank, provided that the Bank may refuse
to issue a Letter of Credit due to the nature of the transaction or its
terms or in connection with any transaction where the Bank, due to the
beneficiary or the nationality or residence of the beneficiary, would be
prohibited by any applicable law, regulation or order from issuing such
Letter of Credit.
D. ISSUANCE OF LETTERS OF CREDIT. Prior to the issuance of each Letter of
Credit but in no event later than 10:00 a.m. (California time) on the day
such Letter of Credit is to be issued (which shall be a Business Day), the
Borrowers shall deliver to the International Department of the Bank a duly
executed form of the Bank's standard form of application for issuance of a
letter of credit with proper insertions.
2.04 NON-USAGE FEE. The Borrower shall pay to the Bank a fee (the "Non-Usage
Fee") in an amount equal to one-half of one percent (0.50%) per annum on the
difference (if any ) between the Line of Credit facility amount and the average
daily outstanding balances under this Line of Credit. The fee shall be
calculated on the basis of 360 days per year but charged on the actual number of
days elapsed. The fee shall begin to accrue on the date of this Agreement and
shall be due and payable quarterly in arrears on the last day of April, July,
October and January in each year, commencing on the first such date after the
date of this Agreement.
2.05 JOINT AND SEVERAL LIABILITY. Notwithstanding that monies may be advanced to
a particular Borrower hereunder, each Borrower is jointly and severally liable
for all Indebtedness incurred hereunder and for compliance with all terms and
conditions set forth herein. By each Borrower's respective execution of this
Agreement, each such Borrower, jointly and severally, promises and agrees to pay
and to guarantee the obligations incurred hereunder and does hereby severally
waive presentment, demand, protest and notice of protest, dishonor and
nonpayment. Each Borrower expressly consents to the extension of time for the
performance of any obligation hereunder and the release of any party liable for
the obligation. The release of any party liable hereunder shall not operate to
release any other party.
SECTION III
CONDITIONS PRECEDENT
3.01 CONDITIONS PRECEDENT TO THE INITIAL EXTENSION OF CREDIT AND/OR FIRST
ADVANCE. The obligation of the Bank to make the initial extension of credit
and/or the first Advance hereunder is subject to the conditions precedent that
the Bank shall have received before the date of such extension of credit and/or
the first Advance all of the following, in form and substance satisfactory to
the Bank:
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A. AUTHORITY TO BORROW. Evidence relating to the duly given approval and
authorization of the execution, delivery and performance of this Agreement,
all menu, instruments and agreements required under this Agreement and all
other actions to be taken by the Borrowers hereunder or thereunder.
B. GUARANTORS. Continuing guaranties in favor of the Bank, in form and
substance satisfactory to the Bank, executed by Tag-It Pacific, Inc.,
A.G.S., Inc., Tag-It Printing & Packaging Ltd. and Tag-It de Mexico S.A. de
C.V. (each a 'Guarantor'), together with evidence that the execution, ad
performance of the Guaranties by each Guarantor has been duly authorized.
C. LOAN FEES. Evidence that any required loan fees and expenses as set
forth above with respect to each credit facility have been paid or provided
for by the Borrowers.
D. AUDIT. The opportunity to conduct an audit of the Borrowers' books,
records and operations and the Bank shall be satisfied as to the condition
thereof.
E. MISCELLANEOUS DOCUMENTS. Such other documents, instruments, agreements
and opinions as are necessary, or as the Bank may reasonably require, to
consummate the transactions contemplated under this Agreement, all fully
executed.
3.02 CONDITIONS PRECEDENT TO ALL EXTENSIONS OF CREDIT AND/OR ADVANCES. The
obligation of the Bank to make any extensions of credit and/or each Advance to
or on account of the Borrowers (including the initial extension of credit and/or
the first Advance) shall be subject to the further conditions precedent that, as
of the date of each extension of credit or Advance and after the making of such
extension of credit or Advance:
A. REPRESENTATIONS AND WARRANTIES. The representations and warranties set
forth in the Section entitled "Representations and Warranties" herein and
in any other document, instrument, agreement or certificate delivered to
the Bank hereunder are true and correct.
B. EVENT OF DEFAULT. No event has occurred and is continuing which
constitutes, or, with the lapse of time or giving of notice or both, would
constitute an Event of Default.
C. SUBSEQUENT APPROVALS, ETC. The Bank shall have received such
supplemental approvals, opinions or documents as the Bank may reasonably
request.
3.03 REAFFIRMATION OF STATEMENTS. For the purposes hereof, any Borrower's
acceptance of the proceeds of any extension of credit and any Borrower's
execution or instrument evidencing or creating any Obligation hereunder shall
each be deemed to constitute the Borrowers' representation and warranty that the
statements set forth above in this Section are true and correct.
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SECTION IV
REPRESENTATIONS AND WARRANTIES
The Borrowers hereby make the following representations and warranties to the
Bank, which representations and warranties are continuing:
4.01 STATUS.
A. TAG-IT, INC. Tag-It, Inc. is a corporation duly organized and validly
existing under the laws of the State of California and is properly
licensed, qualified, to do business and in good standing in, and, where
necessary to maintain such Borrower's rights and privileges, has complied
with the fictitious name statute of every jurisdiction in which such
Borrower is doing business.
B. PACIFIC TRIM & BELT, INC. Pacific Trim & Belt, Inc. is a corporation
duly organized and validly existing under the laws of the State of
California and is properly licensed, qualified to do business and in good
standing in and, where necessary to maintain such Borrower's rights and
privileges, has complied with the fictitious name statute of every
jurisdiction in which such Borrower is doing business.
4.02 AUTHORITY. The execution, delivery and performance by the Borrowers of
this Agreement and any instrument, document or agreement required hereunder have
been duly authorized by each Borrower and do not and will not: (i) violate any
provision of any law, rule, regulation, writ, judgment or injunction presently
in effect affecting any Borrower; (ii) require any consent or approval of the
stockholders of any Borrower or violate any provision of the articles of
incorporation or by-laws of any Borrower; or (iii) result in a breach of or
constitute a default under any material agreement to which any Borrower is a
party or by which it or their properties may be bound or affected.
4.03 LEGAL EFFECT. This Agreement constitutes, and any document, instrument or
agreement required hereunder when delivered will constitute, legal, valid and
binding obligations of the Borrowers enforceable against the Borrowers in
accordance with their respective terms.
4.04 FICTITIOUS TRADE STYLES. The Borrowers currently use no fictitious trade
styles in connection with their business operations. The Borrowers shall notify
the Bank within thirty (30) days of the use of any fictitious trade style at any
future date, indicating the trade style and state(s) of its use.
4.05 FINANCIAL STATEMENTS. All financial statements, information and other data
which may have been and which may hereafter be submitted by any Borrower to the
Bank are true, accurate and correct and have been and will be prepared in
accordance with generally accepted accounting principles consistently applied
and accurately represent the respective Borrower's financial
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condition and, as applicable, the other information disclosed therein. Since the
most recent submission of any such financial statement, information or other
data to the Bank, the Borrowers represent and warrant that no material adverse
change in any Borrower's financial condition or operations has occurred which
has not been fully disclosed to the Bank in writing.
4.06 LITIGATION. Except as have been disclosed to the Bank in writing, there are
no actions, suits or proceedings pending or, to the knowledge of any Borrower,
threatened against or affecting any Borrower or any Borrower's properties before
any court or administrative agency which, if determined adversely to the
respective Borrower, would have a material adverse effect on the Borrowers'
financial condition or operations.
4.07 TITLE TO ASSETS. The Borrowers have good and marketable title to all of
their respective assets and the same are not subject to any security interest,
encumbrance, lien or claim of any third person except for Pertained Liens.
4.08 ERISA. If any Borrower has a pension, profit sharing or retirement plan
subject to ERISA, such plan has been and will continue to be funded in
accordance with its terms and otherwise complies with and continues to comply
with the requirements of ERISA.
4.09 TAXES. The Borrowers have filed all tax returns required to be filed and
paid all taxes shown thereon to be due, including interest and penalties, other
than taxes which are currently payable without penalty or interest or those
which are being duly contested in good faith.
4.10 ENVIRONMENTAL COMPLIANCE. The operations of the Borrowers comply, and
during the term of this Agreement will at all times comply, in all respects with
all Environmental Laws; the Borrowers have obtained licenses, permits,
authorizations and registrations required under any Environmental Law
("Environmental Permits") and necessary for their ordinary operations, all such
Environmental Permits are in good standing, and the Borrowers are in compliance
with all material terms and conditions of such Environmental Permits; neither
the Borrowers nor any of their present properties or operations are subject to
any outstanding written order from or agreement with any governmental authority
nor subject to any judicial or docketed administrative proceeding, respecting
any Environmental Law, Environmental Claim or Hazardous Material; there are no
Hazardous Materials or other conditions or circumstances existing, or arising
from operations prior to the date of this Agreement, with respect to any
property of any Borrower that would reasonably be expected to give rise to
Environmental Claims; provided however, that with respect to property leased
from an unrelated third party, the foregoing representation is made to the best
knowledge of the Borrowers. In addition, (i) the Borrowers do not have or
maintain any underground storage tanks which are not properly registered or
permitted under applicable Environmental Laws or which are leaking or disposing
of Hazardous Materials off-site, and (ii) the Borrowers have notified all of
their employees of the existence, if any, of any health hazard arising from
conditions of their employment and have met all notification requirements under
Tide III of CERCLA and all other Environmental Laws.
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SECTION V
COVENANTS
The Borrowers covenant and agree, jointly and severally, that, during the term
of this Agreement, and so long thereafter as the Borrowers are indebted to the
Bank under this Agreement, Borrowers shall, unless the Bank otherwise consents
in writing:
5.01 PRESERVATION OF EXISTENCE; COMPLIANCE WITH APPLICABLE LAWS. With respect to
each Borrower, maintain and preserve their existence and all rights and
privileges now enjoyed; not liquidate or dissolve, merge or consolidate with or
into, or acquire any other business organization; and conduct their business in
accordance with all applicable laws, rules and regulations.
5.02 MAINTENANCE OF INSURANCE. Maintain insurance in such amounts and covering
such risks as is usually carried by companies engaged in similar businesses and
owing similar properties in the same general areas in which the Borrowers
operate and maintain such other insurance and coverages as may be required by
the Bank. All such insurance shall be in form and amount and with companies
satisfactory to the Bank. With respect to insurance covering properties in which
the Bank maintains a security interest or lien, such insurance shall be in an
amount not less than the full replacement value thereof, at the Bank's request,
shall name the Bank as loss payee pursuant to a loss payable endorsement
satisfactory to the Bank and shall not be altered or canceled except upon ten
(10) days' prior written notice to the Bank. Upon the Bank's request, the
Borrowers shall furnish the Bank with the original policy or binder of all such
insurance.
5.03 MAINTENANCE OF PROPERTIES. The Borrowers shall maintain and preserve all
their properties in good working order and condition in accordance with the
general practice of other businesses of similar character and size, ordinary
wear and tear excepted.
5.04 PAYMENT OF OBLIGATIONS AND TAXES. Make timely payment of all assessments
and taxes and all of their liabilities and obligations including, but not
limited to, trade payables, unless the same are being contested in good faith by
appropriate proceedings with the appropriate court or regulatory agency. For
purposes hereof, any Borrower's issuance of a check, draft or similar instrument
without delivery to the intended payee shall not constitute payment.
5.05 INSPECTION RIGHTS. At any reasonable time and from time to time permit the
Bank or any representative thereof to examine and make copies of the records and
visit the properties of the Borrowers and to discuss the business and operations
of the Borrowers with any employee or representative thereof. If the Borrowers
now or at any time hereafter maintain any records (including, but not limited
to, computer generated records and computer programs for the generation of such
records) in the possession of a third party, the Borrowers hereby agree to
notify such third party to permit the Bank free access to such records at all
reasonable times and to
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provide the Bank with copies of any records it may request, all at the
Borrowers' expense, the amount of which shall be payable immediately upon
demand.
5.06 REPORTING REQUIREMENTS. Deliver or cause to be delivered to the Bank the
following information and reports in form and detail satisfactory to the Bank,
which information and reports shall be provided with respect to each Borrower
except that such information may be provided on a joint or consolidated basis
when appropriate and with the approval of the Bank:
A. ANNUAL STATEMENTS. Not later than 90 days after the end of each of the
Borrowers' fiscal years, a copy of the annual financial report of each
Borrower for such year, which report shall be a CPA audited report.
B. RECEIVABLES AND PAYABLES AGINGS. Not later than 30 days after the end
of each month, an aging of accounts receivable and an aging of accounts
payable.
C. INTERIM STATEMENTS. Not later than 30 days after the end of each
calendar month with the exception of the end of the month which represents
the company's fiscal year end which will be not later than 60 days after
the end of such fiscal month, a copy of the consolidating monthly financial
statements, which report shall be prepared by the company.
D. QUARTERLY FINANCIAL STATEMENTS. Not later than 45 days after the end
of each calendar quarter, a copy of the quarterly financial statements on
SEC form 10-Q.
E. OTHER INFORMATION. Promptly upon the Bank's request, such other
information pertaining to the Borrowers or any Guarantor as the Bank may
reasonably request.
5.07 GENERAL PLEDGE OF PROPERTY IN POSSESSION OF BANK. To secure payment of all
of the Borrowers' Obligations under this Agreement and performance of all of the
terms, covenants and agreements contained herein, the Borrowers hereby grant to
the Bank a security interest in and to all monies, and property of the Borrowers
now or hereafter in the possession of the Bank or the Bank's agents, or any one
of them, including, but not limited to, all deposit accounts, certificates of
deposit, stocks, bonds, indentures, warrants, options and other negotiable and
non-negotiable securities and instruments, together with all stock rights,
rights to subscribe, liquidating dividends, cash dividends, payments, dividends
paid in stock, new securities or other property to which the Borrowers may
become entitled to receive on account of such property.
5.08 PAYMENT OF DIVIDENDS. Tag-It and Pacific Trim & Belt, Inc. shall not
declare or pay any dividends on any class of its respective stock now or
hereafter outstanding except dividends payable solely in the corporation's
capital stock and except dividends for the payment of corporate income taxes and
management fees incurred by the holding company.
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5.09 REDEMPTION OR REPURCHASE OF STOCK. Tag-It, Inc. and Pacific Trim & Belt,
Inc. shall not redeem or repurchase any class of its respective corporate stock
nor or hereafter outstanding.
5.10 ADDITIONAL INDEBTEDNESS. Not, after the date hereof, create, incur or
assume, directly or indirectly, any liability or indebtedness other than (i)
indebtedness owed or to be owed to the Bank, (ii) indebtedness to trade
creditors incurred in the ordinary course of the Borrowers' business, or (iii)
except purchase money.
5.11 LOANS. Not make any loans or advances or extend credit to any third person,
including, but not limited to, directors, officers, shareholders, partners,
employees, affiliated entities or subsidiaries of any Borrower, except for
credit extended in the ordinary course of the Borrower's business as presently
conducted.
5.12 LIENS AND ENCUMBRANCES. Not create, assume or permit to exist any security
interest, encumbrance, mortgage, deed of trust or other lien (including, but not
limited to, a lien of attachment, judgment or execution) affecting any of the
Borrowers' properties, or execute or allow to be filed any financing statement
or continuation thereof affecting any such properties, except for Permitted
Liens or as otherwise provided in this Agreement and except for liens or
encumbrances except purchase money.
5.13 TRANSFER ASSETS. Not sell, contract for sale, transfer, convey, assign,
lease or sublet any assets of any Borrower except in the ordinary course of
business as presently conducted by the Borrowers, and then, only for full, fair
and reasonable consideration.
5.14 CHANGE IN THE NATURE OF BUSINESS. Not make any material change in any
Borrower's financial structure or in the nature of any Borrower's business as
existing or conducted as of the date of this Agreement.
5.15 FINANCIAL CONDITION. Maintain at all times (without respect to each
Borrower separately):
A. NET WORTH. A minimum Effective Tangible Net Worth of not less than
$3,000,000.00.
B. DEBT TO NET WORTH RATIO. A Debt to Effective Tangible Net Worth ratio
of not more than 2.00 to 1.00
C. CURRENT RATIO. A ratio of current assets to current liabilities of not
less than 1.40 to 1.00.
D. PROFITABILITY. The borrower shall not have consecutive quarterly
losses.
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5.16 ENVIRONMENTAL COMPLIANCE. The Borrowers shall:
A. Conduct the Borrowers' operations and keep and maintain all of their
properties in compliance with all Environmental Laws.
B. Give prompt written notice to the Bank, but in no event later than 10
days after becoming aware, of the following: (1) any enforcement, cleanup,
removal or other governmental or regulatory actions instituted, completed
or threatened against any Borrower or any of their affiliates or any of
their respective properties pursuant to any applicable Environmental Laws,
(ii) all other Environmental Claims, and (iii) any environmental or similar
condition on any real property adjoining or in the vicinity of the property
of any Borrower or their affiliates that could reasonably be anticipated to
cause such property or any part thereof to be subject to any restrictions
on the ownership, occupancy, transferability or use of such property under
any Environmental Laws.
C. Upon the written request of the Bank, the Borrowers shall submit to the
Bank, at their sole cost and expense, at reasonable intervals, a report
providing an update of the status of any environmental, health or safety
compliance, hazard or liability issue identified in any notice required
pursuant to this Section.
D. At all times indemnify and hold harmless the Bank from and against any
and all liability arising out of any Environmental Claims.
5.17 NOTICE. Give the Bank prompt written notice of any and all (i) Events of
Default; (ii) litigation, arbitration or administrative proceedings to which any
Borrower is a party and in which the claim or liability exceeds $25,000.00; and
(iii) other matters which have resulted in, or might result in a material
adverse change in the financial condition or business operations of any
Borrower.
SECTION VI
EVENTS OF DEFAULT
Any one or more of the following described events shall constitute an event of
default under this Agreement:
6.01 NON-PAYMENT. The Borrowers shall fail to pay any Obligations within 10 days
of when due.
6.02 PERFORMANCE UNDER THIS AND OTHER AGREEMENTS. The Borrowers shall fail in
any material respect to perform or observe of any term, covenant or agreement
contained in this Agreement or in any document, instrument or agreement
evidencing or relating to any indebtedness of any Borrower (whether owed to the
Bank or third persons), and any such failure
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(exclusive of the payment of money to the Bank under this Agreement or under any
other document, instrument or agreement, which failure shall constitute and be
an immediate Event of Default if not paid when due or when demanded to be due)
shall continue for more than 30 days after written notice from the Bank to the
Borrowers of the existence and character of such Event or Default.
6.03 REPRESENTATIONS AND WARRANTIES; FINANCIAL STATEMENTS. Any representation or
warranty made by any Borrower under or in connection with this Agreement or any
financial statement given by any Borrower or any Guarantor shall prove to have
been incorrect in any material respect when made or given or when deemed to have
been made or given.
6.04 INSOLVENCY. Any Borrower or any Guarantor shall: (i) become insolvent or be
unavailable to pay its debts as they mature; (ii) make an assignment for the
benefit of creditors or to an agent authorized to liquidate any substantial
amount of its properties or assets; (iii) file a voluntary petition in
bankruptcy or seeking reorganization or to effect a plan or other arrangement
with creditors; (iv) file an answer admitting the material allegations of an
involuntary petition relating to bankruptcy or reorganization or join in any
such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or
consent to the appointment of, or consent that an order be made, appointing any
receiver, custodian or trustee for itself or any of its properties, assets or
businesses; or (vii) any receiver, custodian or trustee shall have been
appointed for all or a substantial part of its properties, assets or businesses
and shall not be discharged within 30 days after the date of such appointment.
6.05 EXECUTION. Any writ of execution or attachment or any judgment lien shall
be issued against any property of any Borrower and shall not be discharged or
bonded against or released within 30 days after the issuance or attachment of
such writ or lien.
6.06 REVOCATION OR LIMITATION OF GUARANTY. Any Guaranty shall be revoked or
limited or its enforceability or validity shall be contested by any Guarantor,
by operation of law, legal proceeding or otherwise or any Guarantor who is a
natural person shall die.
6.07 SUSPENSION. Any Borrower shall voluntarily suspend the transaction of
business or allow to be suspended, terminated, revoked or expired any permit,
license or approval of any governmental body necessary to conduct the Borrower's
business as now conducted.
6.08 CHANGE IN OWNERSHIP. There shall occur a sale, transfer, disposition or
encumbrance (whether voluntary or involuntary), or an agreement shall be entered
into to do so, with respect to more than 10% of the issued and outstanding
capital stock of Tag-It, Inc. and Pacific Trim & Belt, Inc.
14
<PAGE>
SECTION VII
REMEDIES ON DEFAULT
Upon the occurrence of any Event of Default, the Bank may, at its sole election,
without demand and upon only such notice as may be required by law:
7.01 ACCELERATION. Declare any or all of the Borrowers' indebtedness owing to
the Bank, whether under this Agreement or under any other document, instrument
or agreement, immediately due and payable, whether or not otherwise due and
payable.
7.02 CEASE EXTENDING CREDIT. Cease making Advances or otherwise extending credit
to or for the account of the Borrowers under this Agreement or under any other
agreement now existing or hereafter entered into between the Borrowers and the
Bank.
7.03 TERMINATION. Terminate this Agreement as to any future obligation of the
Bank without affecting the Borrowers' obligations to the Bank or the Bank's
rights and remedies under this Agreement or under any other document, instrument
or agreement.
7.04 LETTERS OF CREDIT. In addition to any other remedies available to the Bank
under this Agreement or otherwise, the Bank may require the Borrowers to pay
immediately the Bank, for application against any drawings under any outstanding
Letters of Credit, the outstanding principal amount of any such Letters of
Credit which have not expired. Any portion of the amount so paid to the Bank
which is not applied to satisfy draws under any such Letters of Credit or any
other obligations of the Borrowers to the Bank shall be repaid to the Borrowers
without interest.
7.05 NON-EXCLUSIVITY OF REMEDIES. Exercise one or more of the Bank's rights set
forth herein or seek such other rights or pursue such other remedies as may be
provided by law, in equity or in any other agreement now existing or hereafter
entered into between the Borrowers and the Bank, or otherwise.
SECTION VII
MISCELLANEOUS PROVISIONS
8.01 DEFAULT INTEREST RATE. If an Event of Default has occurred and is
continuing, the Bank, at its option, may require the Borrowers to pay to the
Bank interest or any Indebtedness or amount payable under this Agreement at a
rate which is 3 % in excess of the rate or rates otherwise then in effect under
this Agreement.
8.02 REIMBURSEMENT OF CERTAIN COSTS IN CONNECTION WITH LETTERS OF CREDIT. The
Borrowers shall, upon the Bank's request, promptly pay to and reimburse the Bank
for all costs incurred and payments made by the Bank by reason of any future
assessment, reserve, deposit or similar
15
<PAGE>
requirement or any surcharge, tax or fee imposed upon the Bank or as a result of
the Bank's compliance with any directive or requirement of any regulatory
authority pertaining or relating to any Letters of Credit.
8.03 RELIANCE. Each warranty, representation, covenant and agreement contained
in this Agreement shall be conclusively presumed to have been relied upon by the
Bank regardless of any investigation made or information possessed by the Bank
and shall be cumulative and in addition to any other warranties,
representations, covenants or agreements which the Borrowers shall now or
hereafter give, or cause to be given, to the Bank.
8.04 DISPUTE RESOLUTION.
A. DISPUTES. It is understood and agreed that, upon the request of any
party to this Agreement, any dispute, claim or controversy of any kind,
whether in contract or in tort, statutory or common law. legal or
equitable, now existing or hereinafter arising between the parties in any
way arising out of, pertaining to or in connection with: (i) this
Agreement, or any related agreements, documents or instruments, (ii) all
past and present loans, credits, accounts, deposit accounts, (whether
demand deposits or time deposits), safe deposit boxes, safekeeping
agreements, guarantees, letters of credit, goods or services, or other
transactions, contracts or agreements of any kind, (iii) any incidents,
omissions, acts, practices, or occurrences causing injury to any party
whereby another party or its agents, employees or representatives may be
liable, in whole or in part, or (iv) any aspect of the past or present
relationships of the parties, shall be resolved through a two-step dispute
resolution process administered by the Judicial Arbitration & Mediation
Services, Inc. ("JAMS") as follows:
B. STEP I - MEDIATION. At the request of any party to the dispute, claim
or controversy, the matter shall be referred to the nearest office of JAMS
for mediation, which is an informal, non-binding conference or conferences
between the parties in which a retired judge or justice from the JAMS panel
will seek to guide the parties to a resolution of the case.
C. STEP II - ARBITRATION (CONTRACTS NOT SECURED BY REAL PROPERTY). Should
any dispute, claim or controversy remain unresolved at the conclusion of
the Step I Mediation Phase, then (subject to the restriction at the end of
this subparagraph) all such remaining matters shall be resolved by final
and binding arbitration before a different judicial panelist, unless the
parties shall agree to have the mediator panelist act as arbitrator. The
hearing shall be conducted at a location determined by the arbitrator in
Los Angeles, California (or such other city as may be agreed upon by the
parties) and shall be administered by and in accordance with the existing
Rules of Practice and Procedure of JAMS and judgement upon any award
rendered by the arbitrator may be entered by any State or Federal Court
having jurisdiction thereof. The arbitrator shall determine which is the
prevailing party and shall include in the award that party's attorneys'
fees and costs.
16
<PAGE>
This subparagraph shall apply only if, at the time of the submission of the
matter to JAMS, the dispute or issues involved do not arise out of any
transaction which is secured by real property collateral or if so secured,
all parties consent to such submission.
As soon as practicable after selection of the arbitrator, the arbitrator,
or the arbitrator's designated representative, shall determine a reasonable
estimate of anticipated fees and costs of the arbitrator, and render a
statement to each party setting forth that party's pro-rata share of said
fees and costs. Thereafter, each party shall, within 10 days of receipt of
said statement, deposit said sum with the arbitrator. Failure of any party
to make such a deposit shall result in a forfeiture by the non-depositing
party of the right to prosecute or defend the claim which is the subject of
the arbitration, but shall not otherwise serve to abate, stay or suspend
the arbitration proceedings.
D. STEP II - TRIAL BY COURT REFERENCE (CONTRACTS SECURED BY REAL
PROPERTY). If the dispute, claim or controversy is not one required or
agreed to be submitted to arbitration, as provided in the above
subparagraph, and has not been resolved by Step I mediation, then any
remaining dispute, claim or controversy shall be submitted for
determination by a trial on Order of Reference conducted by a retired judge
or justice from the panel of JAMS appointed pursuant to the provisions of
Section 638(1) of the California Code of Civil Procedure, or any amendment,
addition or successor section thereto, to hear the case and report a
statement of decision thereon. The parties intend this general reference
agreement to be specifically enforceable in accordance with said section.
If the parties are unable to agree upon a member of the JAMS panel to act
as referee, then one shall be appointed by the Presiding Judge of the
county wherein the hearing is to be held. The parties shall pay in advance,
to the referee, the estimated reasonable fees and costs of the reference,
as may be specified in advance by the referee. The parties shall initially
share equally, by paying their proportionate amount of the estimated fees
and costs of the reference. Failure of any party to make such a fee
deposit shall result in a forfeiture by the non-depositing party of the
right to prosecute or defend any cause of action which is the subject of
the reference, but shall not otherwise serve to abate, stay or suspend the
reference proceeding.
E. PROVISIONAL REMEDIES, SELF HELP AND FORECLOSURE. No provision of, or
the exercise of any rights under any portion of this Dispute Resolution
provision, shall limit the right of any party to exercise self help
remedies such as set off, foreclosure against any real or personal property
collateral, or the obtaining of provisional or ancillary remedies, such as
injunctive relief or the appointment of a receiver, from any court having
jurisdiction before, during or after the pendency of any arbitration. At
the Bank's option, foreclosure under a deed of trust or mortgage may be
accomplished either by exercise of power of sale under the deed of trust or
mortgage, or by judicial foreclosure. The institution and maintenance of
an action for provisional remedies, pursuit of provisional or ancillary
remedies or exercise of self help remedies shall not constitute a waiver of
the right of any party to submit the controversy or claim to arbitration.
17
<PAGE>
8.05 WAIVER OF JURY. The Borrowers and the Bank hereby expressly and voluntarily
waive any and all rights, whether arising under the California constitution, any
rules of the California Code of Civil Procedure, common law or otherwise, to
demand a trial by jury in any action, matter, claim or cause of action
whatsoever arising out of or in any way related to this Agreement or any other
agreement, document or transaction contemplated hereby.
8.06 RESTRUCTURING EXPENSES. In the event the Bank and the Borrowers negotiate
for, or enter into, any restructuring, modification or refinancing of the
Indebtedness under this Agreement for the purposes of remedying an Event of
Default, The Bank, may require the Borrowers to reimburse all of the Bank's
costs and expenses incurred in connection therewith, including, but not limited
to reasonable attorneys' fees and the costs of any audit or appraisals required
by the Bank in connection with such restructuring, modification or refinancing.
8.07 ATTORNEYS' FEES. In the event of any suit, mediation, arbitration or other
action in relation to this Agreement or any document, instrument or agreement
executed with respect to, evidencing or securing the indebtedness hereunder, the
prevailing party, in addition to all other sums to which it may be entitled,
shall be entitled to reasonable attorneys' fees.
8.08 NOTICES. All notices, payments, requests, information and demands which
either party hereto may desire, or may be required to give or make to the other
party shall be given or made to such party by hand delivery or through deposit
in the United States mail, postage prepaid, or by Western Union telegram,
addressed to the address set forth below such party's signature to this
Agreement or to such other address as may be specified from time to time in
writing by either party to the other.
8.09 WAIVER. Neither the failure nor delay by the Bank in exercising any right
hereunder or under any document, instrument or agreement mentioned herein shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right hereunder or under any document, instrument or agreement mentioned herein
preclude other or further exercise thereof or the exercise of any other right;
nor shall any waiver of any right or default hereunder or under any other
document, instrument or agreement mentioned herein constitute a waiver of any
other right or default or constitute a waiver of any other default of the same
or any other term or provision.
8.10 CONFLICTING PROVISIONS. To the extent that any of the terms or provisions
contained in this Agreement are inconsistent with those contained in any other
document, instrument or agreement executed pursuant hereto, the terms and
provisions contained herein shall control. Otherwise, such provisions shall be
considered cumulative.
8.11 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the Borrowers and the Bank and their respective successors and
assigns, except that the Borrowers shall not have the right to assign their
rights hereunder or any interest herein without the Bank's prior written
consent. The Bank may sell, assign or grant participations in all or any portion
of its rights and benefits hereunder. The Borrowers agree that, in connection
with any
18
<PAGE>
such sale, grant or assignment, the Bank may deliver to the prospective buyer,
participant or assignee financial statements and other relevant information
relating to any Borrower and any guarantor.
8.12 JURISDICTION. This Agreement, any notes issued hereunder, and any
documents, instruments or agreements mentioned or referred to herein shall be
governed by and construed according to the laws of the State of California, to
the jurisdiction of whose courts the parties hereby submit.
8.13 HEADINGS. The headings set forth herein are solely for the purpose of
identification and have no legal significance.
8.14 ENTIRE AGREEMENT. This Agreement and all documents, instruments and
agreements mentioned herein constitute the entire and complete understanding of
the parties with respect to the transactions contemplated hereunder. All
previous conversations, memoranda and writings between the parties or pertaining
to the transactions contemplated hereunder that are not incorporated or
referenced in this Agreement or in such documents, instruments and agreements
are superseded hereby.
IN WITNESS, this Agreement has been executed by the parties hereto as of the
date first hereinabove written.
BANK: BORROWERS:
SANWA BANK CALIFORNIA TAG-IT, INC.
By: /s/ Linda Tobman By: /s/ Colin Dyne
----------------------------- -----------------------------
Linda Tobman, Authorized Officer Colin Dyne, Chief Executive
Officer of Tag-It, Inc.
Address:
By: /s/ Francis Shisato
-------------------------------
Beverly Hills Office Francis Shisato, Chief Financial
9401 Wilshire Boulevard Officer of Tag-It, Inc.
Beverly Hills, CA 90212
Address:
3820 South Hill
Los Angeles, CA 90037
19
<PAGE>
PACIFIC TRIM & BELT, INC.
By: /s/ Colin Dyne
-----------------------------------
Colin Dyne, Chief Executive
Officer of Pacific Trim & Belt,
Inc.
By: /s/ Francis Shisato
--------------------------------------
Francis Shisato, Chief Financial
Officer of Pacific Trim & Belt,
Inc.
Address:
3820 South Hill
Los Angeles, CA 90037
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS OF TAG-IT PACIFIC, INC. AS OF AND FOR THE FOUR MONTHS ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 736,593
<SECURITIES> 0
<RECEIVABLES> 2,906,923
<ALLOWANCES> 80,191
<INVENTORY> 2,576,501
<CURRENT-ASSETS> 6,779,703
<PP&E> 1,877,505
<DEPRECIATION> 862,321
<TOTAL-ASSETS> 7,897,888
<CURRENT-LIABILITIES> 4,344,176
<BONDS> 0
0
0
<COMMON> 4,070
<OTHER-SE> 3,523,901
<TOTAL-LIABILITY-AND-EQUITY> 7,897,888
<SALES> 3,467,713
<TOTAL-REVENUES> 3,467,713
<CGS> 2,253,268
<TOTAL-COSTS> 3,445,496
<OTHER-EXPENSES> 105,604
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,604
<INCOME-PRETAX> (83,387)
<INCOME-TAX> (13,124)
<INCOME-CONTINUING> (70,263)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (70,263)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>