<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 6, 1998
REGISTRATION NO. 333-38397
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TAG-IT PACIFIC, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 2759 95-4654481
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
</TABLE>
3820 SOUTH HILL STREET
LOS ANGELES, CALIFORNIA 90037
(213) 234-9606
(Address and Telephone Number of Principal Executive Offices)
3820 SOUTH HILL STREET
LOS ANGELES, CALIFORNIA 90037
(213) 234-9606
(Address of Principal Place of Business or Intended Principal Place of Business)
MARK DYNE, CHAIRMAN
TAG-IT PACIFIC, INC.
3820 SOUTH HILL STREET
LOS ANGELES, CALIFORNIA 90037
(213) 234-9606
(Name, Address and Telephone number of Agent for Service)
------------------------------
COPIES TO:
MURRAY MARKILES, ESQ. LAWRENCE B. LOW, ESQ.
SCOTT D. GALER, ESQ. JAMES Y.M. WU, ESQ.
Troop Meisinger Steuber & Pasich, LLP Graham & James LLP
10940 Wilshire Boulevard One Maritime Plaza
Los Angeles, California 90024 San Francisco, California 94111
(310) 824-7000 (415) 954-0200
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value............. 1,805,500 $6.00 $10,833,000 $3,196
</TABLE>
(1) Includes 235,500 shares of Common Stock issuable upon exercise of an option
granted to the Underwriters to cover over-allotments of shares, if any.
(2) Estimated solely for the purpose of calculating the registration fee under
Rule 457(a).
(3) A registration fee of $4,230 was paid with respect to 1,642,000 shares with
the initial filing of the Registration Statement. An additional registration
fee of $290 was paid with respect to 163,500 shares prior to filing this
Amendment No. 3 to Registration Statement.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION DATED JANUARY 6, 1998
THIS PRELIMINARY PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO
COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY
BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
UNDER NO CIRCUMSTANCES SHALL THIS PRELIMINARY PROSPECTUS CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES, IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
SUCH JURISDICTION.
<PAGE>
1,570,000 SHARES
TAG-IT PACIFIC, INC.
COMMON STOCK
Of the 1,570,000 shares of common stock, par value $0.001 per share (the
"Common Stock"), offered hereby (the "Offering"), 1,400,000 shares are being
sold by Tag-It Pacific, Inc. (the "Company") and 170,000 shares are being sold
by a stockholder (the "Selling Stockholder"). See "Principal and Selling
Stockholders." The Company will not receive any proceeds from the sale of shares
by the Selling Stockholder. Prior to this Offering, there has been no public
market for the Common Stock. It is currently estimated that the initial public
offering price will be between $5.00 and $6.00 per share. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price. The Common Stock has been approved for listing on the American
Stock Exchange under the symbol "TAG," subject to notice of issuance.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING
TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share......................................................... $ $ $
Total(3).......................................................... $ $ $
<CAPTION>
PROCEEDS TO
SELLING
STOCKHOLDER
<S> <C>
Per Share......................................................... $
Total(3).......................................................... $
</TABLE>
(1) Excludes additional compensation to the Underwriters in the form of warrants
granted to the Representatives of the Underwriters to purchase 110,000
shares of Common Stock, exercisable over a period of four years commencing
one year from the date of this Prospectus (the "Representatives' Warrants").
In addition, the Company and the Selling Stockholder have agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act").
(2) Before deducting estimated expenses of $890,875 payable by the Company,
including the Representatives' non-accountable expense allowance, certain
consulting fees to be paid following the closing of the Offering and
expenses of the Selling Stockholder. See "Principal and Selling
Stockholders" and "Underwriting."
(3) The Company and the Selling Stockholder have granted the Underwriters a
45-day option to purchase up to 117,750 additional shares from the Company
and 117,750 additional shares from the Selling Stockholder solely to cover
over-allotments, if any (the "Over-Allotment Option"). If the Underwriters
exercise this option in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholder will be $ , $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to the right of the Underwriters to reject any order
in whole or in part and certain other conditions. It is expected that delivery
of the certificates for the Common Stock will be made against payment therefor
at the offices of Cruttenden Roth Incorporated, Irvine, California or through
the facilities of the Depository Trust Company, on or about January , 1998.
CRUTTENDEN ROTH JOSEPHTHAL & CO. INC.
INCORPORATED
THE DATE OF THIS PROSPECTUS IS 1998
<PAGE>
[PICTURES]
INSIDE FRONT COVER OF PROSPECTUS:
Collage of customer logos.
<PAGE>
[PICTURES]
INSIDE FOLD OUT SPREAD (2 PAGES) OF PROSPECTUS:
Pictures of the following product groups:
HANG TAGS - POCKET FLASHERS - SIZE STICKERS - BAR CODE TAGS
WOVEN - EMBROIDERED LABELS - JEAN PATCHES
GIFT SET - HOLIDAY PACKAGING
LEATHER GOODS - ACCESSORY PACKAGING
LICENSED & PRIVATE LABEL STATIONERY - BACKPACKS
JEWELRY PACKAGING
DESIGNER SHOPPING BAGS
WATCH - EYEWEAR PACKAGING
METAL LOGO BUTTONS - ZIPPERS
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE STATEMENTS WHICH
ARE NOT HISTORICAL FACTS CONTAINED IN THIS PROSPECTUS ARE FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED UNDER
"RISK FACTORS." EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS
PROSPECTUS (I) GIVES EFFECT TO THE CONSUMMATION ON OCTOBER 17, 1997 OF THE
CONSOLIDATION, WHICH AS DESCRIBED UNDER "THE COMPANY," COMBINED THE COMPANY'S
SUBSIDIARIES UNDER A SINGLE HOLDING COMPANY, (II) REFLECTS THE CONVERSION INTO
384,402 SHARES OF COMMON STOCK OF A CONVERTIBLE PROMISSORY NOTE IN THE PRINCIPAL
AMOUNT OF $875,000 PAYABLE TO CERTAIN STOCKHOLDERS AT A PRICE OF $2.28 PER
SHARE, (III) HAS BEEN ADJUSTED TO REFLECT THE CHANGE OF THE STATUS OF PACIFIC
TRIM & BELT, INC., A CALIFORNIA CORPORATION, FROM AN S CORPORATION TO A C
CORPORATION FOR INCOME TAX PURPOSES, AND (IV) ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND REPRESENTATIVES' WARRANTS ARE NOT EXERCISED.
THE COMPANY
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's programs
allow its customers, such as Guess?, Calvin Klein, Quiksilver, Carole Little,
The Limited, Sony Signatures and Warner Bros., as well as licensees of Yves
Saint Laurent, Kenneth Cole, Geoffrey Beene and Pierre Cardin, to outsource most
aspects of a brand identity program, including value-added design, materials
procurement and manufacturing and distribution coordination of creative
packaging, tag, and trim products.
The Company 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. The Company also designs and produces
specialty private label and licensed stationery as well as related accessories
and backpacks. The Company designs approximately 70% of the products it sells.
The Company's design capabilities, combined with the Company's experience in
materials procurement, and manufacturing and distribution coordination enable
the Company to provide customers with complete design solutions for entire
product lines that meet not only aesthetic demands, but also functional and cost
parameters.
The majority of the Company's revenues are related to the apparel and
accessory markets, both of which are large and growing. The increasing number of
fashion-driven apparel and accessory producers and products has made it more
difficult for manufacturers to differentiate their products from those of
competitors. As a result, manufacturers of fashion-driven consumer products have
increased their emphasis on specialty packaging, value-added tags and other
promotional material in order to compete for consumer attention in the retail
environment. This emphasis on product differentiation has created strong demand
for creative image enhancements such as bright, colorful and otherwise highly
distinguishable and attractive logos, point-of-sale packaging and signage, tags
and labels. In addition, short product life cycles for fashion-driven items,
advances in printing and packaging technology, and the diverse geographic
locations of specialty packaging or printing vendors and apparel or accessory
manufacturers, combine to make the design and execution of complete brand
identity programs increasingly more complex. The difficulties associated with
executing a program which coordinates these many facets are creating demand for
the programs offered by the Company.
There are a large number of vendors with varying capabilities serving the
printing, packaging and trim markets. Apparel and accessory manufacturers often
find themselves consuming excessive time, effort and expenses attempting to
manage in-house brand identity programs and ship floor-ready packaged products
to retailers throughout the global marketplace. To take advantage of the large
expanding demand for, and address the increasingly complicated requirements of,
effective brand identity programs, the Company has
3
<PAGE>
positioned itself as a fully-integrated single-source provider of complete brand
identity programs with creative design personnel, sales representatives,
assembly workers, program managers and global production and distribution
coordinators in Los Angeles, New York, Mexico and Hong Kong. Because specialty
packaging or printing vendors are usually specialized in limited product areas,
management believes that the Company, with its innovative design and global
manufacturing and distribution coordination capabilities, is well positioned to
become a recognized single-source provider and a market leader.
The Company's growth strategy includes the following elements: (i) expand
its customer base by promoting its single-source solution and in-house design,
materials procurement, and manufacturing and distribution coordination
capabilities, (ii) increase customer penetration by targeting additional product
lines within existing accounts, (iii) expand its marketing programs and network
of sales offices, (iv) broaden its target customer base for products to include
cosmetics and specialty foods manufacturers, (v) pursue private label
opportunities, and (vi) remain opportunistic with respect to strategic
acquisitions.
The Company was formed to serve as the parent holding company for each of
Tag-It, Inc., a California corporation ("Tag-It"), Tag-It Printing & Packaging
Ltd., a British Virgin Islands corporation ("Tag-It Hong Kong"), Tag It de
Mexico, S.A. de C.V., a qualified Maquiladora ("Tag-It Mexico"), A.G.S.
Stationery, Inc., a California corporation ("AGS Stationery") and Pacific Trim &
Belt, Inc., a California corporation ("Pacific Trim") (collectively the
"Subsidiaries"). Reference to the Company hereafter includes all of the
Subsidiaries.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company.................................... 1,400,000 shares
The Selling Stockholder........................ 170,000 shares
Common Stock to be outstanding after the 3,870,011 shares(1)
Offering.......................................
Use of Proceeds.................................. To repay certain indebtedness; develop a
national sales network; acquire certain
fixed assets; establish domestic woven
label capability; increase inventories to
maximize efficiencies; and for working
capital and general corporate purposes.
See "Use of Proceeds."
Proposed American Stock Exchange Symbol.......... "TAG"
</TABLE>
- ------------------------
(1) Excludes (i) an estimated 357,631 shares of Common Stock issuable upon
exercise of outstanding options and warrants, (ii) up to a maximum of 80,000
shares of Common Stock issuable upon exercise of warrants (the "Bridge
Warrants") that may be granted to Cruttenden Roth Bridge Fund, LLC in
connection with that certain bridge financing described in "Underwriting",
and (iii) 302,500 shares of Common Stock reserved for issuance pursuant to
options that may be granted in the future under the Company's 1997 Stock
Incentive Plan. See "Management--Stock Incentive Plan," "Description of
Capital Stock--Warrants," "Underwriting" and "Shares Eligible for Future
Sale."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED
AUGUST 31, NOVEMBER 30,
--------------------- --------------------
1996 1997 1996 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................................................... $ 14,738 $ 19,539 $ 4,890 $ 4,751
Cost of goods sold.................................................. 10,090 12,546 3,341 3,035
---------- --------- --------- ---------
Gross profit...................................................... 4,648 6,993 1,549 1,716
Selling, general and administrative expenses........................ 4,973 5,897 1,444 1,350
Write-off of printing division...................................... -- 232 116 --
---------- --------- --------- ---------
Total operating expenses.......................................... 4,973 6,129 1,560 1,350
---------- --------- --------- ---------
Income (loss) from operations....................................... (325) 864 (11) 366
Interest expense.................................................... 465 810 197 261
---------- --------- --------- ---------
Income (loss) before provision for income taxes..................... (790) 54 (208) 105
Provision for income taxes(1)....................................... -- 113 -- 57
---------- --------- --------- ---------
Net income (loss)................................................. $ (790) $ (59) $ (208) $ 48
---------- --------- --------- ---------
---------- --------- --------- ---------
Net income (loss) per share......................................... $ (.37) $ (.03) $ (.10) $ .02
---------- --------- --------- ---------
---------- --------- --------- ---------
Weighted average shares outstanding................................. 2,161 2,161 2,161 2,545
---------- --------- --------- ---------
---------- --------- --------- ---------
Pro forma net loss per share(2) $ (.02)
---------
---------
Pro forma weighted average shares outstanding(2).................... 2,545
---------
---------
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1997
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash.................................................................................... $ 137 $ 4,758
Working capital......................................................................... (1,164) 3,780
Total assets............................................................................ 6,026 10,648
Total liabilities....................................................................... 7,244 5,672
Stockholders' equity (capital deficiency)............................................... (1,217) 4,976
</TABLE>
- ------------------------
(1) The Provision for income taxes included the effect of the Subsidiaries
filing separate tax returns in periods prior to the Consolidation. See "The
Company."
(2) To reflect the conversion of a convertible promissory note in the principal
amount of $875,000 into 384,402 shares of Common Stock on October 16, 1997.
(3) As adjusted for sale of 1,400,000 shares of Common Stock by the Company at
an assumed offering price of $5.50 per share in the Offering.
5
<PAGE>
THE COMPANY
The Company was incorporated in Delaware in September 1997. The Company was
formed to combine several existing related operating entities formed by Harold,
Colin and Mark Dyne under a single holding company for the purposes of creating
a simplified and unified corporate structure, securing capital for the benefit
of all of the individual entities, capturing within the holding company overall
operating efficiencies and developing an integrated sales and marketing network.
The Company combines Tag-It, Tag-It Hong Kong, Tag-It Mexico, AGS Stationery and
Pacific Trim, all of which were related through common stockholders, shared
facilities, and certain shared personnel.
Tag-It Pacific L.L.C., a Delaware limited liability company ("Tag-It Pacific
LLC"), has (i) acquired directly, and in the case of AGS Stationery, indirectly
through AGS Holdings L.L.C., a Delaware limited liability company ("AGS
Holdings"), in a single transaction all of the outstanding capital stock of each
of the Subsidiaries for an aggregate of 2,470,001 membership units of Tag-It
Pacific LLC, and (ii) assumed outstanding warrants to purchase equity securities
of certain Subsidiaries which will become exercisable for 62,076 membership
units of Tag-It Pacific LLC at a weighted average exercise price of $0.7299 per
unit in a stock-for-unit exchange (the "Exchange"). At the time of the Exchange,
Pacific Trim converted from an S corporation to a C corporation for tax
purposes. Immediately prior to the effectiveness of this Prospectus, the
2,470,001 outstanding membership units of Tag-It Pacific LLC will be converted
to 2,470,001 shares of Common Stock of the Company and outstanding warrants to
acquire units will be converted into warrants to acquire 62,076 shares of Common
Stock of the Company (the Exchange and such conversion are referred to as the
"Consolidation.")
Tag-It, founded in May 1991, designs and produces hang tags and specialty
packaging products. In October 1994, Tag-It's founders expanded Tag-It's
offshore raw material sourcing capabilities and Asian distribution
infrastructure by forming Tag-It Hong Kong. In 1996, Tag-It expanded into the
licensed and private label stationery business. Also in 1996, to gain the
benefits of a larger and more cost-effective in-house labor force, Tag-It
commenced operations in Mexico through Tag-It Mexico, a qualified "Maquiladora"
under Mexico's Border Industrialization Program. Tag-It, Tag-It Hong Kong and
Tag-It Mexico, although separate corporate entities, have always operated as a
single functional enterprise.
In December 1995, AGS Stationery was formed for the limited purpose of
designing, manufacturing and marketing Guess? brand stationery products pursuant
to an exclusive license covering the United States, Canada, Mexico, Australia
and parts of Asia. AGS Stationery is operated separately from the other
stationery operations of Tag-It due to provisions of the Guess? license which
mandate that voting and management control of AGS Stationery be maintained by
Mark Dyne and Colin Dyne. See "Risk Factors--Dependence upon Guess? License."
Pacific Trim was founded in November 1987 and shares its principal offices
and facilities with Tag-It and AGS Stationery. Pacific Trim has been treated as
an S corporation for tax purposes since its inception. Due to its S corporation
status and the existence of third party shareholders not associated with the
Dyne family, Pacific Trim, although operated at the same location as Tag-It and
AGS Stationery in Los Angeles and sharing certain overhead and infrastructure
resources and certain sales and marketing personnel, has operated as a separate
entity for financial reporting, financing and legal purposes.
As a result of the Exchange, Pacific Trim's S corporation status was
terminated. Through the date immediately preceding the date of the termination
of its S corporation status (the "Termination Date"), Pacific Trim's earnings
will be taxed for federal income tax purposes directly to its shareholders,
rather than to the Company. Other than a tax imposed on S corporations by the
State of California (currently 1.5% of income), state income taxes on earnings
also have been the responsibility of the shareholders of Pacific Trim. On the
Termination Date, Pacific Trim became subject to federal and state corporate
income taxes. See Note 7 of Notes to Financial Statements.
6
<PAGE>
Approximately $92,000 of the proceeds of the Offering will be distributed to
Pacific Trim's shareholders to permit them to pay income taxes attributable to
the earnings of Pacific Trim prior to the Termination Date.
Immediately prior to the Exchange, the Company and the Pacific Trim
shareholders entered into a tax indemnification agreement (the "Tax Agreement")
relating to their respective income tax liabilities. Because the Company became
fully subject to corporate income taxation on the earnings of Pacific Trim after
the Termination Date, the reallocation of income and deductions between the
period during which Pacific Trim was treated as an S corporation and the period
following the Termination Date may increase the taxable income of one party
while decreasing that of another party. Accordingly, the Tax Agreement is
intended to assure that taxes are borne by the Company and the shareholders of
Pacific Trim only to the extent that such parties received the related income.
The Tax Agreement generally provides that, if an adjustment is made to the
taxable income of Pacific Trim for a year in which it was treated as an S
corporation, the Company will indemnify the Pacific Trim shareholders and the
Pacific Trim shareholders will indemnify the Company against any increase in the
indemnified party's income tax liability (including interest, penalties and
related costs and expenses), to the extent such increase results in a
corresponding decrease in the income tax liability of the indemnifying party for
that year. The Company has also indemnified the Pacific Trim shareholders
against any increase in income tax liability as a result of their receipt of an
indemnification payment under the Tax Agreement. Any payment made by the Company
to the Pacific Trim shareholders pursuant to the Tax Agreement may be considered
by the Internal Revenue Service or state taxing authorities to be non-deductible
by the Company for income tax purposes.
The Exchange will be treated as a reorganization of companies under common
control and will be accounted for in a manner similar to a pooling of interests.
All information set forth in this Prospectus gives effect to the Consolidation
and the conversion of Pacific Trim to a C corporation for tax purposes,
including all financial information which is presented on a consolidated basis.
The Company maintains its principal executive offices at 3820 South Hill
Street, Los Angeles, California 90037. The telephone number of its principal
executive offices is (213) 234-9606.
7
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS REGARDING THE INTENT, BELIEF AND
CURRENT EXPECTATIONS OF THE COMPANY, ITS DIRECTORS AND ITS OFFICERS, INCLUDING
STATEMENTS WITH RESPECT TO THE USE OF PROCEEDS OF THE OFFERING AND TRENDS
AFFECTING THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES AND THAT
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE ACCOMPANYING
INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING THE INFORMATION SET FORTH
BELOW AND UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," AND "BUSINESS" IDENTIFIES IMPORTANT FACTORS THAT COULD
CAUSE SUCH DIFFERENCES.
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 following the Offering. 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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
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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.
Although the Company intends to apply a portion of the proceeds of the Offering
to the implementation and improvement of its financial and management
information and reporting systems and staff, there are no assurances that the
Company will be successful in doing so, and the Company's failure to improve its
financial and management information and reporting systems 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 21.2% and 14.4%, respectively, of the Company's net sales (on a
consolidated basis) for the three months ended November 30, 1997, approximately
18.3% and 11.1%, respectively, of the Company's net sales (on a consolidated
basis) for the year ended August 31, 1997, and approximately 15.1% and 11.4%,
respectively, of the Company's net sales (on a consolidated basis) for the year
ended August 31, 1996. 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. See "Business--Customers."
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 Mark 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,
9
<PAGE>
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. See "Business--Employees" and "Management."
CONTROL BY EXISTING STOCKHOLDERS
Upon consummation of the Offering, the Company's officers and directors (and
their affiliates), will own approximately 46.7% of the Company's outstanding
shares (approximately 42.3% assuming the full exercise of the Over-Allotment
Option); and the Dyne family (Harold Dyne, Mark Dyne, Colin Dyne, Larry Dyne and
Jonathan Burstein) will own approximately 46.3% of the Company's outstanding
shares (approximately 42.0% assuming the full exercise of the Over-Allotment
Option). As a result, these stockholders, or the Dyne family acting as a group,
will be able to 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. See "Management," "Principal and Selling
Stockholders," and "Description of Capital 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. See "Certain
Transactions." 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 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.
Following the Offering, the Company expects to replace its factoring
relationships with more cost effective asset based financing. However, no
assurance can be given that the Company will be able to obtain such financing or
any other financing at rates and on terms more favorable to the Company than its
current factoring arrangements. 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. See
"Business--Procurement, Assembly and Finishing."
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<PAGE>
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 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. See "Business--Competition."
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
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<PAGE>
accounted for 10.9% of the Company's consolidated net sales in fiscal year 1997.
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 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 Company has structured the Consolidation in order to
assure that Mark Dyne and Colin Dyne continue to control the management of AGS
Stationery, and Guess? has been notified of this structure and has not objected.
See "The Company." 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?. See "Business-- Products--Private Label and Specialty
Licenses."
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 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
During fiscal 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, 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
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<PAGE>
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company anticipates that its existing capital resources, together with
the net proceeds of the Offering, will be adequate to satisfy its capital
requirements for at least the next 18 months. 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. To the extent that existing
resources and future earnings are insufficient to fund the Company's activities,
the Company may 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. See "--Access to Financing and Replacement of Factors"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
13
<PAGE>
MANAGEMENT'S DISCRETION AS TO USE OF PROCEEDS
The Company's management will have broad discretion as to the application of
the net proceeds to the Company from the sale of Common Stock in the Offering.
The net proceeds to the Company are estimated to be approximately $6.2 million
(assuming no exercise of the Over-Allotment Option). The Company expects to use
approximately $1.80 million of the net proceeds to repay outstanding
indebtedness (of which $1.54 million will be used to repay indebtedness to
related parties), approximately $1.0 million to develop a national sales and
marketing network, including hiring additional sales personnel, approximately
$750,000 to acquire fixed assets, including bar-code equipment, prototype
fabrication equipment, and equipment to upgrade the Company's information
systems, approximately $750,000 to finance increased inventory levels to
maximize efficiency and volume discounts and approximately $500,000 to establish
domestic woven label capacity for rapid turnaround of samples and short-run
production. The balance of the net proceeds will be used for working capital and
general corporate purposes. The Company may change the allocation of these
proceeds in response to developments in the industries in which it operates and
changes in the Company. See "Use of Proceeds."
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.
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.
IMMEDIATE AND SUBSTANTIAL DILUTION
The proposed initial public offering price of $5.50 per share is
substantially higher than the book value per outstanding share of Common Stock.
Specifically, investors will sustain immediate dilution of $4.21 per share (or
77%) based on the adjusted net tangible book value of the Company at November
30, 1997 of $4,975,729. Investors in the Offering therefore will bear a
disproportionate part of the financial risk
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<PAGE>
associated with the Company's business while effective control will remain with
existing stockholders and management. Additional dilution may occur upon the
exercise of outstanding stock options and warrants. See "Dilution" and
"Principal and Selling Stockholders."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; ARBITRARY
DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Although the Company has received approval for trading of the Common Stock on
the American Stock Exchange, there can be no assurance that an active trading
market for the Common Stock will develop as a result of the Offering or, if a
trading market does develop, that it will continue or be sustained after the
Offering. 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 could be 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. The public offering price of the shares
of Common Stock will be determined by arms-length negotiations between the
Company, Selling Stockholder and Cruttenden Roth Incorporated and Josephthal &
Co. Inc., as representatives of the Underwriters (the "Representatives") and
will not necessarily bear any relationship to the Company's assets, book value,
earnings history or other investment criteria. There can be no assurance that
the shares offered hereby will trade at market prices in excess of the initial
public offering price. See "Underwriting."
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. Upon completion of the Offering, the
Company will have 3,870,011 shares of Common Stock outstanding (3,987,761 if the
Over-Allotment Option is exercised in full). Of those shares, the 1,570,000
shares of Common Stock offered hereby (1,805,500 if the Over-Allotment Option is
exercised in full) will be 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 2,300,011 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 stockholders
of the Company have agreed that they will not, directly or indirectly, sell,
assign or otherwise transfer any shares of Common Stock owned by them for a
period of 365 days after the effective date of this Prospectus, without the
prior written consent of Cruttenden Roth Incorporated. Upon expiration of the
lock-up agreements, such 2,300,011 shares of Common Stock will become eligible
for sale, subject to compliance with the volume and manner of sale limitations
of Rule 144. See "Shares Eligible for Future Sale" and "Underwriting."
The Company 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"). See "Management--Stock
Incentive Plan." This registration statement will become effective immediately
upon filing. As of December 31, 1997, options to purchase 260,000 shares of
Common Stock and warrants to purchase 129,631 shares of Common Stock (including
warrants to purchase an estimated 35,555 shares issued to Troop Meisinger
Steuber & Pasich, LLP (the "TMS&P Warrants")) had been
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<PAGE>
granted, none of which had been exercised. See "Description of Capital
Stock--Warrants" and "Underwriting." 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. See "Description of Capital Stock--Preferred Stock" and
"Description of Capital Stock--Anti-Takeover Provisions."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,400,000 shares of
Common Stock offered by the Company hereby are estimated to be $6.2 million
(approximately $6.8 million if the Over-Allotment Option granted to the
Underwriters by the Company is excercised in full), at an assumed initial public
offering price of $5.50 per share and after deducting the estimated offering
expenses and underwriting discounts and commissions payable by the Company.
The Company expects to use the estimated net proceeds (i) to repay certain
indebtedness, which was incurred to fund the working capital requirements of the
Company's operations, of which $1.54 million will be paid to certain related
parties (the "Related Party Indebtedness"); (ii) to develop a national sales and
marketing network, including hiring of additional sales personnel; (iii) to
acquire fixed assets, including bar-code equipment, prototype fabrication
equipment, and equipment to upgrade the Company's information systems; (iv) to
finance increased inventory levels to maximize efficiency and volume discounts;
and (v) to establish domestic woven label capability for rapid turnaround of
samples and short-run production. The balance of the net proceeds will be used
for working capital and general corporate purposes.
The Company anticipates allocating the net proceeds of the Offering among
the foregoing uses approximately as follows:
<TABLE>
<CAPTION>
PERCENTAGE
AMOUNT OF OF NET
APPLICATION NET PROCEEDS PROCEEDS
- -------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Repayment of indebtedness........................................... $1,797,000 29.0%
Develop national sales and marketing network........................ 1,000,000 16.1
Acquire fixed assets................................................ 750,000 12.1
Increase inventory levels........................................... 750,000 12.1
Establish domestic woven label capability........................... 500,000 8.1
Working capital and general corporate purposes...................... 1,396,000 22.6
------------ -----------
Total............................................................. $6,193,000 100.0%
------------ -----------
------------ -----------
</TABLE>
The Company is also conducting the Offering to create a market for its
Common Stock, to facilitate future access by the Company to the public equity
markets and to enhance the Company's public image and credibility to support its
marketing efforts, particularly its plans to create a national sales presence in
the United States.
Until the net proceeds of the Offering are used, the Company intends to
invest them in United States government securities, short-term certificates of
deposit, money market funds or other short-term interest bearing investments.
The Company's management will have broad discretion as to the application of the
net proceeds to the Company from the sale of Common Stock in the Offering. The
Company may change the allocation of these proceeds in response to developments
in the industries in which it operates and changes in the Company.
As of December 31, 1997, the Related Party Indebtedness consisted of
approximately, (i) $10,000 owed by Tag-It to Harold Dyne with an interest rate
of 10.0% per annum, (ii) $15,000 owed by Tag-It to Mark Dyne with an interest
rate of 7.5% per annum, (iii) $300,000 owed by AGS Stationery to Monto Holdings
Pty. Ltd. ("Monto Holdings") with an interest rate of 7.5% per annum, (iv)
$124,626 owed by Pacific Trim to Monto Holdings with an interest rate of 10.0%
per annum, (v) $715,000 owed by Tag-It to NPM Investments, Inc. with an interest
rate of 7.5% per annum, secured by all of the assets of Tag-It, (vi) $16,000
owed by Tag-It to Pacific Western, Inc. ("Pacific Western") with an interest
rate of 7.5% per annum, (vii) $6,000 owed by Pacific Trim to Pacific Western
with an interest rate of 7.5% per annum, (viii) $126,972 owed by Tag-It to NPM
Investments, Inc. with an interest rate of 7.5% per annum, (ix) $100,000 owed by
Tag-It to Harold Dyne with an interest rate equal to the interest rate on the
indebtedness owed by Harold Dyne to Mercantile National Bank (11.75% as of
October 15, 1997),
17
<PAGE>
(x) $110,000 owed by Pacific Trim to Monto Holdings with an interest rate of
7.5% per annum, and (xi) $12,000 owed by AGS Stationery to Monto Holdings with
an interest rate of 7.5% per annum. Except for the indebtedness of Tag-It and
Pacific Trim to Pacific Western, all of the Related Party Indebtedness is due
and payable on the fifteenth day following delivery of written demand for
payment which may be delivered at any time following December 31, 1998. The
indebtedness of Tag-It and Pacific Trim to Pacific Western is due and payable on
the fifteenth day following delivery of a written demand for payment.
As of December 31, 1997, the non-Related Party Indebtedness to be repaid by
the Company with the net proceeds of the Offering consists of (i) $220,000 owed
by the Company to Cruttenden Roth Bridge Fund, LLC with an interest rate of
12.0% per annum and which is due and payable upon the consummation of the
Offering, (ii) $25,200 owed by Pacific Trim to ECD International, Inc. with an
interest rate of 10.0% per annum and which is due and payable on the fifteenth
day following the date of delivery of written demand for payment, and (iii)
$15,897 owed by Pacific Trim to Raymond Spiro with an interest rate of 10.0% per
annum and which is due and payable on the fifteenth day following the date of
delivery of written demand for payment.
DIVIDEND POLICY
The Company has no current intention to pay dividends on its Common Stock
following the Offering and intends to follow a policy of retaining earnings to
finance the growth of its business. Additionally, several of the Company's
current credit facilities limit or prohibit the payment of dividends unless
certain conditions are satisfied. Any future determination to pay dividends will
be at the discretion of the Board of Directors of the Company and will be
dependent on the Company's results of operations, financial condition,
contractual and legal restrictions and other factors deemed relevant by the
Board of Directors at that time.
18
<PAGE>
DILUTION
The consolidated net tangible book value of the Common Stock as of November
30, 1997, was $(1,217,396) or $(.49) per share. Consolidated net tangible book
value per share is equal to the total tangible assets of the Company, less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of the 1,400,000 shares offered by the Company hereby
(at an assumed initial offering price of $5.50 per share) and assuming net
proceeds to the Company of $6,193,125 (after deducting underwriting discounts
and commissions and estimated offering expenses), the consolidated net tangible
book value for the Common Stock as of November 30, 1997, would have been
$4,975,729, or $1.29 per share. This represents an immediate increase in
consolidated net tangible book value of $1.78 per share to existing stockholders
and an immediate dilution of $4.21 per share to new investors purchasing shares
in the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................ $ 5.50
Consolidated net tangible book value per share as of November
30, 1997................................................... $ (.49)
Increase per share attributable to new investors............. $ 1.78
---------
Consolidated net tangible book value per share as of November
30, 1997, as adjusted...................................... $ 1.29
---------
Dilution per share to new investors.......................... $ 4.21
---------
---------
</TABLE>
The following table summarizes, with respect to existing holders of Common
Stock and new investors, a comparison of the number of shares of Common Stock
acquired from the Company, the percentage ownership of such shares, the total
consideration, the percentage of total consideration and the average price per
share.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK ACQUIRED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
All existing stockholders................... 2,470,011 63.82% $ 960,000 11.09% $ .39
New investors............................... 1,400,000 36.18 7,700,000 88.91 5.50
--------- --------- ---------- --------- -----------
3,870,011 100.00% $8,660,000 100.00% $ 2.24
--------- --------- ---------- --------- -----------
--------- --------- ---------- --------- -----------
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options and warrants. At December 31, 1997, 260,000 shares of Common Stock were
subject to outstanding options at a weighted average exercise price of $4.40 per
share and 129,631 shares of Common Stock (including warrants to purchase an
estimated 35,555 shares of Common Stock under the TMS&P Warrants) were subject
to outstanding warrants at a weighted average exercise price of $3.34 per share.
If all of the currently exercisable options and warrants are exercised, an
additional 162,631 shares would be issued and the dilution to new investors
would decrease to $4.14 per share.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at November
30, 1997 and as adjusted to give effect to the sale of the 1,400,000 shares of
Common Stock offered by the Company hereby at an assumed offering price of $5.50
per share and the application of the estimated net proceeds therefrom (after
deducting underwriting discounts and commissions and estimated offering
expenses). See "Use of Proceeds." This table should be read in conjunction with
the Consolidated Financial Statements and related notes contained therein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NOVEMBER 30, 1997
----------------------
AS
ACTUAL ADJUSTED(1)
---------- ----------
<S> <C> <C>
Current Liabilities................................................ $5,938,666 $5,616,507
---------- ----------
Total long-term debt, less current portion......................... 55,315 55,315
Notes payable to related parties, less current portion............. 1,249,698 -0-
---------- ----------
Stockholders' deficiency:
Preferred Stock, $.001 par value; 3,000,000 shares authorized; no
shares issued and outstanding.................................. -- --
Common Stock; $.001 par value; 15,000,000 shares authorized;
shares issued and outstanding, 2,470,011 and 3,870,011......... 2,470 3,870
Additional paid-in capital....................................... 957,530 7,149,255
Accumulated deficit.............................................. (2,177,396) (2,177,396)
---------- ----------
Total Stockholders Equity (Capital Deficiency)..................... (1,217,396) 4,975,729
---------- ----------
Total Liabilities and Stockholders Equity.......................... $6,026,283 $10,647,551
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) As adjusted for sale of 1,400,000 shares of Common Stock by the Company at
an assumed offering price of $5.50 per share in the Offering.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
The following selected consolidated financial data have been derived from
the Company's consolidated financial statements, which financial statements for
the years ended August 31, 1996 and 1997 have been audited by BDO Seidman, LLP,
independent certified public accountants. The consolidated financial statements
as of August 31, 1996 and 1997, and for each of the years in the two-year period
ended August 31, 1997, and the report thereon, are included elsewhere in this
Prospectus. The selected consolidated financial data for the three months ended
November 30, 1996 and 1997, as well as the as adjusted balance sheet data, are
derived from the unaudited financial statements of the Company and, in the
opinion of management, include all adjustments that are necessary to present
fairly the results of operations and financial position of the Company for those
periods. The selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related notes and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
AUGUST 31, NOVEMBER 30,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................. $ 14,738 $ 19,539 $ 4,890 $ 4,751
Cost of goods sold.................................... 10,090 12,546 3,341 3,035
--------- --------- --------- ---------
Gross profit........................................ 4,648 6,993 1,549 1,716
Selling, general and administrative expenses.......... 4,973 5,897 1,444 1,350
Write-off of printing division........................ -- 232 116 --
--------- --------- --------- ---------
Total operating expenses............................ 4,973 6,129 1,560 1,350
--------- --------- --------- ---------
Income (loss) from operations......................... (325) 864 (11) 366
Interest expense...................................... 465 810 197 261
--------- --------- --------- ---------
Income (loss) before provision for income taxes....... (790) 54 (208) 105
Provision for income taxes(1) -- 113 -- 57
--------- --------- --------- ---------
Net loss............................................ $ (790) $ (59) $ (208) $ 48
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share.................................... $ (.37) $ (.03) $ (.10) $ .02
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding................... 2,161 2,161 2,161 2,545
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma net loss per share(2)....................... $ (.02)
---------
---------
Pro forma weighted average shares ourstanding(2)...... 2,545
---------
---------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
NOVEMBER 30, 1997
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
BALANCE SHEET DATA:
Cash................................................................................ $ 137 $ 4,758
Working capital..................................................................... (1,164) 3,780
Total assets........................................................................ 6,026 10,648
Total liabilities................................................................... 7,244 5,672
Stockholders' equity (capital deficiency)........................................... (1,217) 4,976
</TABLE>
- ------------------------
(1) The provision for income taxes includes the effect of the Subsidiaries
filing separate tax returns in years prior to the Consolidation.
(2) To reflect the conversion of a convertible promissory note in the principal
amount of $875,000 into 384,402 shares of Common Stock on October 16, 1997.
(3) As adjusted for sale of 1,400,000 shares of Common Stock by the Company at
an assumed offering price of $5.50 per share in the Offering.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED FINANCIAL DATA, CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND
THE OTHER FINANCIAL INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
MOREOVER, THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "RISK FACTORS."
OVERVIEW
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.
Revenues for all product lines are recognized at the time of product
shipment. Cost of goods sold consists primarily of raw material purchases,
direct labor, certain art and design costs associated with the product
development process, die and printing plate charges, finishing costs, freight-in
costs and royalties associated with the Guess? license. The Company develops
photographic films, dies and designs art images which are used for various
products. Development costs associated with films, dies or designs art images
which are deemed to have no future use are expensed as incurred, while
development costs associated with films, dies or designs art images which are
deemed to have future use are capitalized and are amortized over three years on
a straight line basis.
Historically, the Company has been capital constrained. The Company's
working capital has been provided primarily through related party loans and
factoring arrangements. Factoring of its receivables has substantially increased
the 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. In addition, meeting its factoring obligations, has
required cash which would otherwise have been used by the Company for cost
efficient raw material purchases and to further expand its business. For
example, in fiscal 1997, the Company purchased approximately $3.5 million of
paper products used in its business, but because of capital constraints, was
frequently unable to take advantage of volume purchase discounts which would
have lowered its overall cost of materials and cost of goods sold. From the
proceeds of this Offering, the Company plans to repay substantially all of its
debt and discontinue its factoring arrangements which will substantially reduce
interest expense. In addition, the Company plans to take advantage of volume
material purchase discounts which management believes will enhance the Company's
profitability.
Beginning in September 1996, the Company implemented several strategies
which contributed to a 32.6% growth in net sales in fiscal 1997 and which are
anticipated to facilitate further growth in net sales. These strategies included
the establishment of an assembly operation in Mexico, which enabled the Company
to attract significant new business and to conduct assembly operations at a
lower cost, the start-up of the Company's private-label and licensed stationery
business and the expansion of its sales and marketing efforts.
The Company plans to change its fiscal year end from August 31 to December
31 following the completion of the Offering.
22
<PAGE>
RESULTS OF OPERATIONS
The following tables sets forth, for the periods indicated, certain selected
statement of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED
AUGUST 31, NOVEMBER 30,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales............................................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................................................... 68.5 64.2 68.3 63.9
--------- --------- --------- ---------
Gross profit.......................................................... 31.5 35.8 31.7 36.1
Selling, general and administrative expenses.......................... 33.7 30.2 29.5 28.4
--------- --------- --------- ---------
Income (loss) from operations......................................... (2.2)% 4.4% (0.2)% 7.7%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 1996 AND NOVEMBER 30, 1997
NET SALES. Net sales decreased approximately $139,000 to $4.75 million or
(2.8%) for the three months ended November 30, 1997 from $4.89 million for the
three months ended November 30, 1996. The decrease in net sales is primarily the
result of the shipment of specialty stationery products for the holiday season
in December 1997 rather than November 1997, as occurred in the three months
ended November 30, 1996. Such decrease in net sales was partially offset by
higher net sales in apparel trim products.
GROSS PROFIT. Gross profit increased approximately $167,000 or 10.8% to
$1.7 million for the three months ended November 30, 1997 from $1.5 million for
the three months ended November 30, 1996. Gross margin as a percentage of net
sales increased to approximately 36.1% as compared to 31.6% for the three months
ended November 30, 1996. The increase in gross margin is attributable to
improved overhead absorption, labor and other cost savings associated with
normalized production at the Company's Mexico facility, lower overhead resulting
from termination of printing operations in November 1996 and increased sales of
higher margin specialty packaging products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately $94,000 to $1.3 million for the
three months ended November 30, 1997 from $1.4 million for the three months
ended November 30, 1996. As a percentage of net sales, these expenses decreased
to 28.4% in the three months ended November 30, 1997 compared to 29.5% for the
three months ended November 30, 1996.
PRINTING DIVISION EXPENSE. In the three months ended November 30, 1996, 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 increased approximately $64,000 or 32.2%
to $260,000 for the three months ended November 30, 1997 from $197,000 for the
prior fiscal quarter. This increase is attributable to increased factoring
expenses associated with increased working capital requirements and increased
debt.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
approximately $57,000 for the three months ended November 30, 1997 as compared
to no tax provision for the three months ended November 30, 1996. 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.
23
<PAGE>
NET INCOME. Net income was $48,000 for the three months ended November 30,
1997 as compared to a net loss of $208,000 for the three months ended November
30, 1996.
COMPARISON OF FISCAL YEAR ENDED AUGUST 31, 1996 AND AUGUST 31, 1997
NET SALES. Net sales increased approximately $4.8 million or 32.6% to $19.5
million for the fiscal year ended August 31, 1997 from $14.7 million for the
prior fiscal year. A substantial portion of the net sales increase was due to
increased sales of hang tag and specialty packaging products to the Company's
two largest customers, Guess? and Swank, sales to new customers including Calvin
Klein Jeans as well as the hang tag and label sales pursuant to the Warner Bros.
Looney Tunes licensing agreement. Increases in specialty packaging and custom
shopping bag sales is directly related to the opening of the Mexico facility
which provided the Company with greater assembly and finishing capacity at lower
costs. Other sales increases were attributable to the commencement of sales of
the Guess? licensed stationery.
GROSS PROFIT. Gross profit increased approximately $2.4 million or 50.5% to
$7.0 million for the fiscal year ended August 31, 1997 from $4.6 million for the
prior fiscal year. Gross margin as a percentage of net sales increased to
approximately 35.8% for the 1997 fiscal year as compared to 31.5% for the prior
fiscal year. The increase in gross margin is attributable to improved overhead
absorption and substantial labor and other cost savings associated with
production of specialty packaging and high quality shopping bags at the
Company's Mexico facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $923,000 or 18.6% to $5.9
million for the fiscal year ended August 31, 1997 from $5.0 million for the
prior fiscal year; however, as a percentage of net sales, these expenses
declined to 30.2% in fiscal 1997 compared to 33.7% in the prior period.
Increases in expenses were attributable to a higher level of sales, marketing
and other general expenses associated with the launching of the Guess?
stationery line and other private label and licensed stationery business, and
higher selling expenses associated with increased sales of hang tag and
specialty packaging products.
Direct art costs capitalized as part of the Company's art designs total
$45,732 and $134,256 for the years ended August 31, 1996 and 1997, respectively.
Amortization of capitalized art costs of $7,622 and $37,620 for the 1996 and
1997 fiscal years, respectively, are included in cost of goods sold. Capitalized
costs to develop photographic films and dies equaled $225,718 and $246,825 for
the years ended August 31, 1996 and 1997, respectively. Amortization of
capitalized film and die costs of $45,865 and $104,011 for the 1996 and 1997
fiscal years, respectively, are included in selling, general and administrative
expenses.
PRINTING DIVISION EXPENSE. The Company incurred approximately $232,000 of
incremental printing costs associated with the operation of its captive printing
division which was closed during fiscal 1997.
INTEREST EXPENSE. Interest expense increased approximately $346,000 or
74.4% to $811,000 for the fiscal year ended August 31, 1997 from $465,000 for
the prior fiscal year. This increase is attributable to increased factoring
expenses associated with increased sales.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
approximately $113,000 for the fiscal year ended August 31, 1997 as compared
with no tax provision for the prior fiscal year. 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.
NET LOSS. Net loss was $59,000 for the fiscal year ended August 31, 1997 as
compared to a net loss of approximately $790,000 for the prior fiscal year.
24
<PAGE>
QUARTERLY RESULTS
The Company's quarterly operating results have varied in the past and can be
expected to vary in the future. Fluctuations in operating results generally are
caused by a number of 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 which may be 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.
The following table presents certain data for each of the Company's last
five fiscal quarters. This information has been derived from unaudited
Consolidated Financial Statements which, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such information. These operating results are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(AMOUNTS IN THOUSANDS)
---------------------------------------------------------------------
NOVEMBER 30, FEBRUARY 28, MAY 31, AUGUST 31, NOVEMBER 30,
1996 1997 1997 1997 1997
------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $ 4,890 $ 4,443 $ 4,067 $ 6,139 $ 4,751
Cost of goods sold.............................. 3,341 2,859 2,567 3,779 3,035
------ ------ ----------- ----------- ------
Gross profit.................................... 1,549 1,584 1,500 2,360 1,716
Selling, general and administrative expenses.... 1,560 1,569 1,304 1,696 1,350
------ ------ ----------- ----------- ------
Income (loss) from operations................... $ (11) $ 15 $ 196 $ 664 $ 366
------ ------ ----------- ----------- ------
------ ------ ----------- ----------- ------
AS A PERCENTAGE OF NET SALES:
Cost of goods sold.............................. 68.3% 64.4% 63.1% 61.6% 63.9%
Gross profit.................................... 31.7% 35.6% 36.9% 38.4% 36.1%
Selling, general and administrative expenses.... 31.9% 35.3% 32.1% 27.6% 28.4%
Income (loss) from operations................... (0.2)% 0.3% 4.8% 10.8% 7.7%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1995 and 1996 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 the peak working
capital needs occurring at the end of the calendar year.
Pursuant to the terms of its factoring agreements, 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 November 30, 1997, the amount factored without recourse was $987,184 and
the net amount due to the factor recorded as a current liability was $281,343.
25
<PAGE>
As of November 30, 1997 the Company had outstanding related party debt of
approximately $1.54 million and non-related party debt of approximately
$178,000. All related party debt 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. On December 31, 1997 the
Cruttenden Roth Bridge Fund, LLC (the "Bridge Fund") purchased $220,000 of the
Company's Senior Subordinated Secured Notes (the "Bridge Notes"), the proceeds
of which will be used by the Company for working capital pending the
consummation of the Offering. The Company may require the Bridge Fund to
purchase an aggregate principal amount of $550,000 in Bridge Notes. See
"Underwriting."
Net cash (used in) provided by operating activities was approximately
($1,230,000) and $236,000 for fiscal years 1996 and 1997, respectively and
($477,000) and ($424,000) for the three months ended November 30, 1996 and 1997,
respectively. Cash used in operating activities during 1996 resulted primarily
from the operating losses incurred relating to the start up of the Guess?
licensed stationery line including operating expenses and the purchases of
inventory. Cash provided by operating activities during 1997 resulted primarily
from higher accounts payable and accrued expenses offset partially by increased
trade credit and increased inventory. In addition, the Company used cash to
increase inventory during 1997 to support the Guess? stationery launch and
increased customer orders for hang tags and specialty packaging. Cash used in
the three months ended November 30, 1996 resulted primarily from operating
losses incurred relating to the start-up of the Company's Guess? licensed
stationery line. Cash used in operations in the three months ended November 30,
1997 resulted primarily from increased accounts receivable, increased inventory
and expenses related to the Offering, partially offset by increases in accounts
payable.
Net cash used in investing activities was $463,000 and $610,000 for fiscal
years 1996 and 1997, respectively and $64,000 and $137,000, respectively for the
three months ended November 30, 1996 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 provided by financing activities was approximately $1,685,000 and
$433,000 for 1996 and 1997, respectively and $511,000 and $550,000 for the three
months ended November 30, 1996 and 1997, respectively. The net cash provided by
financing activities in fiscal 1996 and the three months ended November 30, 1996
was provided primarily by borrowings from related parties and net advances from
factors. Net cash in fiscal 1997 and the three months ended November 30, 1997
was provided by borrowings from related parties and offset by decreases in net
advances from factors.
The Company is continually evaluating various financing strategies to be
utilized in expanding its business and to fund future growth or acquisitions.
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. To
the extent that existing resources and future earnings are insufficient to fund
the Company's activities, the Company may 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.
Management of the Company anticipates that the net proceeds from the
Offering, combined with cash flow from operations, will provide adequate
liquidity to fund its business growth plans and its operations for at least the
next 18 months. The Company intends to use a portion of the net proceeds from
the Offering to satisfy all obligations existing under the Heller Financial and
Safcor factoring arrangements and to repay all outstanding Related Party
Indebtedness and the Bridge Notes.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement
128"), which is effective for financial statements
26
<PAGE>
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. Some of the changes made to current EPS standards
include (i) eliminating the presentation of primary EPS and replacing it with
basic EPS, with the principal difference being that common stock equivalents are
not considered in computing basic EPS; (ii) eliminating the modified treasury
stock method and the three percent materiality provision; and (iii) revising the
contingent share provision and the supplemental EPS data requirements. Statement
128 also requires dual presentation of basic and diluted EPS on the face of the
income statement, as well as a reconciliation of the numerator and denominator
used in the two computations of EPS. Basic EPS is defined by Statement 128 as
net income from continuing operations divided by the average number of common
shares outstanding without the consideration of common stock equivalents which
may be dilutive to EPS. The Company does not expect the adoption will have a
material effect on its EPS calculation.
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 130"), 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.
YEAR 2000 MODIFICATIONS
The Company is currently reviewing its computer systems in order to evaluate
if any modifications are necessary for the year 2000. The Company currently does
not anticipate that any material modifications or expenditures will be required
in its computer systems for the year 2000.
27
<PAGE>
BUSINESS
GENERAL
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's programs
allow its customers, such as Guess?, Calvin Klein Jeans, Quiksilver, Carole
Little, The Limited, Sony Signatures and Warner Bros, as well as licensees of
Yves Saint Laurent, Kenneth Cole, Geoffrey Beene and Pierre Cardin, to outsource
most aspects of a brand identity program, including value-added design,
materials procurement, and manufacturing and distribution coordination of
creative packaging, tag, and trim products.
The Company 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. The Company also designs and produces
specialty private label and licensed stationery as well as related accessories
and backpacks. The Company designs approximately 70% of the products it sells.
The Company's design capabilities, combined with the Company's experience in
materials procurement, and manufacturing and distribution coordination enable
the Company to provide customers with complete design solutions for entire
product lines that meet not only aesthetic demands, but also functional and cost
parameters.
INDUSTRY BACKGROUND
The majority of the Company's revenues are related to the apparel and
accessory markets, both of which are large and growing. According to The TOPLINE
REPORT published by the NPD Group, Inc., annual apparel sales in 1996 in the
United States equaled $161.4 billion, up from $152.5 billion in 1995. The
increasing number of fashion-driven apparel and accessory producers and products
has made it more difficult for manufacturers to differentiate their products
from those of competitors. As a result, these manufacturers have increased their
emphasis on specialty packaging, value-added tags and other promotional material
in order to compete for consumer attention in the retail environment. This
emphasis on product differentiation has created strong demand for creative image
enhancements such as bright, colorful and otherwise highly distinguishable and
attractive logos, point-of-sale packaging and signage, tags and labels. For
example, the primary distinction among many brand oriented products such as
designer jeans are woven and leather labels, buttons and trims. Where designer
jeans are displayed by retail stores, the trims, hang tags and pocket tags are
used to attract customer attention, as well as to provide important consumer
information. Similarly, wallets and designer jewelry, which are in many cases
difficult to visually distinguish, are often differentiated by specially
designed boxes, which then become a significant factor in attracting consumer
attention.
Short product life cycles for fashion-driven items, advances in printing and
packaging technology, and the diverse geographic locations of specialty
packaging or printing vendors and apparel or accessory manufacturers, combine to
make the design and execution of complete brand identity programs increasingly
more complex. Manufacturers demand complex assortments of specialty packaging,
hang tags, labels and trim items compliant with a number of color, materials,
printing, bar coding and other quality standards and timely delivery that can
generally only be provided by a single vendor able to coordinate its
manufacturing and distribution on a world-wide basis. While apparel and
accessory manufacturers are actively involved in the design and manufacture of
their proprietary product lines, the design and production of critical
point-of-sale differentiators are ancillary to their primary business and are
often out-sourced to multiple separate vendors typically overseen by the
manufacturer or a separate vendor agency. Apparel and accessory manufacturers
who oversee their own multi-vendor brand identify programs often find themselves
consuming excessive time, effort and expenses attempting to manage in-house
brand identity programs and ship floor-ready packaged products to retailers
throughout the global marketplace.
28
<PAGE>
The difficulties associated with executing a program which coordinates these
many facets are creating demand for the single source programs offered by the
Company.
THE TAG-IT PACIFIC SOLUTION
To take advantage of the large expanding demand for, and address the
increasingly complicated requirements of, effective brand identity programs, the
Company has positioned itself as a fully-integrated single-source provider of
complete brand identity programs with creative design personnel, sales
representatives, assembly workers, program managers and global production and
distribution coordinators and with offices located in Los Angeles, New York,
Mexico and Hong Kong. Because specialty packaging or printing vendors usually
specialize in limited product areas, management believes that the Company, with
its innovative designs and its global manufacturing and distribution
coordination, is well positioned to become a recognized single-source provider
and a market leader.
TAG-IT PACIFIC GROWTH STRATEGY
The Company's growth strategy includes the following elements: (i) expand
its customer base by promoting its single-source solution and in-house design,
materials procurement, and manufacturing and distribution coordination
capabilities, (ii) increase customer penetration by targeting additional product
lines within existing accounts, (iii) expand its marketing programs and network
of sales offices, (iv) broaden its target customer base for products to include
cosmetics and specialty foods manufacturers, (v) pursue private label
opportunities, and (vi) remain opportunistic with respect to strategic
acquisitions.
EXPAND THE COMPANY'S CUSTOMER BASE BY PROMOTING ITS SINGLE SOURCE SOLUTIONS
AND IN-HOUSE DESIGN, MANUFACTURING AND DISTRIBUTION COORDINATION
CAPABILITIES. The Company plans to expand its reputation as a single source
provider of specialty packaging and tag and trim needs. The Company's design
capabilities, combined with the Company's experience in materials procurement,
and manufacturing and distribution coordination enable the Company to provide
customers with a complete design solution for entire product lines that meet not
only aesthetic demands, but also functional and cost parameters. Because of its
single source provider capability, the Company's customers do not have to
maintain the same level of oversight as is required for numerous separate
vendors, allowing the customer to realize an internal cost savings in addition
to the competitive pricing offered by the Company.
INCREASE CUSTOMER PENETRATION BY TARGETING ADDITIONAL PRODUCT LINES WITHIN
EXISTING ACCOUNTS. The Company intends, through increased account coverage and
client monitoring, to further penetrate each individual customer account it
currently services with additional products and services. The Company plans to
increase sales by actively marketing its total solution design capabilities to
new and existing clients.
EXPAND ITS MARKETING PROGRAMS AND NETWORK OF SALES OFFICES. The Company
intends to continue developing a sales and marketing network to offer its fully
integrated design, manufacturing and distribution capabilities in the key
apparel and accessory manufacturing centers in the United States and possibly in
Asia and South America.
BROADEN ITS TARGET CUSTOMER BASE FOR PRODUCTS TO INCLUDE COSMETICS AND
SPECIALTY FOODS MANUFACTURERS. The Company has begun to exploit its experience
in the apparel and accessories industry to other industries and applications
such as specialty packaging tags and labels for cosmetics and specialty food
products, all of which should provide new business opportunities not previously
pursued by the Company.
PURSUE PRIVATE LABEL OPPORTUNITIES. The Company has produced lines of
private label stationery for Quiksilver, and its Roxy division, and has
developed private label expertise in connection with its Guess? stationery
license. The Company intends to pursue private label design and manufacturing
projects for additional customers with well established brand recognition.
REMAIN OPPORTUNISTIC WITH RESPECT TO STRATEGIC ACQUISITIONS. While
historically the Company has grown solely through internal efforts, the Company
may in the future pursue selected strategic acquisitions. In
29
<PAGE>
this regard, the Company will seek acquisition targets that build additional
internal product expertise or bring in-house certain manufacturing capabilities
that are currently performed by third party vendors. The Company is not
currently considering any acquisition candidate.
DESIGN AND DEVELOPMENT
The Company estimates that 70% of the products sold by the Company are also
designed by the Company. The Company believes that its products are
distinguished by the innovative designs developed by its in-house creative
staff. The Company's expertise in material procurement and manufacturing
coordination of the products it designs enables the Company to design products
that meet not only aesthetic demands, but also functional and cost parameters.
The Company believes that specialty design companies, with limited sourcing or
manufacturing experience, create designs that often cannot be implemented
because of difficulties in the manufacturing process, the expenses of required
materials, or because the resulting product is not functional. The Company's
products are designed to function within the limitations imposed by the
applicable manufacturing framework, and, because of its manufacturing and
sourcing experience, time consuming delays arising from the coordination of
independent design houses and manufacturing facilities are minimized. This not
only reduces development and production costs, but also decreases the total time
to market.
The Company's product development begins with the creation of a distinctive
design that embodies a customer's corporate image and existing trademarks.
Although the designs developed by the Company are consistent with the customer's
image, they are distinct to each particular product. The Company will typically
create a comprehensive design presentation for a customer focused on a discrete
product tag, packaging, trim or label assignment or for an entire packaging, tag
and labeling program for a line of products. From the presentation, the client
is able to select from numerous prototypes generated by the Company the
particular design and product style and image. The Company will then coordinate
the manufacture, assembly, finishing and distribution of all packaging, tag,
label and trim products to the customer's locations. The Company believes that
its in-house ability to create customized prototypes for customer marketing
presentations is a significant competitive advantage.
All of the Company's design work is done in-house by its team of seven
designers, who include graphic artists and prototype fabricators. All design
services for specialty packaging, hang tags, woven labels, metal jean buttons
and trims, and licensed and private label stationery is performed by the
Company's art department located in Los Angeles. In addition, all film, die
making and pre-production is completed at the Company's Los Angeles facilities.
The Company's design team uses computer assisted design techniques employing
a sophisticated Scitex color separating and color control system to produce all
color separations for its printed products. The Company provides these color
separations to its contract manufacturers worldwide to ensure that the Company's
finished products, wherever manufactured, have color and appearance uniformity.
Many woven labels designed by the Company are manufactured offshore. The
Company plans to use a portion of the net proceeds of the Offering to establish
a woven label manufacturing capability in the United States for rapid turn
around of samples and short-run production.
PROCUREMENT, ASSEMBLY AND FINISHING
The Company creates all product artwork, and any necessary films, dies and
molds, which are used to manufacture its products. All bar-code printing,
assembly and finishing of high quality paper boxes, custom shopping bags and
point-of-sale packaging signage is performed internally by the Company. The
Company also assembles multi-part jean buttons. All other products designed and
sold by the Company are produced by third party vendors. The Company intends to
continue to outsource high risk production to qualified vendors, particularly
with respect to manufacturing activities that require substantial investment in
capital equipment.
30
<PAGE>
Through its Hong Kong facility, the Company produces and distributes
bar-coded hang tags, distributes apparel packaging and coordinates the
manufacturing and distribution of the full range of the Company's products. The
Hong Kong facility supplies several significant packaging programs, services
customers located in Asia and the Pacific Rim and sources products for the
Company's Los Angeles operations. Through its assembly and finishing facility in
Mexico, the Company completes the assembly and finishing of many of its
packaging products and has commenced distributing products to Mexico based
manufacturers.
The Company purchases raw materials from several qualified material
suppliers and has developed a knowledge of the best materials, prices and
vendors for particular products and raw materials. Because of its raw material
procurement capabilities and knowledge, the Company is able to produce a broad
range of packaging styles at various price points which meet a customer's budget
and product pricing parameters.
The Company's customers generally book orders for speciality packaging, hang
tags or woven labels for an entire season. Although the Company will produce the
entire order, it allows its customers to draw down and pay for finished items in
inventory, on an as needed basis. Although the Company from time to time holds
significant inventory and bears the cost of doing so, all customers are
obligated by contract to pay the full purchase order price of the inventory by a
specified date, regardless of when or whether they accept delivery. The Company
prefers to purchase certain paper stock and finished product in bulk, but, as a
result of cash constraints raw materials have generally been purchased on an as
needed basis. This has resulted in less than optimal pricing for raw material
and finished goods purchases, and has required multiple runs to fulfill
customers' orders, increasing labor cost and management burden. The Company
intends to use a portion of the net proceeds of this Offering to purchase
certain materials in bulk in order to realize the benefits of volume discounts
and single production runs. See "Use of Proceeds," "Risk Factors--Limited
Sources of Supply" and "--Fluctuating Paper Costs and Paper Shortages."
SALES AND MARKETING
The Company's principal products are currently sold through a combination of
its own sales force (five representatives based in Los Angeles and two based in
New York) and three independent sales representatives and one sales manager who
focuses on sales of licensed and private label stationery products.
Additionally, the Company has three major account managers who service three of
the Company's significant customers and who have first hand knowledge of those
customers' practices. The Company believes that its in-house design and
prototype development capabilities allow its sales representatives to make
effective customer presentations with actual prototypes and examples of the
Company's innovative designs. The Company believes that these in-house design
and prototype development capabilities provide the Company with a significant
competitive advantage.
The Company's senior executives have developed strong relationships with its
major customers at senior levels and actively participate in marketing and sales
functions and development of overall strategy. The Company also builds upon its
top-level relationships through its account managers who are responsible for
enhancing these existing relationships through a high level of responsiveness
and attention. When the Company becomes the outsourcing vendor for a customer's
packaging or tag requirements, the Company attempts to position itself as a
department of the customer's procurement operation.
The Company plans to expand its overall team approach for the sales and
marketing of its products to include regional sales vice presidents located in
major apparel centers who will be assigned account coverage and make calls on
senior merchandising officers of major manufacturers and field representatives
who will interface with the manufacturing and distribution personnel of these
major customers. These team sales efforts will be supported by the Company's
in-house account representatives who will provide customer service to all
accounts, and coordinate order fulfillment. The Company considers a high level
of customer service essential to its success.
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<PAGE>
It is anticipated that a portion of the net proceeds of this Offering will
be used to expand the Company's sales force. The Company initially plans to
expand its sales network into major apparel and accessory centers in the United
States and possibly in Asia and South America.
PRODUCTS
SPECIALTY PACKAGING. The Company's specialty packaging products include
high quality paper boxes, metal tins, injection-molded packaging items and high
quality shopping bags. These products are designed and produced individually or
as part of a program where the Company designs and develops an entire
coordinated packaging line for a client. The Company's specialty packaging is
used for a wide variety of products, such as wallets, watches, sunglasses,
belts, undergarments and gift sets.
HANG TAGS AND PRINTED APPAREL PACKAGING AND TRIMS. The Company's hang tags,
pocket flashers, waistband tickets, size stickers and bar-coded hang tags are
attached to products by manufacturers and retailers to identify and promote
their products, allow automated data collection and provide brand identification
and consumer information such as UPC bar code, manufacturer's suggested retail
price, size, fabric content and care instructions.
The Company's customized woven, leather, synthetic, embroidered and novelty
labels and tapes are designed for and printed on or woven in a wide range of
fabrics and other materials and produced on various types of high-speed
equipment. The Company's labels are used primarily for product identification
and consumer information on apparel.
The Company offers its customers a full range of logo and non-logo hardware
trim for their apparel. The hardware product line includes jean buttons, jean
rivets, snaps, metal sew-on buttons as well as an assortment of logo hardware
which is designed to customize the products of the Company's customers. The
Company believes it has the ability to supply its customers with all of their
hardware needs. The Company leases its customers machinery to attach buttons,
rivets and snaps produced by the Company. This equipment is used exclusively for
the Company's products. The revenues generated from these leases are not
material to the Company's operations.
PRIVATE LABEL. The Company designs and manufactures private label product
lines, including book bags, ring binders, composition books, stationery, metal
pencil tins and date books. Many of the Company's apparel and accessory
customers are major brand names and are potential customers for the Company's
private label business.
SPECIALTY LICENSES. The Company has entered into licensing arrangements
with companies which have high brand recognition among consumers. The Company's
licensing arrangements allow the Company to manufacture products utilizing such
companies' trademarks, brand names or other intellectual property. The Company
currently produces stationery products under a license from Guess?. In 1996, the
Company was awarded the exclusive packaging license for Batman and Superman
licensed apparel by Warner Bros. Consumer Products. Under this arrangement, any
licensee of Warner Bros. selling products bearing the Batman or Superman logos
must purchase all product hang tags, woven labels and printed labels from the
Company. The Company is also one of a limited number of approved vendors
permitted to supply hang tags, woven labels and printed labels for LOONEY TUNES
AND BABY LOONEY TUNES licensed products. In addition, the Company recently
secured from the Sony Signatures division of Sony Pictures Entertainment, Inc.
the hang tag business for all consumer products associated with the release of
the upcoming feature films GODZILLA, JEANNIE, and ZORRO and the GHOSTBUSTERS
television series. The Company intends to obtain additional licenses as they
become available on appropriate terms and conditions.
CUSTOMERS
The Company has more than 125 customers, including well-known apparel
manufacturers, such as Guess?, Calvin Klein Jeans, Quiksilver, Carole Little,
licensees of Yves Saint Laurent, Kenneth Cole, Geoffrey Beene and Pierre Cardin,
specialty retailers such as American Eagle Outfitters and Miller's
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<PAGE>
Outpost and mass merchant retailers, such as Office Max and J.C. Penney, and the
promotional arms of large entertainment companies such as Sony Signatures Inc.
and Warner Bros. Consumer Products. For the three months ended November 30, 1997
and the fiscal year ended August 31, 1997, Guess? and Swank (a licensee of Yves
Saint Laurent, Kenneth Cole, Geoffrey Beene and Pierre Cardin) represented
approximately 21.2% and 14.4%, respectively, and 18.3% and 11.1%, respectively,
of the Company's total sales. The Company does not have long-term contracts with
its customers requiring them to use its products or services. The Company does
not believe that the loss of any single customer other than Guess? or Swank
would have a material adverse effect upon the Company's consolidated financial
position or results of operations. See "Risk Factors--Dependence on Key
Customers; Absence of Long-Term Contracts with Customers."
The following table describes the products provided by the Company for its
significant customers.
PACKAGING AND STATIONERY PRODUCTS
<TABLE>
<CAPTION>
STATIONERY
PACKAGING PRODUCTS PRODUCTS
-------------------------------------------------------------- -------------
PAPER SHOPPING PLASTIC BACK TO
NAME OF CUSTOMER BOXES BAGS PACKAGING METAL TINS SCHOOL
- ---------------------------------------------- ----------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Guess?........................................ X X X X*
- -------------------------------------------------------------------------------------------
Swank ........................................ X X X
Quiksilver.................................... X X X
- -------------------------------------------------------------------------------------------
Warner Bros. ................................. X X X
Baby Guess?................................... X X
- -------------------------------------------------------------------------------------------
Nordstrom .................................... X X
Sony Signature................................ X
- -------------------------------------------------------------------------------------------
Gymboree ..................................... X X
Signal Apparel................................ X
- -------------------------------------------------------------------------------------------
XOXO ......................................... X X
<CAPTION>
ACCESSORIES
NAME OF CUSTOMER BACKPACKS GIFT PACKS
- ---------------------------------------------- --------------- ---------------
<S> <C> <C>
Guess?........................................ X* X*
- ----------------------------------------------
Swank ........................................
Quiksilver....................................
- ----------------------------------------------
Warner Bros. .................................
Baby Guess?...................................
- ----------------------------------------------
Nordstrom ....................................
Sony Signature................................
- ----------------------------------------------
Gymboree .....................................
Signal Apparel................................
- ----------------------------------------------
XOXO .........................................
</TABLE>
- ------------------------
* These products are produced under license from Guess? for resale to Guess?
retail stores and other customers.
33
<PAGE>
APPAREL RELATED PRODUCTS
<TABLE>
<CAPTION>
HANG TAGS/
BAR CODE POCKET JEAN WOVEN
NAME OF CUSTOMER PRINTING FLASHERS BOXES BUTTONS RIVETS LABELS
- ------------------------------------- --------------- --------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Guess?............................... X X X X X X
- -------------------------------------------------------------------------------------------
Swank ............................... X
Quiksilver........................... X X X X
- -------------------------------------------------------------------------------------------
Gymboree ............................ X X X
Warner Bros.......................... X X X X
- -------------------------------------------------------------------------------------------
Baby Guess? ......................... X X X X X X
Signal Apparel....................... X X X
- -------------------------------------------------------------------------------------------
Carole Little ....................... X X X
Paul Davril.......................... X X
- -------------------------------------------------------------------------------------------
Sony Signatures ..................... X X X
Calvin Klein Jeans................... X X
- -------------------------------------------------------------------------------------------
Miller's Outpost .................... X X X X X
Express.............................. X X X X
- -------------------------------------------------------------------------------------------
JC Penny ............................ X X X
Azteca*.............................. X X X X X
- -------------------------------------------------------------------------------------------
Honda ............................... X
Chorus Line.......................... X X X
- -------------------------------------------------------------------------------------------
Dr. Martens ......................... X X X X
A4Moshay (licensee of Converse)......
- -------------------------------------------------------------------------------------------
Z-Cavaricci ......................... X
Outlaw Jeans......................... X X X X
- -------------------------------------------------------------------------------------------
Union Bay/Nautica ................... X X
Enc/Kellwood......................... X X
- -------------------------------------------------------------------------------------------
Paris Blues ......................... X X X
<CAPTION>
LEATHER-PVC
NAME OF CUSTOMER PATCHES SNAPS ZIPPERS
- ------------------------------------- ----------------- ----------- -------------
<S> <C> <C> <C>
Guess?............................... X X
- -------------------------------------
Swank ............................... X
Quiksilver...........................
- -------------------------------------
Gymboree ............................
Warner Bros..........................
- -------------------------------------
Baby Guess? ......................... X X
Signal Apparel.......................
- -------------------------------------
Carole Little .......................
Paul Davril..........................
- -------------------------------------
Sony Signatures .....................
Calvin Klein Jeans...................
- -------------------------------------
Miller's Outpost .................... X
Express..............................
- -------------------------------------
JC Penny ............................ X
Azteca*.............................. X
- -------------------------------------
Honda ............................... X X
Chorus Line.......................... X
- -------------------------------------
Dr. Martens ......................... X X X
A4Moshay (licensee of Converse)...... X X
- -------------------------------------
Z-Cavaricci ......................... X
Outlaw Jeans......................... X
- -------------------------------------
Union Bay/Nautica ...................
Enc/Kellwood.........................
- -------------------------------------
Paris Blues ......................... X X
</TABLE>
- ------------------------
* The Company supplies Calvin Klein Jeans, American Eagle Outfitters and other
branded products to Azteca.
34
<PAGE>
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 tag, trim and packaging products. Some of the Company's competitors,
including Paxar, Inc., RVL, Inc., Copac International Packaging, Inc., Universal
Button, Inc., and Scovill Fasteners, Inc. have greater name recognition, longer
operating histories and, in many cases, substantially greater financial and
other resources than the Company. See "Risk Factors--Competition."
The Company believes that competitive factors in the market are generally
design capability, price, quality, service and delivery lead times. The Company
believes that it is competitive with respect to all of these factors. Because of
the Company's integrated material procurement and production capabilities, the
Company is able to effectively compete for business particularly where the
various functional requirements in packaging production are separately sourced.
EMPLOYEES
As of November 30, 1997, the Company had approximately 340 employees located
at its various facilities, with 55 employees in Los Angeles, nine employees in
Hong Kong, four employees in New York and the balance of employees in Mexico.
All of the Company's employees based in Los Angeles, other than executive
officers and senior management are provided by an employee leasing company that
has responsibility for payroll and human resources functions. The Company has
determined that leasing employees offers advantages over directly employing its
workforce, including reduction of management time and effort required to be
devoted to multistate payroll administration, payroll tax and reporting, health
insurance program oversight and other administrative functions.
The Company's labor force located in the United States and Hong Kong are
non-union. The employees at the Company's Mexico facilities are represented by
the Sindicato "Mexico Moderno" De Trabajadores De La Baja California, C.R.O.M.
In addition to its salaried and hourly workforce, the Company employs additional
workers, on a temporary basis, throughout the year at its Mexico facilities
depending upon current production and assembly requirements. The temporary work
force ranges from zero to approximately one hundred employees at any one time
throughout the year. The Company believes that it has satisfactory employee and
labor relations.
The Company believes that its future success will depend in large part upon
its ability to recruit and retain qualified employees, particularly in the area
of product operations and sales and marketing. See "Risk Factors--Management of
Business Changes; Potential Growth; Potential Acquisitions" and "-- Dependence
on Key Personnel."
The Company intends to hire additional key personnel in the near future,
particularly in the areas of production operations and sales and marketing.
Specifically, the Company plans to use a portion of the net proceeds of this
Offering to hire additional sales representatives, in-house account managers and
additional operations staff.
All of the Company's key employees are located in Los Angeles, California.
PROPERTIES
The Company's headquarters is located in Los Angeles, California, in the
center of the apparel manufacturing district. It occupies approximately 18,145
square feet of administrative, preproduction and warehouse space pursuant to a
lease which expires on April 30, 2000 and provides for a current annual rental
of approximately $108,870. The Company's Los Angeles premises are leased from
D.P.S. Associates, a general partnership in which Harold Dyne is a general
partner. Adjacent to the headquarters, the Company leases an additional 5,000
square feet of office and warehouse space for the business of AGS
35
<PAGE>
Stationery. This lease expires on September 30, 1998 and the current annual
rental is approximately $31,200.
In addition to the Los Angeles facilities, Tag-It Hong Kong leases
approximately 3,000 square feet of office and warehouse space located in Fo Tan.
The lease expires on May 22, 1998 and provides for a current monthly rental of
approximately $3,770. Tag-It Mexico leases approximately 15,000 square feet of
production and warehouse space located in Tijuana, Mexico. The lease expires on
November 14, 1999, and the current monthly rental is $4,500. The lease may be
renewed for an additional one year term. In addition, Pacific Trim leases
approximately 800 square feet of office and showroom space located in New York,
New York. The current term of the lease expires on April 30, 1998 and provides
for a current monthly rental of $1,400. The lease may be renewed through April
30, 1999 at a monthly rental of $1,500.
The Company is currently studying its office and production requirements. It
is anticipated that a portion of the proceeds from the Offering may be used to
relocate the Company's operations to larger facilities during the first or
second quarters of 1998. The Company does not believe that there will be any
adverse impact in terminating its current lease agreements for any of its leased
properties in Los Angeles.
LEGAL PROCEEDINGS
Certain claims, suits and complaints which arise in the ordinary course of
the Company's business have been filed or are pending against the Company. The
Company believes that it has meritorious defenses to such claims or that such
matters either are adequately reserved for, are covered by insurance, or would
not, after taking into account the reserves established and/or insurance in
place, have a material adverse effect on the Company's consolidated financial
condition or results of operations, if adversely determined against the Company.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the directors and executive officers of the
Company as of November 30, 1997 is as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ----------------------------------------------------------------------
<S> <C> <C>
Mark Dyne(1)........................ 36 Chairman of the Board
Colin Dyne(1)....................... 34 Chief Executive Officer and Director;
Chief Executive Officer of Tag-It
Harold Dyne(1)...................... 65 President and Director; Chief Executive Officer of Pacific Trim
Francis Shinsato.................... 46 Chief Financial Officer
Jonathan Markiles(2)................ 33 Executive Vice President, Strategic Planning and Business Development,
and Secretary
Jonathan Burstein(3)................ 31 Executive Vice President, Sales and Marketing
Diana Maranon(4)(5)................. 39 Director
Brent Cohen*(4)(5).................. 39 Director
Michael Katz*....................... 56 Director
Paul Markiles*(2)................... 64 Director
</TABLE>
- ------------------------
* These individuals currently do not serve in the positions indicated. The
Company intends to appoint these individuals to these positions prior to the
consummation of the Offering.
(1) Colin Dyne and Mark Dyne are brothers. Harold Dyne is their Father.
(2) Jonathan Markiles is the son of Paul Markiles.
(3) Jonathan Burstein is Harold Dyne's son-in-law and Colin Dyne's and Mark
Dyne's brother-in-law.
(4) Member of the Audit Committee effective upon appointment as a director.
(5) Member of the Compensation Committee effective upon appointment as a
director.
MARK DYNE has served as Chairman of the Board of Directors of the Company
since September 1997. Mr. Dyne currently is Chairman of the Board of Directors
and Chief Executive Officer of Brilliant Digital Entertainment, Inc., a position
he has held since October 1996, Joint Managing Director of Sega Ozisoft Pty.
Limited, a company he helped found in 1982, a director of Monto Holdings Pty.
Ltd. and Nu-Metro Multimedia Pty. Ltd., and a co-owner and director of Packard
Bell Australia Pty. Ltd. From June 1995 through May 1997, Mr. Dyne served as
Co-Chief Executive Officer of Sega Enterprises (Australia) Pty., Ltd., which
operates a $70 million interactive indoor theme park in Darling Harbor in
Sydney, Australia.
COLIN DYNE has served as Chief Executive Officer and Director of the Company
since October 1997. Mr. Dyne founded Tag-It in 1991 with his father, Harold
Dyne, and has served as its President since inception. Prior to founding Tag-It
in 1991, Mr. Dyne worked in numerous positions within the stationery products
industry, including owning and operating retail stationery businesses and
servicing the larger commercial products industry through contract stationery
and printing operations.
HAROLD DYNE has served as President and Director of the Company since
October 1997. Mr. Dyne, founder of Pacific Trim, one of the Subsidiaries, has
served as Chief Executive Officer of Pacific Trim since it was founded in 1987.
Mr. Dyne has been involved in the apparel industry since 1958, when he founded
the Union Fasteners Corporation in South Africa. In 1971, he formed a joint
venture with YKK Zipper Manufacturing Company in Southern Africa.
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FRANCIS SHINSATO was appointed Chief Financial Officer of the Company in
November 1997. Prior to joining the Company, from February 1997 through October
1997, Mr. Shinsato was an independent accounting and information systems
consultant. From January 1996 until February 1997, Mr. Shinsato was the
Controller of Centon Electronics, Inc., a privately held computer memory
manufacturer where he was responsible for financial statement preparation and
credit and collection management. From 1985 to 1995, Mr. Shinsato served as the
Vice President of Finance and Controller of Newport Electronics, Inc. and
oversaw all financial, accounting and management information systems. Newport
Electronics, Inc. is a designer and manufacturer of test and measurement
equipment and was a publicly traded company until 1992. Mr. Shinsato is a
certified public accountant.
JONATHAN MARKILES is Executive Vice President, Strategic Planning and
Business Development, and Secretary of the Company. Mr. Markiles joined Tag-It
in May 1994 as its General Manager where he has been responsible for production,
distribution and international operations. Prior to joining Tag-It, Mr. Markiles
received his M.B.A. from the University of Southern California in May 1994. From
1987 until August 1992, Mr. Markiles held various operational positions with
Windshields America, Inc., a national chain of autoglass stores.
JONATHAN BURSTEIN is Executive Vice President, Sales and Marketing of the
Company. From 1987 until the present, Mr. Burstein has been employed by Pacific
Trim, where he has been responsible for managing many of Pacific Trim's largest
customer accounts and supervising Pacific Trim's sales force. Mr. Burstein also
has been responsible for implementing systems and protocols in the purchasing
department as well as developing and managing Pacific Trim's key supply lines.
DIANA MARANON will be elected a director of the Company prior to the
consummation of the Offering. Ms. Maranon is the President and Managing Director
of Averil Associates, Inc. ("Averil Associates"), a financial advisory firm and
member of the National Association of Securities Dealers, and serves as a
director of Brilliant Digital Entertainment, Inc., a production and development
studio involved in the production of a new generation of digital entertainment,
and Micronet Technology, Inc., a company involved in the development of data
storage products. Prior to founding Averil Associates in 1994, Ms. Maranon was a
Vice President with Wasserstein Perella & Co., Inc., an investment banking firm,
with whom she started in 1988. From 1985 to 1988, Ms. Maranon practiced
securities law with Skadden Arps Slate Meagher & Flom. Ms. Maranon is a member
of the State Bar of California.
BRENT COHEN will be elected a director of the Company prior to the
consummation of the Offering. Mr. Cohen has served as President of the Consumer
Products and International divisions of Packard Bell NEC, Inc., since 1996. From
1987 to 1996, Mr. Cohen served in various positions with Packard Bell,
culminating with the position of Chief Financial Officer and Chief Operating
Officer prior to his election to his current office. Prior to joining Packard
Bell NEC, Inc., Mr. Cohen was employed with Ernst & Young.
MICHAEL KATZ will be elected a director of the Company prior to the
consummation of the Offering. From 1987 to the present, Mr. Katz has served as
President, Chief Operating Officer and director of Transducer Controls
Corporation, a manufacturer of position and pressure transducers. During the
same period, Mr. Katz also served as President, Chief Operating Officer and
director of Tedea-Huntleigh, Inc., a manufacturer of lode-cells and force-cells.
Since September 1996, Mr. Katz has held the position of Chairman of the Board of
Filtomat, Inc., a manufacturer of automatic industrial water filters.
PAUL MARKILES will be elected a director of the Company prior to the
consummation of the Offering. Prior to his retirement in 1991, Mr. Markiles
served as President and Chief Executive Officer of Windshields America, Inc., a
subsidiary of South African Breweries. Mr. Markiles was responsible for the
founding and expansion of Windshields America into a national chain of over 120
retail autoglass stores.
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BOARD OF DIRECTORS
The Board of Directors is divided into three classes, designated Class I,
Class II and Class III. Brent Cohen and Diana Maranon will serve as the Class I
directors. This class will stand for election at the 1998 annual stockholders
meeting. Harold Dyne, Michael Katz and Paul Markiles will serve as the Class II
directors. This class will stand for election at the 1999 annual stockholders
meeting. Colin Dyne and Mark Dyne currently are the Class III directors. This
class will stand for election at the 2000 annual stockholders meeting. At each
annual meeting of stockholders, successors of the class of directors whose term
expires at that annual meeting are elected for a three-year term or until their
successors have been elected and qualified. If the number of directors is
changed, any increase or decrease is to be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible.
Directors may be removed from office only for cause by the affirmative vote of a
majority of the outstanding shares of Common Stock. Vacancies on the Board of
Directors may be filled only by a majority of the directors then in office.
BOARD COMMITTEES
The Company's Board of Directors maintains an Audit Committee and a
Compensation Committee. The Audit Committee's functions include recommending to
the Board of Directors the engagement of the Company's independent certified
public accountants, reviewing with those accountants the plan and results of
their audit of the financial statements and determining the independence of the
accountants. The Compensation Committee reviews and makes recommendations with
respect to compensation of officers and key employees, and is currently
responsible for the grant of options and other awards under the Company's Stock
Incentive Plan. See "--Stock Incentive Plan."
DIRECTOR COMPENSATION
Nonemployee directors of the Company currently are paid $1,500 for their
personal attendance at any meeting of the Board and $500 for attendance at any
telephonic meeting of the Board or at any meeting of a committee of the Board.
Directors also are reimbursed for their reasonable travel expenses incurred in
attending Board or committee meetings. The Company has granted to Ms. Maranon,
and intends to grant to each of Messrs. Cohen, Katz and Markiles, effective upon
commencement of their services as directors, options to purchase 15,000 shares,
20,000 shares, 15,000 shares and 15,000 shares, respectively, of Common Stock at
an exercise price of $4.40 per share.
EXECUTIVE COMPENSATION
The following table sets forth both cash and noncash compensation paid or to
be paid by the Company, directly and/or through its subsidiaries, to, Colin
Dyne, the Chief Executive Officer of the Company, and Harold Dyne, the President
of the Company and the Chief Executive Officer of Pacific Trim, and each other
executive officer whose compensation exceeded $100,000 (the "Named Executive
Officers") for the fiscal year ended August 31, 1997. No other officer received
compensation in excess of $100,000 for the fiscal year ended August 31, 1997.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL YEAR ------------------------------------
ENDED AUGUST OTHER ANNUAL
NAME AND PRINCIPAL POSITION 31, SALARY BONUS COMPENSATION
- --------------------------------------------------------------- ------------- ---------- ---------
<S> <C> <C> <C> <C>
Colin Dyne, ................................................... 1997 $ 227,340 -- $ 22,773(1)
Chief Executive Officer
Harold Dyne, .................................................. 1997 $ 214,334 -- $ 24,832(1)
President
Jonathan Burstein, ............................................ 1997 $ 152,981 -- $ 12,393(1)
Executive Vice President, Sales and Marketing
</TABLE>
- ------------------------
(1) Represents car allowance and medical insurance.
EMPLOYMENT CONTRACTS
None of the Named Executive Officers have employment agreements with the
Company and their employment may be terminated at any time. See "Risk
Factors--Dependence on Key Personnel."
STOCK INCENTIVE PLAN
The Company adopted a Stock Incentive Plan (the "1997 Plan") in October
1997. Each executive officer, other employee, non-employee director or
consultant of the Company or any of its subsidiaries is eligible to be
considered for the grant of awards under the 1997 Plan. A maximum of 562,500
shares of Common Stock may be issued pursuant to awards granted under the 1997
Plan, subject to certain adjustments to prevent dilution. Any shares of Common
Stock subject to an award which for any reason expires or terminates unexercised
are again available for issuance under the 1997 Plan.
The 1997 Plan will be administered by the Company's Board of Directors or by
a committee of two or more directors appointed by the Board of Directors (the
"Administrator"). Subject to the provisions of the 1997 Plan, the Administrator
will have full and final authority to select the executives and other employees
to whom awards will be granted thereunder, to grant the awards and to determine
the terms and conditions of the awards and the number of shares to be issued
pursuant thereto.
AWARDS. The 1997 Plan authorizes the Administrator to enter into any type
of arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of (1) shares of Common Stock, (2) an option, warrant,
convertible security, stock appreciation right or similar right with an exercise
or conversion privilege at a price related to the Common Stock, or (3) any other
security or benefit with a value derived from the value of the Common Stock. The
maximum number of shares of Common Stock with respect to which options or rights
may be granted under the 1997 Plan to any participant in any year is 140,625,
subject to certain adjustments to prevent dilution.
Awards under the 1997 Plan are not restricted to any specified form or
structure and may include arrangements such as sales, bonuses or other transfers
of stock, restricted stock, stock options, reload stock options, stock purchase
warrants, other rights to acquire stock or securities convertible into or
redeemable for stock, stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares. An award may consist of
one such arrangement or two or more such arrangements in tandem or in the
alternative. An award may provide for the issuance of Common Stock for any
lawful consideration, including services rendered or, to the extent permitted by
applicable state law, to be rendered. Currently, Delaware law does not permit
the issuance of common stock for services to be rendered.
An award granted under the 1997 Plan may include a provision conditioning or
accelerating the receipt of benefits, either automatically or in the discretion
of the Administrator, upon the occurrence of specified events, including a
change of control of the Company, an acquisition of a specified percentage of
the voting power of the Company or a dissolution, liquidation, merger,
reclassification, sale of substantially all of the property and assets of the
Company or other significant corporate transaction. Any stock option
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<PAGE>
granted to an employee may be an incentive stock option within the meaning of
Section 422 of the Code or a nonqualified stock option.
An award under the 1997 Plan may permit the recipient to pay all or part of
the purchase price of the shares or other property issuable pursuant to the
award, and/or to pay all or part of the recipient's tax withholding obligations
with respect to such issuance, by delivering previously owned shares of capital
stock of the Company or other property, or by reducing the amount of shares or
other property otherwise issuable pursuant to the award. If an option granted
under the 1997 Plan permitted the recipient to pay for the shares issuable
pursuant thereto with previously owned shares, the option may grant the
recipient the right to "pyramid" his or her previously owned shares, i.e., to
exercise the option in successive transactions, starting with a relatively small
number of shares and, by a series of exercises using shares acquired from each
transaction to pay the purchase price of the shares acquired in the following
transaction, to exercise the option for a larger number of shares with no more
investment than the original share or shares delivered.
As of the date hereof, the Board has granted options covering an aggregate
of 260,000 shares of Common Stock to certain directors and officers of the
Company, with an exercise price of $4.40 per share. The directors' options were
granted effective at such time as each director joins the Board of Directors and
will be immediately fully vested. The options granted to officers vest either in
four equal annual installments commencing on the date of grant or in 48 equal
monthly installments commencing on the date of grant.
PLAN DURATION. The 1997 Plan became effective upon its adoption by the
Board of Directors and approved by the Company's stockholders on October 1,
1997, and, unless sooner terminated by the Board of Directors, will terminate on
October 1, 2007. No awards may be made after such date, nor may any shares of
Common Stock be issued pursuant to any award made after such date, although any
award that was duly granted on or prior to such date may thereafter be exercised
or settled in accordance with its terms. See "Principal and Selling
Stockholders."
AMENDMENTS. The Administrator may amend the 1997 Plan at any time and in
any manner, subject to the following: (1) no recipient of any award may, without
his or her consent, be deprived thereof or of any of his or her rights
thereunder or with respect thereto as a result of such amendment or termination;
and (2) if any rule or regulation promulgated by the Securities and Exchange
Commission (the "Commission"), the Internal Revenue Service or any national
securities exchange or quotation system upon which any of the Company's
securities are listed requires that any such amendment be approved by the
Company's stockholders, then such amendment will not be effective until it has
been approved by the Company's stockholders.
FORM S-8 REGISTRATION. The Company intends to file a registration statement
under the Securities Act to register the 562,500 shares of Common Stock reserved
for issuance under the 1997 Plan. Such registration statement is expected to be
filed shortly following the date of this Prospectus and will become effective
immediately upon filing with the Commission. Shares issued under the 1997 Plan
after the effective date of such registration statement generally will be
available for sale to the public without restriction, except for agreed lock-up
provisions and except for shares issued to affiliates of the Company, which will
remain subject to the volume and manner of sale limitations of Rule 144. See
"Shares Eligible For Future Sale."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation and its Bylaws provide for the
indemnification by the Company of each director, officer and employee of the
Company to the fullest extent permitted by the Delaware General Corporation Law,
as the same exists or may hereafter be amended. Section 145 of the Delaware
General Corporation Law provides in relevant part that a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the
41
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right of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper. Delaware law further provides that nothing
in the above-described provisions shall be deemed exclusive of any other rights
to indemnification or advancement of expenses to which any person may otherwise
be entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
The Company's Certificate of Incorporation also provides that a director of
the Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, to the greatest extent
permitted by the Delaware General Corporation Law. Section 102(b)(7) of the
Delaware General Corporation Law provides that a provision so limiting the
personal liability of a director shall not eliminate or limit the liability of a
director for, among other things: breach of the duty of loyalty; acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law; unlawful payment of dividends; and transactions from which
the director derived an improper personal benefit.
The Company has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director of the Company and certain of
its officers (the "Indemnitees"). Pursuant to the terms and conditions of the
Indemnity Agreements, the Company has agreed to indemnify each Indemnitee
against any amounts which he or she becomes legally obligated to pay in
connection with any claim against him or her based upon any action or inaction
which he or she may commit, omit or suffer while acting in his or her capacity
as a director and/or officer of the Company or its subsidiaries, provided,
however, that Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal action, had no reasonable cause to believe
Indemnitee's conduct was unlawful.
At the present time, there is no pending litigation or proceedings involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceedings which may result in a claim for such
indemnification.
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CERTAIN TRANSACTIONS
The information set forth herein briefly describes certain transaction
between the Company and certain affiliated parties. Future transactions with
affiliated parties will be approved by a majority of the Company's disinterested
directors and will be on terms no less favorable to the Company than those that
could be obtained from unaffiliated parties.
D.P.S. Associates, a general partnership in which Harold Dyne is a general
partner, is the lessor of the Company's executive offices located at 3820 South
Hill Street in Los Angeles, California pursuant to a Lease Agreement (the
"D.P.S. Lease") with Pacific Trim, a wholly owned subsidiary of the Company.
Harold Dyne is the President and a director of the Company and the Chief
Executive Officer of Pacific Trim. The D.P.S. Lease provides for a base rent of
$9,072 per month and expires on April 30, 2000.
Harold Dyne, the President and a director of the Company and the Chief
Executive Officer of Pacific Trim, and Colin Dyne, the Chief Executive Officer
and a director of the Company and the Chief Executive Officer of Tag-It, each
have personally guaranteed certain obligations of Pacific Trim and Tag-It under
various equipment lease agreements with Saddleback Financial Corporation and
Quail American Corp. The total original amount outstanding under these equipment
lease agreements was approximately $202,000. Harold Dyne also has guaranteed
Pacific Trim's obligations under its lease agreement for the premises located at
262 W. 38th Street, New York, New York. The lease provides for an annual base
rent of $16,800.
Certain affiliated parties have made loans to the Subsidiaries to be used
for general working capital purposes, all of which are evidenced by promissory
notes executed by the respective Subsidiary and are due and payable on the
fifteenth day following the date written demand for payment is made by the
holder thereof at any time after December 31, 1998. The loans include (i) a loan
by Harold Dyne in June 1991 of $10,000 to Tag-It at an interest rate of 10.0%
per annum, (ii) a loan by Mark Dyne in January 1997 of $15,000 to Tag-It at an
interest rate of 7.5% per annum, (iii) a loan by Monto Holdings in February 1996
of $300,000 to AGS Stationery at an interest rate of 7.5% per annum, (iv) a loan
by Monto Holdings in January 1995 of $124,626 to Pacific Trim at an interest
rate of 10.0% per annum, (v) a loan by NPM Investments, Inc. in August 1996 of
$715,000 to Tag-It at an interest rate of 7.5% per annum, which loan is secured
by all of the assets of Tag-It, (vi) a loan by Pacific Western, Inc. in May 1996
of $16,000 to Tag-It at an interest rate of 7.5% per annum, and (vii) a loan by
Pacific Western, Inc. in June 1996 of $6,000 to Pacific Trim at an interest rate
of 7.5% per annum. Mark Dyne, the Chairman of the Board of the Company holds a
significant equity interest in Monto Holdings, NPM Investments, Inc. and Pacific
Western, Inc. A company controlled by Alan Saloner is the general partner of the
Saloner Family Investments Limited Partnership, which is a stockholder of the
Company, and Alan Saloner holds a significant equity interest in NPM
Investments, Inc.
In addition, in August 1996, NPM Investments, Inc. made an additional loan
of $875,000 to Tag-It, without interest, pursuant to a convertible secured
promissory note (the "Convertible Note") which was secured by all of the assets
of Tag-It. Mark Dyne and Alan Saloner hold significant equity interests in NPM
Investments, Inc. The proceeds of the loan were used for working capital
purposes. In October 1997, the Convertible Note was converted by NPM
Investments, Inc. into shares of Common Stock of Tag-It, Tag-It Hong Kong and
AGS Stationery which in the aggregate represent 384,402 shares of Common Stock.
In September and October 1997, NPM Investments, Inc. made an additional loan
of $126,972 to Tag-It to fund expenses incurred in connecton with the Offering.
The loan bears simple interest at a rate of 7.5% per annum, is due and payable
on the fifteenth day following the date of delivery by NPM Investments, Inc. of
written demand therefor and is expected to be repaid upon the closing of the
Offering.
In September 1996, Harold Dyne borrowed $100,000 from Mercantile National
Bank, which loan was guaranteed by Tag-It. The term loan matures on May 17, 1999
and had an outstanding principal balance of approximately $81,552 as of October
10, 1997. In September 1996, the $100,000 borrowed by Mr. Dyne was
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lent to Tag-It for working capital purposes at the same interest rate payable on
Mr. Dyne's loan from Mercantile National Bank (11.75% as of November 30, 1997).
The loan from Mr. Dyne to Tag-It is due and payable on the fifteenth day
following the date written demand for payment is made by Mr. Dyne at any time
after December 31, 1998.
In October and November 1997, Monto Holdings made additional loans of
$12,000 to AGS Stationery and $110,000 to Pacific Trim, respectively, to fund
expenses incurred in connection with the Offering. The loans bear simple
interest at a rate of 7.5% per annum, are due and payable on the fifteenth day
following the date of delivery by Monto Holdings of written demand therefor at
any time after December 31, 1998 and are expected to be repaid upon the closing
of the Offering.
Harold Dyne and Colin Dyne have each guaranteed the obligations of Tag-It
under a term loan with Mercantile National Bank. The term loan matures on June
8, 1998 and had an outstanding principal balance of approximately $59,169 as of
November 30, 1997.
As of November 30, 1997, Harold Dyne was indebted to Pacific Trim in the
aggregate amount of $22,649. This indebtedness is evidenced by a promissory note
dated August 31, 1997 in the principal amount of $19,649, which currently does
not bear interest, and a promissory note dated October 15, 1997 in the principal
amount of $3,000, which bears interest at a rate of 7.5% per annum and is due
and payable on December 31, 1998.
As of November 30, 1997, Colin Dyne was indebted to Tag-It in the aggregate
amount of $90,655. This indebtedness is evidenced by a promissory note dated
August 31, 1997 in the principal amount of $71,542, which is due and payable in
four bi-annual installments of $17,886 on June 30, 1998, December 31, 1998, June
30, 1999 and December 31, 1999, and a promissory note dated October 15, 1997 in
the principal amount of $6,089, which is due and payable on December 31, 1998.
Both promissory notes bear interest at a rate of 7.5% per annum.
Harold Dyne and Colin Dyne have each guaranteed the obligations of Tag-It
under a Consulting Agreement and an Agreement for the Repurchase of Stock with
Frank M. Peck, a former shareholder of Tag-It. The Consulting Agreement provides
that until December 31, 1998, Frank Peck will receive a monthly consulting fee
in the amount of $11,900 subject to certain adjustments based on the aggregate
annual compensation paid by Tag-It to Colin Dyne and Harold Dyne.
In June 1997, AGS Stationery entered into a Collection Date Factoring
Agreement (the "Safcor Agreement") with Safcor, Inc. ("Safcor"). Alan Saloner,
the general partner of the Saloner Family Investments Limited Partnership, a
significant stockholder of the Company, is an officer and director of Safcor.
Pursuant to the Safcor Agreement, AGS Stationery has agreed to sell to Safcor
all accounts relating to the sale of goods or the rendering of services by AGS
Stationery for a purchase price equal to the gross amount of each account, less
all discounts and credits and a factoring commission of 1.5% of the net amount
of the account. In addition, Safcor has the right, in its sole discretion, to
provide customers of AGS Stationery with credit lines for the purchase of AGS
Stationery's products. As of November 30, 1997, receivables advanced by AGS
Stationery to Safcor totalled $1,095,402, and amounts paid by Safcor to AGS
Stationery for such receivable totalled $751,738. The Safcor Agreement may be
terminated by either party upon 60 days prior written notice to the other party.
In 1994, Jonathan Markiles, as compensation for employment services,
received a warrant (the "Markiles Warrants") to purchase 14 shares of Tag-It
Common Stock which, upon the Consolidation, became exercisable for 39,235 shares
of Common Stock at a price of $.7136 per share. In the event the shares of
Common Stock underlying the Markiles Warrants are not freely tradeable under the
Securities Act, the Company has agreed to register these shares on Form S-3 or
Form S-8. The Markiles Warrants provide for piggyback registration rights and
expire on December 31, 2002.
Averil Associates, Inc., ("Averil Associates") a financial advisory firm
founded and controlled by Diana Maranon, has, since January 1, 1996, performed
various services for AGS Stationery and the
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Company including investigation of strategic financing and other corporate
growth initiatives. Ms. Maranon is a director of the Company. As consideration
for such services, AGS Stationery has paid to Averil Associates the aggregate
amount of $26,123, including out of pocket expenses. As additional compensation
for services rendered, AGS Stationery has granted to Chloe Holdings, Inc.
("Chloe"), an affiliate of Averil Associates, warrants (the "Chloe Warrants") to
purchase up to 135 shares of Common Stock of AGS Stationery, and the Company has
agreed to pay to Averil Associates an additional $175,000 upon consummation of
the Offering. Effective upon the Consolidation, the Chloe Warrants became
exercisable for 22,841 shares of Common Stock of the Company. The Chloe Warrants
are immediately exercisable. In the event the shares of Common Stock underlying
the Chloe Warrants are not freely tradeable under the Securities Act, the
Company has agreed to register these shares on Form S-3. The Company plans to
continue to engage Averil Associates; however, the Company is unable to
currently estimate the extent to which it will use Averil Associates in the
future.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1997, and as adjusted
to reflect the sale of 1,400,000 shares of Common Stock by the Company and the
sale of 170,000 shares of Common Stock by the Selling Stockholder offered by
this Prospectus and assumes no exercise of the Over-Allotment Option granted to
the Underwriters by the Company and the Selling Stockholder for (i) each person
who is known to the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers, and (iv) all directors and executive officers of
the Company as a group. The address of each person listed is in care of the
Company, 3820 South Hill Street, Los Angeles, California 90037, unless otherwise
set forth below such person's name.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) AFTER THE OFFERING
----------------------- NUMBER -----------------------
NUMBER PERCENT OF SHARES NUMBER PERCENT
NAME OF BENEFICIAL OWNER OF SHARES OF CLASS OFFERED OF SHARES OF CLASS
- --------------------------------------------------------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Harold Dyne(2)........................................... 789,507 32.0% 170,000 619,507 16.0%
Colin Dyne(2)............................................ 584,541 23.7 -- 584,541 15.1
Mark Dyne(2)............................................. 461,401 18.7 -- 461,401 11.9
Saloner Family Investments Limited Partnership........... 160,168 6.5 -- 160,168 4.1
Jonathan Burstein........................................ 75,788 3.1 -- 75,788 2.0
Jonathan Markiles(3)(4).................................. 53,248 2.1 -- 53,248 1.4
Diana Maranon(5)......................................... 37,841 1.5 -- 37,841 1.0
Brent Cohen(6)........................................... 20,000 * -- 20,000 *
Michael Katz(7).......................................... 15,000 * -- 15,000 *
Paul Markiles(3)(7)...................................... 15,000 * -- 15,000 *
All of the directors and executive officers as a group
(nine persons)(8)...................................... 2,052,326 79.0 170,000 1,882,326 47.1
</TABLE>
- ------------------------
* Represents less than 1% of outstanding Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially owned
by any person who has or shares voting or investment power with respect to
such shares. Unless otherwise indicated, the persons named in this table
have sole voting and sole investment power with respect to all shares shown
as beneficially owned, subject to community property laws where applicable.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days of December 31, 1997 are deemed outstanding. Such
shares, however, are not deemed outstanding for the purposes of computing
the percentage ownership of each other person. Accordingly, the beneficial
ownership percentages shown above exceed 100%.
(2) Colin Dyne and Mark Dyne are brothers. Harold Dyne is their Father.
(3) Paul Markiles and Jonathan Markiles are father and son.
(4) Includes 39,235 shares of Common Stock reserved for issuance upon exercise
of Markiles Warrants, which are currently exercisable.
(5) Includes 15,000 shares of Common Stock reserved for issuance upon exercise
of stock options which are currently exercisable and 22,841 shares of Common
Stock reserved for issuance upon exercise of the Chloe Warrants, which are
currently exercisable.
(6) Represents 20,000 shares of Common Stock reserved for issuance upon exercise
of stock options which are currently exercisable.
(7) Represents 15,000 shares of Common Stock reserved for issuance upon exercise
of stock options which are currently exercisable.
(8) Includes the shares of Common Stock referred to in footnotes (4), (5), (6)
and (7) above.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 15,000,000 shares of Common Stock, par
value $0.001 per share, and 3,000,000 shares of Preferred Stock, par value
$0.001 per share. At December 31, 1997, the Company had 2,470,011 shares of
Common Stock outstanding held by 12 holders of record. The following statements
are brief summaries of certain provisions relating to the Company's capital
stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters on which the holders of Common Stock are entitled to vote.
The holders of Common Stock are entitled to receive ratably dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. In the event of liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled subject to the rights of holders of
Preferred Stock issued by the Company, if any, to share ratably in all assets
remaining available for distribution to them after payment of liabilities and
after provision is made for each class of stock, if any, having preference over
the Common Stock.
The holders of Common Stock have no preemptive or conversion rights and they
are not subject to further calls or assessments by the Company. There are no
redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are, and the Common Stock issuable pursuant
to this Prospectus will be, when issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the authorized and
unissued Preferred Stock in one or more series with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which adversely affect the voting power or other rights
of the holders of the Company's Common Stock. In the event of issuance, the
Preferred Stock could be utilized, under certain circumstances, as a way of
discouraging, delaying or preventing an acquisition or change in control of the
Company. The Company does not currently intend to issue any shares of its
Preferred Stock.
WARRANTS
In connection with its engagement of Troop Meisinger Steuber & Pasich, LLP
("TMS&P") as counsel to the Company, the Company has agreed to issue to TMS&P
warrants (the "TMS&P Warrants") to purchase such number of shares of Common
Stock of the Company as is equal to the quotient of (i) 120% of the actual fees,
costs and disbursements billed by TMS&P in connection with the Offering, divided
by (ii) an amount equal to 90% of the initial public offering price of a share
of Common Stock in the Offering. The TMS&P Warrants will be granted upon the
closing of the Offering or, if the Offering is not successful, on such date as
the Company decides not to continue with the Offering. Each TMS&P Warrant will
be immediately exercisable and will expire five years following the date of
grant unless the Company decides not to continue with the Offering, in which
case they will expire one year following the date of grant. Each TMS&P Warrant
provides for piggyback registration rights. See "--Registration Rights."
Pursuant to an agreement with Averil Associates, the Company issued the
Chloe Warrants to purchase 22,841 shares of Common Stock with an exercise price
of $.7578 per share. In the event the shares of Common Stock underlying the
Chloe Warrants are not freely tradeable pursuant to an exemption from
registration under the Securities Act of 1933, as amended, (the "Securities
Act"), the Company has agreed to register these shares on Form S-3.
Additionally, the Chloe Warrants provide for piggyback registration rights. See
"--Registration Rights." These warrants expire on December 31, 2002.
47
<PAGE>
In 1994, Jonathan Markiles, as compensation for employment services,
received the Markiles Warrants to purchase 14 shares of Tag-It Common Stock
which, upon the Consolidation, became exercisable for 39,235 shares of Common
Stock at a price of $.7136 per share. In the event the shares of Common Stock
underlying the Markiles Warrants are not freely tradeable under the Securities
Act, the Company has agreed to register these shares on Form S-3 or Form S-8.
The Markiles Warrants also provide for piggyback registration rights and expire
on December 31, 2002.
On December 31, 1997, in connection with the purchase of $220,000 of Bridge
Notes, Cruttenden Roth Bridge Fund, LLC (the "Bridge Fund") received Bridge
Warrants to purchase 32,000 shares of Common Stock and is entitled to receive
additional Bridge Warrants to purchase up to 15,000 shares of Common Stock if
the Bridge Fund purchases an additional $110,000 of Senior Subordinated Secured
Notes (the "Bridge Notes"). The Bridge Warrants will be exercisable for a period
of four years, commencing one year after the date of this Prospectus, at an
initial per share exercise price equal to the greater of $6.00 or 120% of the
price set forth on the cover page of this Prospectus. The Company may require
the Bridge Fund to purchase an aggregate maximum amount of $550,000 in Bridge
Notes. If the Bridge Fund purchases such maximum amount, the Bridge Fund has the
right to convert $1,000 of Bridge Note principal into Bridge Warrants to
purchase an additional 33,000 shares of Common Stock. The Bridge Warrants
provide for demand and piggyback registration rights. See "Underwriting"
All of the warrants granted to TMS&P, Chloe, Jonathan Markiles, the Bridge
Fund and the Representatives are entitled to equitable adjustments in the
purchase price and in the number of shares of Common stock and/or other
securities deliverable upon exercise thereof in the event of a stock dividend,
stock split, reclassification, reorganization, consolidation or merger.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation provides that the Company's Board
of Directors is classified into three classes of directors. The Certificate of
Incorporation also provides that all stockholder action must be effected at a
duly called meeting of stockholders and not by a consent in writing. In
addition, the Company's Certificate of Incorporation and Bylaws provide that
only the Company's Chief Executive Officer, President, Chairman of the Board or
a majority of the members of the Company's Board of Directors may call a special
meeting of stockholders. In addition, directors may not be removed without
cause. These provisions of the Certificate of Incorporation and Bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. Such provisions also may have the effect of
preventing changes in the management of the Company. See "Risk Factors--Effect
of Certain Charter Provisions; Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with certain exceptions, that a
Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of such person, who is an
"interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless: (i) the transaction resulting in
a person becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any
48
<PAGE>
person that is (a) the owner of 15% or more of the outstanding voting stock of
the corporation or (b) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
REGISTRATION RIGHTS
After the Offering, the holders of the Representatives' Warrants, the TMS&P
Warrants, the Chloe Warrants, the Markiles Warrants and the Bridge Warrants will
be entitled to certain rights with respect to registration of such shares under
the Securities Act. If the Company proposes to register any of its securities
under the Securities Act at least 180 days subsequent to the Offering, the
holders of the TMS&P Warrants, the Chloe Warrants and the Markiles Warrants are
entitled to notice of such registration and are entitled to include the shares
underlying their respective warrants in such registration, provided, among other
conditions, that the underwriters of any offering have the right to limit the
number of shares included in such registration. In addition, in the event the
shares of Common Stock underlying the Chloe Warrants or the Markiles Warrants
are not freely tradeable pursuant to an exemption from registration under the
Securities Act, the Company has agreed to register such shares on Form S-3 or
Form S-8. For a description of the Representatives' Warrants and the Bridge
Warrants, and the registration rights associated with such warrants, see
"Underwriting."
TRANSFER AGENT
The Company's transfer agent and registrar for its Common Stock is American
Stock Transfer and Trust Corporation, 40 Wall Street, New York, New York 10005.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Company's
Common Stock. Sale of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock.
Upon completion of the Offering, based on the number of shares outstanding
as of December 31, 1997, the Company will have outstanding an aggregate of
3,870,011 shares of Common Stock, assuming no exercise of the Underwriters'
Over-Allotment Option and no exercise of outstanding options and warrants. Of
these shares, the 1,570,000 shares sold in the Offering will be freely tradeable
without restriction or further registration under the Securities Act, unless
held by "affiliates" of the Company, as that term is defined in Rule 144 under
the Securities Act. The remaining 2,300,011 shares of Common Stock held by
existing stockholders are "restricted" securities within the meaning of Rule 144
under the Securities Act. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below.
All holders of the Company's securities outstanding prior to the Offering
will, prior to the Offering, be subject to "lock-up" provisions providing that
such holders will not offer to sell, contract to sell or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to, any shares of Common
Stock, or any options or warrants to purchase Common Stock, or any securities
convertible into or exercisable for Common Stock, of the Company for 365 days
after the effective date of the Offering without the prior written consent of
the Representatives. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, no shares will be eligible for immediate sale on the
effective date of the Offering and, unless earlier released from the lock-up
provisions, 2,300,011 currently outstanding shares of Common Stock will be
eligible for sale 365 days after the effective date of the Offering, subject in
all cases to the volume limitations of Rules 144 and 701 summarized below.
Additionally, pursuant to Rules 144 and 701, beginning one year after the
effective date of the Offering, upon the expiration of contractual lock-up
provisions with the Company, an aggregate of approximately 211,381 shares will
be vested and eligible for sale upon the exercise of outstanding stock options
and warrants.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Offering, a person (or persons whose shares must be aggregated) who has
beneficially owned restricted shares for at least one year, will be entitled to
sell in any three-month period a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock (approximately
38,700 shares immediately after the Offering) or (ii) the average weekly trading
volume during the four calendar weeks immediately preceding the date on which
notice of the sale is filed with the Securities and Exchange Commission. Sales
pursuant to Rule 144 are subject to certain requirements relating to manner of
sale, notice and availability of current public information about the Company. A
person (or persons whose shares must be aggregated) who is not deemed to have
been an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who has beneficially owned his or her shares for at least
two years is entitled to sell such shares pursuant to Rule 144(k) without regard
to the limitations described above. In general, under Rule 701 under the
Securities Act as currently in effect, any non-affiliate employee, consultant or
advisor of the Company who acquires shares from the Company in connection with a
compensatory stock or option plan or other written agreement related to
compensation is eligible to resell such shares 90 days after the effective date
of the Offering in reliance on Rule 144, but without compliance with certain
restrictions contained in Rule 144.
At December 31, 1997, the Company had reserved an aggregate of 562,500
shares of Common Stock for issuance pursuant to the 1997 Plan, and options to
purchase 260,000 shares were outstanding under the 1997 Plan. The Company
intends to file a registration statement under the Securities Act to register
the
50
<PAGE>
562,500 shares of Common Stock reserved for issuance under the 1997 Plan. Such
registration statement is expected to be filed shortly following the date of
this Prospectus and will become effective immediately upon filing with the
Securities and Exchange Commission. Shares issued under the 1997 Plan after the
effective date of such registration statement generally will be available for
sale to the public without restriction, except for the 365-day lock-up
provisions and shares issued to affiliates of the Company, which will remain
subject to the volume and manner of sale limitations of Rule 144. See
"Underwriting." Additionally, after the Offering, the Representatives, TMS&P,
Chloe, Jonathan Markiles and the Bridge Fund will be entitled to certain rights
with respect to registration under the Securities Act of the shares of Common
Stock underlying the Representatives' Warrants, the TMS&P Warrants, the Chloe
Warrants, the Markiles Warrants and the Bridge Warrants, respectively.
51
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Cruttenden Roth Incorporated and
Josephthal & Co. Inc. are acting as the representatives (the "Representatives"),
have agreed severally, subject to the terms and conditions contained in an
Underwriting Agreement ("Underwriting Agreement"), to purchase from the Company
and the Selling Stockholder the number of shares of Common Stock indicated below
opposite their respective names at the proposed public offering price less the
estimated underwriting discounts and commissions set forth on the cover page of
this Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions, and that the Underwriters are
committed to purchase all of such shares (other than those covered by the
Over-Allotment Option), if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Cruttenden Roth Incorporated..................................................... --
Josephthal & Co. Inc............................................................. --
----------
Total........................................................................ 1,570,000
----------
----------
</TABLE>
The Underwriters initially propose to offer the shares of Common Stock
offered hereby to the public at the price to public set forth on the cover page
of this Prospectus. The Underwriters may allow a concession to selected dealers
who are members of the National Association of Securities Dealers, Inc. ("NASD")
not in excess of $ per share, and the Underwriters may allow, and such
dealers may re-allow, to members of the NASD, a concession not in excess of
$ per share. After the public offering, the price to public, the
concession and the re-allowance may be changed by the Representatives.
The Company and the Selling Stockholder have granted the Over-Allotment
Option to the Underwriters, exercisable within 45 days after the date of this
Prospectus, to purchase up to 117,500 additional shares of Common Stock from the
Company and 117,500 additional shares of Common Stock from the Selling
Stockholder at the proposed initial price to public, less the estimated
underwriting discounts and commissions, set forth on the cover page of this
Prospectus. The Underwriters may exercise the option only for the purpose of
covering over-allotments. To the extent that the Underwriters exercise the
Over-Allotment Option, each Underwriter will be committed, subject to certain
conditions, to purchase from the Company and the Selling Stockholder that number
of additional shares of Common Stock which is proportionate to such
Underwriter's initial commitment.
The Company has also agreed to sell to the Representatives warrants to
purchase up to 110,000 shares of Common Stock (the "Representatives' Warrants").
The Representatives' Warrants will be exercisable for a period of four years,
commencing one year after the date of this Prospectus, at an initial per share
exercise price equal to 120% of the price to public set forth on the cover page
of this Prospectus. Neither the Representatives' Warrants nor the shares of
Common Stock issuable upon exercise thereof may be transferred, assigned or
hypothecated until one year from the date of this Prospectus, 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
realized by the Representatives on the sale of securities issuable upon exercise
of the Representatives' Warrants may be deemed to be additional compensation.
The holder of the Representatives' Warrants will have no voting, dividend or
other rights as a stockholder of the Company unless and until the exercise of
the Representatives' Warrants. The number of securities deliverable upon any
exercise of the Representatives' Warrants or their underlying securities and the
exercise price of the Representatives' Warrants are subject to adjustment to
protect against any dilution upon the occurrence of certain events, including
issuance of stock dividends, stock splits, subdivision or combination of
outstanding stock and reclassification of stock.
52
<PAGE>
The Company has agreed with the Representatives to register the
Representatives' Warrants and/or the underlying shares for resale, on one such
occasion at any time during the four-year period commencing one year following
the date of this Prospectus upon written demand by the Representatives. The
Company has agreed with the Representatives that if, during the four-year period
commencing one year following the date of this Prospectus, the Company registers
any of its Common Stock for sale pursuant to a registration statement (with the
exception of Form S-4, Form S-8 or other inappropriate form), it will use its
best efforts, upon request of any of holder of the Representatives' Warrants
and/or the underlying shares, to include such securities as a part of the
registration statement. The Company will bear all the costs, except underwriting
discounts and the Representatives' legal fees, for any registration.
The Representatives will also receive at the closing of the Offering a
non-accountable expense allowance equal to 2% of the aggregate public offering
price of the shares of Common Stock sold in the Offering including proceeds from
the Over-Allotment Option, if exercised. The Representatives' expenses in excess
of the non-accountable expenses allowance, including their legal expenses, will
be borne by the Representatives. To the extent that the expenses of the
Representatives are less than the non-accountable expense allowance, the excess
shall be deemed to be compensation to the Representatives.
The Company, and its executive officers, directors and its stockholders have
agreed that for a period of 365 days after the date of this Prospectus they will
not, directly or indirectly, offer, sell, contract to sell, grant any option to
sell, or otherwise dispose of shares of Common Stock or other securities which
are substantially similar to the Common Stock or securities convertible into or
exercisable or exchangeable for or any rights to purchase or acquire Common
Stock or securities which are substantially similar to the Common Stock without
the prior written consent of the Representatives.
Prior to this Offering, there has been no public market for the Common Stock
and there can be no assurance that a regular trading market will develop upon
the completion of this Offering. The public offering price will be determined by
arms-length negotiations between the Company, the Selling Stockholder and the
Representatives and will not necessarily bear any relationship to assets, book
value, earnings history or other investment criteria. The primary factors
considered in determining such offering price included the trading price for the
Company's Common Stock, the history of and prospects for the industry in which
the Company competes, market valuation of comparable companies, market
conditions for public offerings, the history of and prospects for the Company's
business, the Company's past and present operations and earnings and the trend
of such earnings, the prospects for future earnings of the Company, the
Company's current financial position, an assessment of the Company's management,
the general condition of the securities markets, the demand for similar
securities of comparable companies and other relevant factors. There can be no
assurance, however, that the prices at which the Common Stock will trade in the
public market following the Offering will not be lower than the initial public
offering price.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act or to contribute to payments which the Underwriters may be
required to make in respect thereof.
The Representatives have advised the Company that they do not expect any
sales by the Underwriters to accounts over which they exercise discretionary
authority.
The foregoing is a brief summary of the provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. The Underwriting Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
Certain persons participating in the Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid, or the effecting of any
53
<PAGE>
purchase, for the purpose of pegging, fixing or maintaining the price of the
Common Stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the Offering. A penalty bid means an
arrangement that permits the Underwriters to reclaim a selling concession from a
syndicate member in connection with the Offering when shares of Common Stock
sold by the syndicate member in connection with the Offering are purchased in
syndicate covering transactions. Such transactions may be effected on the
American Stock Exchange, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
The Cruttenden Roth Bridge Fund, LLC (the "Bridge Fund") has agreed to
purchase from the Company up to $550,000 in Senior Subordinated Secured Notes
(the "Bridge Notes") at a discount of 90.9% of the principal amount of the
Bridge Notes and the Company has agreed to issue the Bridge Fund Bridge Warrants
for Bridge Notes purchased. Cruttenden Roth Incorporated owns a 75% interest in
the Bridge Fund. The Bridge Notes bear interest at the rate of 12% per annum
payable on a monthly basis. As of December 31, 1997, the Bridge Fund had
purchased $220,000 of Bridge Notes and had received Bridge Warrants to purchase
32,000 shares of Common Stock. The Bridge Fund is entitled to receive additional
Bridge Warrants to purchase up to 15,000 shares of Common Stock for an
additional $110,000 of Bridge Notes purchased. The Company may require the
Bridge Fund to purchase an aggregate maximum amount of $550,000 in Bridge Notes.
If the Bridge Fund purchases such maximum amount, the Bridge Fund has the right
to convert $1,000 of Bridge Note principal into Bridge Warrants to purchase an
additional 33,000 shares of Common Stock.
The Bridge Warrants provide for registration rights similar to those
provided under the Representatives' Warrants. The Bridge Warrants will be
exercisable for a period of four years, commencing one year after the date of
this Prospectus, at an initial per share exercise price equal to the greater of
$6.00 or 120% of the price set forth on the cover page of this Prospectus.
Neither the Bridge Warrants nor the shares of Common Stock issuable upon the
exercise thereof may be transferred, assigned or hypothecated until one year
from the date of this Prospectus, except that they may be assigned, in whole or
in part, (i) to individuals who are either officers or partners of Cruttenden,
or (ii) by will or the laws of descent and distribution or (iii) to certain
successors of Cruttenden. Any profit realized by Cruttenden on the sale of
securities issuable upon exercise of the Bridge Warrants may be deemed to be
additional compensation.
LEGAL MATTERS
Counsel for the Company, Troop Meisinger Steuber & Pasich, LLP, Los Angeles,
California, have rendered an opinion to the effect that the Common Stock offered
by the Company upon sale will be duly and validly issued, fully paid and
non-assessable. Troop Meisinger Steuber & Pasich, LLP holds warrants to purchase
approximately 35,555 shares of Common Stock of the Company. Graham & James LLP,
San Francisco, California, has acted as counsel to the Underwriters in
connection with certain legal matters relating to this Offering.
EXPERTS
The consolidated financial statements of the Company at August 31, 1997 and
1996, and for the years then ended, appearing in this Prospectus and
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
54
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement under the Securities Act for the
shares offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits included
with the Registration Statement. Statements contained in this Prospectus as to
the contents of any contract or any other document referred to are not
necessarily complete, and with respect to any contract or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
is qualified in its entirety by this reference. For further information about
the Company and the shares offered by this Prospectus, reference is hereby made
to the Registration Statement and exhibits included with the Registration
Statement. A copy of the Registration Statement, including exhibits, may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
certain prescribed rates.
Upon consummation of the Offering, the Company will become subject to the
information requirements of the Exchange Act and, in accordance therewith, will
file reports and other information with the Securities and Exchange Commission
in accordance with its rules. These reports and other information concerning the
Company may be inspected and copied at the public reference facilities referred
to above as well as certain regional offices of the Securities and Exchange
Commission.
The Securities and Exchange Commission maintains a Web Site which contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Securities and Exchange Commission
(such as the Company) at http:\\www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by its independent auditors and
quarterly reports containing unaudited consolidated financial statements for
each of the first three quarters of each fiscal year.
55
<PAGE>
TAG-IT PACIFIC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of August 31, 1996 and 1997 and as of November 30,
1997 (unaudited) F-3
Consolidated Statements of Operations for the years ended August 31, 1996 and 1997 and for the three month
periods (unaudited) ended November 30, 1996 and 1997 F-4
Consolidated Statements of Stockholders' Deficiency for the years ended August 31, 1996 and 1997 and for
the three month period (unaudited) ended November 30, 1997. F-5
Consolidated Statements of Cash Flows for the years ended August 31, 1996 and 1997 and for the three month
periods (unaudited) ended November 30, 1996 and 1997 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Tag-It Pacific, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Tag-It
Pacific, Inc. as of August 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' deficiency and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tag-It
Pacific, Inc. at August 31, 1996 and 1997, and the results of their operations
and their cash flows for each of the years then ended in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
Los Angeles, California
October 17, 1997.
F-2
<PAGE>
TAG-IT PACIFIC, INC. (NOTE 1)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
----------------------------
1996 1997
------------- ------------- NOVEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 6)
Current Assets:
Cash............................................................... $ 89,873 $ 148,062 $ 136,533
Accounts receivable (Note 11)...................................... 1,430,022 1,990,206 2,066,264
Due from related parties (Note 12)................................. 75,372 102,092 112,556
Inventories (Note 3)............................................... 1,206,026 2,017,503 2,216,479
Prepaid expenses and other current assets.......................... 217,400 215,678 243,203
------------- -------------
Total current assets............................................. 3,018,693 4,473,541 4,775,035
Property and equipment, net (Note 4)................................. 606,558 922,262 965,248
Other assets......................................................... 54,963 49,153 286,000
------------- ------------- -------------
Total Assets......................................................... $ 3,680,214 $ 5,444,956 $ 6,026,283
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Bank overdrafts.................................................... $ 175,647 $ 251,115 $ 410,922
Due to factor, net (Note 2)........................................ 563,927 94,786 281,343
Current portion of long-term debt (Note 5)......................... 180,136 158,176 122,668
Current portion of notes payable to related parties (Note 6)....... 1,179,953 912,898 276,727
Accounts payable................................................... 2,696,837 3,294,442 3,789,163
Accrued expenses................................................... 775,691 1,569,363 1,057,843
------------- ------------- -------------
Total current liabilities........................................ 5,572,191 6,280,780 5,938,666
Long-term debt, less current portion (Note 5)........................ 189,660 55,315 55,315
Notes payable to related parties, less current portion............... -- 1,249,698 1,249,698
------------- ------------- -------------
Total Liabilities.................................................... 5,761,851 7,585,793 7,243,679
Commitments and contingencies (Note 10)..............................
Stockholders' Deficiency (Notes 8 and 12)............................
Preferred stock, $.001 par value; 3,000,000 shares authorized; no
shares issued and outstanding ................................... -- --
Common stock; $.001 par value; 15,000,000 shares authorized;
2,085,609 shares issued and outstanding at August 31, 1996 and
1997; 2,470,011 at November 30, 1997............................. 2,086 2,086 2,470
Additional paid-in capital......................................... 82,914 82,914 957,530
Accumulated deficit................................................ (2,166,637) (2,225,837) (2,177,396)
------------- ------------- -------------
Total stockholders' deficiency................................. (2,081,637) (2,140,837) (1,217,396)
------------- ------------- -------------
Total Liabilities and Stockholders' Deficiency....................... $ 3,680,214 $ 5,444,956 $ 6,026,283
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TAG-IT PACIFIC, INC. (NOTE 1)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------------
1996 1997
------------- ------------- THREE MONTHS ENDED
NOVEMBER 30,
--------------------------
1996 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales (Note 11)..................................... $ 14,738,041 $ 19,539,411 $ 4,890,000 $ 4,751,117
Cost of goods sold...................................... 10,090,538 12,546,541 3,341,000 3,034,884
------------- ------------- ------------ ------------
Gross profit.......................................... 4,647,503 6,992,870 1,549,000 1,716,233
Selling, general and administrative expenses............ 4,973,058 5,896,543 1,444,000 1,349,985
Write-off of printing division (Note 9)................. -- 231,803 116,000 --
------------- ------------- ------------ ------------
Total operating expenses.............................. 4,973,058 6,128,346 1,560,000 1,349,985
------------- ------------- ------------ ------------
Income (loss) from operations........................... (325,555) 864,524 (11,000) 366,248
Interest expense........................................ 464,805 810,681 197,000 260,519
------------- ------------- ------------ ------------
Income (loss) before income taxes....................... (790,360) 53,843 (208,000) 105,729
Provision for income taxes (Note 7)..................... -- 113,043 -- 57,288
------------- ------------- ------------ ------------
Net income (loss)..................................... $ (790,360) $ (59,200) $ (208,000) $ 48,441
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Historical information (Note 1):
Net income (loss) per share........................... $ (.37) $ (.03) $ (.10) $ .02
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Weighted average shares outstanding................... 2,160,849 2,160,849 2,160,849 2,545,251
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Pro forma information (Note 1):
Net loss per share.................................... $ (.02)
-------------
-------------
Weighted average shares outstanding................... 2,545,251
-------------
-------------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
TAG-IT PACIFIC, INC. (NOTE 1)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED AUGUST 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
----------------------- -------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ --------- --------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 1,
1995..................... 2,085,609 $ 2,086 -- $ $ 82,914 $ (1,376,277) $ (1,291,277)
Net loss................. -- -- -- -- -- (790,360) (790,360)
------------ --------- --------- --------- ---------- ------------- -------------
Balance, August 31, 1996... 2,085,609 2,086 -- 82,914 (2,166,637) (2,081,637)
Net loss................. -- -- -- -- -- (59,200) (59,200)
------------ --------- --------- --------- ---------- ------------- -------------
Balance, August 31, 1997... 2,085,609 $ 2,086 -- $ $ 82,914 $ (2,225,837) $ (2,140,837)
------------ --------- --------- --------- ---------- ------------- -------------
------------ --------- --------- --------- ---------- ------------- -------------
Issuance of Common Stock
(unaudited) (Note 6)..... 384,402 384 -- -- 874,616 -- 875,000
Net income (unaudited)..... -- -- -- -- -- 48,441 48,441
------------ --------- --------- --------- ---------- ------------- -------------
Balance, November 30, 1997
(unaudited).............. 2,470,011 $ 2,470 -- $ -- $ 957,530 $ (2,177,396) $ (1,217,396)
------------ --------- --------- --------- ---------- ------------- -------------
------------ --------- --------- --------- ---------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TAG-IT PACIFIC, INC. (NOTE 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
1996 AUGUST 31,1997
------------- ------------- THREE MONTHS ENDED
NOVEMBER 30,
1996 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Net income (loss)................................ $ (790,360) $ (59,200) $ (208,000) $ 48,441
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 144,484 268,047 68,000 84,000
Changes in operating assets and liabilities:
Accounts receivables......................... (584,525) (560,184) (698,385) (76,058)
Inventories.................................. (525,117) (811,477) (51,974) (198,976)
Other assets................................. (8,065) 5,810 18,963 (236,847)
Prepaid expenses and other current assets.... (117,088) 1,722 (200,600) (27,525)
Accounts payable............................. 271,355 597,605 (436,837) 494,721
Accrued expenses............................. 379,074 793,672 1,031,352 (511,520)
------------- ------------- ------------- -------------
Net cash (used in) provided by operating
activities..................................... (1,230,242) 235,995 (477,481) (423,764)
Cash flows from investing activities:
Loans to related parties....................... 25,503 (26,720) 45,372 (10,464)
Acquisition of property and equipment.......... (488,360) (583,751) (109,442) (126,986)
------------- ------------- ------------- -------------
Net cash used in investing activities............ (462,857) (610,471) (64,070) (137,450)
Cash flows from financing activities:
Bank overdraft................................. 26,759 75,468 1,353 159,807
Net advances from factor....................... 734,987 (469,141) (67,520) 186,557
Proceeds from long-term debt................... 369,796 -- -- --
Payments on long-term debt..................... -- (156,305) (68,180) (35,508)
Proceeds from notes payable to related
parties...................................... 588,946 1,716,672 645,025 238,829
Repayments of notes payable to related
parties...................................... (34,996) (734,029) -- --
------------- ------------- ------------- -------------
Net cash provided by financing activities........ 1,685,492 432,665 510,678 549,685
------------- ------------- ------------- -------------
Net increase (decrease) in cash.................... (7,607) 58,189 (30,873) (11,529)
Cash at beginning of year.......................... 97,480 89,873 89,873 148,062
------------- ------------- ------------- -------------
Cash at end of year................................ $ 89,873 $ 148,062 $ 59,000 $ 136,533
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest....................................... $ 260,220 $ 566,599 $ 197,000 $ 260,519
Income Taxes................................... $ 30,204 $ 19,404 $ -- --
Non-cash financing activity
Note payable converted to equity (Note 6)...... $ -- $ -- $ -- $ 875,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO NOVEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Tag-It Pacific, Inc. (the "Company") was incorporated in September 1997 and
was formed to combine several existing related operating entities under a single
holding company.
The Company combines Tag-It, Inc., a California corporation ("Tag-It");
Tag-It Printing & Packaging Ltd., a British Virgin Islands corporation ("Tag-It
Hong Kong"); Tag It de Mexico S.A. de C.V. ("Tag-It Mexico"); A.G.S. Stationery,
Inc., a California corporation ("AGS Stationery"); and Pacific Trim & Belt,
Inc., a California corporation ("Pacific Trim") (collectively, the
"Subsidiaries").
On October 17, 1997, Tag-It Pacific L.L.C., a Delaware limited liability
company ("Tag-It Pacific LLC"), acquired all of the outstanding capital stock of
each of the Subsidiaries for an aggregate of 2,470,001 membership units of
Tag-It Pacific LLC and assumed outstanding options and warrants to purchase
equity securities of certain Subsidiaries in a stock-for-unit exchange (the
"Exchange"). Immediately prior to the expected effectiveness of the Company's
initial public offering, the outstanding membership units of Tag-It Pacific LLC
will be converted to 2,470,001 shares of Common Stock of the Company (the
Exchange and such conversion are referred to as the "Conversion").
The accompanying consolidated financial statements consist of the
Subsidiaries presented on a consolidated basis to give effect to the Conversion
as of the earliest period presented and treated as a reorganization of entities
under common control accounted for in a manner similar to a pooling of
interests. Accordingly, all references to shares of Common Stock and related
share prices have assumed the effects of the Conversion.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
NATURE OF BUSINESS
The Company operates in one reportable business segment, apparel and
accessory industry. The Company provides labels, hang tags, buttons and other
trimmings to apparel manufacturers. The Company also designs, produces and
markets specialty stationery products under license agreements for branded
stationery products. The Company has production facilities in the United States,
Hong Kong and Mexico. The Company's products are sold in the United States and
Hong Kong. Sales in Hong Kong were $2,030,245 and $2,119,582 for the years ended
August 31, 1996 and 1997, and $679,000 and $508,600 for the three months ended
November 30, 1996 and 1997.
REVENUE RECOGNITION
Sales are recorded at the time of shipment.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major improvements and
replacements of property and equipment are capitalized. Maintenance and repairs
are charged to expense as incurred. Upon retirement
F-7
<PAGE>
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO NOVEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
or other disposition of property and equipment, applicable cost and accumulated
depreciation and amortization are removed from the accounts and any gains or
losses are included in results of operations. The Company capitalizes the cost
of films, dies, molds and art designs. The cost capitalized includes direct
material and direct labor cost.
Depreciation of property and equipment is computed using the straight-line
method based on estimated useful lives ranging from three to seven years.
Leasehold improvements are amortized using the straight-line method over the
term of the lease or the estimated life of the related improvements, whichever
is shorter.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred income taxes are recognized based on the differences
between financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established, when necessary to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the period and the change during the
year in deferred tax assets and liabilities.
Income taxes have been provided on a separate company basis. Pacific Trim
has elected to be treated as an S corporation under the Internal Revenue Code
for the years ended August 31, 1996 and 1997. In lieu of corporate income taxes,
the stockholders of an S corporation are taxed on their proportionate share of
the corporation taxable income. The S corporation was terminated on October 16,
1997 in conjunction with the Exchange. Therefore, no provision or benefit for
income taxes has been included in the accompanying consolidated financial
statements for this S corporation.
NET LOSS PER SHARE
Historical net loss per share is based on the weighted average number of
shares outstanding as if the reorganization took place at the beginning of each
period presented and after giving pro forma effect to the Conversion in
connection with the initial public offering and includes the weighted average
effect of options which occurred below the expected offering price per share in
accordance with SAB 83.
Pro forma net loss per share is based on the weighted average number of
shares outstanding and after giving pro forma effect to the Conversion in
connection with the initial public offering and includes the weighted average
effect of options and the debt conversion subsequent to year end which occurred
below the expected offering price per share in accordance with SAB 83.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which a
company acquires goods or services from non-employees in exchange for equity
instruments. SFAS 123 also gives the option to account for stock-based employee
compensation in accordance with Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock issued to
F-8
<PAGE>
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO NOVEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Employees," or SFAS 123. The Company has chosen to account for stock-based
compensation utilizing the intrinsic value method prescribed in APB 25 and not
the method established by SFAS 123. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the fair market price of the
Company's stock at the measurement date over the amount an employee must pay to
acquire stock.
When SFAS 123 is not adopted related to stock-based employee compensation,
SFAS 123 requires that companies present in a footnote the effect of measuring
the cost of stock-based employee compensation at the grant date based on the
value of the award and recognize this cost over the service period. The value of
the stock-based award is determined using a pricing model whereby compensation
cost is the excess of the fair value of the option as determined by the model at
grant date or other measurement date over the amount an employee must pay to
acquire the stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. DUE TO FACTOR: Due to the short-term nature and variable interest
rates under the factor agreements, the fair value approximates the carrying
value. ACCOUNTS RECEIVABLE: Due to the short-term nature of the receivables, the
fair value approximated the carrying value. DUE FROM RELATED PARTIES AND NOTES
PAYABLE TO RELATED PARTIES: Due to the related party nature of the loan and
notes, the fair value cannot be determined. LONG-TERM DEBT: Estimated based upon
current market borrowing rates for loans with similar terms and maturities.
INTERIM FINANCIAL INFORMATION
The interim financial statements for the three months ended November 30,
1996 and 1997 are unaudited. In the opinion of management, such statements
reflect all adjustments (consisting of normal recurring adjustments) necessary
for fair presentaion of the results of the interim period. The results of
operations for the three months ended November 30, 1997 are not necessarily
indicative of the results for the entire year.
NEW ACCOUNTING PRONOUNCEMENTS
The Statement of Financial Accounting Standard Number 128 ("SFAS No. 128"),
"Earnings Per Share" ("EPS"), is effective for financial statements issued for
the periods ending after December 15, 1997, including interim periods. The SFAS
No. 128 requires restatement of all prior period EPS data presented. The new
standard also requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. The Company does not expect the adoption will have a material
effect on its EPS calculation.
F-9
<PAGE>
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO NOVEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS No. 129") effective for financial
statements ending after December 15, 1997. The new standard reinstates various
securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by SFAS No. 128. The
Company does not expect adoption of SFAS No. 129 to have a material effect, if
any, on its consolidated financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") is effective for financial statements
with fiscal years beginning after December 15, 1997. Earlier application is
permitted. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS No. 131") is effective
for financial statements 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 SFAS No. 131
to have a material effect, if any, on its consolidated results of operations.
2. DUE TO FACTOR
The Company assigns its qualified accounts receivable without recourse under
its two factoring agreements. The Company pays a fixed commission and may borrow
up to 80% of its eligible accounts receivable. Interest is charged at 2.5% over
the prevailing reference rate (8.5% at August 31, 1997). Factored accounts
receivable without recourse amounted to $1,016,995, $1,326,383 and $987,184 at
August 31, 1996, 1997 and November 30, 1997, respectively. In addition, the
Company receives advances from the factors relating to receivables factored with
recourse. The amounts due to the factor at August 31, 1996, 1997 and November
30, 1997 were $563,927, $94,786 and $281,343, respectively.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
-------------------------- ------------
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Raw materials....................................... $ 108,750 $ 269,539 $ 250,400
Work-in-process..................................... 354,625 458,079 428,600
Finished goods...................................... 742,651 1,289,885 1,537,479
------------ ------------ ------------
$ 1,206,026 $ 2,017,503 $ 2,216,479
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-10
<PAGE>
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO NOVEMBER 30, 1996 AND 1997 IS UNAUDITED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
-------------------------- ------------
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Furniture and fixtures.............................. $ 214,753 $ 343,725 $ 350,400
Machinery and equipment............................. 387,750 427,797 492,585
Leasehold improvements.............................. 162,211 195,822 185,905
Films, dies, molds and art designs.................. 271,450 652,571 675,186
------------ ------------ ------------
1,036,164 1,619,915 1,704,076
Accumulated depreciation and amortization........... (429,606) (697,653) (738,828)
------------ ------------ ------------
$ 606,558 $ 922,262 $ 965,248
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-11
<PAGE>
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO NOVEMBER 30, 1996 AND 1997 IS UNAUDITED)
5. LONG-TERM DEBT
Long-term debt consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
---------------------- NOVEMBER 30,
1996 1997 1997
---------- ---------- ------------
<S> <C> <C> <C>
Payable to a former shareholder dated October 1994
with monthly payments of $11,900, interest imputed
at 10.75% maturing December 1998................... $ 293,541 $ 176,649 $ 144,021
Note payable to, an unrelated company, dated
September 30, 1995, payable on demand with interest
accruing at 10%.................................... 25,200 25,200 25,200
Other.............................................. 51,055 11,642 8,762
---------- ---------- ------------
369,796 213,491 177,983
Current portion................................ 180,136 158,176 122,668
---------- ---------- ------------
$ 189,660 $ 55,315 $ 55,315
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
Aggregate maturities of long-term debt in the next five years are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- -------------------------------------------------------------- ----------
<S> <C>
1999.......................................................... $ 49,433
2000.......................................................... 2,880
2001.......................................................... 3,002
----------
$ 55,315
----------
----------
</TABLE>
The estimated fair value of long term debt, is $364,492, $210,118, and
$175,171 at August 31, 1996, 1997 and November 30, 1997.
F-12
<PAGE>
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO NOVEMBER 30, 1996 AND 1997 IS UNAUDITED)
6. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------- NOVEMBER 30,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Six notes payable issued in 1996 and four notes
payable issued in 1997 and two notes payable
issued in 1998 to companies which are owned by
officers and directors of the Company with no
monthly payments and interest accrued ranging
from 7.5% to 10% annually, due and payable on
the fifteenth day following delivery of written
demand for payment which may be delivered at
any time following December 31, 1998........... $ 1,132,099 $ 446,626 $ 568,626
Five notes payable to officers and directors of
the Company with no monthly payments and
interest ranging from 7.5% to prime plus 3.5%
annually, due and payable on the fifteenth day
following delivery of written demand for
payment which may be delivered at any time
following December 31, 1998.................... 47,854 125,970 115,827
Notes payable to NPM Investments, Inc., which
is a majority owned by the Chairman of the
Company. The notes require no monthly payments
and interest accrues at 7.5% annually, due and
payable on the fifteenth day following delivery
of written demand for payment which may be
delivered at any time following December 31,
1998, collateralized by the assets of Tag-It,
Inc............................................ -- 715,000 841,972
Note payable to NPM Investments, Inc., which is
majority owned by the Chairman of the Company.
The note, dated August 23, 1996 was made
without interest and no maturity date. The note
was converted to 384,402 shares on October 16,
1997. See Note 12.............................. -- 875,000 --
------------ ------------ ------------
1,179,953 2,162,596 1,526,425
Less: Current maturities of notes payable...... 1,179,953 912,898 276,727
------------ ------------ ------------
$ -- $ 1,249,698 $1,249,698
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-13
<PAGE>
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO NOVEMBER 30, 1996 AND 1997 IS UNAUDITED)
7. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED AUGUST
31, NOVEMBER 30,
--------------------- --------------------
1996 1997 1996 1997
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Current:
Federal....................................... $ -- $ -- $ -- $ 39,269
State......................................... -- 6,920 -- 11,896
--------- ---------- --------- ---------
-- 6,920 -- 51,165
--------- ---------- --------- ---------
Deferred:
Federal....................................... $ -- $ 76,899 $ -- $ 4,699
State......................................... -- 29,224 -- 1,424
--------- ---------- --------- ---------
-- 106,123 -- 6,123
--------- ---------- --------- ---------
$ -- $ 113,043 $ -- $ 57,288
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
A reconciliation of the statutory Federal income tax rate with the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED AUGUST 31, NOVEMBER 30,
----------------------- ---------------------
1996 1997 1996 1997
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Federal statutory rate.................... $ (268,722) $ 18,307 $ (70,720) $ 35,948
Change in valuation allowance............. 471,070 194,074 83,200 14,333
Meals and entertainment................... 3,040 -- -- --
State taxes net of federal benefit........ (100,172) (55,896) (12,480) 7,007
Pro forma effect of taxes on S-Corp....... (105,216) (43,442) -- --
----------- ---------- ---------- ---------
$ -- $ 113,043 $ -- $ 57,288
----------- ---------- ---------- ---------
----------- ---------- ---------- ---------
</TABLE>
The primary components of temporary differences which give rise to the
Company's deferred assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
------------------------ NOVEMBER 30,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 513,489 $ 659,662 $ 673,995
Other temporary differences........................ 1,331 5,482 5,482
Valuation allowance.................................. (471,070) (665,144) (679,477)
----------- ----------- ------------
Total deferred tax assets.......................... 43,750 -- --
----------- ----------- ------------
Deferred tax liabilities:
Depreciation....................................... (43,750) (106,123) (112,246)
----------- ----------- ------------
Net deferred tax asset (liability)............... $ -- $ (106,123) $ (112,246)
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
F-14
<PAGE>
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO NOVEMBER 30, 1996 AND 1997 IS UNAUDITED)
7. INCOME TAXES (CONTINUED)
A valuation allowance has been established for the deferred tax assets which
management has determined are not more likely than not to be realizable.
At November 30, 1997, the Company has Federal and state net operating loss
("NOL") carryforwards of approximately $1,573,000 and $1,479,000 respectively.
The Federal NOL is available to offset future taxable income through 2011, and
the state NOL expires in 2001. The Company's ability to utilize the NOL
carryforwards are dependent upon the Company's ability to generate taxable
income in future periods and may be limited due to restrictions imposed to under
Federal and state laws upon a change in ownership. The NOL's stated above are
subject to separate return year loss limitations.
8. STOCK OPTIONS AND WARRANTS
WARRANTS
In June 1994, one executive officer was granted warrants to purchase 39,235
shares of the Company's Common Stock at $.71 per share, the estimate fair value
of the Common Stock on the grant date. The warrants vest immediately and are
exercisable through their expiration date of December 2002.
In connection with certain professional services provided by a related party
(see Note 12), the Company issued warrants in January, 1996 to purchase 22,841
shares of the Company's Common Stock at an exercise price of $.76 per share. The
exercise price was the Company's estimate of the fair value of the Common Stock
on the date of grant. The shares of Common Stock underlying the warrants vest
immediately and are exercisable through their expiration date of December 2002.
In connection with certain professional services provided by the Company's
counsel, the Company agreed to issue warrants in October, 1997 to purchase
approximately 35,555 shares of common stock at an exercise price of
approximately $4.40 per share. The warrants vest immediately and expire five
years following the grant date.
STOCK OPTION INCENTIVE PLAN
On October 1, 1997, the Company adopted the 1997 Stock Incentive Plan (the
"1997 Plan"), which authorized the granting of a variety of stock-based
incentive awards. A total of 562,500 shares of Common Stock have been reserved
for issuance under the 1997 Plan. The 1997 Plan is administered by the Board of
Directors, or a committee appointed by the Board of Directors, who determine the
recipients and terms of the awards granted. In September, October and November,
1997, the Company granted options to purchase 260,000 shares of Common Stock at
an exercise price of $4.40 per share, the estimated fair value of the Common
Stock on the grant date. The options vest immediately and are exercisable
through their expiration date in 2007.
9. WRITE-OFF OF PRINTING DIVISION
In September, 1996, the Company acquired a printing operation located in
Southern California. The results of the printing division were evaluated during
the year and management decided to dispose of this division. Accordingly, the
Company incurred $231,803 of incremental printing costs associated with this
division during the year ended August 31, 1997.
F-15
<PAGE>
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO NOVEMBER 30, 1996 AND 1997 IS UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company is a party to a number of non-cancelable operating lease
agreements involving buildings and equipment which expire at various dates. The
future minimum lease commitments as of August 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AUGUST 31, AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
1998............................................................................ $ 459,650
1999............................................................................ 343,808
2000............................................................................ 240,585
2001............................................................................ 63,032
2002............................................................................ 36,125
------------
Total minimum payments.......................................................... $ 1,143,200
------------
------------
</TABLE>
Total rental expense for the years ended August 31, 1996 and 1997 aggregated
$212,644 and $416,832, respectively. Total rental expense for the three months
ended November 30, 1996 and 1997 aggregated $46,067 and $65,193, respectively.
ROYALTIES
Under a license agreement with a major customer, the Company is required to
pay royalties of 7% on licensed stationery products. Royalty expense of $26,250
and $139,278 is included in the statement operations for the years ended August
31, 1996 and 1997. Royalty expense of $18,231 and $(4,758) is included in the
statement of operations for the three months ended November 30, 1996 and 1997.
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.
11. MAJOR CUSTOMERS
Two customers accounted for 11.38 % and 15.09%, respectively of consolidated
net sales for the year ended August 31, 1996, 11.12% and 18.34% for the year
ended August 31, 1997, 14.0% and 15.9% for the three months ended November 30,
1996, and 14.4% and 21.2% for the three months ended November 30, 1997. The
related amount of accounts receivable due from these customers amounted to
$268,419 and $116,736 at August 31, 1996, $695,162 and $441,240 at August 31,
1997, and $168,856 and $628,881 at November 30, 1997.
12. RELATED PARTY TRANSACTIONS
The President and director of the Company is the general partner of D.P.S.
Associates, a general partnership, which is the lessor of the Company's
executive offices in Los Angeles, California, pursuant to a lease agreement with
Pacific Trim. The lease provides for base rent of $9,072 per month and expires
in April 2000.
F-16
<PAGE>
TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO NOVEMBER 30, 1996 AND 1997 IS UNAUDITED)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
The President and the Chief Executive Officer of the Company have personally
guaranteed certain obligations of Tag-It and Pacific Trim under various
equipment lease agreements which approximated $202,000. The President of the
Company has also guaranteed Pacific Trim's obligations under its lease agreement
for the premises in New York which provides for annual base rent of $16,800.
In August 1996, NPM Investments, Inc. made a loan of $875,000 to Tag-It,
without interest, pursuant to a convertible secured promissory note (the
"convertible note") which was secured by all of the assets of Tag-It. The
Chairman of the Board of the Company holds a significant equity interest in NPM
Investments, Inc. In October 1997, the convertible note was converted, based on
the original terms of the Convertible Note, which was based on the fair market
value at the time of the issuance by NPM Investments, Inc. into fully paid
non-assessable shares of Common Stock of Tag-It, Tag-It Hong Kong and AGS
Stationery, which represent 384,402 shares of Common Stock of the Company.
In September 1996, the President of the Company borrowed $100,000 from
Mercantile National Bank, which loan was guaranteed by Tag-It. The term loan
matures October 10, 1999. In September 1996, the $100,000 borrowed by the
President of the Company was lent to Tag-It at the same interest rate payable on
the President's loan to the bank. The loan from the President to Tag-It is due
and payable on the fifteenth day following the date written demand for payment
is made by the President.
The CEO and President of the Company have each guaranteed the obligations of
Tag-It under a term loan with Mercantile National Bank which matures June 8,
1998.
In June 1997, AGS Stationery entered into a Collection Date Factoring
Agreement (the "Safcor Agreement") with Safcor, Inc. ("Safcor"). An officer and
director of Safcor is a stockholder of the Company. Pursuant to the Safcor
Agreement, AGS Stationery has agreed to sell to Safcor all accounts receivable
related to the sale of goods or the rendering of services by AGS Stationery for
a purchase price equal to the gross amount of each account, less all discounts
and credits and a factoring commission of 1.5% of the net amount of the account.
In addition, Safcor has the right, at its sole discretion, to provide customers
of AGS Stationery with the credit lines for the purchase of AGS Stationery's
products. The Safcor Agreement may be terminated by either party upon 60 days
prior written notice to the other party. Total factoring commissions paid to
Safcor amounted to $18,309 for the year ended August 31, 1997.
A Director of the Company controls a financial advisory firm, Averil
Associates, Inc. ("Averil Associates"), which has performed various services for
the Company including investigation of strategic financing and other corporate
growth initiatives. As consideration of such services, AGS Stationery paid the
aggregate amount of $26,123, plus out of pocket expenses. As additional
compensation for such services, AGS Stationery has granted to Chloe Holdings,
Inc., an affiliate of Averil Associates, warrants to purchase up to 135 Shares
of Common Stock of AGS Stationery. Effective upon consolidation, the Chloe
Warrants became exercisible for 22,841 shares of the common stock of the Company
(see Note 8) and the Company has agreed to pay Averil Associates an additional
$175,000 upon consummation of the offering.
13. SUBSEQUENT EVENTS
In September 1997, NPM Investments, Inc. made an additional loan of $127,000
to the Company. The loan bears interest at 7.5% per annum and is due December
31, 1998.
The Company has entered into a letter of intent with an underwriter to sell
shares of the Company in an Initial Public Offering.
The Company intends to change its fiscal year end to December 31.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SHARES OF
COMMON STOCK OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN
OFFER TO, OR A SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
The Company............................................................... 6
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 18
Dilution.................................................................. 19
Capitalization............................................................ 20
Selected Consolidated Financial Data...................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 28
Management................................................................ 37
Certain Transactions...................................................... 43
Principal and Selling Stockholders........................................ 46
Description of Capital Stock.............................................. 47
Shares Eligible For Future Sale........................................... 50
Underwriting.............................................................. 52
Legal Matters............................................................. 54
Experts................................................................... 54
Additional Information.................................................... 55
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OF SUBSCRIPTIONS.
1,570,000 SHARES
TAG-IT PACIFIC, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
CRUTTENDEN ROTH
INCORPORATED
JOSEPHTHAL & CO. INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation and its Bylaws provide for the
indemnification by the Registrant of each director, officer and employee of the
Registrant to the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or may hereafter be amended. Section 145 of the Delaware
General Corporation Law provides in relevant part that a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper. Delaware law further provides that nothing
in the above-described provisions shall be deemed exclusive of any other rights
to indemnification or advancement of expenses to which any person may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
The Registrant's Certificate of Incorporation provides that a director of
the Registrant shall not be liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director. Section 102(b)(7)
of the Delaware General Corporation Law provides that a provision so limiting
the personal liability of a director shall not eliminate or limit the liability
of a director for, among other things: breach of the duty of loyalty; acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law; unlawful payment of dividends; and transactions from which
the director derived an improper personal benefit.
The Registrant has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director of the Registrant and certain
officers of the Registrant (the "Indemnitees"). Pursuant to the terms and
conditions of the Indemnity Agreements, the Registrant has indemnified each
Indemnitee against any amounts which he or she becomes legally obligated to pay
in connection with any claim against him or her based upon any action or
inaction which he or she may commit, omit or suffer while acting in his or her
capacity as a director and/or officer of the Registrant or its subsidiaries,
provided,
II-1
<PAGE>
however, that such Indemnitee acted in good faith and in a manner such
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Registrant and, with respect to any criminal action, had no reasonable cause
to believe such Indemnitee's conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Registrant's Certificate of Incorporation.................................... 3.1
Registrant's Bylaws.......................................................... 3.2
Registrant's Form of Indemnification Agreement............................... 10.1
Tax Indemnification Agreement................................................ 10.12
</TABLE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered. All the amounts shown are estimates except the Securities and
Exchange Commission registration fee, the NASD filing fee and the American Stock
Exchange fee:
<TABLE>
<CAPTION>
<S> <C>
Registration fee--Securities and Exchange Commission............................ $ 4,520
NASD filing fee................................................................. 1,896
American Stock Exchange fee..................................................... 25,000
Accounting fees and expenses.................................................... 150,000
Legal fees and expenses (other than blue sky)................................... 220,000
Blue sky fees and expenses, including legal fees................................ 15,000
Printing; stock certificates.................................................... 113,585
Transfer agent and registrar fees............................................... 5,000
Consulting fees................................................................. 175,000
Non-accountable expense allowance............................................... 154,000
Non-accountable expense allowance for Over Allotment Option..................... 12,925
Miscellaneous................................................................... 26,874
------------
Total......................................................................... $ 903,800
------------
------------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In September 1997 the Company issued 10 shares of Common Stock for $10 to
Colin Dyne. The issuance of these shares was exempt from registration pursuant
to Section 4(2) of the Act as a transaction not involving any public offering.
In October 1997, Tag-It Pacific, LLC issued 2,470,001 membership units (the
"LLC Units") in exchange for: (i) all of the outstanding shares of Common Stock
of Pacific Trim & Belt, Inc., a California corporation, owned by Harold Dyne and
three other shareholders; (ii) all of the outstanding shares of Common Stock of
Tag-It, Inc., a California corporation, owned by Mark Dyne, Harold Dyne, Colin
Dyne and four other shareholders; (iii) all of the outstanding shares of Common
Stock of Tag-It Printing & Packaging Ltd., a British Virgin Islands corporation,
owned by Mark Dyne and three other shareholders; and (iv) all of the outstanding
shares of Common Stock of A.G.S. Stationery, Inc., a California corporation,
owned by Mark Dyne, Harold Dyne, Colin Dyne and three other shareholders.
Pursuant to the Exchange Agreement, each of the recipients of the LLC Units
represented that (i) it was acquiring the LLC Units for its own account with the
present intention of holding such securities for investment
II-2
<PAGE>
purposes only and not with a view to, or for sale in connection with, any
distribution of such securities (other than a distribution in compliance with
all applicable federal and state securities laws); (ii) it is an experienced and
sophisticated investor and has such knowledge and experience in financial and
business matters that it is capable of evaluating the relative merits and the
risks of an investment in the LLC Units and of protecting its own interests in
connection with this transaction; (iii) it is willing to bear and is capable of
bearing the economic risk of an investment in the LLC Units; and (iv) it is an
"accredited investor" as that term is defined under Rule 501(a)(8) of Regulation
D promulgated by the Commission under the Securities Act. No brokers,
underwriters or finders were involved in the Exchange. The issuance and sale of
these securities was exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act (in accordance with Rule 506 of Regulation D) as a transaction not involving
any public offering.
In October 1997, the Company issued warrants to purchase shares of Common
Stock of the Company to Troop Meisinger Steuber & Pasich, LLP. In February 1996,
A.G.S. Stationery, Inc. issued warrants to purchase 135 shares of Common Stock
of A.G.S. Stationery, Inc. to Chloe Holdings, Inc. ("Chloe"), which warrants
became exercisable for 22,841 shares of Common Stock of the Company upon the
consummation of the acquisition of A.G.S. Stationery, Inc. by the Company. In
1994, Tag-It, Inc. issued warrants to Jonathan Markiles to purchase 14 shares of
Common Stock of Tag-It, Inc., which warrants became exercisable for 39,235
shares of Common Stock of the Company upon the consummation of the acquisition
of Tag-It, Inc. by the Company. In December 1997, the Company issued warrants to
purchase 32,000 shares of Common Stock of the Company to Cruttenden Roth Bridge
Fund, LLC. Each of Troop Meisinger Steuber & Pasich, LLP, Chloe, Jonathan
Markiles and Cruttenden Roth Bridge Fund, LLC represented that (i) it acquired
the warrants for its own account with the present intention of holding such
warrants for investment purposes only and not with a view to, or for sale in
connection with, any distribution of such warrants (other than a distribution in
compliance with all applicable federal and state securities laws); (ii) it is an
experienced and sophisticated investor and has such knowledge and experience in
financial and business matters that it is capable of evaluating the relative
merits and the risks of an investment in the warrants and of protecting its own
interests in connection with the transaction at issue; (iii) it is willing to
bear and is capable of bearing the economic risk of an investment in the
warrants; and (iv) the Company made available, prior to the date of its warrant
agreement, to it the opportunity to ask questions of the Company and its
officers, and to receive from the Company and its officers information
concerning the terms and conditions of the warrant and the warrant agreement and
to obtain any additional information with respect to the Company, its business,
operations and prospects, as reasonably requested by it; and (v) it is an
"accredited investor" as that term is defined under Rule 501(a)(8) of Regulation
D promulgated by the Commission under the Securities Act. The issuance and sale
of these securities was exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act (in accordance with Rule 506 of Regulation D) as a transaction not involving
any public offering.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
1.2 Form of Representatives' Warrants.*
2.1 Exchange Agreement, dated October 17, 1997.*
3.1 Certificate of Incorporation of Registrant.*
3.2 Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
5.1 Opinion and Consent of Troop Meisinger Steuber & Pasich, LLP.
10.1 Form of Indemnification Agreement.*
10.2 Manufacturing License Agreement, dated as of March 1, 1996, between Guess?, Inc. and AGS Inc.+*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.3 Collection Date Factoring Agreement, dated June 13, 1997, between A.G.S. Stationery, Inc. and Safcor,
Inc.*
10.4 Lease Agreement, dated May 1, 1994, between D.P.S. Associates and Pacific Trim & Belt, Inc.*
10.5 Lease Agreement, dated September 6, 1996, between S & S Partnership and Tag-It, Inc.*
10.6 Lease Agreement, dated June 8, 1996, between Lea Tai Property Development Limited and Tag-It Printing &
Packaging Ltd.*
10.7 Lease Agreement, dated March 17, 1997, between Palobueno N.V. Ltd. and Pacific Trim & Belt, Inc.*
10.8 Collection Date Factoring Agreement, dated June 24, 1991, between Tag-It, Inc. and Heller Financial,
Inc.*
10.9 Promissory Note, dated June 6, 1997, between Tag-It, Inc. and Mercantile National Bank; Commercial
Guaranty, dated June 6, 1997, provided by Harold Dyne for the benefit of Mercantile National Bank; and
Commercial Guaranty, dated June 6, 1997, provided by Colin Dyne for the benefit of Mercantile National
Bank.*
10.10 Promissory Note, dated September 13, 1996, between Harold Dyne and Mercantile National Bank; Change in
Terms Agreement, dated May 16, 1997, between Harold Dyne and Mercantile National Bank; and Commercial
Guaranty, dated May 16, 1997, provided by Tag-It, Inc. for the benefit of Mercantile National Bank.*
10.11 Domestic Collection Date Factoring Agreement, dated August 6, 1996, between A.G.S. Stationery, Inc. and
Heller Financial, Inc.*
10.12 Tax Indemnification Agreement between Pacific Trim & Belt, Inc. and Harold Dyne, Jonathan Burstein,
Raymond Spiro and Stan Magnus.*
10.13 Equipment Lease Guaranty, Lease No. CPL7B17, provided by Colin Dyne for the benefit of Quail American
Corp.*
10.14 Equipment Lease Guaranty, Lease No. 09532-0196, provided by Harold Dyne for the benefit of Saddleback
Financial Corporation.*
10.15 Equipment Lease Guaranty, Lease No. ADV5I02, provided by Harold Dyne for the benefit of Quail American
Corp.*
10.16 Equipment Lease Guaranty, Lease No. N6F08B, provided by Harold Dyne and Colin Dyne for the benefit of
Quail American Corp.*
10.17 Equipment Lease Guaranty, Lease No. CPL7B17, provided by Harold Dyne for the benefit of Quail American
Corp.*
10.18 Equipment Lease Guaranty, Lease No. Q6DO1, provided by Harold Dyne for the benefit of Quail American
Corp.*
10.19 Equipment Lease Guaranty, Lease No. JLA7H07, provided by Colin Dyne for the benefit of Quail American
Corp.*
10.20 Equipment Lease Guaranty, Lease No. JLA7H07, provided by Harold Dyne for the benefit of Quail American
Corp.*
10.21 Equipment Lease Guaranty provided by Harold Dyne and Colin Dyne for the benefit of Quail American Corp.*
10.22 Promissory Note, dated September 30, 1996, provided by Tag-It, Inc. to Harold Dyne.*
10.23 Promissory Note, dated June 30, 1991, provided by Tag-It, Inc. to Harold Dyne.*
10.24 Promissory Note, dated January 31, 1997, provided by Tag-It, Inc. to Mark Dyne.*
10.25 Promissory Note, dated February 29, 1996, provided by A.G.S. Stationery, Inc. to Monto Holdings Pty.
Ltd.*
10.26 Promissory Note, dated January 19, 1995, provided by Pacific Trim & Belt, Inc. to Monto Holdings Pty.
Ltd.*
10.27 Convertible Promissory Note, dated August 23, 1996, provided by Tag-It, Inc. to NPM Investments, Inc.*
10.28 Promissory Note, dated August 23, 1996, provided by Tag-It, Inc. to NPM Investments, Inc.*
10.29 Registrant's 1997 Stock Incentive Plan.*
10.30 Form of Nonstatutory Stock Option Agreement.*
10.31 Promissory Note, dated August 31, 1997, provided by Colin Dyne to Tag-It, Inc.*
10.32 Promissory Note, dated August 31, 1997, provided by Harold Dyne to Pacific Trim & Belt, Inc.*
10.33 Promissory Note, dated October 15, 1997, provided by Colin Dyne to Tag-It, Inc.*
10.34 Promissory Note, dated October 15, 1997, provided by Harold Dyne to Pacific Trim & Belt, Inc.*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.35 Formation Agreement of AGS Holdings L.L.C., dated as of October 17, 1997.*
10.36 Promissory Note, dated October 21, 1997, provided by Tag-It, Inc. to NPM Investments, Inc.*
10.37 Guaranty of Colin Dyne and Harold Dyne in favor of Frank Peck.*
10.38 Engagement Letter, dated January 1, 1996, between Averil Associates, Inc. and A.G.S. Stationery, Inc.,
d.b.a. Guess Stationery, and Indemnification Agreement, dated January 1, 1996, between Averil
Associates, Inc. and A.G.S. Stationery, Inc., d.b.a. Guess Stationery.*
10.39 Warrant Agreement, dated June 1, 1994, between Jonathan Markiles and Tag-It, Inc.*
10.40 Warrant Agreement, dated February 1, 1996, between A.G.S. Stationery, Inc. and Chloe Holdings, Inc.*
10.41 Form of Warrant Agreement between the Company and Troop Meisinger Steuber & Pasich, LLP.*
10.42 Promissory Note between Pacific Western, Inc. and Tag-It, Inc.*
10.43 Promissory Note between Pacific Western, Inc. and Pacific Trim & Belt, Inc.*
10.44 Contract for Manufacturing Services between USA and Mexico, between Tag-It, Inc. and Tag It de Mexico,
S.A. de C.V.*
10.45 Form of Lock-up Agreement.*
10.46 Lease Agreement, dated November 15, 1997, between Mr. Abraham Beteeh Moussan and Tag It de Mexico, S.A.
de C.V.*
10.47 Domestic Labor Regulations of Tagit de Mexico, SA de CV.*
10.48 Promissory Note, dated October 15, 1997, provided by A.G.S. Stationery Inc. to Monto Holdings Pty. Ltd.*
10.49 Promissory Note, dated November 4, 1997, provided by Pacific Trim & Belt, Inc. to Monto Holdings Pty.
Ltd.*
10.50 Securities Purchase Agreement, dated December 31, 1997, between the Company and Cruttenden Roth Bridge
Fund, LLC.
10.51 Promissory Note, dated December 31, 1997, delivered by the Company to Cruttenden Roth Bridge Fund, LLC.
10.52 Security Agreement, dated December 31, 1997, between the Company and Cruttenden Roth Bridge Fund, LLC.
11 Computation of Earnings.
21.1 List of Subsidiaries of Registrant.*
23.1 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its opinion to be filed as Exhibit 5.1
hereto).
23.2 Consent of BDO Seidman, LLP.
24.1 Power of Attorney (included in signature page).
27 Financial Data Schedule.
99.1 Consent of Brent Cohen as nominee.*
99.2 Consent of Diana Maranon as nominee.*
99.3 Consent of Michael Katz as nominee.*
99.4 Consent of Paul Markiles as nominee.*
</TABLE>
- --------------------------
* Previously filed.
+ Certain portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for an
order granting confidential treatment pursuant to Rule 406 of the General
Rules and Regulations under the Securities Act of 1933, as amended.
II-5
<PAGE>
ITEM 29. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer of controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on January 6, 1998.
<TABLE>
<S> <C> <C>
TAG-IT PACIFIC, INC.
By: /s/ COLIN DYNE
------------------------------------------
Colin Dyne
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Colin
Dyne and Diana Maranon, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments (including post effective amendments) to this Registration
Statement and a new Registration Statement filed pursuant to Rule 462(b) of the
Securities Act of 1933 and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
*
- ------------------------------ Chairman of the Board January 6, 1998
Mark Dyne
/s/ COLIN DYNE
- ------------------------------ Chief Executive Officer January 6, 1998
Colin Dyne and Director
*
- ------------------------------ President and Director January 6, 1998
Harold Dyne
* Chief Financial Officer
- ------------------------------ (Principal Financial January 6, 1998
Francis Shinsato Officer)
- ------------------------------ Director January 6, 1998
Diana Maranon
*By /s/ COLIN DYNE
-------------------------
HIS ATTORNEY-IN-FACT
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT DESCRIPTION NUMBER PAGE
- ----------- ----------------------------------------------------------------------------------------- ---------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.*
1.2 Form of Representatives' Warrants.*
2.1 Exchange Agreement, dated October 17, 1997.*
3.1 Certificate of Incorporation of Registrant.*
3.2 Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
5.1 Opinion and Consent of Troop Meisinger Steuber & Pasich, LLP.
10.1 Form of Indemnification Agreement.*
10.2 Manufacturing License Agreement, dated as of March 1, 1996, between Guess?, Inc. and AGS
Inc.+*
10.3 Collection Date Factoring Agreement, dated June 13, 1997, between A.G.S. Stationery, Inc.
and Safcor, Inc.*
10.4 Lease Agreement, dated May 1, 1994, between D.P.S. Associates and Pacific Trim & Belt,
Inc.*
10.5 Lease Agreement, dated September 6, 1996, between S & S Partnership and Tag-It, Inc.*
10.6 Lease Agreement, dated June 8, 1996, between Lea Tai Property Development Limited and
Tag-It Printing & Packaging Ltd.*
10.7 Lease Agreement, dated March 17, 1997, between Palobueno N.V. Ltd. and Pacific Trim &
Belt, Inc.*
10.8 Collection Date Factoring Agreement, dated June 24, 1991, between Tag-It, Inc. and Heller
Financial, Inc.*
10.9 Promissory Note, dated June 6, 1997, between Tag-It, Inc. and Mercantile National Bank;
Commercial Guaranty, dated June 6, 1997, provided by Harold Dyne for the benefit of
Mercantile National Bank; and Commercial Guaranty, dated June 6, 1997, provided by
Colin Dyne for the benefit of Mercantile National Bank.*
10.10 Promissory Note, dated September 13, 1996, between Harold Dyne and Mercantile National
Bank; Change in Terms Agreement, dated May 16, 1997, between Harold Dyne and Mercantile
National Bank; and Commercial Guaranty, dated May 16, 1997, provided by Tag-It, Inc.
for the benefit of Mercantile National Bank.*
10.11 Domestic Collection Date Factoring Agreement, dated August 6, 1996, between A.G.S.
Stationery, Inc. and Heller Financial, Inc.*
10.12 Tax Indemnification Agreement between Pacific Trim & Belt, Inc. and Harold Dyne, Jonathan
Burstein, Raymond Spiro and Stan Magnus.*
10.13 Equipment Lease Guaranty, Lease No. CPL7B17, provided by Colin Dyne for the benefit of
Quail American Corp.*
10.14 Equipment Lease Guaranty, Lease No. 09532-0196, provided by Harold Dyne for the benefit
of Saddleback Financial Corporation.*
10.15 Equipment Lease Guaranty, Lease No. ADV5I02, provided by Harold Dyne for the benefit of
Quail American Corp.*
10.16 Equipment Lease Guaranty, Lease No. N6F08B, provided by Harold Dyne and Colin Dyne for
the benefit of Quail American Corp.*
10.17 Equipment Lease Guaranty, Lease No. CPL7B17, provided by Harold Dyne for the benefit of
Quail American Corp.*
10.18 Equipment Lease Guaranty, Lease No. Q6DO1, provided by Harold Dyne for the benefit of
Quail American Corp.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT DESCRIPTION NUMBER PAGE
- ----------- ----------------------------------------------------------------------------------------- ---------------------
<C> <S> <C>
10.19 Equipment Lease Guaranty, Lease No. JLA7H07, provided by Colin Dyne for the benefit of
Quail American Corp.*
10.20 Equipment Lease Guaranty, Lease No. JLA7H07, provided by Harold Dyne for the benefit of
Quail American Corp.*
10.21 Equipment Lease Guaranty provided by Harold Dyne and Colin Dyne for the benefit of Quail
American Corp.*
10.22 Promissory Note, dated September 30, 1996, provided by Tag-It, Inc. to Harold Dyne.*
10.23 Promissory Note, dated June 30, 1991, provided by Tag-It, Inc. to Harold Dyne.*
10.24 Promissory Note, dated January 31, 1997, provided by Tag-It, Inc. to Mark Dyne.*
10.25 Promissory Note, dated February 29, 1996, provided by A.G.S. Stationery, Inc. to Monto
Holdings Pty. Ltd.*
10.26 Promissory Note, dated January 19, 1995, provided by Pacific Trim & Belt, Inc. to Monto
Holdings Pty. Ltd.*
10.27 Convertible Promissory Note, dated August 23, 1996, provided by Tag-It, Inc. to NPM
Investments, Inc.*
10.28 Promissory Note, dated August 23, 1996, provided by Tag-It, Inc. to NPM Investments,
Inc.*
10.29 Registrant's 1997 Stock Incentive Plan.*
10.30 Form of Nonstatutory Stock Option Agreement.*
10.31 Promissory Note, dated August 31, 1997, provided by Colin Dyne to Tag-It, Inc.*
10.32 Promissory Note, dated August 31, 1997, provided by Harold Dyne to Pacific Trim & Belt,
Inc.*
10.33 Promissory Note, dated October 15, 1997, provided by Colin Dyne to Tag-It, Inc.*
10.34 Promissory Note, dated October 15, 1997, provided by Harold Dyne to Pacific Trim & Belt,
Inc.*
10.35 Formation Agreement of AGS Holdings L.L.C., dated as of October 17, 1997.*
10.36 Promissory Note, dated October 21, 1997, provided by Tag-It, Inc. to NPM Investments,
Inc.*
10.37 Guaranty of Colin Dyne and Harold Dyne in favor of Frank Peck.*
10.38 Engagement Letter, dated January 1, 1996, between Averil Associates, Inc. and A.G.S.
Stationery, Inc., d.b.a. Guess Stationery, and Indemnification Agreement, dated January
1, 1996, between Averil Associates, Inc. and A.G.S. Stationery, Inc., d.b.a. Guess
Stationery.*
10.39 Warrant Agreement, dated June 1, 1994, between Jonathan Markiles and Tag-It, Inc.*
10.40 Warrant Agreement, dated February 1, 1996, between A.G.S. Stationery, Inc. and Chloe
Holdings, Inc.*
10.41 Form of Warrant Agreement between the Company and Troop Meisinger Steuber & Pasich, LLP.*
10.42 Promissory Note between Pacific Western, Inc. and Tag-It, Inc.*
10.43 Promissory Note between Pacific Western, Inc. and Pacific Trim & Belt, Inc.*
10.44 Contract for Manufacturing Services between USA and Mexico, between Tag-It, Inc. and Tag
It de Mexico, S.A. de C.V.*
10.45 Form of Lock-up Agreement.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT DESCRIPTION NUMBER PAGE
- ----------- ----------------------------------------------------------------------------------------- ---------------------
<C> <S> <C>
10.46 Lease Agreement, dated November 15, 1997, between Mr. Abraham Beteeh Moussan and Tag It
de Mexico, S.A. de C.V.*
10.47 Domestic Labor Regulations of Tagit de Mexico, SA de CV.*
10.48 Promissory Note, dated October 15, 1997, provided by A.G.S. Stationery Inc. to Monto
Holdings Pty. Ltd.*
10.49 Promissory Note, dated November 4, 1997, provided by Pacific Trim & Belt, Inc. to Monto
Holdings Pty. Ltd.*
10.50 Securities Purchase Agreement, dated December 31, 1997, between the Company and
Cruttenden Roth Bridge Fund, LLC.
10.51 Promissory Note, dated December 31, 1997, delivered by the Company to Cruttenden Roth
Bridge Fund, LLC.
10.52 Security Agreement, dated December 31, 1997, between the Company and Cruttenden Roth
Bridge Fund, LLC.
11 Computation of Earnings.
21.1 List of Subsidiaries of Registrant.*
23.1 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its opinion to be filed as
Exhibit 5.1 hereto).
23.2 Consent of BDO Seidman, LLP.
24.1 Power of Attorney (included in signature page).
27 Financial Data Schedule.
99.1 Consent of Brent Cohen as nominee.*
99.2 Consent of Diana Maranon as nominee.*
99.3 Consent of Michael Katz as nominee.*
99.4 Consent of Paul Markiles as nominee.*
</TABLE>
- ------------------------
* Previously filed.
+ Certain portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for an
order granting confidential treatment pursuant to Rule 406 of the General
Rules and Regulations under the Securities Act of 1933.
<PAGE>
TROOP MEISINGER STEUBER & PASICH, LLP
LAWYERS
January 6, 1998
Tag-It Pacific, Inc.
3820 South Hill Street
Los Angeles, CA 90037
Ladies/Gentlemen:
At your request, we have examined the Registration Statement on Form SB-2
(the "Registration Statement") to which this letter is attached as Exhibit
5.1 filed by Tag-It Pacific, Inc., a Delaware corporation (the "Company"), in
order to register under the Securities Act of 1933, as amended (the "Act"),
1,570,000 shares of Common Stock, par value $0.001 per share, of the Company,
and an additional 235,500 shares of Common Stock, par value $0.001 per share,
of the Company subject to the underwriters' over-allotment option, and any
additional shares of Common Stock of the Company which may be registered
pursuant to Rule 462(b) under the Act (collectively, the "Shares").
We are of the opinion that the Shares have been duly authorized and upon
issuance and sale of the Shares in conformity with and pursuant to the
Registration Statement, the Shares will be validly issued, fully paid and
non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to use of our name in the Prospectus constituting a part
thereof.
Respectfully submitted,
/s/ Troop Meisinger Steuber & Pasich, LLP
TROOP MEISINGER STEUBER & PASICH, LLP
<PAGE>
EXHIBIT 10.50
SECURITIES PURCHASE AGREEMENT
by and among
TAG-IT PACIFIC, LLC.
and
THE CRUTTENDEN ROTH BRIDGE FUND, LLC
Dated as of December 31, 1997
Senior Subordinated Secured Note
Warrants to Purchase Membership Units
CRUTTENDEN ROTH, INC.
Placement Agent
<PAGE>
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (the "Agreement") is entered into as
of December 31, 1997 by and between Tag-It Pacific, LLC, a Delaware limited
liability company (the "Issuer") and The Cruttenden Roth Bridge Fund, LLC, a
California limited liability company ("Purchaser"). In consideration of the
mutual promises, representations, warranties, covenants and conditions set
forth below, the parties agree as follows:
1. ISSUANCE OF SECURITIES.
1.1 AUTHORIZATION. Issuer has duly authorized the issue of (i)
Issuer's Senior Subordinated Secured Note (the "Note") in the aggregate
principal amount of $220,000, such Note to be in the form of Exhibit A; (ii)
a five-year warrant (the "Warrant") to purchase 32,000 shares of Issuer's
Membership Units, par value $0 per share ("Issuer Membership Units") at an
exercise price per Issuer Membership Unit equal to the greater of (a) 120% of
the price indicated on the cover of the final prospectus relating to the
Issuer's initial public offering of securities which is registered under the
Securities Act of 1933, as amended (the "Initial Public Offering") or (b)
$6.00, subject to adjustments set forth therein, which Warrant shall be
executed and delivered to the Purchaser within fifteen (15) days from the
date hereof (but which shall be deemed issued on the date hereof) and shall
be in substantially the same form as the warrant issued to Cruttenden Roth
Incorporated and Josephthal & Co., Inc. in connection with the Company's
Initial Public Offering, except that the Warrant will contain a provision
enabling the Purchaser to exercise the Warrant by means of a "cashless" or
"net" exercise; and (iii) the Issuer Membership Units issuable upon exercise
of the Warrant. The Note shall mature, bear interest, be payable and
otherwise be substantially in the manner provided herein and in Exhibit A.
Issuer shall execute and deliver to Purchaser a security agreement in
substantially the form of Exhibit B (the "Security Agreement") evidencing
Purchaser's security interest in the collateral identified therein (the
"Collateral"). The Note and Warrant, and the certificates and other
instruments from time to time evidencing the Note and the Warrant, are herein
sometimes collectively called the "Securities."
1.2 PURCHASE AND SALE OF SECURITIES; THE CLOSING. Issuer shall sell to
Purchaser and, subject to the terms and conditions hereof, Purchaser shall
purchase from Issuer, the Securities at a price equal to $199,980.00, less
amounts withheld in accordance with Section 13.1.
The closing (the "Closing") of such purchase of the Securities shall
take place on the date hereof, or at such other time as the parties hereto
may mutually agree; provided, however, that if the
<PAGE>
initial Closing Date shall not have occurred on or prior to December 31,
1997, Purchaser's obligation to purchase and pay for the Note and Warrant,
and the Issuer's obligations to sell the Note and Warrant hereunder, shall be
terminated and Purchaser and Issuer shall have no liability or further
obligations hereunder.
On the Closing Date, the Issuer will deliver to Purchaser at the offices
of Stradling, Yocca, Carlson & Rauth in Newport Beach, California, or at such
other place as Issuer and Purchaser may agree, the Note and Warrant, in the
name of Purchaser or its nominee, duly executed and dated the Closing Date,
against Purchaser's delivery to Issuer of immediately available funds in the
amount of the purchase price.
1.3 PURCHASE AND SALE OF ADDITIONAL SECURITIES. So long as an Event of
Default has not occurred and is not continuing, the Issuer shall have the
right to cause the Purchaser to purchase additional notes hereunder in the
form of the Note, except as provided below with respect to the Convertible
Additional Note (each, an "Additional Note"), in increments of $55,000 up to
an aggregate principal amount, together with the Note, not to exceed
$550,000. In the event that the Issuer desires to exercise such right, the
Issuer shall give the Purchaser at least one day prior written notice, which
notice shall set forth the principal amount of the Additional Note being sold
to the Purchaser. The purchase price for such Additional Note shall equal
90.9% of the aggregate principal amount of the Additional Note sold, and for
each $55,000 of the principal amount of each Additional Note so issued to the
Purchaser, the Issuer shall also issue a warrant to the Purchaser to purchase
the lesser of (i) an additional 7,500 shares of the Issuer Membership Units
or (ii) the maximum number of shares of the Issuer Membership Units permitted
by the NASD under Article III, Section 1 of the NASD's Rules of Fair Practice
(without adjusting the amount of the compensation paid or payable to
Cruttenden Roth Incorporated, Josephthal & Co., Inc. and Averil Associates,
Inc. in connection with the Issuer's Initial Public Offering or otherwise),
which warrant shall be identical in form to the Warrant, except with respect
to the date issued and the number of shares of Issuer Membership Units
issuable thereunder; PROVIDED, HOWEVER, that the aggregate number of warrants
issued to the Purchaser in connection with the sale by the Issuer of the Note
and Additional Notes shall not exceed 47,000 warrants. Notwithstanding the
foregoing, at such time as the Issuer has sold to the Purchaser Additional
Notes in the aggregate principal amount of $330,000, the Issuer shall issue
an Additional Note to the Purchaser (the "Convertible Additional Note") which
Convertible Additional Note shall provide that the Purchaser may, at its
option, convert $1,000 of the principal of such Convertible Additional Note
into a warrant to purchase 33,000 Issuer Membership Units, which warrant
shall be identical in form to the Warrant, except with respect to the date
issued and the number of shares of Issuer Membership Units issuable
thereunder. Purchaser shall not be obligated to purchase any Additional Note
unless Purchaser shall have received a certificate signed by the President of
Issuer, dated the Closing Date relating to such purchase, certifying that all
of the conditions precedent to the Purchaser's obligations under Section 3
have been satisfied and that no Event of Default shall have occurred and is
continuing on such date.
2
<PAGE>
1.4 REPRESENTATIONS OF THE PURCHASER. Purchaser hereby represents and
warrants to Issuer that:
(a) The Purchaser is acquiring the Securities for its own
account, not as a nominee or agent, for the purpose of investment, and not
with a view to or for sale in connection with any distribution thereof in
violation of the Securities Act of 1933 (the "Securities Act").
(b) The Purchaser has no present intention of selling,
granting any participation in or otherwise distributing the Securities and
Purchaser does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant a participation to such person or
to any third person, with respect to any of the Securities.
(c) Purchaser understands that the Securities at the time of
issuance will not be registered under the Securities Act on the ground that
the sale provided for in this Agreement and the issuance of securities
hereunder is exempt from registration under the Securities Act and that the
Issuers' reliance on such exemption is predicated in part on Purchaser's
representations set forth herein.
(d) Purchaser represents that Purchaser is experienced in
evaluating and investing in companies in the development stage, Purchaser is
able to fend for itself, Purchaser has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of Purchaser's investment in the Securities, and Purchaser has the
ability to bear the economic risks of such investment.
(e) Purchaser understands that the Securities may not be
sold, transferred, or otherwise disposed of without registration under the
Securities Act or an exemption therefrom, and that in the absence of an
effective registration statement covering the Securities or an available
exemption from registration under the Securities Act, the Securities may need
to be held indefinitely.
(f) Purchaser is a commercial finance lender duly licensed as
such pursuant to Sections 22000 et seq. of the California Financial Code.
(g) The Purchaser is an "accredited investor" within the
meaning of Rule 501 of Regulation D promulgated by the Securities and
Exchange Commission, as presently in effect.
2. REPRESENTATIONS OF ISSUER.
Issuer represents and warrants to Purchaser as of the date hereof and as
of the Closing Date that:
2.1 ORGANIZATION AND AUTHORITY. Issuer is a limited liability company
duly organized, validly existing and in good standing under the laws of the
state of Delaware, and has all requisite power and authority to own or hold
under lease the property it purports to own or hold under lease
3
<PAGE>
and to transact the business it transacts and proposes to transact. Issuer
has all requisite corporate power and authority to execute and deliver this
Agreement, the Securities and the Security Agreement and any other documents
or agreements contemplated hereby and thereby to which Issuer is a party, to
perform the obligations hereunder and thereunder and to consummate the
transactions contemplated hereunder and thereunder.
The execution, delivery and performance of this Agreement, the
Securities, the Security Agreement and any other documents or agreements to
which Issuer is a party contemplated hereby and thereby, and the consummation
of the transactions contemplated hereby and thereby, have been duly
authorized and approved by the Board of Directors of Issuer. Each of this
Agreement, the Securities, the Security Agreement and any other document or
agreement to which Issuer is a party contemplated hereby or thereby has been
(or on the Closing Date will have been) duly authorized, executed and
delivered by, and each is (or, when duly executed and delivered on the
Closing Date, will be) the valid and binding obligation of, Issuer,
enforceable in accordance with its terms, except as may be limited by
applicable bankruptcy, reorganization, insolvency, moratorium or other
similar laws or by legal or equitable principles relating to or limiting
creditors' rights generally.
2.2 REGISTRATION STATEMENT. The Issuer's Registration Statement on
Form SB-2 relating to the Issuer's Initial Public Offering, and any and all
amendments thereto, as filed from time to time with the Securities and
Exchange Commission (the "Registration Statement"), did not, as of the date
of filing thereof contain any untrue statement of a material fact nor omit
nor misstate any material fact required to be stated therein or necessary in
order to make the statements therein not misleading.
3. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PURCHASER.
The obligation of Purchaser to purchase and pay for the Securities to be
purchased by it on the Closing Date shall be subject to the satisfaction on
or before the Closing Date of the conditions hereinafter set forth, which
conditions are solely for the Purchaser's benefit and may be waived only in
writing by it.
3.1 SECURITIES AND SECURITY AGREEMENT. The Securities and the Security
Agreement shall have been duly executed and delivered by Issuer in the
respective definitive forms of such documents attached hereto. Arrangements
which Purchaser, in Purchaser's reasonable discretion, deems satisfactory
shall have been made for such instruments to be duly filed, delivered or
recorded in all places necessary to perfect and maintain the liens
respectively purported to be created thereby and all governmental charges
payable in connection therewith shall have been paid (or payment shall have
been provided for) in full, and shall be in full force and effect and no term
or condition thereof shall have been amended, modified or waived without the
prior written consent of Purchaser.
3.2 PROCEEDINGS SATISFACTORY. All proceedings taken on or prior to the
Closing Date in connection with the issuance of the Securities and the
consummation of the transactions contemplated hereby and all documents and
instruments relating thereto shall be reasonably satisfactory in form and
substance to Purchaser and Purchaser's counsel; and Purchaser and Purchaser's
counsel shall have
4
<PAGE>
received copies of such documents, instruments, and certificates of officers
of the Issuers in form and substance reasonably satisfactory to Purchaser and
Purchaser's counsel, all as Purchaser or they may reasonably request in
connection therewith.
3.3 REPRESENTATIONS TRUE. All representations and warranties of the
Issuer contained in Section 2 shall be true and not misleading, in each case
on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of the Closing Date;
the Issuer shall have performed all agreements on its part required to be
performed under this Agreement on or prior to the Closing Date.
4. PREPAYMENT AND SUBORDINATION OF THE NOTE.
4.1 PREPAYMENT. The Note shall not be subject to prepayment of
principal except as set forth in the Note and in this Section 4. Upon notice
given as provided below, Issuer, at its option, may prepay the Note in whole
or in part at any time at par (together with any accrued but unpaid interest
as of the date of prepayment), without premium. In addition, if at any time
there occurs a Refinancing (as defined in Section 8 below), then, within 15
business days of the consummation of such Refinancing, Issuer shall pay the
Purchaser an amount equal to $220,000, together with all accrued but unpaid
interest on such date, in full satisfaction of the amounts owed thereunder.
Issuer will give written notice of prepayment of the Note pursuant to this
Section 4.1 to Purchaser not less than one (1) business days prior to the
date fixed for such prepayment in such notice, which notice shall specify the
amount so to be prepaid.
4.2 SUBORDINATION. Except as set forth in Section 7.2, the
indebtedness evidenced by the Note shall not be subordinated to any existing
or future debt of the Issuer.
5. FINANCIAL INFORMATION; COMPLIANCE CERTIFICATES; MAINTENANCE OF
RECORDS.
Issuer has and will continue to engage BDO Seidman or another accounting
firm from the group commonly known as the "Big Five" to audit and review its
financial statements. Issuer will furnish to Purchaser, so long as Purchaser
shall hold the Note:
(a) within forty-five (45) days after the end of each fiscal
quarter in each fiscal year (other than the last fiscal quarter in each
fiscal year), an unaudited consolidated balance sheet of Issuer and the
related consolidated statements of income, stockholders' equity and cash
flows, such consolidated balance sheet to be as of the end of such fiscal
quarter and such consolidated statements of income, stockholders' equity and
cash flows to be for the fiscal quarter and for the period from the beginning
of the fiscal year to the end of such fiscal quarter, in each case with
comparative statements for the corresponding period in the prior fiscal year;
(b) within ninety (90) days after the end of each fiscal
year, a consolidated balance sheet of Issuer and the related consolidated
statements of income, stockholders'
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equity and cash flows, prepared in accordance with GAAP and audited by its
independent public accountants, such consolidated balance sheet to be as of
the end of such fiscal year and such consolidated statements of income,
stockholders' equity and cash flows to be for the period from the beginning
of the fiscal year to the end of such fiscal year, in each case with
comparative statements for the prior fiscal year;
(c) promptly following receipt by Issuer, each audit response
letter, accountant's management letter and other written report submitted to
Issuer by its independent public accountants in connection with an annual or
interim audit or review of the books of Issuer;
(d) concurrently with sending or making available the same,
all press releases, reports and financial statements that Issuer sends or
makes available to its shareholders generally or directors generally; and
(e) immediately upon becoming aware of (i) any Default, Event
of Default or other default in the performance of any covenant, agreement or
condition contained in this Agreement, the Securities or the Security
Agreement or (ii) any Default or, Event of Default under any other Issuer
Indebtedness or Issuer Indebtedness, a certificate of the President, a Vice
President or the Principal Financial Officer of Issuer, specifying such
Default, Event of Default or other default and the nature and status thereof.
6. INSPECTION.
So long as Purchaser shall hold the Note, Purchaser and Purchaser's
authorized representatives shall have the right to visit and inspect any of
the properties of Issuer to examine the books of account and records of
Issuer to be provided with copies and extracts therefrom (at Issuer's
expense), to discuss the affairs, finances and accounts of Issuer with, and
to be advised as to the same by, its President and independent public
accountants (and Issuer authorizes such independent public accountants to
discuss the Issuer's financial matters with Purchaser and Purchaser's
representatives, regardless of whether any representative of Issuer is
present), all upon reasonable prior notice and at such reasonable times and
intervals as Purchaser may desire. Issuer will likewise afford Purchaser the
opportunity to obtain any information, to the extent Issuer possesses such
information or can acquire it without unreasonable effort or expense,
necessary to verify the accuracy of any of the representations and warranties
made by the Issuer hereunder.
Neither Purchaser nor its representatives shall (a) use any such
information in any manner detrimental to Issuer, as the case may be, or (b)
disclose, divulge, provide or make accessible any such information to any
person or entity (other than limited disclosures to their representatives to
the extent necessary to evaluate matters related solely to Issuer).
7. COVENANTS.
The Issuer jointly and severally covenant and agree that on and after
the date hereof, so
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long as any Note shall be outstanding:
7.1 PAYMENT OF NOTE. Issuer shall pay the principal of and interest on
the Note on the dates and in the manner provided in the Note and this
Agreement. The obligation of Issuer described in the preceding sentence is
absolute and unconditional, irrespective of any tax or accounting treatment
of such obligation.
7.2 LIMITATION ON INDEBTEDNESS. The Issuer shall not, directly or
indirectly, create, incur, assume, guarantee, suffer to exist or otherwise in
any manner become liable or commit to become liable with respect to any
indebtedness, including, but not limited to PARI PASSU indebtedness or
indebtedness senior to the Note, except for (a) the Note, (b) indebtedness
existing on the Closing Date which is described or referred to in the
Registration Statement and any extension of maturity, refinancing or
modification of the terms thereof; PROVIDED, HOWEVER, that, unless the Issuer
shall have obtained the Purchaser's prior consent, which consent shall not be
unreasonably withheld (i) such extension, refinancing or modification shall
be pursuant to terms that are not materially less favorable to the Issuer
than the terms of the indebtedness being extended, refinanced or modified and
(ii) after giving effect to the extension, refinancing or modification, the
principal amount of such indebtedness shall not be materially greater than
the amount of indebtedness outstanding immediately prior to such extension,
refinancing or modification, and the obligors on such indebtedness have not
changed; (c) additional secured indebtedness of the Issuer to any single
bank, credit, financing or other lending institution, that is senior to the
Note; (d) secured indebtedness of the Issuer to any bank, credit, financing
or other lending institution, that is senior to the Note, other than the
indebtedness described in (c) above, provided that the aggregate amount of
such indebtedness does not exceed $500,000; (e) existing indebtedness with
respect to capital lease obligations; (f) indebtedness to trade creditors
incurred in the ordinary course of business; and (f) indebtedness that is
subordinated to the Note.
7.3 OBSERVANCE OF STATUTES, REGULATIONS AND ORDERS. The Issuer
shall remain at all times in material compliance with all United States'
statutes or other rules or regulations of any governmental body, including
any environmental law, the violation of which would materially affect
adversely the business, business prospects, properties, conditions (financial
or otherwise) or operations of the Issuers or the ability of the Issuers to
perform their respective obligations under this Agreement or the Securities
and the Security Agreement
7.4 CORPORATE EXISTENCE. The Issuer shall do or cause to be done
all things necessary to preserve and keep in full force and effect its
corporate existence in accordance with its rights (charter and statutory),
licenses and franchises; PROVIDED, HOWEVER, that the Issuer shall not be
required to preserve any such right, license or franchise if its Board of
Directors shall determine in good faith in accordance with its charter that
the preservation thereof is no longer desirable in the conduct of the
business of the Issuer and that the loss thereof is not adverse in any
material respect to the Issuer or the value of the Securities.
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7.5 TAXES. The Issuer shall pay, prior to delinquency, all material
taxes, assessments and governmental levies that may be imposed upon them
except as contested in good faith and by appropriate proceedings and except
as may be reasonably required by reason of business necessity.
7.6 LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. The Issuer shall not
make any payment to any officer or director of Issuer in respect of any
indebtedness for borrowed funds owed to any such officer or director.
7.7 SUBORDINATION AGREEMENT. Purchaser agrees, upon request from the
Issuer from time to time, to execute and deliver to the Issuer all
instruments and documents reasonably necessary to subordinate its security
interest and rights hereunder and under the Security Agreement to any holder
of senior indebtedness permitted by Section 7.2, as the same may reasonably
be requested by any such holder of senior indebtedness; PROVIDED, HOWEVER,
that in no event shall any payment blockage period provided for by any such
instrument or document in the event of a default on the senior indebtedness
exceed 180 days.
8. DEFINITIONS.
8.1 DEFINITIONS. Except as otherwise specified or as the context may
otherwise require, the following terms shall have the respective meanings set
forth below whenever used in this Agreement:
"AFFILIATE" means a Person (1) that directly or indirectly controls, or
is controlled by, or is under common control with, the Issuers, (2) that
beneficially owns ten percent (10%) or more of the voting securities of the
Issuers, or (3) ten percent (10%) or more of the voting securities (or in the
case of a Person that is not a corporation, ten percent ( 10%) or more of the
equity interest) of which is owned by the Issuers. The term "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"PERSON" shall include an individual, a corporation, an association, a
partnership, a trust or estate, a government, foreign or domestic, and any
agency or political subdivision thereof, or any other entity.
"REFINANCING" shall mean any transaction, or series of transactions
pursuant to which the Issuer issues equity securities or otherwise raise
capital with gross proceeds to the Issuer of $3,500,000 or more; PROVIDED,
HOWEVER, that in no event shall a "Refinancing" include any transaction
permitted under Section 7.2(c) or (d) above.
8.2 ACCOUNTING TERMS. All accounting terms used herein which are not
expressly defined in this Agreement have the meanings respectively given to
them in accordance with GAAP, all computations made pursuant to this Agreement
shall be made in accordance with GAAP, and all balance sheets and other
financial statements shall be prepared in accordance with GAAP, except in
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the case of unaudited financial statements which are subject to year-end
audit adjustments and the absence of footnotes.
9. EVENTS OF DEFAULT; REMEDIES.
9.1 EVENTS OF DEFAULT DEFINED; ACCELERATION OF MATURITY. If any of the
following events ("Events of Default") shall occur and be continuing for the
applicable periods set forth below (for any reason whatsoever and whether it
shall be voluntary or involuntary or by operation of law or otherwise):
(a) default shall be made by Issuer in the payment of all or
any portion of the principal of, or premium (if any) on, the Note within
three (3) business days following written notice from Purchaser that the same
is due and payable, whether at stated maturity, by acceleration, by notice of
prepayment or otherwise; or
(b) default shall be made by Issuer in the payment of any
interest on the Note within three (3) business days following written notice
from Purchaser that the same is due and payable; or
(c) default shall be made by the Issuer in the performance or
observance of any covenant contained in Sections 4, 7 and 9 hereof, provided
that, with respect to the covenants of the Issuer set forth in Section 7
hereof (other than a default of the covenants set forth in Sections 7.1 and
7.4, or a willful default of the covenant set forth in Section 7.6, all of
which shall have no applicable cure period), such default shall remain
uncured for a period of sixty (60) days from the date Purchaser provides
written notice to the Issuer of such default;
(d) default shall be made by the Issuer in the performance or
observance of any other covenant, agreement or condition contained in the
Security Agreement, which default, if curable, shall remain uncured for a
period of sixty (60) days from the date Purchaser provides written notice to
the Issuer of such default; or
(e) the Issuer shall (1) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its
property, (2) make a general assignment for the benefit of its creditors, (3)
commence a voluntary case under the Federal Bankruptcy Code (as now or
hereafter in effect), (4) file a petition seeking to take advantage of any
other law providing for the relief of debtors, (5) fail to controvert in a
timely or appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under such Bankruptcy Code, (6) take any
action under the laws of its jurisdiction of incorporation analogous to any
of the foregoing, or (7) take any corporate action for the purpose of
effecting any of the foregoing; or
(f) a proceeding or case shall be commenced, without the
application or consent of the Issuer, in any court of competent jurisdiction,
seeking (1) the liquidation,
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reorganization, dissolution, winding up, or composition or readjustment of
the debts of the Issuer, (2) the appointment of a trustee, receiver,
custodian, liquidator or the like of the Issuer or of all or any substantial
part of its respective assets, or (3) similar relief in respect of the Issuer
under any law providing for the relief of debtors, and such proceeding or
case shall continue undismissed, or unstayed and in effect, for a period of
sixty (60) days; or an order for relief shall be entered in an involuntary
case under such Bankruptcy Code, against the Issuer; or action under the laws
of the jurisdiction of incorporation of the Issuer analogous to any of the
foregoing shall be taken with respect to the Issuer and shall continue
unstayed and in effect for any period of sixty (60) days; or
(g) a final judgment for the payment of money shall be
rendered by a court of competent jurisdiction against the Issuer and the
Issuer shall not discharge the same or provide for its discharge in
accordance with its terms, or procure a stay of execution thereof within
thirty (30) days from the date of entry thereof and within said period of
thirty (30) days, or such longer period during which execution of such
judgment shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal, and such judgment together with all
other such judgments shall exceed in the aggregate $2,000,000; or
(h) any representation or warranty made by the Issuer in this
Agreement or any Security Document or in any certificate or other instrument
delivered pursuant hereto or thereto or in connection with any provision
hereof of thereof shall be false or incorrect in any material respect as of
the date made;
then, upon the occurrence of any Event of Default, (i) the interest rate
shall increase from 12% to 13-1/2% and (ii) the unpaid principal amount of the
Note, together with the interest accrued thereon and all other amounts
payable by the Issuers hereunder, shall automatically become immediately due
and payable, without presentment, demand, protest or other requirements of
any kind, all of which are hereby expressly waived by the Issuer.
The provisions of this Section are subject, however, to the condition
that if, at any time after the Note shall have so become due and payable,
Issuer shall pay all arrears of interest on the Note and all payments on
account of the principal of the Note which shall have become due otherwise
than by acceleration, with interest on such principal and, to the extent
permitted by law, on overdue payments of interest, at the rate specified in
the Note and all Events of Default (other than nonpayment of principal of and
accrued interest on Note, and amounts equal to premium as aforesaid, due and
payable solely by virtue of acceleration) shall be remedied or waived
pursuant to Section 11, then, and in every such case, the holder of such
Note, by written notice to Issuer, may rescind and annul any such
acceleration and its consequences; but no such action shall affect any
subsequent Default or Event of Default or impair any right consequent thereon.
9.2 SUITS FOR ENFORCEMENT. If any Event of Default described in
Subsection (a) or (b) of Section 9.1 above with respect to the Note, shall
have occurred and be continuing, then the Purchaser may proceed to protect
and enforce its rights, either by suit in equity or by action at law, or
both, whether for the specific performance of any covenant or agreement
contained in this Agreement or in
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aid of the exercise of any power granted in this Agreement, or such holder
may proceed to enforce the payment of all sums due upon the Note or to
enforce any other legal or equitable right of such holder.
The Issuer covenants that, if it shall default in the making of any
payment due under the Note or in the performance or observance of any
agreement contained in this Agreement, it will pay to Purchaser such further
amounts, to the extent lawful, as shall be sufficient to pay the costs and
expenses of collection or of otherwise enforcing Purchaser's rights,
including reasonable counsel fees and costs and expenses incurred in
connection with any restructuring, refinancing, workout, bankruptcy or other
similar transaction or proceeding. The obligations set forth in this
paragraph shall survive the payment in full of the Note.
9.3 REMEDIES CUMULATIVE; REMEDIES NOT WAIVED. No remedy herein
conferred upon Purchaser is intended to be exclusive of any other remedy and
each and every such remedy shall be cumulative and shall be in addition to
every other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise. No course of dealing between the Issuer
and Purchaser and no delay or failure in exercising any rights hereunder
shall operate as a waiver of any rights of Purchaser.
9.4 SECURITY AGREEMENT. The Issuer and the Purchaser hereby agree
to the terms of the Security Agreement and Purchaser and any assignee of the
Note shall be bound thereby and by any amendments to such documents approved
in accordance with this Agreement.
10. REGISTRATION, TRANSFER AND EXCHANGE OF NOTE; LOST, ETC., NOTES.
Issuer will keep at its principal executive office a register in which,
subject to such reasonable regulations as it may prescribe, but at its
expense (other than transfer taxes, if any), it will provide for the
registration and transfer of the Note.
The Note may not be sold, transferred, pledged or hypothecated unless
the proposed transaction does not require registration or qualification under
federal or state securities laws or unless the proposed transaction is
registered or qualified as required. Any transferee of the Note shall be
deemed to have made the representations set forth in Section 1.3 of this
Agreement.
Upon receipt by Issuer of evidence satisfactory to it of the loss,
theft, destruction or mutilation of the Note, and (in case of loss, theft or
destruction) of indemnity reasonably satisfactory to it, upon surrender and
cancellation of such Note or receipt of such indemnity, Issuer will make and
deliver in lieu of such Note a new Note in the same denomination and dated as
of the date to which interest has been paid thereon.
Notwithstanding the foregoing provisions of this Section, if any
certificate evidencing the Note is lost, stolen or destroyed, then the
affidavit of a holder's Secretary or Assistant Secretary (or
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other responsible official), setting forth the circumstances with respect to
such loss, theft or destruction, shall be accepted as satisfactory evidence
thereof.
11. AMENDMENT AND WAIVER.
11.1 AMENDMENT AND WAIVER. Any term, covenant, agreement or condition
of this Agreement, the Note or the Security Agreement may, with the written
consent of the Issuer as authorized by their respective Board of Directors,
be amended, or compliance therewith may be waived (either generally or in a
particular instance and either retroactively or prospectively), by a written
instrument signed by the Purchaser.
11.2 EFFECT OF AMENDMENT OR WAIVER. Any amendment or waiver pursuant
to Section 11.1 shall be binding upon the holder of the Note, upon each
future holder of the Note and upon the Issuer, in each case whether or not a
notation thereof shall have been placed on the Note.
12. TAXES.
The Issuer will pay all taxes (including interest and penalties), other
than taxes imposed on the income of the holders of the Securities, which may
be payable in respect of the execution and delivery of this Agreement or of
the execution and delivery of any of the Securities or of any amendment of,
or waiver or consent under or with respect to, this Agreement or any of the
Securities and will save Purchaser and all subsequent holders of the
Securities harmless against any loss or liability resulting from nonpayment
or delay in payment of any such tax. The obligations of the Issuers under
this Section shall survive the payment of the Note and the exercise of the
Warrant.
13. MISCELLANEOUS.
13.1 FEES AND EXPENSES. The Issuer agrees to pay Cruttenden Roth
Bridge Fund, LLC upon the Closing Date (and each closing date relating to a
subsequent purchase of notes, as provided in Section 1.3) a funding fee equal
to "out-of-pocket" expenses up to a maximum of $10,000 in the aggregate.
The Issuer agrees that Purchaser may withhold from the purchase price
payable in accordance with Section 1.2 (or Section 1.3) the funding fee and
all other fees and expenses otherwise payable by the Issuer on the Closing
Date in accordance with this Section 13.1.
13.2 RELIANCE ON AND SURVIVAL OF REPRESENTATIONS. All agreements,
representations and warranties of the Issuer herein and in the Security
Agreement and in any certificates or other instruments delivered pursuant to
this Agreement or the Security Agreement shall (A) be deemed to be material
and to have been relied upon by Purchaser, notwithstanding any investigation
heretofore or hereafter made by Purchaser or on Purchaser's behalf, and (B)
survive the execution and delivery of this Agreement and of the Securities,
and shall continue in effect so long as any Security is
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outstanding; provided, however, that all statements as to factual matters
contained herein shall be deemed to be representations and warranties by the
Issuer hereunder solely as of the date of such representation or warranty.
13.3 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of and be enforceable by the Issuer, Purchaser and Purchaser's
respective successors and assigns, and, in addition, shall inure to the
benefit of and be enforceable by each person who shall from time to time be a
holder of any portion of the Note. The Issuer may not assign their rights
under this Agreement or Security Agreement.
13.4 INDEMNIFICATION. The Issuer agrees to defend (with counsel
reasonably satisfactory to Purchaser), protect, indemnify and hold harmless
Purchaser, each affiliate or subsidiary of Purchaser, and each of their
respective officers, directors, employees, attorneys and agents (each an
"Indemnified Party") from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs,
expenses and disbursements of any kind or nature (including, without
limitation, the disbursements and the reasonable fees of counsel for each
Indemnified Party in connection with any investigative, administrative or
judicial proceeding, whether or not the Indemnified Party shall be designated
a party thereto), which may be imposed on, incurred by, or asserted against,
any Indemnified Party (whether direct, indirect or consequential and whether
based on any federal, state or local laws or regulations including, without
limitation, securities, environmental and commercial laws and regulations,
under common law or in equity, or based on contract or otherwise) in any
manner relating to or arising out of this Agreement, the Securities and the
Security Agreement or any other agreement, act, event or transaction related
or attendant thereto; PROVIDED, HOWEVER, that the Issuer shall not have any
obligation hereunder to any Indemnified Party with respect to matters caused
by or resulting from the willful misconduct or gross negligence of such
Indemnified Party. To the extent that the undertaking to indemnify set forth
in the preceding sentence may be unenforceable because it is violative of any
law or public policy, the Issuer shall satisfy such undertaking to the
maximum extent permitted by applicable law. Any liability, obligation, loss,
damage, penalty, cost or expense covered by this indemnity shall be paid to
each Indemnified Party on demand, and, failing prompt payment, shall,
together with interest thereon from the date incurred by each Indemnified
Party until paid by Issuer, be added to the Obligations of Issuers and be
secured by the Collateral. The provisions of this Section 13.4 shall survive
the satisfaction and payment of the other obligations herein and the
termination of this Agreement.
13.5 NOTICES. All notices and other communications provided for in
this Agreement shall be in writing and delivered, telecopied or mailed, first
class postage prepaid, addressed:
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(i) if to Issuer:
TAG-IT PACIFIC, LLC.
3820 South Hill Street
Los Angeles, California 90037
Attention: Colin Dyne
Telephone: (213) 234-9606
Telecopy: (213) 231-3515
(ii) if to Purchaser, at the address set forth on
Purchaser's signature page and as may be designated by notice to the Issuers;
and
(iii) if to any subsequent holder of the Securities, to
the address as may be hereafter specified by notice to the Issuers.
Any such notice or communication shall be deemed to have been duly given
when delivered, telecopied or mailed as aforesaid.
13.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
13.7 GOVERNING LAW. This Agreement and the Note and (unless otherwise
provided) all amendments, supplements, waivers and consents relating hereto
or thereto shall be governed by and construed in accordance with the laws of
the State of California without regard to principles of conflicts of law.
13.8 ARBITRATION. The parties hereto agree that in the event of any
dispute arising in connection with the construction or enforcement of this
Agreement or in connection with the issuance of the Securities, such dispute
shall be submitted to arbitration, such arbitration proceedings to be held in
Los Angeles County, California, in accordance with the rules then obtaining
of the National Association of Securities Dealers, Inc., and this agreement
to arbitrate shall be specifically enforceable. Any award rendered in any
such arbitration proceeding shall be final and binding on each of the
parties, and judgment may be entered thereon in the Superior Court of the
State of California for the County of Los Angeles or any other court of
competent jurisdiction; provided, however, that the arbitrators shall be
required to follow the law and any errors of law shall be appealable to the
Los Angeles Superior Court or to a reference proceeding under the rules
thereof. The costs and fees of any such arbitration proceeding shall be
borne by the respective parties thereto, but the arbitrators may in their
discretion award costs and reasonable attorneys' fees to the prevailing
party. Notwithstanding any of the foregoing, this Section 13.8 shall not
apply to the enforcement by any holder of any of the Securities of its rights
thereunder at law or in equity in the event of an actual or alleged default
by Company of its obligations under the Note or under the Warrant, as the
case may be.
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13.9 WAIVER OF JURY TRIAL. PURCHASER, EACH SUBSEQUENT HOLDER OF A
SECURITY, BY ITS ACCEPTANCE THEREOF, AND THE ISSUER, EACH HEREBY AGREE TO
WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE SECURITIES, OR ANY OTHER
AGREEMENTS RELATING TO THE SECURITIES OR ANY DEALINGS BETWEEN THEM RELATING
TO THE SUBJECT MATTER OF THIS TRANSACTION. The scope of this waiver is
intended to be all encompassing of any and all disputes that may be filed in
any court, which are not submitted to arbitration pursuant to Section 13.8
hereof, and that relate to the subject matter of this transaction, including
without limitation, contract claims, tort claims, breach of duty claims and
all other common law and statutory claims. Purchaser and the Issuer
acknowledge that this waiver is a material inducement to enter into a
business relationship, that each has already relied on the waiver in entering
into this Agreement, and that each will continue to rely on the waiver in
their related future dealings. Purchaser and the Issuer further represent and
warrant that each has reviewed this waiver with its legal counsel, and that
each knowingly and voluntarily waives its jury trial rights following
consultation with legal counsel. NOTWITHSTANDING ANYTHING TO THE CONTRARY
HEREIN, THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED
EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, THE
SECURITIES, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE
SECURITIES. In the event of litigation, this Agreement may be filed as a
written consent to a trial by the Court.
13.10 ATTORNEYS' FEES. In any action or proceeding brought to enforce
any provision of this Agreement, or where any provision hereof is validly
asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys, fees (including any fees incurred in any appeal) in
addition to its costs and expenses and any other available remedy.
13.11 NO COMMISSIONS. Except for the fee payable to Cruttenden Roth,
Inc. and referred to in Section 13.1 above, the Issuer hereby represents and
warrant to Purchaser that no Person is entitled to any brokerage commission,
finders' fee or other compensation arising out of or connected with the
transactions contemplated by this Agreement.
13.12 INVALIDITY. The invalidity of any provision or provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement or of this Agreement as a whole.
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IN WITNESS WHEREOF, this Securities Purchase Agreement is executed as of
the date first above written.
ISSUER: TAG-IT PACIFIC, LLC.
A Delaware limited liability company
By:
--------------------------------
Its:
---------------------------
PURCHASER: THE CRUTTENDEN ROTH BRIDGE FUND, LLC
a California limited liability company
By:
---------------------------------
Name: Shelly Singhal
Title: Manager
Address for Notices and Payments:
The Cruttenden Roth Bridge Fund, LLC
c/o Cruttenden Roth Incorporated
18301 Von Karman
Irvine, California 92715-1009
Attention: Mr. Shelly Singhal
Telephone: (714) 757-5700
Telecopy: (714) 852-9603
With a copy to: Stradling, Yocca, Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
Attention: Nick E. Yocca, Esq.
Telephone: (715) 725-4000
Telecopy: (714) 725-4100
16
<PAGE>
EXHIBITS
Exhibit A Form of Note
Exhibit B Security Agreement
<PAGE>
EXHIBIT 10.51
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") NOR IS SUCH REGISTRATION
CONTEMPLATED. THIS NOTE MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE
TRANSFERRED AT ANY TIME WHATSOEVER UNLESS REGISTERED UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE, EXCEPT UPON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED FOR SUCH
TRANSFER OR THE SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE
SATISFACTORY TO IT AND TO ITS COUNSEL TO THE EFFECT THAT ANY SUCH TRANSFER
WILL NOT BE IN VIOLATION OF THE ACT, OR APPLICABLE STATE SECURITIES LAWS OR
ANY RULE OR REGULATION PROMULGATED THEREUNDER.
TAG-IT PACIFIC, LLC
SENIOR SUBORDINATED SECURED NOTE
DUE DECEMBER 31, 1998
$220,000 Irvine, California
December 31, 1997
FOR VALUE RECEIVED, the undersigned, TAG-IT PACIFIC, LLC, a Delaware
limited liability company (the "COMPANY"), hereby promises to pay to THE
CRUTTENDEN ROTH BRIDGE FUND, LLC, a California limited liability company
("PAYEE") or registered assigns ("HOLDER"), the principal sum of TWO HUNDRED
TWENTY THOUSAND DOLLARS ($220,000) (or so much thereof as shall not have been
prepaid) on earlier of (i) December 31, 1998, or (ii) the effective date of a
Refinancing (as such term is defined in that certain Securities Purchase
Agreement between the Company and Payee dated December 31, 1997 (the
"Agreement")) (the "Maturity Date"), together with interest (computed on the
basis of actual days in the 360-day year) on the unpaid principal balance
hereof at the rate of twelve percent (12%) from the date hereof except as
provided below, under the terms of the Agreement, payable monthly in arrears,
commencing January 31, 1998 (which first payment shall include accrued
interest from the date hereof to and including such date), until said
principal shall have become due and payable in accordance with the Agreement,
and to pay interest at the foregoing rate per annum on any overdue principal
and, to the extent permitted by applicable law, on any interest overdue
(without regard to any applicable grace period), until the same shall be
paid. Notwithstanding the foregoing, in the event that the amounts under
this note become due and payable upon a Refinancing, then the Company shall
be obligated to pay, and the Holder shall accept in full satisfaction of the
obligations hereunder, an amount equal to $220,000.00 together with all
accrued and unpaid interest as of such date, less amounts withheld in
accordance with Section 13.1 of the Agreement.
Payments of principal, prepayment charges (if any) and interest are to
be made at the office of Holder at the address for notice set forth in the
Agreement or such other address of which Holder informs Company in writing,
in lawful money of the United States of America.
<PAGE>
The indebtedness evidenced by this Note is secured by, and this Note is
the "Note" referred to in, that certain Security Agreement dated as of the
date hereof between the Company and Payee.
This Note is issued pursuant to the Agreement and is also entitled to
the benefits thereof. As provided in the Agreement, this Note is subject to
mandatory prepayment requirements, and is further subject to optional
prepayments in whole or in part, without any prepayment charge, all as
specified in the Agreement.
Upon surrender of this Note for registration of transfer or assignment,
duly endorsed, or accompanied by a written instrument of transfer or
assignment duly executed, by the registered Holder hereof or such Holder's
attorney duly authorized in writing, a new Note for a like principal amount
will be issued to, and, at the option of the Holder, registered in the name
of, the transferee or assignee. The Company may deem and treat the person in
whose name this Note is registered as the Holder and owner hereof for the
purpose of receiving payments and for all other purposes whatsoever, and the
Company shall not be affected by any notice to the contrary.
If an Event of Default (as defined in the Agreement) shall occur and be
continuing, the principal of this Note may, under certain circumstances,
become or be declared due and payable in the manner and with the effect
provided in said Agreement.
Upon the occurrence of any Event of Default (as defined in the
Agreement), the principal interest rate shall increase from 12% to 13 1/2%.
All agreements between the Company and the Payee are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of maturity of the indebtedness evidenced hereby or otherwise,
shall the amount paid or agreed to be paid to the Payee for the use,
forbearance or detention of the indebtedness evidenced hereby exceed the
maximum permissible under applicable law. As used herein, the term
"applicable law" shall mean the law in effect as of the date hereof,
PROVIDED, HOWEVER, that in the event there is a change in the law which
results in a higher permissible rate of interest than the highest permissible
rate under applicable law in effect as of the date hereof, then this Note
shall be governed by such new law as of its effective date. If, from any
circumstance whatsoever, fulfillment of any provision hereof or the Agreement
at the time performance of such provision shall be due, shall involve
transcending the limit of validity prescribed by law, then the obligation to
be fulfilled shall automatically be reduced to the limit of such validity,
and if from any circumstances the Payee should ever receive as interest an
amount which would exceed the highest lawful rate, such amount which would be
excessive interest shall be applied to the reduction of the principal balance
evidenced hereby and not to the payment of interest, and if the principal
amount of this Note has been paid in full, shall be refunded to the Company.
This provision shall control every other provision of all agreements between
the Company and the Payee.
TAG-IT PACIFIC, LLC, a Delaware
limited liability company
By: __________________________
Name: __________________________
Title:__________________________
3
<PAGE>
EXHIBIT 10.52
SECURITY AGREEMENT
THIS AGREEMENT is made as of December 31, 1997, by TAG-IT PACIFIC, LLC.
a Delaware limited liability company ("Debtor"), to THE CRUTTENDEN ROTH
BRIDGE FUND, LLC, a California limited liability company ("Secured Party").
RECITALS
A. Debtor has executed and delivered to Secured Party that certain note (the
"Note") captioned "Senior Subordinated Secured Note" dated as of the date
hereof, in the original principal amount of $220,000.
B. As part of the consideration for the granting of the loan evidenced by the
Note and as additional security therefor, Secured Party has required that
Debtor grant a security interest in the "Collateral" (as defined below)
and Debtor desires to grant such security interest.
NOW, THEREFORE, in consideration of the covenants and promises
hereinafter set forth and other valuable consideration, the parties agree as
follows:
1. DEFINITIONS. Certain terms used in this Agreement shall have the
meaning set forth below.
"COLLATERAL" means all of Debtor's right, title and interest (whether
now held or hereafter acquired) in and to all personal property (whether
tangible or intangible) described in EXHIBIT "A" hereto, incorporated herein
by reference.
"EVENT OF DEFAULT" means an Event of Default as defined in, and
occurring under, that certain Securities Purchase Agreement (the "Securities
Purchase Agreement") of even date herewith by and between Debtor and Secured
Party.
"INDEBTEDNESS" means the indebtedness evidenced by the Note and any
other indebtedness or liability of Debtor to Secured Party now existing or
hereafter arising under the Note, including, without limitation, under any
Additional Note.
"PERMITTED LIENS" means any security interests, mortgages, pledges,
liens, claims, counterclaims, charges and encumbrances, in, or on any of the
assets or properties of the Debtor, to secure the indebtedness described in
Section 7.2 of the Securities Purchase Agreement.
"SENIOR DEBT" shall bear the same meaning as in the Securities Purchase
Agreement.
2. GRANT OF SECURITY INTEREST. As security for the Indebtedness,
Debtor hereby grants a security interest in the Collateral to Secured Party.
3. DEBTOR'S REPRESENTATIONS AND WARRANTIES. Debtor represents and
warrants as follows:
<PAGE>
(a) REGISTRATION STATEMENT. The Debtor's Registration
Statement on Form SB-2 relating to the Debtor's initial public offering of
securities which is registered under the Securities Act of 1933, as amended,
and any and all amendments thereto, as filed from time to time with the
Securities and Exchange Commission, did not, as of the filing date thereof,
contain any untrue statement of a material fact nor omit nor misstate any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading.
(b) LOCATION OF COLLATERAL. Debtor shall not, without at
least thirty (30) days' prior written notice to Secured Party, (i) change
Debtor's name or place of business (or, if Debtor has more than one place of
business, its chief executive office), or the office in which Debtor's
records relative to receivables are kept, (ii) keep Collateral consisting of
chattel paper at any location other than its chief executive office set forth
in item 1 of EXHIBIT "B" hereto.
(c) REPAIR AND INSPECTION OF COLLATERAL. Debtor shall maintain
and protect its equipment and fixtures, in good order and working repair and
condition (taking into consideration ordinary wear and tear) and from time to
time make or cause to be made all needful and proper repairs, renewals and
replacements thereto and shall competently manage and care for its property
in accordance with prudent industry practices. Upon reasonable notice,
Debtor shall permit Secured Party or its agents to inspect all of such
property from time to time.
(d) PAYMENT OF TAXES AND FEES ASSESSED UPON COLLATERAL. Debtor
shall pay, when due, all taxes and assessments now or hereafter relating to,
or imposed or assessed upon the Collateral.
(e) NO TRANSFER OF COLLATERAL. Debtor shall not voluntarily,
involuntarily, or by operation of law, sell, assign, transfer or otherwise
dispose of the Collateral, or any interest therein, or permit any of the
foregoing to occur, and shall not otherwise do or permit anything to be done
or occur that may impair the Collateral as security hereunder, and, so long
as Debtor has not committed an Event of Default, (i) Debtor may sell or
otherwise dispose of the Collateral when obsolete, worn out, inadequate,
unserviceable or unnecessary for use in the conduct of the business of
Debtor, (ii) Debtor may grant non-exclusive licenses (and exclusive licenses
within specified geographic regions) and other similar arrangements for the
use of Debtor's property for good faith business purposes and (iii) Debtor
may collect and use in the ordinary course of business all cash proceeds of
any Collateral sold, free and clear of the security interest created hereby.
(f) DEFENSE OF TITLE TO COLLATERAL. Debtor shall defend any
proceeding which may affect title to, or Secured Party's security interest
in, the Collateral, or the first priority of such security interest after
that created with respect to Permitted Liens, and shall indemnify, defend,
protect and hold Secured Party harmless against any and all liability,
damages, causes of action or other costs or expenses, including reasonable
attorneys' fees, arising out of or incurred in connection with or on account
of any such proceeding, unless such proceeding is caused by Secured Party's
gross negligence or willful misconduct.
(g) MAINTENANCE OF SECURED PARTY'S SECURITY INTEREST. Debtor
shall do all such acts and things as may be necessary or appropriate, or
which Secured Party from time to time or at any time reasonably requests as
necessary in its opinion, to establish and maintain a perfected security
interest in the Collateral, subject to no other liens or encumbrances other
than Permitted Liens; and Debtor shall pay the cost of all filings or
recordings of this Agreement or any other document or instrument in all
public offices whenever it is deemed by Secured Party to be necessary or
desirable. Debtor irrevocably constitutes and appoints Secured Party the
attorney-in-fact of Debtor to execute, deliver and, if appropriate, to file
or record with the appropriate filing officer or office such security
agreements, financing statements, continuation statements or other
instruments as Secured Party may request or require in order to impose,
perfect or continue the perfection of, the lien or security interest created
hereby. The foregoing power of attorney is coupled with an interest and
shall survive a Transfer or the dissolution, bankruptcy, insolvency or
termination of Debtor as an entity. Debtor shall not execute or authorize
the filing of any financing statement in favor of any person or entity other
than Secured Party or other than related to the Permitted Liens.
2
<PAGE>
(h) PROVISION OF ACCURATE INFORMATION. Debtor shall provide to
Secured Party any information it reasonably requires pertaining to the
Collateral, the Indebtedness or the provisions hereof. All information
supplied to Secured Party by or on behalf of Debtor is and shall be true,
correct and complete, and Debtor shall promptly notify Secured Party of any
material change in such information not later than five (5) days after any
such change. Debtor shall promptly notify Secured Party of any event causing
loss or depreciation in the value of any Collateral.
(i) PROMPT PAYMENT OF EXPENSES. Debtor shall pay to Secured
Party immediately on demand all expenses (including reasonable attorneys'
fees, other legal expenses and costs and the cost of filing financing
statements and any renewals or extensions thereof) incurred by Secured Party
under this Agreement, with interest at the greater of the interest rate
charged on the Note or any default rate thereunder but not more than the
maximum rate allowed by applicable usury law, from the date of such
expenditure.
(j) SPECIAL PROVISIONS CONCERNING TRADEMARKS. The Debtor
hereby agrees not to divest itself of any right under the domestic trademark
"Tag-It Pacific-Registered Trademark-" absent prior written approval of the
Secured Party.
4. DEFAULT: REMEDIES.
(a) REMEDIES. Upon an Event of Default, Secured Party may, at
its option and without notice to Debtor, declare the Indebtedness secured
hereby due and payable pursuant to the terms of the Securities Purchase
Agreement and shall have all of the remedies of a secured party under the
Uniform Commercial Code, including the right and power to sell, or otherwise
dispose of, the Collateral, or any part thereof, at any one or more public or
private sales as permitted by applicable law, at such location as Secured
Party may choose, and for that purpose may take immediate and exclusive
possession of the Collateral, or any part thereof, and with or without
judicial process enter upon any premises on which the Collateral, or any part
thereof, may be situated and remove the same therefrom without being deemed
guilty of trespass and without liability for damages thereby occasioned. At
Secured Party's option and demand, Debtor shall assemble the Collateral and
make it available to Secured Party at the premises of Debtor, or at such
other place and at the time designated in the demand.
(b) SECURED PARTY'S RIGHTS TO COLLATERAL. Secured Party may
hold, maintain, preserve and prepare the Collateral for sale; control,
manage, rent and lease the Collateral; collect all rents and income from the
Collateral and apply the same in any order of priority to reimburse Secured
Party for any costs and expenses incurred hereunder and to the payment or
performance of Debtor's obligations hereunder, and apply the balance to
interest and then to principal of the Indebtedness
3
<PAGE>
secured hereby; or secure the appointment of a receiver of the Collateral.
Secured Party may also render the Collateral unusable, or repair and renovate
the same, and dispose of the Collateral on Debtor's premises. Debtor
expressly waives any right to require an election of remedies by Secured
Party existing after an Event of Default hereunder, except that Debtor shall
be entitled to notice of sale or other disposition of the Collateral, and
Debtor agrees that if such notice is served on Debtor as hereinafter
specified a minimum of five (5) days before the time of sale or disposition,
such notice shall be deemed commercially reasonable and shall fully satisfy
any requirement for giving of such notice. Any person, including Debtor and
Secured Party, shall be eligible to purchase any part or all of such
Collateral at any such sale or disposition. Debtor acknowledges that sales
of the Collateral for cash or on credit to a wholesaler, retailer or user of
the Collateral, or at public or private auction, within the discretion of
Secured Party, are all commercially reasonable. Any disposition made
hereunder may be conducted by an employee or agent of Secured Party.
(c) STAY; EXTENSION. The Debtor agrees (to the extent it may
lawfully do so) that it will not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay or
extension law or other law that would prohibit or forgive the Debtor from
paying all or a portion of the principal of or interest on the Notes as
contemplated herein, wherever enacted, now or at any time hereinafter in
force, or that may materially affect the covenants or the performance of this
Agreement in a manner inconsistent with the provisions of this Agreement. The
Debtor expressly waives all benefit or advantage of any such law and agrees
not to hinder, delay or impede the execution of any power granted to
Purchaser hereunder, but will suffer and permit the execution of such power
as though no such law has been enacted. If a court of competent jurisdiction
prescribes that the Debtor may not waive its rights to take the benefit or
advantage of any stay or extension law or any other law in accordance with
the prior sentence, then the obligation to pay interest on the Note and any
Additional Note shall be reduced to the maximum legal limit under applicable
law governing the interest payable in connection with the Note and any
Additional Note.
(d) APPLICATION OF PROCEEDS. The Proceeds of any sale,
disposition or other realization upon all or any part of the Collateral shall
be distributed by Secured Party in the following order of priorities:
First, to Secured Party in an amount sufficient to pay in full the reasonable
costs of Secured Party in connection with such sale, disposition or other
realization, including all fees, costs, expenses, liabilities and advances
incurred or made by Secured Party in connection therewith, including, without
limitation, reasonable attorneys' fees;
Second, to Secured Party in an amount equal to the then unpaid principal
amount of and accrued interest and prepayment premiums, if any, on the Note
and any Additional Note;
Third, to Secured Party in an amount equal to any other Indebtedness which is
then unpaid; and
Finally, upon payment in full of all Indebtedness to Debtor or its
representatives or as a court of competent jurisdiction may direct.
(e) ASSUMPTION OF EXPENSES AND PAYMENTS. In connection with
any Event of Default, Secured Party may incur expenses, including reasonable
attorneys' fees, expenses and costs, appropriate to the exercise of any right
or power under this Agreement, make any payment agreed to be made by Debtor
hereunder, and perform any obligation of Debtor hereunder, without, however,
any obligation so to do. Any monies expended hereunder by Secured Party,
including attorneys' fees, shall be
4
<PAGE>
chargeable, with interest at the greater of the interest rate then charged on
the Note or any default rate thereunder, but not more than the maximum rate
allowed by applicable usury law, to Debtor and become part of the
Indebtedness secured hereby.
(f) REMEDIES CUMULATIVE. The remedies of Secured Party
hereunder are cumulative and the exercise of any one or more of the remedies
provided for herein, or under the Uniform Commercial Code, shall not be
construed as a waiver of any of the other remedies of the Secured Party, so
long as any part of the Indebtedness remains unsatisfied. The acceptance by
Secured Party of this Security Agreement shall not waive or impair any other
security Secured Party may have or hereafter acquire for the payment of the
Indebtedness, nor shall the taking of any such additional security waive or
impair this Agreement, or any term, covenant or condition herein contained,
but Secured Party may resort to any security it may have in such order it may
deem proper. Release of the security interest hereunder in any or all of the
Collateral shall not affect the liability of any person on the Indebtedness
secured hereby.
5. MISCELLANEOUS.
(a) SECURED PARTY'S RIGHTS NOT BARRED. Until the Indebtedness
is paid and performed in full, Secured Party's rights shall continue even if
the Indebtedness, or any portion thereof, is barred by any statute of
limitations. The right of Debtor, if any, to plead any and all statutes of
limitation as a defense to any demand with respect to the Indebtedness is
expressly waived by Debtor, to the full extent permissible by law.
(b) FORM AND EFFECT OF WAIVERS. No delay or failure on the
part of Secured Party in exercising any right, privilege or remedy hereunder
shall operate as a waiver of such or any other right, privilege or remedy,
and no waiver whatsoever shall be valid unless in writing, signed by Secured
Party and then only to the extent set forth therein.
(c) NOTICES. Except when otherwise required by law, all
notices required to be given hereunder shall be served in the manner and at
the addresses specified for the giving of notice in the Securities Purchase
Agreement, and shall, unless otherwise provided by law, be deemed given,
received, made or communicated on the date personal delivery is effected or,
if mailed, on the delivery date or attempted delivery date if refused.
(d) SEVERABILITY OF TERMS. If any term of this Agreement, or
the application thereof to any person or circumstance, shall, to any extent,
be declared invalid or unenforceable, the remainder of this Agreement, or the
application of such term to persons or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected thereby, and each
such term shall be valid and enforceable to the fullest extent permitted by
law.
(e) FINANCING STATEMENT. A financing statement (and when
requested by Secured Party, a fixture filing) placing of record the security
interest hereunder shall be executed and delivered by Debtor to Secured Party
contemporaneously herewith, and Secured Party is authorized to file or record
the same.
(f) CONSTRUCTION. The terms and provisions contained herein
shall, unless the context otherwise requires, have the meaning and be
construed as provided in the Uniform Commercial Code. Reference in this
Agreement to the "Uniform Commercial Code" refers to the Uniform Commercial
Code as enacted in the State of California. Whenever the words "including",
"includes" or "include" are used
5
<PAGE>
in this Agreement (including any Exhibit hereto), they shall be read as
though the phrase, "without limitation," immediately followed the same.
(g) SUCCESSORS AND ASSIGNS. The terms "Debtor" and "Secured
Party" include and are binding upon the successors and assigns hereof.
(h) DEFINITION OF PROMPT NOTICE. The use herein of the words
"prompt notice", or "notify promptly", or "give notice promptly", or
"promptly", or "immediately," or words of similar import, when used with
reference to any notice to be given or act to be undertaken by Debtor, shall
mean notice given or such act performed in any event not later than five (5)
days after the occurrence of the specified event for which notice or action
is required, unless another time period is expressly made applicable.
(i) AMENDMENT IN WRITING. This Agreement may not be amended,
modified or changed, nor shall any waiver of any provision hereof be
effective, except by an instrument in writing and signed by the party against
whom enforcement of any amendment, change or modification is sought.
(j) GOVERNING LAW. This Security Agreement shall be governed
by and construed and enforced in accordance with the laws of the State of
California (without regard to conflicts of law), except where federal law is
applicable (including, without limitation, any applicable federal law
preempting state laws).
(k) CHIEF EXECUTIVE OFFICE. Debtor hereby represents and
warrants that Debtor's chief executive office is located at 3820 South Hill
Street, Los Angeles, California 90037.
6
<PAGE>
IN WITNESS WHEREOF, Debtor has executed and delivered this Agreement to
Secured Party as of the day and year first above written.
"DEBTOR"
TAG-IT PACIFIC, LLC.
a Delaware limited liability company
By: _______________________________________
Its: _______________________________________
7
<PAGE>
EXHIBIT "A"
COLLATERAL
Any of the following, whether now owned or hereafter acquired by Debtor:
a. all present and future rights to payment for goods
sold or leased or for services rendered, whether or not
represented by instruments or chattel paper, and whether or
not earned by performance; all present and future rights to
payments arising out of the licensing of computer software
and systems; all accounts, contract rights, chattel paper,
instruments and documents, proceeds of any letter of credit
of which Debtor is a beneficiary; all forms of obligations
whatsoever owed to Debtor, including any obligations of any
subsidiary or affiliate of Debtor owed to Debtor, together
with all instruments and documents of title representing
any of the foregoing; all rights, security and guarantees
with respect to any of the foregoing, including, without
limitation, any right of stoppage in transit; together with
all property included within the definitions of "accounts",
"chattel papers", "documents" and "instruments" set forth
in the Uniform Commercial Code in effect in the State of
California (the "UCC");
b. all choses in action, causes of action and all other
intangible property of every kind and nature, including,
without limitation, corporate or other business records,
inventions, designs, patents, patent applications,
trademarks, trademark applications, trade names, processes,
operation manuals, techniques, trade secrets, goodwill,
registrations, copyrights, licenses, franchises, customer
lists, tax refunds, tax refund claims, rights of claims
against carriers and shippers, investments and interests in
subsidiaries, leases and rights to indemnification,
together with all property which is included within the
definition of "general intangibles" as set forth in the
UCC;
c. equipment and fixtures, excluding inventory but
including, without limitation, computer hardware, computer
software, and systems, furniture, machinery, vehicles and
trade fixtures, together with any and all accessories,
accessions, parts and appurtenances thereto, substitutions
therefor and replacements thereof, together with all other
such items which are included within the definitions of
"equipment" and "fixtures" as set forth in the UCC; and
d. to the extent not otherwise included, all proceeds and
products of any or all of the foregoing.
A-1
<PAGE>
EXHIBIT "B"
1. The legal name of Debtor and the address of its chief executive
office is:
Tag-It Pacific, LLC.
3820 South Hill Street
Los Angeles, California 90037
2. Debtor has the following places of business:
ADDRESS
______________________
______________________
B-1
<PAGE>
TAG-IT PACIFIC, INC.
EXHIBIT 11
<TABLE>
<CAPTION>
Three months ended
Year ended August 31, November 30,
----------------------- -----------------------
1996 1997 1996 1997
---------- --------- ---------- ---------
Historical:
<S> <C> <C> <C> <C>
Net loss $ 790,360 $ 59,200 $ (208,000) $ 48,441
---------- ---------- ---------- ----------
Weighted average common shares outstanding 2,085,609 2,085,609 2,085,609 2,470,011
Effect of options issued after August 31, 1997
at below the offering price 318,396 318,396 318,396 318,396
Option proceeds used to re-acquire treasury
stock at the offering price (243,156) (243,156) (243,156) (243,156)
---------- ---------- ---------- ----------
Weighted average shares outstanding 2,160,849 2,160,849 2,160,849 2,545,251
---------- ---------- ---------- ----------
Loss per share $ 0.37 $ 0.03 $ (.10) $ .02
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Pro forma:
Net loss $ 59,200
----------
Weighted average common shares outstanding 2,085,609
Effect of options issued after August 31, 1997
at below the offering price 318,396
Effect of debt converted on October 14, 1997
at below the offering price 384,402
Option proceeds used to re-acquire treasury
stock at the offering price (243,156)
----------
Weighted average shares outstanding 2,545,251
----------
Loss per share $ 0.02
----------
----------
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
TAG-IT PACIFIC, INC.
Los Angeles, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated October 17, 1997, relating to the
consolidated financial statements of Tag-It Pacific, Inc.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Los Angeles, California
January 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF TAG-IT PACIFIC, INC. FOR THE YEARS ENDED
AUGUST 31, 1996 AND 1997 AND FOR THE THREE MONTHS ENDED NOVEMBER 30, 1996 AND
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 3-MOS
<FISCAL-YEAR-END> AUG-31-1996 AUG-31-1997 NOV-30-1996 NOV-30-1997
<PERIOD-START> SEP-01-1995 SEP-01-1996 SEP-01-1996 SEP-01-1997
<PERIOD-END> AUG-31-1996 AUG-31-1997 NOV-30-1996 NOV-30-1997
<CASH> 89,873 148,062 0 136,533
<SECURITIES> 0 0 0 0
<RECEIVABLES> 1,430,022 1,990,206 0 2,066,264
<ALLOWANCES> 0 0 0 0
<INVENTORY> 1,206,026 2,017,503 0 2,216,479
<CURRENT-ASSETS> 0 0 0 0
<PP&E> 1,036,164 1,619,915 0 1,648,764
<DEPRECIATION> 429,606 697,653 0 683,516
<TOTAL-ASSETS> 3,680,214 5,444,956 0 6,026,283
<CURRENT-LIABILITIES> 5,572,191 6,280,780 0 5,938,666
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 2,086 2,086 0 2,470
<OTHER-SE> 0 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 3,680,214 5,444,956 0 6,026,283
<SALES> 14,738,041 19,539,411 4,890,000 4,751,117
<TOTAL-REVENUES> 14,738,041 19,539,411 4,890,000 4,751,117
<CGS> 10,090,538 12,546,541 3,341,000 3,034,884
<TOTAL-COSTS> 10,090,538 12,546,541 3,341,000 3,034,884
<OTHER-EXPENSES> 4,973,058 6,128,346 1,560,000 1,349,985
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 464,805 810,681 197,000 260,519
<INCOME-PRETAX> (790,360) 53,843 (208,000) 105,729
<INCOME-TAX> 0 113,043 0 57,288
<INCOME-CONTINUING> (790,360) (59,200) (208,000) 48,441
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (790,360) (59,200) (208,000) 48,441
<EPS-PRIMARY> 0 (.02) 0 0
<EPS-DILUTED> 0 (.02) 0 0
</TABLE>
