-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S4Wr7OR6g4Q5HLoXcx1I4dqnQy0jrCYKKgZYomQclxc8T7w0SbaXOClOlBnLinSE frmleemEGpf334L5//eRSw== 0001170918-05-000333.txt : 20050516 0001170918-05-000333.hdr.sgml : 20050516 20050516170721 ACCESSION NUMBER: 0001170918-05-000333 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050516 DATE AS OF CHANGE: 20050516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TAG IT PACIFIC INC CENTRAL INDEX KEY: 0001047881 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-APPAREL, PIECE GOODS & NOTIONS [5130] IRS NUMBER: 954654481 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13669 FILM NUMBER: 05835751 BUSINESS ADDRESS: STREET 1: 21900 BURBANK BLVD. STREET 2: SUITE 270 CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8184444100 MAIL ADDRESS: STREET 1: 21900 BURBANK BLVD. STREET 2: SUITE 270 CITY: WOODLAND HILLS STATE: CA ZIP: 91367 10-Q 1 fm10q-033105.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 2005. OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ____________ to _______________. Commission file number 1-13669 TAG-IT PACIFIC, INC. (Exact Name of Issuer as Specified in its Charter) DELAWARE 95-4654481 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 21900 BURBANK BOULEVARD, SUITE 270 WOODLAND HILLS, CALIFORNIA 91367 (Address of Principal Executive Offices) (818) 444-4100 (Registrant's Telephone Number, Including Area Code) Indicate by check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [_] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, par value $0.001 per share, 18,241,045 shares issued and outstanding as of May 13, 2005. ================================================================================ TAG-IT PACIFIC, INC. INDEX TO FORM 10-Q PART I FINANCIAL INFORMATION PAGE ---- Item 1. Consolidated Financial Statements (unaudited).........................3 Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 (unaudited).....................................3 Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004 (unaudited).............................4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 (unaudited)................5 Notes to the Consolidated Financial Statements........................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................11 Item 3. Quantitative and Qualitative Disclosures About Market Risk...........26 Item 4. Controls and Procedures..............................................26 PART II OTHER INFORMATION Item 6. Exhibits.............................................................28 2 PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS. TAG-IT PACIFIC, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, December 31, 2005 2004 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents ................... $ 2,863,254 $ 5,460,662 Trade accounts receivable, net .............. 16,463,294 17,890,044 Trade accounts receivable, related party .... 4,500,000 4,500,000 Inventories ................................. 11,117,904 9,305,819 Prepaid expenses and other current assets ... 2,890,810 2,326,245 Deferred income taxes ....................... 1,000,000 1,000,000 ------------ ------------ Total current assets ...................... 38,835,262 40,482,770 Property and equipment, net of accumulated depreciation and amortization ............... 9,791,606 9,380,026 Tradename ...................................... 4,110,750 4,110,750 Goodwill ....................................... 450,000 450,000 License rights ................................. 229,250 259,875 Due from related parties ....................... 567,341 556,550 Other assets ................................... 1,076,611 1,207,885 ------------ ------------ Total assets ................................... $ 55,060,820 $ 56,447,856 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Line of credit .............................. $ 598,682 $ 614,506 Accounts payable and accrued expenses ....... 8,080,233 7,460,916 Subordinated notes payable to related parties 664,971 664,971 Current portion of capital lease obligations 915,069 859,799 Current portion of notes payable ............ 177,868 174,975 Note payable ................................ 800,000 1,400,000 ------------ ------------ Total current liabilities ................. 11,236,823 11,175,167 Capital lease obligations, less current portion 1,203,855 1,220,969 Notes payable, less current portion ............ 1,402,289 1,447,855 Secured convertible promissory notes ........... 12,416,513 12,408,623 ------------ ------------ Total liabilities ......................... 26,259,480 26,252,614 ------------ ------------ Stockholders' equity: Preferred stock, Series A $0.001 par value; 250,000 shares authorized, no shares issued or outstanding ............................ -- -- Common stock, $0.001 par value, 30,000,000 shares authorized; 18,241,045 shares issued and outstanding at March 31, 2005; 18,171,301 at December 31, 2004 ........... 18,243 18,173 Additional paid-in capital .................. 51,327,873 51,073,402 Accumulated deficit ......................... (22,544,776) (20,896,333) ------------ ------------ Total stockholders' equity ..................... 28,801,340 30,195,242 ------------ ------------ Total liabilities and stockholders' equity ..... $ 55,060,820 $ 56,447,856 ============ ============ See accompanying notes to consolidated financial statements. 3 TAG-IT PACIFIC, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended March 31, ----------------------------- 2005 2004 ------------ ------------ Net sales .................................... $ 13,055,277 $ 10,160,298 Cost of goods sold ........................... 9,803,454 7,168,248 ------------ ------------ Gross profit ............................ 3,251,823 2,992,050 Selling expenses ............................. 742,334 772,116 General and administrative expenses .......... 3,727,260 2,442,465 Restructuring charges ........................ -- 414,675 ------------ ------------ Total operating expenses ................ 4,469,594 3,629,256 Loss from operations ......................... (1,217,771) (637,206) Interest expense, net ........................ 268,655 186,719 ------------ ------------ Loss before income taxes ..................... (1,486,426) (823,925) Provision (benefit) for income taxes ......... 162,017 (271,895) ------------ ------------ Net loss ................................ $ (1,648,443) $ (552,030) ============ ============ Less: Preferred stock dividends ............. -- 30,505 ------------ ------------ Net loss available to common shareholders .... $ (1,648,443) $ (582,535) ============ ============ Basic loss per share ......................... $ (0.09) $ (0.04) ============ ============ Diluted loss per share ....................... $ (0.09) $ (0.04) ============ ============ Weighted average number of common shares outstanding: Basic ................................... 18,179,426 14,921,591 ============ ============ Diluted ................................. 18,179,426 14,921,591 ============ ============ See accompanying notes to consolidated financial statements. 4 TAG-IT PACIFIC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, ---------------------------- 2005 2004 ------------ ------------ Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net loss ........................................... $ (1,648,443) $ (552,030) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization ....................... 555,148 377,580 Increase in allowance for doubtful accounts ......... 74,941 75,000 Stock issued for services ........................... -- 74,825 Changes in operating assets and liabilities: Receivables, including related party ............. 1,351,809 (2,048,590) Inventories ...................................... (1,812,085) (1,703,582) Other assets ..................................... 1,581 3,162 Prepaid expenses and other current assets ........ (504,565) 930,637 Accounts payable and accrued expenses ............ 468,930 (1,308,107) Income taxes payable ............................. 139,596 (433,738) ------------ ------------ Net cash used by operating activities .................. (1,373,088) (4,584,843) ------------ ------------ Cash flows from investing activities: Acquisition of property and equipment .............. (587,923) (247,564) ------------ ------------ Cash flows from financing activities: Repayment of bank line of credit, net .............. (15,824) (2,409,053) Proceeds from exercise of stock options and warrants 254,541 348,241 Repayment of capital leases ........................ (232,441) (143,420) Repayment of notes payable ......................... (642,673) (300,000) ------------ ------------ Net cash used by financing activities .................. (636,397) (2,504,232) ------------ ------------ Net decrease in cash ................................... (2,597,408) (7,336,639) Cash at beginning of period ............................ 5,460,662 14,442,769 ------------ ------------ Cash at end of period .................................. $ 2,863,254 $ 7,106,130 ============ ============ Supplemental disclosures of cash flow information: Cash received (paid) during the period for: Interest paid .................................... $ (358,887) $ (189,949) Income taxes paid ................................ $ (32,071) $ (170,016) Interest received ................................ $ 14,009 $ -- Non-cash financing activities: Capital lease obligation ........................... $ 270,597 $ -- Preferred Series D stock converted to common stock . $ -- $ 22,918,693 Preferred Series C stock converted to common stock . $ -- $ 2,895,001 Accrued dividends converted to common stock ........ $ -- $ 458,707
See accompanying notes to consolidated financial statements. 5 TAG-IT PACIFIC, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. PRESENTATION OF INTERIM INFORMATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments that, in the opinion of the management of Tag-It Pacific, Inc. and Subsidiaries (collectively, the "Company"), are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company's Form 10-K for the year ended December 31, 2004. The balance sheet as of December 31, 2004 has been derived from the audited financial statements as of that date but omits certain information and footnotes required for complete financial statements. 2. EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:
LOSS SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ----------- ----------- THREE MONTHS ENDED MARCH 31, 2005: Basic loss per share: Loss available to common stockholders $(1,648,443) 18,179,426 $ (0.09) Effect of Dilutive Securities: Options ....................... -- -- -- Warrants ...................... -- -- -- ----------- ----------- ----------- Loss available to common stockholders $(1,648,443) 18,179,426 $ (0.09) =========== =========== =========== THREE MONTHS ENDED MARCH 31, 2004: Basic loss per share: Loss available to common stockholders $ (582,535) 14,921,591 $ (0.04) Effect of Dilutive Securities: Options ....................... -- -- -- Warrants ...................... -- -- -- ----------- ----------- ----------- Loss available to common stockholders $ (582,535) 14,921,591 $ (0.04) =========== =========== ===========
Warrants to purchase 1,510,479 shares of common stock at between $3.50 and $5.06, options to purchase 1,872,000 shares of common stock at between $1.30 and $5.23 and convertible debt of $500,000 convertible at $4.50 per share were outstanding for the three months ended March 31, 2005, but were not included in the computation of diluted earnings per share because the effect of exercise or conversion would have an antidilutive effect on earnings per share. 6 Warrants to purchase 1,236,219 shares of common stock at between $0.71 and $5.06, options to purchase 1,927,000 shares of common stock at between $1.30 and $4.63 and convertible debt of $500,000 convertible at $4.50 per share were outstanding for the three months ended March 31, 2004, but were not included in the computation of diluted earnings per share because the effect of exercise or conversion would have an antidilutive effect on earnings per share. 3. STOCK BASED COMPENSATION All stock options issued to employees had an exercise price not less than the fair market value of the Company's Common Stock on the date of grant, and in accounting for such options utilizing the intrinsic value method there is no related compensation expense recorded in the Company's financial statements for the three months ended March 31, 2005 and 2004. If compensation cost for stock-based compensation had been determined based on the fair market value of the stock options on their dates of grant in accordance with SFAS 123, the Company's net loss and loss per share for the three months ended March 31, 2005 and 2004 would have amounted to the pro forma amounts presented below:
Three Months Ended March 31, -------------------------------- 2005 2004 ------------ ----------- Net loss, as reported.................................. $ (1,648,443) $ (552,030) Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects .......................................... -- -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards ................................... (11,730) (39,556) ------------ ----------- Pro forma net loss..................................... $ (1,660,173) $ (591,586) ============ =========== Loss per share: Basic - as reported............................... $ (0.09) $ (0.04) Basic - pro forma................................. $ (0.09) $ (0.04) Diluted - as reported............................. $ (0.09) $ (0.04) Diluted - pro forma............................... $ (0.09) $ (0.04)
4. GUARANTEES AND CONTINGENCIES In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others - and interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34." The following is a summary of the Company's agreements that it has determined are within the scope of FIN 45: In accordance with the bylaws of the Company, officers and directors are indemnified for certain events or occurrences arising as a result of the officer or director's serving in such capacity. The term of the indemnification period is for the lifetime of the officer or director. The maximum potential amount of future payments the Company could be required to make under the indemnification provisions of its bylaws is unlimited. However, the Company has a director and officer liability insurance policy that reduces its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of the indemnification provisions of its bylaws is minimal and therefore, the Company has not recorded any related liabilities. 7 The Company enters into indemnification provisions under its agreements with investors and its agreements with other parties in the normal course of business, typically with suppliers, customers and landlords. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has not recorded any related liabilities. The Company has filed suit against Pro-Fit Holdings Limited in the U.S. District Court for the Central District of California -- TAG-IT PACIFIC, INC. V. PRO-FIT HOLDINGS LIMITED, CV 04-2694 LGB (RCx) - based on various contractual and tort claims relating to the Company's exclusive license and intellectual property agreement, seeking declaratory relief, injunctive relief and damages. The agreement with Pro-Fit gives the Company exclusive rights in certain geographic areas to Pro-Fit's stretch and rigid waistband technology. Pro-Fit filed an answer denying the material allegations of the complaint and filed a counterclaim alleging various contractual and tort claims seeking injunctive relief and damages. The Company filed a reply denying the material allegations of Pro-Fit's pleading. Pro-Fit has since purported to terminate the exclusive license and intellectual property agreement based on the same alleged breaches of the agreement that are the subject of the parties' existing litigation, as well as on an additional basis unsupported by fact. In February 2005, the Company amended its pleadings in the litigation to assert additional breaches by Pro-Fit of its obligations to the Company under the agreement and under certain additional letter agreements, and for a declaratory judgment that Pro-Fit's patent No. 5,987,721 is invalid and not infringed by the Company. Discovery in this case has commenced. There have been ongoing negotiations with Pro-Fit to attempt to resolve these disputes. The Company intends to proceed with the lawsuit if these negotiations are not concluded in a manner satisfactory to it. As we derive a significant amount of revenue from the sale of products incorporating the stretch waistband technology, our business, results of operations and financial condition could be materially adversely affected if our dispute with Pro-Fit is not resolved in a manner favorable to us. Additionally, we have incurred significant legal fees in this litigation, and unless the case is settled, we will continue to incur additional legal fees in increasing amounts as the case accelerates to trial. The Company is subject to certain other 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. 5. NEW ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 123R "Share Based Payment." This statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. SFAS 123R addresses all forms of share based payment ("SBP") awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest. This statement is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The Company has evaluated the effects of the adoption of this pronouncement and has determined it will not have a material impact on the Company's financial statements. 8 In November 2004, the FASB issued SFAS No. 151 "Inventory Costs" (SFAS 151). This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities. The provisions of SFAS 151 are effective for inventory cost incurred in fiscal years beginning after June 15, 2005. As such, the Company is required to adopt these provisions at the beginning of fiscal 2006. The adoption of this pronouncement is not expected to have material effect on the Company's financial statements. In December 2004, the FASB issued Statement Accounting Standard ("SFAS") No. 153 "Exchanges of Nonmonetary Assets." This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after December 16, 2004. The provisions of this Statement should be applied prospectively. The adoption of this pronouncement is not expected to have material effect on the Company's financial statements. In October 2004, the American Jobs Creation Act of 2004 (Act) became effective in the U.S. Two provisions of the Act may impact the provision (benefit) for income taxes in future periods, namely those related to the Qualified Production Activities Deduction (QPA) and Foreign Earnings Repatriation (FER). The QPA will be effective for the U.S. federal tax return year beginning after December 31, 2004. In summary, the Act provides for a percentage deduction of earnings from qualified production activities, as defined, commencing with an initial deduction of 3 percent for tax years beginning in 2005 and increasing to 9 percent for tax years beginning after 2009, with the result that the statutory federal tax rate currently applicable to our qualified production activities of 35 percent could be reduced initially to 33.95 percent and ultimately to 31.85 percent. However, the Act also provides for the phased elimination of the Extraterritorial Income Exclusion provisions of the Internal Revenue Code, which have previously resulted in tax benefits to both CCN and IMC. Due to the interaction of the law provisions noted above as well as the particulars of the Company's tax position, the ultimate effect of the QPA on the Company's future provision (benefit) for income taxes has not been determined at this time. The FASB issued FASB Staff Position FAS 109-1, Application of FASB Statement No.109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, (FSP 109-1) in December 2004. FSP 109-1 requires that tax benefits resulting from the QPA should be recognized no earlier than the year in which they are reported in the entity's tax return, and that there is to be no revaluation of recorded deferred tax assets and liabilities as would be the case had there been a change in an applicable statutory rate. The FER provision of the Act provides generally for a one-time 85 percent dividends received deduction for qualifying repatriations of foreign earnings to the U.S. Qualified repatriated funds must be reinvested in the U.S. in certain qualifying activities and expenditures, as defined by the Act. In December 2004, the FASB issued FASB Staff Position FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2). FSP 109-2 allows additional time for entities potentially impacted by the FER provision to determine whether any foreign earnings will be repatriated under said provisions. At this time, the Company has not undertaken an evaluation of the application of the FER provision and any potential benefits of effecting repatriations under said provision. Numerous factors, including previous actual and 9 deemed repatriations under federal tax law provisions, are factors impacting the availability of the FER provision and its potential benefit to the Company, if any. The Company intends to examine the issue and will provide updates in subsequent periods. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read together with the Consolidated Financial Statements of Tag-It Pacific, Inc. and the notes to the Consolidated Financial Statements included elsewhere in this Form 10-Q. This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of Tag-It Pacific, Inc. for the three months ended March 31, 2005 and 2004. Except for historical information, the matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. OVERVIEW Tag-It Pacific, Inc. is an apparel company that specializes in the distribution of trim items to manufacturers of fashion apparel, specialty retailers and mass merchandisers. We act as a full service outsourced trim management department for manufacturers, a specified supplier of trim items to owners of specific brands, brand licensees and retailers, a manufacturer and distributor of zippers under our TALON brand name and a distributor of stretch waistbands that utilize licensed patented technology under our TEKFIT brand name. We have developed, and are now implementing, what we refer to as our TALON franchise strategy, whereby we appoint suitable distributors in various geographic international regions to finish and sell zippers under the TALON brand name. Our designated franchisees purchase and install locally equipment for dying and producing finished zippers, thus minimizing our capital outlay. The franchisee will then purchase from us large zipper rolls with other materials such as sliders and produce finished zippers locally, according to their customers' specifications, in markets around the world, becoming in essence a local marketer and distributor of the TALON brand. This strategy is expected to expand the geographic footprint of our TALON division. We have entered into seven franchise agreements for the sale of TALON zippers. The agreements provide for minimum purchases of TALON zipper products to be received over the term of the agreements as follows: Region Agreement Date Term - ---------------------- ----------------- ---------- Central Asia October 21, 2004 42 Months South East Asia November 10, 2004 42 Months Southern Hemisphere December 21, 2004 66 Months Asia December 28, 2004 42 Months South East Asia January 7, 2005 42 Months Middle East and Africa February 19, 2005 42 Months Central Asia March 31, 2005 39 Months - ---------------------- ----------------- ---------- During 2004, we set up a TALON manufacturing facility in Kings Mountain, North Carolina. This facility manufactures TALON zippers for use in the Western Hemisphere and will reduce our reliance on our current major zipper supplier. The facility began production in January 2005 and is expected to reach capacity in the third quarter of 2005. 11 As described more fully elsewhere in this report, we are presently in litigation with Pro-Fit Holdings Limited relating to our exclusively licensed rights to sell or sublicense stretch waistbands manufactured under Pro-Fit's patented technology. We supply Levi with waistbands in reliance on our agreement with Pro-Fit. As we derive a significant amount of revenue from the sale of products incorporating the stretch waistband technology, our business, results of operations and financial condition could be materially adversely affected if our dispute with Pro-Fit is not resolved in a manner favorable to us. Additionally, we have incurred significant legal fees in this litigation, and unless the case is settled, we will continue to incur additional legal fees in increasing amounts as the case accelerates to trial. APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory and our allowance for uncollectable accounts receivable. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: o Inventory is evaluated on a continual basis and reserve adjustments are made based on management's estimate of future sales value, if any, of specific inventory items. Reserve adjustments are made for the difference between the cost of the inventory and the estimated market value, if lower, and charged to operations in the period in which the facts that give rise to the adjustments become known. A portion of our total inventories is subject to buyback arrangements with our customers. The buyback arrangements contain provisions related to the inventory we purchase and warehouse on behalf of our customers, and require that these customers purchase the inventories from us in accordance with the applicable buyback arrangements. If the financial condition of a customer were to deteriorate, resulting in an impairment of its ability to purchase inventories, an additional adjustment may be required. These buyback arrangements are considered in management's estimate of future market value of inventories. See further discussion of inventory write-downs recorded in the fourth quarter of 2004 below. o Accounts receivable balances are evaluated on a continual basis and allowances are provided for potentially uncollectible accounts based on management's estimate of the collectibility of customer accounts. If the financial condition of a customer were to deteriorate, resulting in an impairment of its ability to make payments, an additional allowance may be required. Allowance adjustments are charged to operations in the period in which the facts that give rise to the adjustments become known. See further discussion of accounts receivable reserves recorded during the fourth quarter of 2004 below. o We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for 12 a valuation allowance. If we determine that we may not realize all or part of our deferred tax assets in the future, we will make an adjustment to the carrying value of the deferred tax asset, which would be reflected as an income tax expense. Conversely, if we determine that we will realize a deferred tax asset, which currently has a valuation allowance, we would be required to reverse the valuation allowance, which would be reflected as an income tax benefit. o Intangible assets are evaluated on a continual basis and impairment adjustments are made based on management's valuation of identified reporting units related to goodwill, the valuation of intangible assets with indefinite lives and the reassessment of the useful lives related to other intangible assets with definite useful lives. Impairment adjustments are made for the difference between the carrying value of the intangible asset and the estimated valuation and charged to operations in the period in which the facts that give rise to the adjustments become known. o Sales are recorded at the time of shipment, at which point title transfers to the customer, and when collection is reasonably assured. 2004 WRITE-OFF OF ACCOUNTS RECEIVABLE AND INVENTORIES FROM A FORMER MAJOR CUSTOMER Following negotiations with United Apparel Ventures and its affiliate, Tarrant Apparel Group, a former major customer of ours, we determined that a significant portion of the obligations due from this customer, primarily related to accounts receivable and inventories, was uncollectable. As a result, we wrote-off a net of $4.3 million of obligations due from this customer, with a remaining receivable balance due from UAV of $4.5 million. Included in general and administrative expenses for the year ended December 31, 2004 are $4,289,436 of expenses related to the write-off of obligations due from UAV and Tarrant. UAV agreed to pay the $4.5 million receivable balance over an eight-month period beginning May 2005. There were no further charges as a result of this write-off in the first quarter of 2005. RESULTS OF OPERATIONS The following table sets forth for the periods indicated, selected statements of operations data shown as a percentage of net sales: THREE MONTHS ENDED MARCH 31, ----------------------------- 2005 2004 ----------- ----------- Net sales........................................ 100.0 % 100.0 % Cost of goods sold............................... 75.1 70.6 ----------- ----------- Gross profit..................................... 24.9 29.4 Selling expenses................................. 5.7 7.6 General and administrative expenses.............. 28.5 24.0 Restructuring charges............................ - 4.1 ----------- ----------- Operating loss................................... (9.3)% (6.3)% =========== =========== 13 The following table sets forth for the periods indicated revenues attributed to geographical regions based on the location of the customer as a percentage of net sales: THREE MONTHS ENDED MARCH 31, ------------------------------ 2005 2004 ----------- ----------- United States.......................... 4.5 % 8.2 % Asia 32.9 20.3 Mexico................................. 35.4 36.0 Dominican Republic..................... 17.0 21.3 Central and South America.............. 9.1 14.0 Other.................................. 1.1 0.2 ----------- ----------- 100.0 % 100.0 % =========== =========== Net sales increased approximately $2,895,000, or 28.5%, to $13,055,000 for the three months ended March 31, 2005 from $10,160,000 for the three months ended March 31, 2004. The increase in net sales was due primarily to an increase in sales from our TRIMNET programs related to major U.S. retailers in our Hong Kong and Mexico facilities and an increase in zipper sales under our TALON brand name in Asia. During the fourth quarter of 2003, we implemented a plan to restructure certain business operations, including the reduction of our reliance on two significant customers in Mexico and reported a decrease in net sales of approximately $4.2 million for the three months ended March 31, 2004 as compared to net sales of approximately $14.4 million for the three months ended March 31, 2003. We have been able to replace substantially all of the lost revenue from our Tlaxcala, Mexico operations during the quarter ended March 31, 2005 with new customers primarily in Mexico and Asia. Gross profit increased approximately $260,000, or 8.7%, to $3,252,000 for the three months ended March 31, 2005 from $2,992,000 for the three months ended March 31, 2004. Gross margin as a percentage of net sales decreased to approximately 24.9% for the three months ended March 31, 2005 as compared to 29.4% for the three months ended March 31, 2004. The decrease in gross profit as a percentage of net sales for the three months ended March 31, 2005 was due to overhead costs incurred in our new TALON manufacturing facility in North Carolina. This facility began production in January 2005 and is expected to reach capacity in the third quarter of 2005. Gross profit was also adversely affected by credits we issued to a customer during the first quarter of 2005 for defective products received from Pro-Fit Holdings. The decrease in gross profit as a percentage of net sales for the quarter was also due to a change in our product mix. Selling expenses decreased approximately $30,000, or 3.9%, to $742,000 for the three months ended March 31, 2005 from $772,000 for the three months ended March 31, 2004. As a percentage of net sales, these expenses decreased to 5.7% for the three months ended March 31, 2005 compared to 7.6% for the three months ended March 31, 2004 since employee costs increased at a slower rate than sales. The decrease in selling expenses during the period was due primarily to a decrease in the royalty rate related to our exclusive license and intellectual property rights agreement with Pro-Fit Holdings Limited. We incurred royalties related to this agreement of approximately $97,000 for the three months ended March 31, 2005 compared to $115,000 for the three months ended March 31, 2004. We pay royalties of 6% on related sales of up to $10 million, 4% of related sales from $10-20 million and 3% on related sales in excess of $20 million. General and administrative expenses increased approximately $1,285,000, or 52.6%, to $3,727,000 for the three months ended March 31, 2005 from $2,442,000 for the three months ended March 31, 2004. The increase in general and administrative expenses was partially due to the hiring of additional employees related to the expansion of our Asian operations, including our TALON franchising 14 strategy. Additional travel expenses associated with our Asian expansion were incurred during the current period. We also incurred additional legal costs related to our litigation with Pro-Fit Holdings Limited during the quarter. Unless this case is settled, we will continue to incur additional legal fees in increasing amounts as the case accelerates to trial. In the first quarter of 2004, we incurred additional restructuring charges of $414,675 related to the final residual costs associated with our restructuring plan implemented in the fourth quarter of 2003. This one-time charge was offset by a decrease in salaries and related benefits and other costs as a result of the implementation of our restructuring plan in the fourth quarter of 2003. As a percentage of net sales, these expenses increased to 28.5% for the three months ended March 31, 2005 compared to 24.0% for the three months ended March 31, 2004, due to the factors described above. Interest expense increased approximately $82,000, or 43.9%, to $269,000 for the three months ended March 31, 2005 from $187,000 for the three months ended March 31, 2004. The interest expense increase was primarily due to higher debt levels. Borrowings under our UPS Capital credit facility decreased during the period ended March 31, 2004 due to proceeds received from our private placement transactions in May and December 2003 in which we raised approximately $29 million from the sale of common and convertible preferred stock. In November 2004, we raised $12.5 million from the sale of 6% secured convertible notes payable. The provision for income taxes for the three months ended March 31, 2005 amounted to approximately $162,000 compared to an income tax benefit of $272,000 for the three months ended March 31, 2004. Income taxes increased for the three months ended March 31, 2005 due to taxes provided for earned income in our foreign subsidiary. Based on our net operating losses, there is not sufficient evidence to determine that it is more likely than not that we will be able to utilize our net operating loss carryforwards to offset future taxable income. As a result, we have not recorded a benefit for income taxes for the three months ended March 31, 2005. Net loss was approximately $1,648,000 for the three months ended March 31, 2005 as compared to $552,000 for the three months ended March 31, 2004, due primarily to an increase in general and administrative expenses and a decrease in gross profit, as discussed above. Preferred stock dividends amounted to $31,000 for the three months ended March 31, 2004. There were no dividends for the three months ended March 31, 2005. Preferred stock dividends represent earned dividends at 6% of the stated value per annum of the Series C convertible redeemable preferred stock. In February 2004, the holders of the Series C convertible redeemable preferred stock converted all 759,494 shares of the Series C Preferred Stock, plus $458,707 of accrued dividends, into 700,144 shares of our common stock. Net loss available to common shareholders amounted to $1,648,000 for the three months ended March 31, 2005 compared to $583,000 for the three months ended March 31, 2004. Basic and diluted loss per share were $0.09 and $0.04 for the three months ended March 31, 2005 and 2004. LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS Cash and cash equivalents decreased to $2,863,000 at March 31, 2005 from $5,461,000 at December 31, 2004. The decrease resulted from approximately $1,373,000 of cash used by operating activities, $588,000 of cash used in investing activities and $636,000 of cash used in financing activities. Net cash used in operating activities was approximately $1,373,000 and $4,585,000 for the three months ended March 31, 2005 and 2004. Cash used in operating activities for the three months ended March 31, 2005 resulted primarily from the net loss, increased inventories and prepaid expenses, offset by decreased accounts receivable. The increase in inventories during the period was due primarily to increased customer orders for future sales. The decrease in accounts receivable during the period was due 15 primarily to increased customer collections. Cash used in operating activities for the three months ended March 31, 2004 resulted primarily from increased accounts receivable and inventories and decreased accounts payable and accrued expenses. Net cash used in investing activities was approximately $588,000 and $248,000 for the three months ended March 31, 2005 and 2004, respectively. Net cash used in investing activities for the three months ended March 31, 2005 consisted primarily of capital expenditures for TALON zipper equipment and leasehold improvements related to our new TALON manufacturing facility in North Carolina. Net cash used in investing activities for the three months ended March 31, 2004 consisted primarily of capital expenditures for computer equipment and the purchase of additional TALON zipper equipment. Net cash used in financing activities was approximately $636,000 and $2,504,000 for the three months ended March 31, 2005 and 2004, respectively. Net cash used in financing activities for the three months ended March 31, 2005 primarily reflects the repayment of capital lease obligations and notes payable, offset by funds raised from the exercise of stock options and warrants. Net cash used in financing activities for the three months ended March 31, 2004 primarily reflects the repayment of borrowings under our credit facility and subordinated notes payable, offset by funds raised from the exercise of stock options and warrants. We currently satisfy our working capital requirements primarily through cash flows generated from operations, sales of equity securities and borrowings from institutional investors and individual accredited investors. On November 10, 2004, we paid off our working capital credit facility with UPS Capital Global Trade Finance Corporation with a portion of the proceeds received from a private placement of $12.5 million of Secured Convertible Promissory Notes. The Secured Convertible Promissory Notes are convertible into common stock at a price of $3.65 per share, bear interest at 6% payable quarterly, are due November 9, 2007 and are secured by the TALON trademarks. The Notes are convertible at the option of the holder at any time after closing. We may repay the Notes at any time after one year from the closing date with a 15% prepayment penalty. At maturity, we may repay the Notes in cash or require conversion if certain conditions are met. In connection with the issuance of the Notes, we issued to the Note holders warrants to purchase up to 171,235 shares of common stock. The warrants have a term of five years, an exercise price of $3.65 per share and vested 30 days after closing. We have registered with the SEC, the resale by the holders of the shares issuable upon conversion of the Notes and exercise of the warrants. At March 31, 2005, there were no outstanding borrowings under our UPS Capital credit facility which was terminated in November 2004. Amounts borrowed under our foreign factoring agreement as of March 31, 2005 amounted to approximately $599,000. At March 31, 2004, outstanding borrowings under our UPS Capital credit facility, including amounts borrowed under our foreign factoring agreement, amounted to approximately $4,686,000. Open letters of credit under our UPS Capital credit facility at March 31, 2004 amounted to $110,000. There were no open letters of credit under our UPS Capital credit facility at March 31, 2005. In 2005, we entered into a letter of credit facility with Wells Fargo Bank. This facility provides for letters of credit up to a maximum of $1.5 million, expires in November 2005 and is secured by cash on hand managed by Wells Fargo Bank. At March 31, 2005, outstanding letters of credit under the Wells Fargo facility amounted to approximately $614,000. Pursuant to the terms of a foreign factoring agreement under our UPS Capital credit facility, UPS Capital purchased our eligible accounts receivable and assumed the credit risk with respect to those foreign accounts for which UPS Capital had given its prior approval. If UPS Capital did not assume the credit risk for a receivable, the collection risk associated with the receivable remained with us. We paid a 16 fixed commission rate and borrowed up to 85% of eligible accounts receivable under our credit facility. Included in due from factor as of March 31, 2004 are trade accounts receivable factored without recourse of approximately $60,000. Included in due from factor are outstanding advances due to UPS Capital under this factoring arrangement amounting to approximately $51,000 at March 31, 2004. There were no factored accounts receivable or advances from factor under the UPS credit facility as of March 31, 2005. Pursuant to the terms of a factoring agreement for our Hong Kong subsidiary, Tag-It Pacific Limited, the factor purchases our eligible accounts receivable and assumes the credit risk with respect to those accounts for which the factor has given its prior approval. If the factor does not assume the credit risk for a receivable, the collection risk associated with the receivable remains with us. We pay a fixed commission rate and may borrow up to 80% of eligible accounts receivable. Interest is charged at 1.5% over the Hong Kong Dollar prime rate. As of March 31, 2005 and 2004, the amount factored with recourse and included in trade accounts receivable was approximately $1,326,000 and $375,000. Outstanding advances as of March 31, 2005 and 2004 amounted to approximately $599,000 and $164,000 and are included in the line of credit balance. As we continue to respond to the current industry trend of large retail brands to outsource apparel manufacturing to offshore locations, our foreign customers, though backed by U.S. brands and retailers, are increasing. This makes receivables based financing with traditional U.S. banks more difficult. Our current borrowings may not provide the level of financing we may need to expand into additional foreign markets. As a result, we are continuing to evaluate non-traditional financing of our foreign assets. Our trade receivables, net of allowance for doubtful accounts, decreased to $20,963,000 at March 31, 2005 from $21,227,000 at March 31, 2004. The decrease in receivables was due to a net decrease in related party trade receivables of approximately $6.4 million resulting from decreased sales to related parties during the period and the write-off of outstanding accounts receivable obligations due from United Apparel Ventures and its affiliate, Tarrant Apparel Group, during the fourth quarter of 2004. Following negotiations with United Apparel Ventures and its affiliate, Tarrant Apparel Group, a former major customer of ours, we determined that a significant portion of the obligations due from this customer were uncollectable. This resulted in a write-off of $6.9 million of accounts receivable due from Tarrant and UAV in the fourth quarter of 2004 and a net receivable balance due from UAV of $4.5 million at December 31, 2004 and March 31, 2005. UAV agreed to pay the $4.5 million receivable balance over an eight-month period beginning May 2005. The decrease in related party receivables was offset by an increase in non-related party receivables of approximately $11.4 million, less an increase in the reserve for bad debts of $5.3 million, for a net increase of $6.1 million. This increase in non-related party receivables was due to increased sales to non-related party customers and slower collections, and an additional $6.7 million due to the inclusion of receivables that were previously classified as related party trade receivables. As a result of the sale of its ownership in our common stock, Azteca Production International is now considered a non-related party customer. Our net deferred tax asset at March 31, 2005 amounted to $1.0 million compared to $2.8 million at March 31, 2004. Our deferred tax asset valuation allowance increased to $9.9 million at March 31, 2005 from $1.8 million at March 31, 2004. The decrease in the net deferred tax asset resulted in a charge of $1.8 million against the provision for income taxes in the fourth quarter of 2004. At December 31, 2004, we had Federal and state net operating loss carryforwards of approximately $21.6 million and $12.9 million, respectively, available to offset future taxable income. Our net operating losses may be limited in future periods if the ownership of the Company changes by more than 50% within a three-year period. As of December 31, 2004, some of our net operating losses may be limited by the Section 382 rules. The amount of such limitations, if any, has not yet been determined. 17 We have incurred significant legal fees in our litigation with Pro-Fit Holdings Limited. Unless the case is settled, we will continue to incur additional legal fees in increasing amounts as the case accelerates to trial. We believe that our existing cash and cash equivalents and anticipated cash flows from our operating activities and available financing will be sufficient to fund our minimum working capital and capital expenditure needs for at least the next twelve months. The extent of our future capital requirements will depend on many factors, including our results of operations, future demand for our products, the size and timing of future acquisitions and our expansion into foreign markets. Our need for additional long-term financing includes the integration and expansion of our operations to exploit our rights under our TALON trade name, the expansion of our operations in the Asian, Central and South American and Caribbean markets and the further development of our waistband technology. If our cash from operations is less than anticipated or our working capital requirements and capital expenditures are greater than we expect, we may need to raise additional debt or equity financing in order to provide for our operations. We are continually evaluating various financing strategies to be used to expand our business and fund future growth or acquisitions. There can be no assurance that additional debt or equity financing will be available on acceptable terms or at all. If we are unable to secure additional financing, we may not be able to execute our plans for expansion, including expansion into foreign markets to promote our TALON brand tradename, and we may need to implement additional cost savings initiatives. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS During the three months ended March 31, 2005, future minimum payments due under operating lease agreements increased by approximately $570,000. This increase was due to new lease agreements entered into by the Company related primarily to leased warehouse space. At March 31, 2005 and 2004, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. RELATED PARTY TRANSACTIONS We had a supply agreement with Tarrant Apparel Group and had been supplying Tarrant with all of its trim requirements under our MANAGED TRIM SOLUTION(TM) system since 1998. Pricing and terms were consistent with competitive vendors. At the time we entered into this supply agreement, we sold 2,390,000 shares of our common stock to KG Investment, LLC, an entity then owned by Gerard Guez and Todd Kay, executive officers and significant shareholders of Tarrant Apparel Group. KG Investment, LLC subsequently transferred its shares to Gerard Guez and Todd Kay. As of April 18, 2005, Todd Kay owned 5.5% of our common stock or 1,003,500 shares. We terminated our supply relationship with Tarrant and, in December 2004, we wrote-off the remaining obligations due from Tarrant. Total sales to Tarrant and its affiliate, United Apparel Ventures, for the three months ended March 31, 2004 amounted to approximately $74,000. There were no sales to Tarrant or its affiliate for the three months ended March 31, 2005. As of March 31, 2004, accounts receivable related party included approximately $7,140,000 due from Tarrant and its affiliate. As of March 31, 2005, accounts receivable, related party included $4.5 million due from Tarrant's affiliate, Untied Apparel Ventures. United Apparel Ventures agreed to pay the $4.5 million receivable balance over a nine-month period beginning May 2005. 18 As of March 31, 2005 and 2004, we had outstanding related-party debt of approximately $665,000 and $850,000, at interest rates ranging from 7% to 11%, and additional non-related-party debt of $25,200 at an interest rate of 10%. The majority of related-party debt is due on demand, with the remainder due and payable on the fifteenth day following the date of delivery of written demand for payment. NEW ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 123R "Share Based Payment." This statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. SFAS 123R addresses all forms of share based payment ("SBP") awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest. This statement is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. We have evaluated the effects of the adoption of this pronouncement and have determined it will not have a material impact on our financial statements. In November 2004, the FASB issued SFAS No. 151 "Inventory Costs" (SFAS 151). This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities. The provisions of SFAS 151 are effective for inventory cost incurred in fiscal years beginning after June 15, 2005. As such, we are required to adopt these provisions at the beginning of fiscal 2006. The adoption of this pronouncement is not expected to have material effect on our financial statements. In December 2004, the FASB issued Statement Accounting Standard ("SFAS") No. 153 "Exchanges of Nonmonetary Assets." This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after December 16, 2004. The provisions of this Statement should be applied prospectively. The adoption of this pronouncement is not expected to have material effect on our financial statements. In October 2004, the American Jobs Creation Act of 2004 (Act) became effective in the U.S. Two provisions of the Act may impact the provision (benefit) for income taxes in future periods, namely those related to the Qualified Production Activities Deduction (QPA) and Foreign Earnings Repatriation (FER). The QPA will be effective for our U.S. federal tax return year beginning after December 31, 2004. In summary, the Act provides for a percentage deduction of earnings from qualified production activities, as defined, commencing with an initial deduction of 3 percent for tax years beginning in 2005 and increasing to 9 percent for tax years beginning after 2009, with the result that the Statutory federal tax rate currently applicable to our qualified production activities of 35 percent could be reduced initially to 33.95 percent and ultimately to 31.85 percent. However, the Act also provides for the phased elimination of the Extraterritorial Income Exclusion provisions of the Internal Revenue Code, which have previously 19 resulted in tax benefits to both CCN and IMC. Due to the interaction of the law provisions noted above as well as the particulars of our tax position, the ultimate effect of the QPA on our future provision (benefit) for income taxes has not been determined at this time. The FASB issued FASB Staff Position FAS 109-1, Application of FASB Statement No.109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, (FSP 109-1) in December 2004. FSP 109-1 requires that tax benefits resulting from the QPA should be recognized no earlier than the year in which they are reported in the entity's tax return, and that there is to be no revaluation of recorded deferred tax assets and liabilities as would be the case had there been a change in an applicable statutory rate. The FER provision of the Act provides generally for a one-time 85 percent dividends received deduction for qualifying repatriations of foreign earnings to the U.S. Qualified repatriated funds must be reinvested in the U.S. in certain qualifying activities and expenditures, as defined by the Act. In December 2004, the FASB issued FASB Staff Position FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2). FSP 109-2 allows additional time for entities potentially impacted by the FER provision to determine whether any foreign earnings will be repatriated under said provisions. At this time, we have not undertaken an evaluation of the application of the FER provision and any potential benefits of effecting repatriations under said provision. Numerous factors, including previous actual and deemed repatriations under federal tax law provisions, are factors impacting the availability of the FER provision and its potential benefit to us, if any. We intend to examine the issue and will provide updates in subsequent periods. CAUTIONARY STATEMENTS AND RISK FACTORS Several of the matters discussed in this document contain forward-looking statements that involve risks and uncertainties. Factors associated with the forward-looking statements that could cause actual results to differ from those projected or forecast are included in the statements below. In addition to other information contained in this report, readers should carefully consider the following cautionary statements and risk factors. OUR GROWTH AND OPERATING RESULTS COULD BE MATERIALLY, ADVERSELY EFFECTED IF WE ARE UNSUCCESSFUL IN RESOLVING A DISPUTE THAT NOW EXISTS REGARDING OUR RIGHTS UNDER OUR EXCLUSIVE LICENSE AND INTELLECTUAL PROPERTY AGREEMENT ("AGREEMENT") WITH PRO-FIT HOLDINGS. Pursuant to our Agreement with Pro-Fit Holdings Limited, we have exclusive rights in certain geographic areas to Pro-Fit's stretch and rigid waistband technology. By letter dated April 6, 2004, Pro-Fit alleged various breaches of the Agreement which we dispute. To prevent Pro-Fit in the future from terminating the Agreement based on alleged breaches that we do not regard as meritorious, we filed a lawsuit against Pro-Fit in the U.S. District Court for the Central District of California, based on various contractual and tort claims seeking declaratory relief, injunctive relief and damages. Pro-Fit filed an answer denying the material allegations of the complaint and filed a counterclaim alleging various contractual and tort claims seeking injunctive relief and damages. We filed a reply denying the material allegations of Pro-Fit's pleading. Pro-Fit has since purported to terminate our exclusive license and intellectual property agreement based on the same alleged breaches of the agreement that are the subject of our existing litigation, as well as on an additional basis unsupported by fact. In February 2005, we amended our pleadings in the litigation to assert additional breaches by Pro-Fit of its obligations to us under our agreement and under certain additional letter agreements, and for a declaratory judgment that Pro-Fit's patent No. 5,987,721 is invalid and not infringed by us. Discovery in this case has commenced. There have been ongoing negotiations with Pro-Fit to attempt to resolve these disputes. We intend to proceed with the lawsuit if these negotiations are not concluded in a manner satisfactory to us. 20 We derive a significant amount of revenues from the sale of products incorporating the stretch waistband technology. Our business, results of operations and financial condition could be materially adversely affected if we are unable to conclude our present negotiations in a manner acceptable to us and ensuing litigation is not resolved in a manner favorable to us. Additionally, we have incurred significant legal fees in this litigation, and unless the case is settled, we will continue to incur additional legal fees in increasing amounts as the case accelerates to trial. IF WE LOSE OUR LARGER CUSTOMERS OR THEY FAIL TO PURCHASE AT ANTICIPATED LEVELS, OUR SALES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED. Our results of operations will depend to a significant extent upon the commercial success of our larger customers. If these customers fail to purchase our trim products at anticipated levels, or our relationship with these customers terminates, it may have an adverse affect on our results because: o We will lose a primary source of revenue if these customers choose not to purchase our products or services; o We may not be able to reduce fixed costs incurred in developing the relationship with these customers in a timely manner; o We may not be able to recoup setup and inventory costs; o We may be left holding inventory that cannot be sold to other customers; and o We may not be able to collect our receivables from them. WE MAY NOT BE ABLE TO ENFORCE THE MINIMUM PURCHASE REQUIREMENTS AND OTHER OBLIGATIONS OF OUR TALON DISTRIBUTORS. Expansion of our TALON zipper business depends in a large part on what we refer to as our TALON franchise strategy. We appoint distributors in various geographic international regions to finish and sell zippers under the TALON brand name. In return for the exclusive right to finish and sell zippers in selected territories, each distributor agrees to purchase a minimum quantity of zipper components from us over the term of our agreement. These distributors are foreign entities located primarily in emerging markets in Asia, Latin America, the Middle East and Africa. Despite a distributor's contractual commitments to us, we may be unable to enforce the distributor's minimum purchase guarantee or recover damages or other relief following a default, which could result in lower than projected revenues for our TALON division. CONCENTRATION OF RECEIVABLES FROM OUR LARGER CUSTOMERS MAKES RECEIVABLE BASED FINANCING DIFFICULT AND INCREASES THE RISK THAT IF OUR LARGER CUSTOMERS FAIL TO PAY US, OUR CASH FLOW WOULD BE SEVERELY AFFECTED. Our business relies heavily on a relatively small number of customers. This concentration of our business reduces the amount we can borrow from our lenders under receivables based financing agreements. Under a borrowing base credit agreement, for instance, if accounts receivable due us from a particular customer exceed a specified percentage of the total eligible accounts receivable against which we can borrower, the lender will not lend against the receivables that exceed the specified percentage. If we are unable to collect any large receivables due us, our cash flow would be severely impacted. IF CUSTOMERS DEFAULT ON BUYBACK AGREEMENTS WITH US, WE WILL BE LEFT HOLDING UNSALABLE INVENTORY. Inventories include goods that are subject to buyback agreements with our customers. Under these buyback agreements, some of our customers are required to purchase inventories from us under normal invoice and selling terms, if any inventory which we purchase on their behalf remains in our hands longer than agreed by the customer from the time we received the goods from our vendors. If any customer defaults on these buyback provisions or insists on markdowns, we may incur a charge in connection with our holding significant amounts of unsalable inventory and this would have a negative impact on our income. 21 OUR REVENUES MAY BE HARMED IF GENERAL ECONOMIC CONDITIONS WORSEN. Our revenues depend on the health of the economy and the growth of our customers and potential future customers. When economic conditions weaken, certain apparel manufacturers and retailers, including some of our customers, have experienced in the past, and may experience in the future, financial difficulties which increase the risk of extending credit to such customers. Customers adversely affected by economic conditions have also attempted to improve their own operating efficiencies by concentrating their purchasing power among a narrowing group of vendors. There can be no assurance that we will remain a preferred vendor to our existing customers. A decrease in business from or loss of a major customer could have a material adverse effect on our results of operations. Further, if the economic conditions in the United States worsen or if a wider or global economic slowdown occurs, we may experience a material adverse impact on our business, operating results, and financial condition. BECAUSE WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS, WE MAY NOT BE ABLE TO ALWAYS OBTAIN MATERIALS WHEN WE NEED THEM AND WE MAY LOSE SALES AND CUSTOMERS. Lead times for materials we order can vary significantly and depend on many factors, including the specific supplier, the contract terms and the demand for particular materials at a given time. From time to time, we may experience fluctuations in the prices, and disruptions in the supply, of materials. Shortages or disruptions in the supply of materials, or our inability to procure materials from alternate sources at acceptable prices in a timely manner, could lead us to miss deadlines for orders and lose sales and customers. IF WE ARE NOT ABLE TO MANAGE OUR RAPID EXPANSION AND GROWTH, WE COULD INCUR UNFORESEEN COSTS OR DELAYS AND OUR REPUTATION AND RELIABILITY IN THE MARKETPLACE AND OUR REVENUES WILL BE ADVERSELY AFFECTED. The growth of our operations and activities has placed and will continue to place a significant strain on our management, operational, financial and accounting resources. If we cannot implement and improve our financial and management information and reporting systems, we may not be able to implement our growth strategies successfully and our revenues will be adversely affected. In addition, if we cannot hire, train, motivate and manage new employees, including management and operating personnel in sufficient numbers, and integrate them into our overall operations and culture, our ability to manage future growth, increase production levels and effectively market and distribute our products may be significantly impaired. WE OPERATE IN AN INDUSTRY THAT IS SUBJECT TO SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS THAT MAY RESULT IN UNEXPECTED REDUCTIONS IN REVENUE AND STOCK PRICE VOLATILITY. We operate in an industry that is subject to significant fluctuations in operating results from quarter to quarter, which may lead to unexpected reductions in revenues and stock price volatility. Factors that may influence our quarterly operating results include: o The volume and timing of customer orders received during the quarter; o The timing and magnitude of customers' marketing campaigns; o The loss or addition of a major customer; o The availability and pricing of materials for our products; o The increased expenses incurred in connection with the introduction of new products; o Currency fluctuations; o Delays caused by third parties; and o Changes in our product mix or in the relative contribution to sales of our subsidiaries. 22 Due to these factors, it is possible that in some quarters our operating results may be below our stockholders' expectations and those of public market analysts. If this occurs, the price of our common stock would likely be adversely affected. OUR CUSTOMERS HAVE CYCLICAL BUYING PATTERNS WHICH MAY CAUSE US TO HAVE PERIODS OF LOW SALES VOLUME. Most of our customers are in the apparel industry. The apparel industry historically has been subject to substantial cyclical variations. Our business has experienced, and we expect our business to continue to experience, significant cyclical fluctuations due, in part, to customer buying patterns, which may result in periods of low sales usually in the first and fourth quarters of our financial year. OUR BUSINESS MODEL IS DEPENDENT ON INTEGRATION OF INFORMATION SYSTEMS ON A GLOBAL BASIS AND, TO THE EXTENT THAT WE FAIL TO MAINTAIN AND SUPPORT OUR INFORMATION SYSTEMS, IT CAN RESULT IN LOST REVENUES. We must consolidate and centralize the management of our subsidiaries and significantly expand and improve our financial and operating controls. Additionally, we must effectively integrate the information systems of our Hong Kong, Mexico and Caribbean facilities with the information systems of our principal offices in California. Our failure to do so could result in lost revenues, delay financial reporting or adversely affect availability of funds under our credit facilities. THE LOSS OF KEY MANAGEMENT AND SALES PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS, INCLUDING OUR ABILITY TO OBTAIN AND SECURE ACCOUNTS AND GENERATE SALES. Our success has and will continue to depend to a significant extent upon key management and sales personnel, many of whom would be difficult to replace, particularly Colin Dyne, our Chief Executive Officer. Colin Dyne is not bound by an employment agreement. The loss of the services of Colin Dyne or the services of other key employees could have a material adverse effect on our business, including our ability to establish and maintain client relationships. Our future success will depend in large part upon our ability to attract and retain personnel with a variety of sales, operating and managerial skills. IF WE EXPERIENCE DISRUPTIONS AT ANY OF OUR FOREIGN FACILITIES, WE WILL NOT BE ABLE TO MEET OUR OBLIGATIONS AND MAY LOSE SALES AND CUSTOMERS. Currently, we do not operate duplicate facilities in different geographic areas. Therefore, in the event of a regional disruption where we maintain one or more of our facilities, it is unlikely that we could shift our operations to a different geographic region and we may have to cease or curtail our operations. This may cause us to lose sales and customers. The types of disruptions that may occur include: o Foreign trade disruptions; o Import restrictions; o Labor disruptions; o Embargoes; o Government intervention; and o Natural disasters. INTERNET-BASED SYSTEMS THAT HOST OUR MANAGED TRIM SOLUTION MAY EXPERIENCE DISRUPTIONS AND AS A RESULT WE MAY LOSE REVENUES AND CUSTOMERS. Our MANAGED TRIM SOLUTION is an Internet-based business-to-business e-commerce system. To the extent that we fail to adequately continue to update and maintain the hardware and software implementing the MANAGED TRIM SOLUTION, our customers may experience interruptions in service due to defects in our hardware or our source code. In addition, since our MANAGED TRIM SOLUTION is Internet-based, interruptions in Internet service generally can negatively impact our customers' ability to use the MANAGED TRIM SOLUTION to monitor and manage various aspects of their trim needs. Such defects or interruptions could result in lost revenues and lost customers. 23 THERE ARE MANY COMPANIES THAT OFFER SOME OR ALL OF THE PRODUCTS AND SERVICES WE SELL AND IF WE ARE UNABLE TO SUCCESSFULLY COMPETE OUR BUSINESS WILL BE ADVERSELY AFFECTED. We compete in highly competitive and fragmented industries with numerous local and regional companies that provide some or all of the products and services we offer. We compete with national and international design companies, distributors and manufacturers of tags, packaging products, zippers and other trim items. Some of our competitors, including Paxar Corporation, YKK, Universal Button, Inc., Avery Dennison Corporation and Scovill Fasteners, Inc., have greater name recognition, longer operating histories and, in many cases, substantially greater financial and other resources than we do. UNAUTHORIZED USE OF OUR PROPRIETARY TECHNOLOGY MAY INCREASE OUR LITIGATION COSTS AND ADVERSELY AFFECT OUR SALES. We rely on trademark, trade secret and copyright laws to protect our designs and other proprietary property worldwide. We cannot be certain that these laws will be sufficient to protect our property. In particular, the laws of some countries in which our products are distributed or may be distributed in the future may not protect our products and intellectual rights to the same extent as the laws of the United States. If litigation is necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others, such litigation could result in substantial costs and diversion of resources. This could have a material adverse effect on our operating results and financial condition. Ultimately, we may be unable, for financial or other reasons, to enforce our rights under intellectual property laws, which could result in lost sales. IF OUR PRODUCTS INFRINGE ANY OTHER PERSON'S PROPRIETARY RIGHTS, WE MAY BE SUED AND HAVE TO PAY LARGE LEGAL EXPENSES AND JUDGMENTS AND REDESIGN OR DISCONTINUE SELLING OUR PRODUCTS. From time to time in our industry, third parties allege infringement of their proprietary rights. Any infringement claims, whether or not meritorious, could result in costly litigation or require us to enter into royalty or licensing agreements as a means of settlement. If we are found to have infringed the proprietary rights of others, we could be required to pay damages, cease sales of the infringing products and redesign the products or discontinue their sale. Any of these outcomes, individually or collectively, could have a material adverse effect on our operating results and financial condition. OUR STOCK PRICE MAY DECREASE, WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND CAUSE OUR STOCKHOLDERS TO SUFFER SIGNIFICANT LOSSES. The following factors could cause the market price of our common stock to decrease, perhaps substantially: o The failure of our quarterly operating results to meet expectations of investors or securities analysts; o Adverse developments in the financial markets, the apparel industry and the worldwide or regional economies; o Interest rates; o Changes in accounting principles; o Sales of common stock by existing shareholders or holders of options; o Announcements of key developments by our competitors; and o The reaction of markets and securities analysts to announcements and developments involving our company. IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK OR ASSUME ADDITIONAL DEBT TO FINANCE FUTURE GROWTH, OUR STOCKHOLDERS' OWNERSHIP COULD BE DILUTED OR OUR EARNINGS COULD BE ADVERSELY IMPACTED. Our business strategy may include expansion through internal growth, by acquiring complementary businesses or by establishing strategic relationships with targeted customers and 24 suppliers. In order to do so or to fund our other activities, we may issue additional equity securities that could dilute our stockholders' stock ownership. We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets if we acquire another company and this could negatively impact our results of operations. WE MAY NOT BE ABLE TO REALIZE THE ANTICIPATED BENEFITS OF ACQUISITIONS. We may consider strategic acquisitions as opportunities arise, subject to the obtaining of any necessary financing. Acquisitions involve numerous risks, including diversion of our management's attention away from our operating activities. We cannot assure our stockholders that we will not encounter unanticipated problems or liabilities relating to the integration of an acquired company's operations, nor can we assure our stockholders that we will realize the anticipated benefits of any future acquisitions. We currently do not have any plans to pursue any potential acquisitions. WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE PRICE OF OUR COMMON STOCK. Our stockholders' rights plan, our ability to issue additional shares of preferred stock and some provisions of our certificate of incorporation and bylaws and of Delaware law could make it more difficult for a third party to make an unsolicited takeover attempt of us. These anti-takeover measures may depress the price of our common stock by making it more difficult for third parties to acquire us by offering to purchase shares of our stock at a premium to its market price. INSIDERS OWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHICH COULD LIMIT OUR STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS. As of April 18, 2005, our officers and directors and their affiliates beneficially owned approximately 15.0% of the outstanding shares of our common stock. The Dyne family, which includes Mark Dyne, Colin Dyne, Larry Dyne, Jonathan Burstein and the estate of Harold Dyne, beneficially owned approximately 17.8% of the outstanding shares of our common stock at April 18, 2005. As a result, our officers and directors and the Dyne family are able to exert considerable influence over the outcome of any matters submitted to a vote of the holders of our common stock, including the election of our Board of Directors. The voting power of these stockholders could also discourage others from seeking to acquire control of us through the purchase of our common stock, which might depress the price of our common stock. WE MAY FACE INTERRUPTION OF PRODUCTION AND SERVICES DUE TO INCREASED SECURITY MEASURES IN RESPONSE TO TERRORISM. Our business depends on the free flow of products and services through the channels of commerce. Recently, in response to terrorists' activities and threats aimed at the United States, transportation, mail, financial and other services have been slowed or stopped altogether. Further delays or stoppages in transportation, mail, financial or other services could have a material adverse effect on our business, results of operations and financial condition. Furthermore, we may experience an increase in operating costs, such as costs for transportation, insurance and security as a result of the activities and potential activities. We may also experience delays in receiving payments from payers that have been affected by the terrorist activities and potential activities. The United States economy in general is being adversely affected by the terrorist activities and potential activities and any economic downturn could adversely impact our results of operations, impair our ability to raise capital or otherwise adversely affect our ability to grow our business. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. All of our sales are denominated in United States dollars or the currency of the country in which our products originate. We are exposed to market risk for fluctuations in the foreign currency exchange rates for certain product purchases that are denominated in British Pounds. During 2004, we purchased forward exchange contracts for British Pounds to hedge the payments of product purchases. We intend to purchase additional contracts to hedge the British Pound exposure for future product purchases. There were no hedging contracts outstanding as of March 31, 2005. Currency fluctuations can increase the price of our products to foreign customers which can adversely impact the level of our export sales from time to time. The majority of our cash equivalents are held in United States bank accounts and we do not believe we have significant market risk exposure with regard to our investments. We are also exposed to the impact of interest rate changes on our outstanding borrowings. At March 31 2005, we had approximately $1.4 million of indebtedness subject to interest rate fluctuations. These fluctuations may increase our interest expense and decrease our cash flows from time to time. For example, based on average bank borrowings of $10 million during a three-month period, if the interest rate indices on which our bank borrowing rates are based were to increase 100 basis points in the three-month period, interest incurred would increase and cash flows would decrease by $25,000. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF CONTROLS AND PROCEDURES We maintain disclosure controls and procedures, which we have designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding disclosure. In response to recent legislation and proposed regulations, we reviewed our internal control structure and our disclosure controls and procedures. In the course of conducting its audit of our financial statements for the fiscal year ended December 31, 2004, our independent auditors, BDO Seidman, LLP informed members of our senior management and the Audit Committee of our Board of Directors that they had discovered significant deficiencies in our internal control over financial reporting that alone and in the aggregate constituted a "material weakness," which is defined under standards established by the Public Company Accounting Oversight Board as a deficiency that could result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The deficiencies identified consisted of the following: o A deficiency related to the identification of and physical controls over approximately $1.0 million of our inventory located in a third party warehouse. We have taken steps, and will continue to take additional steps, to remedy this deficiency and believe that this deficiency was limited to the third party warehouse at which the inventory was located. o We recorded post-closing adjustments in our financial statements for the year ended December 31, 2004 related to the allowance for doubtful accounts and deferred tax asset, which were identified by BDO Seidman, LLP in connection with their audit of the financial statements, indicating a material weakness in our quarterly and annual financial statement closing process. In order to address this material weakness, we implemented additional review procedures over the selection and monitoring of appropriate assumptions and 26 estimates affecting these accounting practices. There were no post-closing adjustments as of March 31, 2005, the end of the period covered by this report. Members of management, including the Company's Chief Executive Officer, Colin Dyne, and Chief Financial Officer, August DeLuca, have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2005, the end of the period covered by this report. Based upon that evaluation, Mr. Dyne and Mr. DeLuca have concluded that the Company's disclosure controls and procedures were effective as of March 31, 2005. Management has identified the steps necessary to address the material weaknesses as described above, and has implemented remediation plans. We believe these corrective actions, taken as a whole, have mitigated the control deficiencies with respect to our preparation of this Quarterly Report and that these measures have been effective to ensure that the information required to be disclosed in this Quarterly Report has been recorded, processed, summarized and reported correctly. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING There were no significant changes in our internal controls over financial reporting that occurred during the first quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than the changes we implemented as discussed above to address the material weaknesses. 27 PART II OTHER INFORMATION ITEM 6. EXHIBITS 31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended 31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended 32.1 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: May 16, 2005 TAG-IT PACIFIC, INC. /S/ AUGUST DELUCA ----------------------------------- By: August DeLuca Its: Chief Financial Officer 29 EX-31 2 ex31-1g.txt EX-31.1 EXHIBIT 31.1 CERTIFICATION OF CEO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a) AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Colin Dyne, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tag-It Pacific, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 16, 2005 /S/ COLIN DYNE ----------------------- Colin Dyne, Chief Executive Officer EX-31 3 ex31-2g.txt EX-31.2 EXHIBIT 31.2 CERTIFICATION OF CFO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a) AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, August DeLuca, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tag-It Pacific, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 16, 2005 /S/ AUGUST DELUCA ----------------------- August DeLuca, Chief Financial Officer EX-32 4 ex32-1g.txt EX-32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of Title 18, United States Code), each of the undersigned officers of Tag-It Pacific, Inc., a Delaware corporation (the "Company"), do hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the quarterly period ended March 31, 2005 as filed with the Securities and Exchange Commission (the "10-K Report") that: (1) the 10-K Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the 10-K Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 16, 2005 /S/ COLIN DYNE --------------------------- Colin Dyne Chief Executive Officer Date: May 16, 2005 /S/ AUGUST DELUCA --------------------------- August DeLuca Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----