Dispute over stretchable trim may undo apparel firm Tag-It.

Tag-It Pacific Inc., an apparel manufacturer that sells trim and zippers to Abercrombie & Fitch and Levi Strauss & Co., is locked in a patent infringement lawsuit for a stretchable waistband material that could potentially wipe out 20 percent of the company's business.

The stretchable waistband, patented by ProFit Holdings Ltd. of Bradford, England, allows rigid fabric to stretch and curve around the waist without bulging at the sides--an increasingly important aspect of clothing as the population becomes older and bigger.

Last year, Tag-It signed a two-year extension of its stretch waistband deal with Levi's for the Dockers line.

At the time, it had already sued and been countersued by Pro-Fit, the patent holder. Tag-It estimated that the Dockers deal would generate between $35 million and $40 million through 2006.

"We've been very careful about our disclosure," said Colin Dyne, Tag-It's president and chief executive. "Investors understand that this business could have a lot more legs to it, or it could go away. We have other pieces of the business that are moving in the fight direction."

Investors were spooked earlier this month when Tag-It reported fourth-quarter earnings but then informed investors on a conference call that the numbers would be revised. Last week, the company said earnings were finalized with no changes.

Tag-It reported a fourth-quarter loss of $17.4 million, compared with a loss of $6 million in the like period a year earlier. Sales rose 1 percent, to $13 million.

Compounding the weak results was a tripling of expenses, to $14.3 million, plus $9 million in write-offs and a $5-million reserve for uncollected accounts receivables from United Apparel Ventures and Tag-It's affiliate, Tarrant Apparel Group.

Though executives reiterated that Tag-It will generate 40 percent top-line growth in 2005, investors have sent shares plummeting 30 percent since mid-March, to $3.75 a share last week.

'Wrong foot'

Dyne said Tag-It got off on the "wrong foot" with Pro-Fit, which patented the waistband technology in 1994 and signed an exclusive licensing agreement with Tag-It in 2001.

Dyne said the two companies clashed because Tag-It was larger and Pro-Fit was "unreasonable about how big business is done and how it is done in the U.S. There always seemed to be some unhappiness with them and the contract."

Dyne said he got tired of Pro-Fit using the renegotiations to hold up shipments of the stretchable material since he needed to fulfill agreements with apparel manufacturers.

"We would come back to them and every time we refused to do what they said, they would hold up goods to us," he said. "Obviously, we needed the merchandise and it put us in a difficult situation."

Pro-Fit executives declined comment.

Like many apparel manufacturers, Tag-It has been involved in a number of lawsuits. Tag-It decided to launch the first one in 2002, alleging that Pro-Fit was not holding up its end of the contract.

Pro-Fit claims in its countersuit that Tag-It abused the license to make products that weren't part of the deal.

"If a product wasn't included in the contract then it wasn't excluded either," Dyne says.

Acrimony between the two companies was heightened when Levi's signed a contract directly with Tag-It, rather than with Pro-Fit, which has always maintained that third-party contracts were not part of its original agreement. In 2002, Levi's agreed to purchase a minimum of $10 million of stretchable waistbands from Tag-It.

Dyne said Tag-It has paid Pro-Fit as much as $24 million for product it supplied, plus around $2 million in royalties. Tag-It later decided to find another provider of stretchable waistband material, eliminating Pro-Fit. That provider, Narrowflex, has also sued Tag-It, though no one from the company returned calls.

While Tag-It and Pro-Fit have mixed it up in court, both companies' lawyers have been in negotiations off-and-on for the past month.

In an SEC filing, Tag-It said that it derives a "significant amount of revenue from the sale of products incorporating the stretch waistband technology," and said its "financial condition could be materially adversely affected if we are unable to conclude our present negotiations."

A trial is set for January 2006.

Ron Goodson, a Tag-It investor from Los Angeles, asked Dyne on a recent conference call about the possibility that Tag-It could be sued by Levi's if the patent litigation goes against them. Dyne said the company has limited liability of between $1.2 million and $1.4 million with Levi's. A Levi's spokesman would not comment on the ongoing litigation.

"I'm in the process of trying to decide if I believe in them," said Goodson, who owns the jewelers Goodson's of Malibu. "They may have outsmarted Pro-Fit and it's possible that they did it legally."