<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 1-8176
--------
LITTLEFIELD, ADAMS & COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey #22-1469846
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6262 Executive Blvd., Huber Heights, Ohio 45424
- --------------------------------------------------------------------------------
(Address of principal executive offices, and Zip Code)
Registrant's telephone number, including area code (937) 236-0660
----------------------
253 North First Avenue, Sturgeon Bay, Wisconsin 54235-2551
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1996
----------------------- ---------------------------------
Common Stock, par value 2,277,981 shares
$1.00 per share
<PAGE> 2
LITTLEFIELD, ADAMS & COMPANY
INDEX Page No.
----- --------
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Report of Independent Public Accountants 3
Consolidated Balance Sheets-
September 30, 1996 and December 31, 1995 4
Consolidated Statements of Operations -
for the three and nine months ended
September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows -
for the nine months ended
September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Part II. Other Information
Item 1. Legal Proceedings 22
Item 5. Other information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 2
<PAGE> 3
[ARTHUR ANDERSEN LLP LETTERHEAD]
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
Littlefield, Adams & Company:
We have reviewed the accompanying consolidated balance sheet of Littlefield,
Adams & Company (a New Jersey corporation) and subsidiaries (the Company) as of
September 30, 1996, and the related consolidated statements of operations for
the three-month and nine-month periods ended September 30, 1996 and 1995, and
the consolidated statements of cash flows for the nine-month periods ended
September 30, 1996 and 1995. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP /S/
----------------------------
Arthur Andersen LLP
San Antonio, Texas
October 25, 1996
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 3
<PAGE> 4
LITTLEFIELD, ADAMS & COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash $ 28 $ 241
Accounts receivable:
Trade, less allowances of $90 at 9/30/96 and
$288 at 12/31/95 903 1,010
Due from factor 991 --
Other, less allowances of $8 at 9/30/96
and $0 at 12/31/95 246 43
Inventories 2,681 3,332
Prepaid expenses and other current assets 139 163
------- -------
Total current assets 4,988 4,789
Property, plant and equipment, net 575 1,109
Goodwill, net 468 524
Notes receivable and other assets, less allowances
of $0 at 9/30/96 and $75 at 12/31/95 281 254
------- -------
TOTAL ASSETS $ 6,312 $ 6,676
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' INVESTMENT
<S> <C> <C>
Current liabilities:
Accounts payable $ 954 $ 1,041
Accrued expenses 1,527 1,805
Notes payable 42 28
Factor borrowing 302 --
Revolving lines of credit 808 1,754
Current portion of long-term debt 165 456
------- -------
Total current liabilities 3,798 5,084
Creditors' debt settlement -- 109
Long-term debt, less current portion 2 10
Deferred compensation 46 49
Class action settlement payable in common stock 1,400 1,400
Commitments and contingencies -- --
Shareholders' investment:
Common stock, $1.00 par; authorized 25,000,000;
issued 2,296,145; outstanding 2,277,981 for 1996
and 2,279,647 for 1995 2,296 2,296
Capital in excess of par value 5,370 5,406
Accumulated deficit (6,487) (7,575)
------- -------
1,179 127
Treasury stock, at cost - 18,164 shares for 1996
and 16,498 for 1995 (113) (103)
------- -------
1,066 24
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 6,312 $ 6,676
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 4
<PAGE> 5
LITTLEFIELD, ADAMS & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the 3 months ended September 30, For the 9 months ended September 30,
1996 1995 1996 1995
----------------------------- -----------------------------
(DOLLARS IN THOUSANDS, (DOLLARS IN THOUSANDS,
Except per share amounts) Except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Net product sales $ 2,223 $ 3,412 $ 8,644 $ 12,686
Other revenues 1 53 131 212
--------- --------- --------- ---------
Total revenues 2,224 3,465 8,775 12,898
Costs and expenses:
Cost of products sold 1,743 2,567 6,006 8,750
Selling and administrative 628 1,419 2,253 4,638
--------- --------- --------- ---------
Total costs and expenses 2,371 3,986 8,259 13,388
--------- --------- --------- ---------
Income (loss) from operations (147) (521) 516 (490)
Other income (expense):
Gain on sale of property and equipment 214 29 221 29
Litigation settlements, net 425 366 425 366
Interest (65) (68) (187) (221)
--------- --------- --------- ---------
574 327 459 174
Income (loss) before income taxes 427 (194) 975 (316)
Benefit from income taxes 41 4 19 36
--------- --------- --------- ---------
Net income (loss) before
extraordinary gain 468 (190) 994 (280)
Extraordinary gain, net of
income tax provision of $9 94 -- 94 --
Net income (loss) $ 562 $ (190) $ 1,088 $ (280)
========= ========= ========= =========
Weighted average common shares outstanding 2,601,491 2,274,373 2,395,973 2,274,373
========= ========= ========= =========
Net income (loss) per common share
Before extraordinary gain $ 0.18 $ (0.08) $ 0.41 $ (0.12)
Extraordinary gain 0.04 0.00 0.04 0.00
--------- --------- --------- ---------
Net income (loss) per common share $ 0.22 $ (0.08) $ 0.45 $ (0.12)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 5
<PAGE> 6
LITTLEFIELD, ADAMS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the 9 months ended September 30,
1996 1995
-----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,088 $ (280)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 200 395
Gain on sale of property and equipment (221) (29)
Extraordinary gain on debt extinguishment (109) --
Changes in operating assets and liabilities:
Increase in accounts and other receivables, net (1087) (386)
(Increase) decrease in inventories, net 651 (60)
Decrease in prepaid expenses and other current assets 24 22
Decrease in accounts payable (87) (230)
Decrease in accrued expenses and other (286) (511)
-------- --------
Net cash provided by (used in) operating activities 173 (1,079)
Cash flows from investing activities:
Proceeds from sale of property and equipment 668 104
Purchase of property and equipment (69) (218)
(Increase) decrease in notes receivable and other assets (27) 1
-------- --------
Net cash provided by (used in) investing activities 572 (113)
Cash flows from financing activities:
Proceeds from line of credit and short term borrowings 7,339 13,591
Repayments of line of credit and short term borrowings (7,983) (12,261)
Payment on creditors' debt settlement -- (202)
Proceeds from bank and other notes payable 80 93
Repayment of bank and other notes payable (358) (101)
Cost to purchase rights to stock (36) --
Cost to purchase treasury stock -- (68)
-------- --------
Net cash provided by (used in) financing activities (958) 1,052
-------- --------
Net decrease in cash (213) (140)
Cash at beginning of period 241 221
-------- --------
Cash at end of period $ 28 $ 81
======== ========
Supplemental disclosures of cash flows information:
Cash paid during the period for interest $ 194 $ 228
Cash paid during the period for income taxes $ 31 $ 332
</TABLE>
During 1996, the Company received $100 worth of T-shirts in connection
with the settlement and termination of a sub-lease agreement.
In May 1995, the Company received 7,974 shares of its own stock which
satisfied a receivable of $88.
The accompanying notes are an integral part of these
consolidated financial statements.
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 6
<PAGE> 7
LITTLEFIELD, ADAMS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
The accompanying consolidated financial statements include the accounts of
Littlefield, Adams & Company and its subsidiaries, Medical Sales Associates,
Inc., Cornerstone Laboratories, Inc., and NUTECH, Inc. ("the Company"). The
former wholly owned subsidiaries, Collegiate Pacific Company and Sports
Imprints, Inc. were merged into Littlefield, Adams & Company effective June 30,
1995. Medical Sales Associates, Inc., Cornerstone Laboratories, Inc., and
NUTECH, Inc. were dissolved subsequent to December 31, 1995, and had no
significant operations for the year ended December 31, 1995, and no
consolidated assets or liabilities as of December 31, 1995. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The consolidated balance sheet at September 30, 1996, and the consolidated
statements of operations and cash flows for the interim periods ended September
30, 1996 and 1995, have been prepared by the Company without audit. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the consolidated financial position,
results of operations and cash flows have been made. However, it should be
understood that accounting measurements at interim dates may be less precise
than at year end. The results of operations for the interim periods are not
necessarily indicative of the operating results for a full year or of future
operations.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted. The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
Certain prior period amounts have been reclassified for comparative
purposes.
NOTE 2: NATURE OF BUSINESS
- -------------------------------
The Company is principally engaged in the imprinting and distribution of
knitted athletic wear, leisure wear, boxer shorts and hats under various
license agreements. Prior to August 31, 1995, the Company sold its products to
customers in various markets such as major nationwide retailers, college
bookstores, resort areas and theme parks across the United States. On August
31, 1995, the Collegiate Pacific division in Roanoke, Virginia was closed.
Since that time, the Company's distribution has been primarily to nationwide
retailers.
NOTE 3: FUTURE OPERATIONS
- ------------------------------
The Company has been largely dependent on sales of Harley-Davidson
licensed products to generate cash flow from operations and provide funds to
meet the Company's obligations as they become due. Harley-Davidson has advised
the Company that it desires to upgrade the quality of apparel associated with
its trademarks, trade dress and designs and to sell these licensed products
through second-tier department stores rather than mass merchandisers.
Harley-Davidson offered to enter into a new license agreement which would have
allowed the Company to move from the mass merchandising market into the
second-tier department store market. The Company declined this offer based on
its evaluation of Harley-Davidson as a second-tier department store license
rather than a mass merchandising market license. Accordingly, as described in
Note 4, the Company's Harley-Davidson license agreement will expire on December
31, 1996, and it will not be renewed. Sales of Harley-Davidson licensed
products accounted for 93% and 90% of total consolidated net product sales for
the three months ended September 30, 1996 and 1995, respectively. The
termination of the Company's relationship with Harley-Davidson as of December
31, 1996, could have a material adverse effect on its future results of
operations. In the event that the Company cannot generate sufficient sales of
other licensed products subsequent to December 31, 1996, it is probable that
the Company will not be able to continue as a going concern. The accompanying
consolidated financial statements have been prepared assuming the Company will
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 7
<PAGE> 8
LITTLEFIELD, ADAMS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
continue as a going concern which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business.
The Company incurred a net loss of $992 for the year ended December 31,
1995, had a working capital deficit of $295 at December 31, 1995, and has
limited financial resources available to support its operations until such time
as sales of other licensed products are sufficient to generate positive cash
flow at levels necessary to meet the Company's obligations as they become due.
These factors raise substantial doubt concerning the ability of the Company to
continue as a going concern. The ability of the Company to continue as a going
concern is dependent upon the ongoing support of its customers and creditors,
and its ability to generate sales of other licensed products subsequent to the
termination of the Harley-Davidson license agreement.
In response to the matters discussed above, the Company has developed
certain new licenses as described in Note 4, and intends to pursue other new
license agreements (Note 14) to replace the sales volume currently attributable
to the Company's Harley-Davidson licensed products. The Company had net income
of $1,088 for the first nine months of 1996, and had working capital of $1,190
at September 30, 1996. Furthermore, the Company closed its Collegiate Pacific
Division, which incurred an operating loss of $495 for the year ended December
31, 1995. Closure of this division has eliminated the negative operating cash
flow associated with these operations. The sale of various assets, primarily
related to Collegiate Pacific, generated $668 during the first nine months of
1996, and was used to reduce debt. The Company closed its Sturgeon Bay,
Wisconsin office in August 1996, and consolidated those operations in Huber
Heights, Ohio. The Company believes that the consolidation of its operations
in Ohio will, over time, result in significant cost savings.
As part of its effort to enhance and stabilize its business through the
acquisition of significant new licenses and the development of new product
lines, the Company, during the quarter ended March 31, 1996, entered into a
two year license agreement with PepsiCo, Inc. for its soft drink brands. The
Company is also pursuing other new license opportunities. Subsequent to
September 30, 1996, the Company expanded its Pepsi and Mountain Dew license to
include boxer shorts and hats. The Company also entered into license
agreements with H.J. Heinz Company and Miller Brewing Company, covering
T-shirts and sweatshirt product lines and boxer shorts. (Notes 4 and 14).
Management believes that in spite of lower sales levels in 1996, compared
to 1995, income from operations will increase from 1995 due to reductions in
certain expenses. This, combined with anticipated 1997 sales of newly acquired
licensed products, will, in management's estimation, generate sufficient cash
flow from operations during 1996 and 1997 to sustain the Company at least
through 1997, and support the Company's effort to achieve sufficient sales
revenue from new licenses to offset the reduction in revenue resulting from the
expiration of the Harley-Davidson license on December 31, 1996. There can be
no assurance, however, that the anticipated 1997 sales will be achieved, or
that, if it is able to do so, that the revenue from such sales will be
sufficient to sustain the Company for any particular period.
The Company believes that cash generated from operations and borrowings
under the current factoring and line of credit agreement with Merchant Factors
Corp. will be adequate to fund working capital requirements, debt service
payments and planned capital expenditures through 1997. The Company expects to
renew its agreement with Merchant Factors Corp. when the current agreement
expires in August of 1997, although there can be no assurance that the Company
will be able to do so. The availability of cash flow from operations
subsequent to December 31, 1996 is dependent on the ability of the Company to
acquire and sell licensed products other than Harley-Davidson through 1997.
The success of the Company's new licensed products is an integral part of that
effort, although there can be no assurance that such licensed products will be
successful. (Notes 4, 7 and 14).
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 8
<PAGE> 9
LITTLEFIELD, ADAMS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 4: CONCENTRATION OF SALES AND CREDIT RISK
- ---------------------------------------------------
Significant Customers-
The Company manufactures and sells imprinted apparel primarily to national
retail discount chains. The license agreement with Harley-Davidson, which
terminates on December 31, 1996, has limited the number of customers to which
the Company could sell Harley-Davidson product. Because Harley-Davidson has
accounted for such a large proportion of the Company's revenues, the Company,
generally, did not pursue customers who were not approved by Harley-Davidson.
The Company's new licenses, including Pepsi and Mountain Dew, do not limit the
customers to which the product can be sold. Accordingly, the Company plans to
expand its sales force and to aggressively seek new customer accounts.
As discussed in Note 7, effective February 1, 1996, the Company entered
into a factoring arrangement for all accounts, except the Company's largest
retail customer. The Company, at its option and its credit risk, can factor
accounts receivable that the factor does not approve for credit. Management
believes that, historically, bad debt expense has been minimal.
Sales to two customers, which individually exceeded 10% of consolidated
net product sales, totaled 52% and 19% for the nine months ended September 30,
1996. Sales to the same two customers for the nine months ended September 30,
1995 were 66% and 3%, respectively. Trade receivable balances relating to
these customers were approximately $985 and $417, respectively, at September
30, 1996, and $713 and $197, respectively, at December 31, 1995.
Significant Licensors-
The Company has two significant licenses: Harley-Davidson, which expires
December 31, 1996; and PepsiCo, Inc. (Pepsi and Mountain Dew), which expires
January 31, 1998.
All licenses, product lines and their respective expiration dates are as
follows:
<TABLE>
<CAPTION>
LICENSE PRODUCTS EXPIRATION
- -------------------- -------------------------------------------- -------------
<S> <C> <C>
Harley-Davidson T-shirts and sweatshirts December 1996
The National Pastime T-shirts and sweatshirts December 1996
MGM/United Artists T-shirts and sweatshirts December 1997
Tales from the Crypt T-shirts and sweatshirts December 1998
PepsiCo T-shirts, sweatshirts, boxer shorts and hats January 1998
H.J. Heinz T-shirts, sweatshirts and boxer shorts October 1998
Miller Beer T-shirts, sweatshirts and boxer shorts December 1998
Leinenkugel's Beer T-shirts, sweatshirts and boxer shorts August 1998
Southpaw Beer T-shirts, sweatshirts and boxer shorts August 1998
</TABLE>
Harley-Davidson licensed sales accounted for 87% of consolidated net
product sales for both the nine months ended September 30, 1996 and 1995. The
Harley-Davidson license agreement will terminate on December 31, 1996, and will
not be renewed. The Company's termination of the relationship with
Harley-Davidson could have a material adverse effect on its future results of
operations (Note 3).
In response to the Harley-Davidson license termination discussed above,
the Company has developed, and will continue to pursue, new license
opportunities in order to replace the sales volume attributable to the
Company's Harley-
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 9
<PAGE> 10
LITTLEFIELD, ADAMS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Davidson licensed products. During the quarter ended March 31, 1996, the
Company entered into a two-year license agreement with PepsiCo, Inc., covering
PepsiCo soft drink brands for national distribution. Sales of PepsiCo.
licensed products, which began late in the second quarter of 1996, were 16% of
cumulative net product sales for the second and third quarters. However, there
can be no assurance that the Company will be successful in its efforts to
acquire other significant new licenses or that, if it is able to do so, that
the revenue from such licenses will be sufficient to replace the sales volume
and revenue attributable to the Company's Harley-Davidson licensed products.
(Note 14).
The minimum royalties as of September 30, 1996 to be paid in future years
are:
Remainder of 1996 $ 5
1997 40
1998 3
---
$48
===
NOTE 5.: INVENTORIES
- ------------------------
Inventories are stated at lower of cost (determined by the first-in,
first-out method) or market (net realizable value). Costs include direct
materials, direct labor and certain indirect manufacturing overhead expenses.
Inventories are summarized as follows:
September 30, December 31,
1996 1995
------------- ------------
Raw materials $ 1,316 $ 1,945
Finished goods 1,490 1,788
Allowance for inventory obsolescence (125) (401)
------------- ------------
$ 2,681 $ 3,332
============= ============
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
- ------------------------------------------
Property, plant and equipment is summarized as follows:
September 30, December 31,
1996 1995
------------- ------------
Land $ -- $ 95
Building and improvements 242 906
Machinery and equipment 1,271 1,609
------------- ------------
1,513 2,610
Less: Accumulated depreciation
and amortization (938) (1,501)
------------- ------------
$ 575 $ 1,109
============= ============
Primarily related to the closing of the Company's Collegiate Pacific
facility in Roanoke, Virginia, fixed assets with a recorded cost of $1,586,
accumulated depreciation of $1,139, and a net book value of $447 were sold
during the nine months ended September 30, 1996. Proceeds from the sales
amounted to $668, resulting in a gain of $221.
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 10
<PAGE> 11
LITTLEFIELD, ADAMS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Certain of Collegiate Pacific's equipment was transferred to the Company's
facility in Huber Heights, Ohio for use in its ongoing operations.
As of September 30, 1996, fixed assets with a net book value of $52 are being
held for sale.
NOTE 7: REVOLVING LINES OF CREDIT AND FACTOR BORROWING
- -----------------------------------------------------------
On January 17, 1992, Collegiate Pacific Company entered into a line of
credit agreement with the Bank of Floyd, Virginia for a maximum principal
amount of $750 payable on demand, but not less than monthly payments of .25% of
the outstanding principal balance and accrued interest. Effective August 29,
1994, the Bank of Floyd reduced the maximum principal amount available to $500
payable on demand. In addition, the Bank of Floyd set the interest rate on the
line of credit at prime plus 1%. The Company is required to make monthly
payments of .25% of the outstanding principal balance and accrued interest
until the line is paid in full. Collateral consists of all of the plant and
equipment of Collegiate Pacific Company and is guaranteed by Littlefield, Adams
& Company. At September 30, 1996, there was no remaining availability under
this line of credit. The Company is currently in discussions with the Bank of
Floyd to convert the existing line of credit to a term loan to be
collateralized by the Company's fixed assets. (Note 8).
The Company had an accounts receivable financing agreement with Merchant
Factors Corp., which expired January 31, 1996, and which allowed the Company to
borrow up to 75% of net qualified accounts receivable. The balance as of
December 31, 1995, was approximately $1,269 and was repaid as the receivables
were collected. The agreement bore interest at prime plus 3.5%. The Company's
accounts receivable were the collateral for this loan, as well as the guarantee
provided by Littlefield, Adams & Company. Additionally, Merchant Factors
Corp., when needed, issued purchase guarantees and/or letters of credit against
this line of credit which are collateralized by the related inventory
purchases. At December 31, 1995, there were no outstanding purchase guarantees
and/or letters of credit issued by Merchant Factors Corp. At December 31,
1995, there were no additional borrowings available under this agreement.
For the year ended December 31, 1995, Merchant Factors Corp., under a
special loan arrangement, lent the Company additional amounts not exceeding
$600 at any one time, secured by the Company's inventory. This arrangement was
repaid in full in January 1996.
Effective February 1, 1996, the Company entered into a new discount
factoring agreement with Merchant Factors Corp., which expires in August 1997.
All of the Company's accounts receivable which Merchant Factors Corp. approves
for credit, excluding Wal-Mart, are being factored at the rate of 1 1/8%.
Accounts that are credit approved by Merchant Factors are at its risk, which
minimizes the Company's credit risk. The Company, at its option, can factor
at a rate of 1 1/8%, with recourse, accounts that Merchant Factors Corp. does
not approve for credit. During 1996, the amount factored with recourse has
been insignificant. The servicing of all factored accounts is done by Merchant
Factors. Under the factoring agreement, the Company may borrow up to 75% of
the net accounts receivable at an annual interest rate of prime plus 2.5%. At
September 30, 1996 the Company had factored receivables amounting to $991,
most of which had been approved for credit by Merchant Factors.
In addition, the Company has an accounts receivable financing arrangement
with Merchant Factors Corp. covering only its accounts receivable from
Wal-Mart. This agreement allows the Company to borrow up to 75% of its net
receivables from Wal-Mart at an annual interest rate of prime plus 5%. The
Company does not pay any factoring fees for the financing of the Wal-Mart
accounts receivable. At September 30, 1996, outstanding purchase
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 11
<PAGE> 12
LITTLEFIELD, ADAMS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
guarantees and/or letters of credit issued by Merchant Factors Corp. amounted
to approximately $53. At September 30, 1996, the combined remaining
availability from Merchant Factors Corp. was approximately $737.
Outstanding balances are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Bank of Floyd $ 474 $ 485
Merchant Factors - Line of Credit 334 1,269
------------- ------------
Subtotal - Revolving Lines of Credit 808 1,754
Merchant Factors - Factor borrowing 302 --
------------- ------------
Total $ 1,110 $ 1,754
============= ============
</TABLE>
NOTE 8: LONG-TERM DEBT
- ---------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Long-term debt balances are as follows:
Mortgage payable, principal callable after
January 1995, interest at 9.38%, due July 1, 2003,
payable monthly, collateralized by real property $ -- $ 253
Note payable to a bank, principal callable on demand,
due September 1, 1999, interest at 8.75%, payable
monthly, collateralized by machinery and equipment 162 192
Other 5 21
------------- ------------
Total debt 167 466
Less - current portion (165) (456)
------------- ------------
$ 2 $ 10
============= ============
</TABLE>
Following are the maturities of long-term debt outstanding at
September 30, 1996.
<TABLE>
<S> <C>
Current $ 165
1997 1
1998 1
-------------
$ 167
=============
</TABLE>
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 12
<PAGE> 13
LITTLEFIELD, ADAMS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 9: COMMON STOCK
- -------------------------
As of September 30, 1996 and December 31, 1995, the Company had issued a
total of 2,296,145 shares of its common stock. Treasury stock consisted of
18,164 shares at September 30, 1996 and 16,498 shares as of December 31, 1995,
resulting in a total of 2,277,981 and 2,279,647 shares outstanding,
respectively.
The Registrant's Common Stock is traded on the American Stock Exchange
under the symbol "LFA". Currently, however, the Company does not fully meet
all of the financial guidelines for continued listing on the American Stock
Exchange, and, accordingly, there can be no assurance that such listing will
continue.
NOTE 10: INCENTIVE PLAN (THE "PLAN")
- ----------------------------------------
The Company has granted stock options to directors and employees as
follows:
<TABLE>
<CAPTION>
Price Range of
Number of Shares Under
Shares Option
--------- --------------
<S> <C> <C>
Outstanding, December 31, 1995 352,500
Canceled (307,500) $2.19 - $6.88
Granted 620,000 $1.00 - $2.00
Exercised -- --
---------
Outstanding, September 30, 1996 665,000
=========
Exercisable, September 30, 1996 665,000
</TABLE>
On June 4, 1996, an outside director was granted fully vested options to
purchase 5,000 shares under the Plan. The exercise price for these options is
$2.00 per share and is equal to the fair market value of LFA common stock on
the date granted, as defined in the Plan. As a result, no compensation expense
has been recorded relative to the issuance of these options. The options are
exercisable over a ten-year period, subject to earlier expiration upon
termination of status as a director. None of these options have been
exercised.
In addition, on May 28, 1996, as part of this Plan, fully vested options
to purchase 185,000 and 130,000 shares of common stock were issued to officers
and a group of key employees, respectively. The exercise price for these
options is $1.25 per share and is equal to the fair market value of LFA common
stock on the date granted, as defined in the Plan. As a result, no
compensation expense has been recorded relative to the issuance of these
options. The options are exercisable over a ten-year period, subject to
earlier expiration upon termination of employment. None of the options have
been exercised.
Additionally, on August 5, 1996, as part of this Plan, fully vested
options to purchase 225,000 and 75,000 shares of common stock were issued to
officers and a key employee, respectively. The exercise price for these
options is $1.00 per share and is equal to the fair market value of LFA common
stock on the date granted, as defined in the Plan. As a result, no
compensation expense has been recorded relative to the issuance of these
options. The options are exercisable over a ten-year period, subject to
earlier expiration upon termination of employment. None of these options have
been exercised.
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 13
<PAGE> 14
LITTLEFIELD, ADAMS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
In accordance with the Plan the following options expired during 1996:
<TABLE>
<CAPTION>
Shares Expiration date Grantee
------ --------------- -------
<S> <C> <C>
2,500 May 1, 1996 Former key employee
300,000 July 12, 1996 Former officer and director
5,000 September 4, 1996 Former director
</TABLE>
NOTE 11: RELATED PARTY TRANSACTIONS
- ---------------------------------------
For the nine months ended September 30, 1995, the Company paid
approximately $33 in sales commissions to JSA, Inc., a sales and marketing
company founded by John K. Stuth, former Chairman of the Board of Directors,
Chief Executive Officer and President of Littlefield, Adams & Company. The
relationship between the Company and JSA, Inc. has been terminated.
During the nine months ended September 30, 1995, the Company incurred
approximately $95 in legal fees and reimbursed expenses to David M. Simmonds,
Esquire. Mr. Simmonds was elected President of the Company by the Board of
Directors on May 30, 1995. Currently, Mr. Simmonds is the Company's Chief
Executive Officer and President, and Chairman of the Board of Directors, and
continues to serve as the Company's General Counsel. As a result, Mr. Simmonds
is now compensated as an employee of the Company.
NOTE 12: LEGAL MATTERS
- --------------------------
Securities Class Action
The Company and certain of its current and past officers and directors,
and others, have been named as defendants in three actions brought by
individual plaintiffs, purportedly representing persons who purchased
securities of the Company during a total period running from July 1, 1991
through May 17, 1994. These actions were filed by the plaintiffs on July 22,
1993, August 13, 1993 and March 16, 1994. These actions have been consolidated
for discovery and pretrial purposes in the United States District Court of the
Western District of Texas and are captioned In re Littlefield, Adams & Co.
Securities Litigation, Civil Action No. SA 93 CA 0561 ("Consolidated Action").
The plaintiffs allege that the Company and certain of its current and past
officers and directors, and others violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10(b)-5 promulgated thereunder, and
other law, as a result of alleged misrepresentations and omissions in
connection with the annual report for 1992, the 1993 quarterly reports, and
certain press releases. The complaint also alleges a claim for treble-damages
under the Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. Sec.
1964. The amount of damages sought is not specified. On February 21, 1995,
the Company reached an agreement with the plaintiffs to settle these claims, as
well as certain related claims involving other parties. Under the terms of
this agreement, which is subject to court approval, the Company will issue
$1,400 in stock and pay $210 in cash to the members of the class to settle the
claims brought by the securities litigation plaintiffs. In return, the
Company will receive releases from the class plaintiffs and the other
defendants. On April 3, 1996, the Court issued an Order Preliminarily
Approving Class and Derivative Settlements and Providing for Notice. The $210
has been paid on the Company's behalf by a third party pursuant to the
settlement of a related matter, and is being held in a Court monitored escrow
account for the benefit of the securities litigation plaintiffs.
Charlotte E. Picard, Derivatively on Behalf of Littlefield, Adams & Company,
v. Curtis A. Younts, Jr., et al.-
This action was filed in the United States District Court, Western
District of Texas on June 29, 1994, under Cause No. SA 94 CA 0544. The Company
is named as a nominal defendant. The complaint alleges that certain current
and former officers and directors of the Company, certain of the Company's
former lawyers, and the Company's former auditors "damaged LFA by causing or
permitting LFA to commit securities fraud and by damaging or
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 14
<PAGE> 15
LITTLEFIELD, ADAMS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
destroying the Company's reputation," and otherwise. The parties to this
action, with the exception of certain of the Company's former lawyers, have
agreed to settle this action. Under the terms of this agreement, which is
subject to court approval, the Company's former auditors will pay $130 to the
Company and the Company will issue $50 in stock to those former auditors in
settlement of claims for fees. The $130 has been placed into a Court monitored
escrow account for the benefit of the Company. In addition, (1) John K. Stuth,
the Company's former Chairman of the Board and CEO, will relinquish to the
Company rights to 5,000 shares of LFA stock that he represented were fully
vested as of February 21, 1995, and rights that he had as of February 21, 1995
to an option to acquire 50,000 shares of LFA stock (the option expired
unexercised on July 12, 1996 - see Note 10); (2) Director Stanley Halbreich,
currently the Company's Treasurer and Chief Financial Officer, will relinquish
to the Company rights that he had as of February 21, 1995 to 5,000 shares of
LFA stock; and (3) former President Wade Hudman will return 1,000 shares of LFA
stock to the Company. On April 3, 1996, the Court issued an Order
Preliminarily Approving Class and Derivative Settlements and Providing for
Notice. In connection with the Court Order, the Company recorded in the 1996
third quarter, in other income, $100 representing amounts to be received in
connection with the settlement, net of estimated legal fees.
Littlefield, Adams & Company v. Younts, et al.-
This action was filed on June 15, 1994, in the Texas District Court in the
57th Judicial District, Bexar County, Texas, by the Company against its former
Chairman, Curtis A. Younts, Jr., his wife and various of their affiliated
entities seeking the immediate repayment of $912 and other amounts alleged to
have been misappropriated by the defendants. Younts filed a counterclaim
against the Company seeking compensation for an unstated amount for services
and expense funds he claims to have provided the Company. The Company denies
that it owes any amount to Younts. As a result of Younts agreeing to
contribute $330 to settle the class action litigation described above, all of
the parties have agreed to dismiss their claims and provide mutual releases of
liability. This agreement is subject to the final judicial approval of the
Class and Derivative settlements, described above.
Curtis A. Younts, Jr. v. Littlefield, Adams & Company, et al.-
This action was filed on June 16, 1994, in the Texas District Court in the
169th Judicial District, Bell County, Texas, against the Company and one of its
officers by its former Chairman, Curtis A. Younts, Jr. Mr. Younts sought an
unspecified amount for the reasonable value of his services, allegedly rendered
on behalf of the Company since 1991. The Company denied that it owed any
amount to Younts. As a result of Younts agreeing to contribute $330 to settle
the class action litigation described above, all of the parties had agreed to
dismiss their claims and provide mutual releases of liability. Notwithstanding
the foregoing, this case was dismissed by the Court, on its own initiative, in
August 1996, for want of prosecution.
Atkisson v. Littlefield, Adams & Company and Curtis A. Younts, Jr.
The Company and a former chief executive officer have been named as
defendants in an action filed on October 15, 1995 by A. Carroll Atkisson in the
United States District Court for the Western District of Virginia, Cause No.
95-1107-R. Atkisson was the owner of a company known as Personal Screening,
Inc. In approximately 1991, Atkisson transferred all of his stock in Personal
Screening, Inc. to LFA, in exchange for shares of LFA. Subsequently, Personal
Screening, Inc. was merged into Collegiate Pacific. Thereafter, Atkisson
served, for a period of time, as a director of LFA and an officer of Collegiate
Pacific.
Atkisson alleges that LFA has wrongly deprived him of a total of 52,500
(post-split) shares of LFA stock, to which he claims he is entitled in
compensation for services rendered as a director, pursuant to an alleged stock
option agreement, and otherwise. He alleges that he is entitled to damages, in
lieu of the referenced stock, of approximately $370. He also alleges that he
is entitled to damages of $16, which he claims to be owed by virtue of LFA's
breach of an employment agreement under which LFA allegedly promised to pay him
$4 per month salary for four months in
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 15
<PAGE> 16
LITTLEFIELD, ADAMS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1993, but failed to do so. In an apparently separate claim, he alleges what
appears to be a claim for compensatory damages of not less than $600.
Atkisson's complaint seeks judgment of $1,000.
The Company answered and filed a counterclaim on December 22, 1995. The
Company denies Atkisson's allegations against it, denies that it is indebted to
Atkisson in any amount and contends that it is entitled to recovery against
Atkisson on its counterclaims. In its counterclaim, the Company asserts causes
of action for breach of fiduciary duty, negligence, fraud, conspiracy and
violation of the Texas Deceptive Trade Practices Act.
Based on the opinion of the Company's General Counsel that the Company has
factual and legal defenses to the plaintiff's claims against it, the Company
does not expect the outcome of this litigation will have a material adverse
effect on the Company's financial position or results of operations.
Littlefield, Adams & Co. v. Midlantic Bank, N.A.
On October 17, 1995, the Company commenced an action against Midlantic
National Bank, N.A., in the District Court, 131st Judicial District, Bexar
County, Texas. The Company alleged that Midlantic, acting as transfer agent
for LFA, breached its contract and common law duties by facilitating the
wrongful transfer of shares of common stock, and in connection with a scheme
concocted by LFA's former chief executive officer, Curtis Younts, Jr., to steal
and convert shares of LFA's common stock which were legally and/or beneficially
owned by LFA.
On December 15, 1995, Midlantic Bank counterclaimed on grounds that LFA's
action was brought in bad faith and for purposes of harassment. Midlantic
sought unspecified damages, including attorneys fees and costs incurred in
defending the action, and damages under the Texas Deceptive Trade Practices
Act. The Company denied Midlantic's allegations.
The Company and Midlantic Bank reached an agreement to settle their
claims, pursuant to which the action was dismissed in August 1996. The terms
of the settlement are subject to a confidentiality agreement. In connection
with the settlement, the Company recorded other income of $325, net of
associated legal fees, in the 1996 third quarter.
Jerrold Luloff v Littlefield, Adams & Company, et al.-
In May 1996, the Company's former President, Co-CEO and director filed a
lawsuit against the Company and certain of its current officers and directors
in The Court of Common Pleas of Franklin County, Ohio. The plaintiff sought
combined damages of $284, plus punitive damages and attorney's fees, based on
an alleged breach by the Company of a purported severance agreement related to
the plaintiff's termination/resignation as an officer, employee and director
of the Company.
The Company answered and filed a counterclaim on June 28, 1996. In its
counterclaim, the Company asserted causes of action for breach of fiduciary
duty, mismanagement and waste, conversion and defalcation, and for judgment
declaring that an alleged agreement under which Luloff claimed rights and
benefits created no such rights and entitled him to no such benefits. The
Company denied the plaintiff's allegations against it, and contended that it
was entitled to recover against Luloff on its counterclaim.
In September 1996, a settlement was reached, whereunder the Company agreed
to pay Luloff a total of $36 over two years for his release of the rights to
23,044 shares of stock which he had earned under the agreement pursuant to
which the Company acquired Sports Imprints, Inc. in 1993.
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 16
<PAGE> 17
LITTLEFIELD, ADAMS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 13: EXTRAORDINARY ITEM
- -------------------------------
In July 1996, an order was entered by a court relieving the Company of
$109 of liability for the settlement of the creditors' debt. A net gain of $94
from the extinguishment of debt, net of associated legal costs and income
taxes is being reported in the third quarter as an extraordinary item.
<TABLE>
<S> <C>
Extinguishment of debt $109
Associated legal cost (6)
----
103
Income taxes (9)
----
Net extraordinary gain $ 94
====
</TABLE>
NOTE 14: SUBSEQUENT EVENTS
- ------------------------------
A. In October 1996, the Company expanded its existing license with
PepsiCo, Inc. to include boxer shorts and hats.
B. In October 1996, the Company entered into a license agreement with the
H.J. Heinz Company for the Heinz trademarks and tradenames and which covers
T-shirts, sweatshirts, and boxer shorts. The agreement will expire on October
14, 1998.
C. In October 1996, the Company entered into license agreements with the
Miller Brewing Company for Miller Beer, Leinenkugel's Beer and Southpaw Beer
properties. The licenses include T-shirts, sweatshirts and boxer shorts. The
Miller license expires on December 31, 1998, and the Leinenkugel's and Southpaw
licenses expire on August 7, 1998.
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 17
<PAGE> 18
LITTLEFIELD, ADAMS, & COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Net product sales decreased from $3,412,000 in the third quarter of 1995
to $2,223,000 in the third quarter of 1996, a decrease of 35%. Net sales for
the first three quarters of 1996 were $8,644,000 compared to $12,686,000 for
the first three quarters of 1995. The reductions in sales were attributable
primarily to a slowdown in Harley-Davidson sales, and to the closing of
Collegiate Pacific (whose sales were 12% of the consolidated sales for the
first nine months of 1995). Sales of Harley-Davidson licensed products for the
first nine months decreased from $11,062,000 in 1995 to $7,535,000 in 1996.
Sales of the Company's new Pepsi and Mountain Dew product lines did not
commence until late in the second quarter and constituted 10% of 1996
year-to-date sales.
For the third quarter of 1995 and 1996, other revenues decreased from
$53,000 to $1,000 due to the settlement and termination in the 1996 second
quarter of a sub-lease agreement from which the company had received monthly
revenue. At this time, the Company does not expect to receive any material
amounts of other revenue during the remainder of 1996.
Gross profit margin, as a percentage of sales, for the third quarter
decreased from 25% in 1995 to 22% in 1996, and year to date remained constant
at 31% compared to last year. Gross profit margin in the third quarter
declined because of lower sales levels and selling some products below normal
prices. Selling and administrative expenses were reduced from approximately
$1,419,000 in the third quarter of 1995, to $628,000 in the third quarter of
1996, a decrease of 56%. Year to date selling and administrative expenses were
$2,253,000 and $4,638,000 for 1996 and 1995, respectively. The decrease was
attributable to the closing of Collegiate Pacific and a reduction in royalties
and overhead. Professional fees for the quarter ended September 30, 1996,
compared to third quarter of last year, declined from $167,000 to $90,000.
Professional fees for the nine months ended September 30, 1996, amounted to
$356,000, compared to $701,000 for the same period last year. Loss from
operations, as a percentage of sales, for the third quarter was (7)% and (15)%
for 1996 and 1995, respectively. For the nine months ended September 30,
income from operations, as a percentage of sales, was 6% for 1996, and the
loss from operations was (4)% for 1995.
The above increases in income from operations for the first nine months of
1996 were attributable to reductions in salary expense, professional fees,
royalties and bad debt expense, and the closing of Collegiate Pacific in
Roanoke, Virginia.
The Company has been largely dependent on sales of Harley-Davidson
licensed products to generate cash flow from operations and provide funds to
meet the Company's obligations as they become due. The Company's
Harley-Davidson license agreement will expire on December 31, 1996, and will
not be renewed. Sales of Harley-Davidson licensed products accounted for 93%
of net product sales for the quarter ended September 30, 1996. Sales of Pepsi
and Mountain Dew licensed products, which commenced late in the second quarter,
accounted for 4% of net product sales for the quarter ended September 30, 1996.
Management believes that the Company's late-season 1996 introduction of its
new Pepsi and Mountain Dew licensed products limited sales of those products
during 1996 because several of the Company's customers had already made
substantial purchase commitments prior to introduction of the lines. Going
into 1997, the Company expects to be able to make its Pepsi and Mountain Dew
product lines available to its customers on a timely basis, although there can
be no assurance that sales of these products will, in fact, increase.
Management anticipates that licenses acquired by the Company during 1996,
together with its new boxer short product lines, will have the potential to
significantly decrease the Company's dependence on sales of Harley-Davidson
licensed products. However, there can be no assurance that this will be
achieved. The Company is also pursuing other new license opportunities to
further decrease that dependence. If, however, the Company cannot generate
sufficient sales of licensed products other than Harley-Davidson after the
termination of the Harley-Davidson license on December 31, 1996, the Company
may not be able to continue as a going concern beyond 1997. The accompanying
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 18
<PAGE> 19
LITTLEFIELD, ADAMS, & COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
consolidated financial statements have been prepared assuming the Company will
continue as a going concern which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. (Note 3).
The Company is also continuing its efforts to further reduce its costs of
operations during the current year. During 1995, the Company closed its
Collegiate Pacific Division in Roanoke, Virginia, which incurred an operating
loss of $495,000 for the year ended December 31, 1995. This loss will be
non-recurring for 1996 and beyond. Closure of that division eliminates the
negative operating cash flow associated with those operations. The sale of
various Collegiate Pacific assets generated $668,000 during 1996, which was
used to reduce debt. The Company closed its Sturgeon Bay, Wisconsin office in
August 1996, and consolidated those operations in Huber Heights, Ohio. The
Company believes that the consolidation of its operations in Ohio will, over
time, result in significant cost savings. Management believes that in spite of
lower sales levels in 1996, compared to 1995, income from operations will
increase from 1995 due to reductions in certain expenses. (Note 3).
From December 31, 1995 to September 30, 1996, management's efforts to
reduce inventory by controlling purchases resulted in a decrease in net
inventories of $651,000. From September 30, 1995 to September 30, 1996, net
inventories decreased by $1,003,000. The annualized inventory turnover rate,
which decreased, primarily due to the reduction in sales, was approximately 3
turns per year as of September 30, 1996, compared to 3.2 turns per year as of
September 30, 1995.
The Company records estimated local, state and federal income taxes,
including federal alternative minimum taxes. For the three and nine months
ended September 30, 1996, the Company is reporting a net income tax benefit
before the extraordinary gain of $41,000 and $19,000, respectively. The
extraordinary gain reported for the same period is net of $9,000 of estimated
income tax expense. The net tax benefit was due to the reversal of excess
prior period accruals of $61,000 based on the refunds and credits requested on
the Company's 1995 income tax returns. A summary of income taxes reported for
1996 is as follows:
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1996 1996
-------------- -------------
<S> <C> <C>
Estimated combined current year income tax
expense before extraordinary gain $ 20,000 $ 42,000
Refunds and credits reversed (61,000) (61,000)
------------- -------------
Net income tax benefit before extraordinary gain (41,000) (19,000)
Estimated income tax on extraordinary gain 9,000 9,000
------------- -------------
Total 1996 estimated income tax effect $ (32,000) $ (10,000)
============= =============
</TABLE>
Included in other income for the third quarter of 1996 are net gains from
the sale of assets and litigation settlements of $214,000 and $425,000,
respectively. The gain on the sale of assets primarily relates to the sale of
the Company's Roanoke, Virginia property as described in Notes 3 and 6. The
net gain of $425,000 from litigation settlements relates to the Derivative and
Midlantic actions. (Note 12). In the third quarter of 1995 there was other
income of $366,000, which related to the net gain from the settlement of
litigation against the Company's former attorneys.
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 19
<PAGE> 20
LITTLEFIELD, ADAMS, & COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In July 1996, an order was entered by a court relieving the Company of
$109,000 of liability for the settlement of the creditors' debt. A net gain of
$94,000 from the extinguishment of debt, net of associated legal costs and
income taxes is being reported in the third quarter as an extraordinary item.
(Note 13).
LIQUIDITY AND CAPITAL SOURCES
- -----------------------------
At December 31, 1995, the Company had an accounts receivable financing
agreement with Merchant Factors Corp., which subsequently expired January 31,
1996, and which allowed the Company to borrow up to 75% of net qualified
accounts receivable. The balance as of December 31, 1995, was approximately
$1,269,000, and has been repaid as the receivables were collected. The
agreement bore interest at prime plus 3.5%; however the Company did not pay any
additional financing fees. The Company's accounts receivable were the
collateral for this loan, which was also guaranteed by Littlefield, Adams &
Company. (Note 7).
Effective February 1, 1996, the Company entered into a new discount
factoring agreement with Merchant Factors Corp., which expires in August 1997.
All of the Company's accounts receivable which Merchant Factors Corp. approves
for credit, excluding Wal-Mart, are being factored at the rate of 1 1/8%.
Accounts that are credit approved by Merchant Factors are at its risk, which
minimizes the Company's credit risk. The Company, at its option, can factor
at a rate of 1 1/8%, with recourse, accounts that Merchant Factors Corp. does
not approve for credit. During 1996, the amount factored with recourse has
been insignificant. The servicing of all factored accounts is done by Merchant
Factors. Under the factoring agreement, the Company may borrow up to 75% of
the net accounts receivable at an annual interest rate of prime plus 2.5%. At
September 30, 1996, the Company had factored receivables amounting to $991,000,
most of which had been approved for credit by Merchant Factors. (Note 7).
In addition, the Company has an accounts receivable financing arrangement
with Merchant Factors Corp. covering only its accounts receivable from
Wal-Mart. This agreement allows the Company to borrow up to 75% of its net
receivables from Wal-Mart at an annual interest rate of prime plus 5%. The
Company does not pay any factoring fees for the financing of the Wal-Mart
accounts receivable. (Note 7).
In addition, Merchant Factors Corp. has periodically issued purchase
guarantees and/or letters of credit against this line of credit. At September
30, 1996, outstanding purchase guarantees and/or letters of credit issued by
Merchant Factors Corp. amounted to approximately $53,000. At September 30,
1996 the remaining availability from both agreements with Merchant Factors
Corp. was approximately $737,000. (Note 7).
The Company is currently in discussions with the Bank of Floyd to convert
the existing line of credit to a term loan to be collateralized by the
Company's fixed assets. (Notes 7 and 8).
For the nine months ended September 30, 1996, cash provided by operating
activities was $173,000, while $572,000 was provided by investing activities.
The Company borrowed a total of $7,419,000 for the nine months ended September
30, 1996, repaid $8,341,000, and used $36,000 to purchase rights to stock,
resulting in net cash of $958,000 being used in financing activities. During
1996, there was a net decrease in cash of $213,000. At September 30, 1996, the
Company had working capital of $1,190,000 compared to a deficit of $295,000 at
December 31, 1995.
Management believes that in spite of lower sales levels in 1996, compared
to 1995, income from operations will increase from 1995 due to reductions in
certain expenses. This, combined with anticipated 1997 sales of newly acquired
licensed products, will, in management's estimation, generate sufficient cash
flow from operations during 1996 and 1997 to sustain the Company at least
through 1997, and support the Company's effort to achieve sufficient sales
revenue from new licenses to offset the reduction in revenue resulting from the
expiration of the Harley-Davidson license on December 31, 1996. There can be
no assurance, however, that the anticipated 1997
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 20
<PAGE> 21
LITTLEFIELD, ADAMS, & COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
sales will be achieved, or that, if it is able to do so, that the revenue from
such sales will be sufficient to sustain the Company for any particular period.
(Note 3).
The Company manufactures and sells imprinted apparel primarily to national
retail discount chains. The license agreement with Harley-Davidson, which
terminates on December 31, 1996, has limited the number of customers to which
the Company could sell Harley-Davidson product. Because Harley-Davidson has
accounted for such a large proportion of the Company's revenues, the Company,
generally, did not pursue customers who were not approved by Harley-Davidson.
The Company's new licenses, including Pepsi and Mountain Dew, do not limit the
customers to which the product can be sold. Accordingly, the Company plans to
expand its sales force and to aggressively seek new customer accounts. (Note
4).
The Company believes that cash generated from operations and borrowings
under this factoring and line of credit agreement with Merchant Factors Corp.
will be adequate to fund working capital requirements, debt service payments
and planned capital expenditures through 1997. The Company expects to renew
its agreement with Merchant Factors Corp. when the current agreement expires in
August of 1997, although there can be no assurance that the Company will be
able to do so. The availability of cash flow from operations subsequent to
December 31, 1996 is dependent on the ability of the Company to acquire and
sell licensed products other than Harley-Davidson through 1997. As discussed
above, the success of the Company's new licensed products is an integral part
of that effort, although there can be no assurance that such licensed products
will be successful. (Note 3).
Sales and bookings to date in the current fourth quarter are in excess of
$4,000,000.
For a discussion of subsequent events, refer to Note 14.
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 21
<PAGE> 22
LITTLEFIELD, ADAMS & COMPANY
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS:
- ---------------------------
The Company is involved in various legal proceedings.
Information required by this Item is included in Note 12 to the
interim Consolidated Financial Statements, which information is
incorporated herein by reference.
Item 5. OTHER INFORMATION:
- ---------------------------
The Board of Directors elected Martin Shifrin as an
independent outside director on August 28, 1996, to serve until the
next annual meeting of shareholders. With the election of Mr.
Shifrin, the Company currently has four directors, including two
independent outside directors.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits required by Item 601 of Regulation S-K
27. Financial Data Schedule.
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 22
<PAGE> 23
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.
LITTLEFIELD, ADAMS & COMPANY
-----------------------------
(Registrant)
Date: November 13, 1996 /s/ David M. Simmonds /s/
-----------------------------
David M. Simmonds
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
General Counsel
Date: November 13, 1996 /s/ Stanley I. Halbreich /s/
-----------------------------
Stanley I. Halbreich
Chief Financial Officer, Treasurer
(Principal Financial & Accounting Officer)
Littlefield, Adams & Company, September 30, 1996 Form 10-Q; Page 23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 28
<SECURITIES> 0
<RECEIVABLES> 1,984
<ALLOWANCES> 90
<INVENTORY> 2,681
<CURRENT-ASSETS> 4,988
<PP&E> 1,513
<DEPRECIATION> 938
<TOTAL-ASSETS> 6,312
<CURRENT-LIABILITIES> 3,798
<BONDS> 2
0
0
<COMMON> 2,296
<OTHER-SE> (1,230)
<TOTAL-LIABILITY-AND-EQUITY> 6,312
<SALES> 8,644
<TOTAL-REVENUES> 8,775
<CGS> 6,006
<TOTAL-COSTS> 6,006
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 187
<INCOME-PRETAX> 975
<INCOME-TAX> (19)
<INCOME-CONTINUING> 994
<DISCONTINUED> 0
<EXTRAORDINARY> 94
<CHANGES> 0
<NET-INCOME> 1,088
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
<FN>
<F1>Bad debt expense of (147) is included in the 2,253 reported as Selling and
Administrative expenses.
</FN>
</TABLE>
