<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 June 30, 1999
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, OH 45424
- --------------------------------------------------------------------------------
(Address of principal executive offices, and Zip Code)
Registrant's telephone number, including area code (937) 236-0660
- --------------------------------------------------------------------------------
(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 August 16, 1999
----- ------------------------------
Common Stock, par value 3,342,719 shares
$1.00 per share
As Filed with the SEC on August 13, 1999
<PAGE> 2
LITTLEFIELD, ADAMS & COMPANY
INDEX
<TABLE>
<CAPTION>
Page No.
<S><C>
Part I. Financial Information
Item 1. Condensed Financial Statements (Unaudited)
Condensed Balance Sheets -
June 30, 1999, and December 31, 1998 3
Condensed Statements of Operations -
for the three and six months ended
June 30, 1999, and 1998 4
Condensed Statements of Cash Flows -
for the six months ended
June 30, 1999, and 1998 5
Notes to Condensed 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 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 3. Defaults Upon Senior Securities 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 2
<PAGE> 3
LITTLEFIELD, ADAMS & COMPANY
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 107 $ 107
Accounts receivable:
Trade, net of allowances of $345 at 6/30/99
and $352 at 12/31/98 2,006 5,765
Due from factor, net of allowances of $24 at 6/30/99
and $208 at 12/31/98 341 2,050
Other 65 33
Inventories 2,153 3,157
Prepaid expenses and other 437 399
---------- ----------
Total current assets 5,109 11,511
PROPERTY, PLANT AND EQUIPMENT, NET 543 486
OTHER ASSETS 18 12
---------- ----------
TOTAL ASSETS $ 5,670 $ 12,009
========== ==========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Notes payable $ -- $ 41
Factor borrowings 20 1,327
Current portion of long-term debt 136 507
Convertible subordinated debentures 805 1,200
Accounts payable 596 1,653
Accrued expenses 532 1,235
---------- ----------
Total current liabilities 2,089 5,963
LONG-TERM DEBT, LESS CURRENT PORTION (Note 1) 472 12
LONG-TERM REVOLVING LINE OF CREDIT (Note 1) 1,221 3,125
DEFERRED COMPENSATION 43 42
---------- ----------
Total liabilities 3,825 9,142
---------- ----------
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' INVESTMENT:
Common stock, $1.00 par; authorized 25,000,000;
issued 3,335,883 for 1999 and 2,808,221 for 1998;
outstanding 3,317,719 for 1999 and 2,790,057 for 1998 3,336 2,808
Capital in excess of par value 6,202 6,325
Accumulated deficit (7,580) (6,153)
---------- ----------
1,958 2,980
Treasury stock, at cost - shares of 18,164 for 1999 and 1998 (113) (113)
---------- ----------
1,845 2,867
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 5,670 12,009
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 3
<PAGE> 4
LITTLEFIELD, ADAMS & COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
1999 1998 1999 1998
----------------------------------- ---------------------------------
(DOLLARS IN THOUSANDS, (DOLLARS IN THOUSANDS,
Except per share amounts) Except per share amounts)
<S> <C> <C> <C> <C>
Net product sales $ 3,006 $ 2,908 $ 5,740 $ 3,324
Cost of products sold 3,244 2,025 5,284 2,452
---------- ----------- ------------ ----------
Gross profit (loss) (238) 883 456 872
---------- ----------- ------------ ----------
Operating expenses:
Selling expenses 531 432 1,004 575
General and administrative expenses 356 263 694 465
---------- ----------- ------------ ----------
Total operating expenses 887 695 1,698 1,040
---------- ----------- ------------ ----------
Income (loss) from operations (1,125) 188 (1,242) (168)
Other expense:
Interest (80) (41) (185) (58)
---------- ----------- ------------ ----------
Income (loss) before income taxes (1,205) 147 (1,427) (226)
Provision for income taxes -- -- -- --
---------- ----------- ------------ ----------
Net income (loss) $ (1,205) $ 147 $ (1,427) $ (226)
========== =========== ============ ==========
Weighted average common shares for:
Basic earnings per share 3,139,425 2,781,815 2,968,621 2,780,941
Diluted earnings per share 3,139,425 4,255,873 2,968,621 2,780,941
Basic earnings per common share:
Net earnings (loss) per share $ (0.38) $ 0.05 $ (0.48) $ (0.08)
========== =========== =========== =========
Diluted earnings per common share:
Net earnings (loss) per share $ (0.38) $ 0.04 $ (0.48) $ (0.08)
========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 4
<PAGE> 5
LITTLEFIELD, ADAMS & COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended June 30,
1999 1998
------------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,427) $ (226)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 73 59
Stock options granted for contractor services 5 --
Changes in operating assets and liabilities:
Accounts and other receivables, net 5,430 (2,424)
Inventories, net 1,004 (504)
Prepaid expenses and other (38) (66)
Accounts payable (1,057) 1,003
Accrued expenses and other (703) 71
----------- ----------
Net cash provided by (used in) operating activities 3,287 (2,087)
----------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (130) (129)
Other 1 (2)
----------- ----------
Net cash used in investing activities (129) (131)
----------- ----------
Cash flows from financing activities:
Proceeds from (payments of) line of credit
and factor borrowings, net (1,307) 1,042
Payments of long-term line of credit, net (1,904) --
Proceeds from bank and other notes payable 135 280
Payments of bank and other notes payable (87) (307)
Proceeds from director's stock transaction 4 --
Proceeds from sale of convertible subordinated debentures -- 1,200
Proceeds from sale of common stock 1 12
----------- ----------
Net cash provided by (used in) financing activities (3,158) 2,227
----------- ----------
Net increase in cash -- 9
Cash at beginning of period 107 57
----------- ----------
Cash at end of period $ 107 $ 66
=========== ==========
Supplemental disclosure of cash flows information:
Cash paid during the period for interest $ 179 $ 42
Cash paid during the period for income taxes $ 41 $ --
Supplemental disclosure of non-cash transactions:
Exercise of convertible subordinated debentures $ 395 $ --
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 5
<PAGE> 6
LITTLEFIELD, ADAMS, & COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Littlefield, Adams & Company (the "Company," "Littlefield," and the
"Registrant").
The condensed balance sheet at June 30, 1999, the condensed statements
of operations for the three and six months ended June 30, 1999 and 1998, and the
condensed statements of cash flows for the six months ended June 30, 1999 and
1998, have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting of normal recurring adjustments and
adjustments to reserves, necessary to fairly present the 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 condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Certain prior period amounts have been reclassified for comparative
purposes. The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
The Company is currently in default under the Loan and Security
Agreement dated December 10, 1998 between the Company and The Provident Bank
("Provident") and under the Business Loan Agreement dated as of May 1, 1999
between the Company and the Bank of Floyd ("Floyd") (the "Provident Loan
Agreement" and "Floyd Loan Agreement", respectively).
The Provident Loan Agreement contains certain financial covenants
including, among others, a requirement that the Company maintain a specified
minimum consolidated tangible net worth. As of June 30, 1999, the Company was
not in compliance with such minimum tangible net worth requirement. Such
noncompliance constitutes an event of Default under the Provident Loan
Agreement. In addition, under cross default provisions in the Floyd Loan
Agreement, the Event of Default under the Provident Agreement also constitutes
an Event of Default under the Floyd Loan Agreement.
The Company has commenced discussions with Provident in order to obtain
a waiver of the breached financial covenant and/or amend the financial covenants
in the Provident Loan Agreement: however, no assurances can be made as to the
outcome of these discussions. If no satisfactory agreement is concluded with
Provident, then as a result of such Event of Default, Provident could at any
time exercise its remedies under the Provident Loan Agreement. Such remedies
could include demanding the immediate repayment of all amounts owed by the
Company to Provident. In addition, as a result of the cross default provisions
in the Floyd Loan Agreement, Floyd also can at any time declare all amounts owed
by the Company to Floyd to be immediately due and payable. These lenders would
also have the right to commence legal action against the Company for the
repayment of the entire debts owed to them, plus certain other amounts and, if
unpaid, to proceed against the Company's assets. The Company does not believe
that it would be in a position to repay either of these loans should the lenders
demand immediate payment, and such an eventuality would likely prevent the
Company from continuing as a going concern. For the purposes of presentation,
the amounts of long-term revolving line of credit and long-term debt related to
the Provident Loan Agreement and The Floyd Loan Agreement, which could, at the
option of the lenders, become immediately due and payable, are classified as
long-term.
This report contains projections and forward-looking statements that
are based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this report, the words
"anticipate," "estimate," "expect," "predict," "project," "believe," and similar
expressions are intended to identify forward
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 6
<PAGE> 7
LITTLEFIELD, ADAMS, & COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
looking statements. The forward-looking statements were prepared on the basis of
assumptions which relate, among other things, to the market acceptance of the
Company's products, including the Company's licensed and proprietary products;
the cost of producing and marketing the Company's products; the prices at which
the Company's products may be sold; and the Company's market share for its
products. Such assumptions may prove not to be accurate or appropriate, and even
if such assumptions do prove to be accurate and appropriate, the actual results
of the Company's operations in the future may vary widely due to increased
competition in the industry, an increase in interest rates, general economic
conditions and other risks and uncertainties, including without limitation risks
associated with having a high percentage of the Company's revenues being derived
from sales related to one license. Accordingly, the actual results of the
Company's operations in the future may vary widely from the forward-looking
statements included herein.
NOTE 2: INVENTORIES
Inventories are stated at the 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:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ----------
<S> <C> <C>
Raw materials $ 2,394 $ 2,735
Finished goods 709 622
Allowance for inventory excess or obsolescence (950) (200)
-------- ---------
$ 2,153 $ 3,157
======== =========
</TABLE>
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 7
<PAGE> 8
LITTLEFIELD, ADAMS, & COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3: DEBT
Long-term debt balances are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Note payable to a bank, interest at 8.75%, payable
in 60 monthly payments,
collateralized by machinery and equipment
and furniture and fixtures $ 451 $ --
Note payable to a bank, principal callable on demand,
interest at 9.50%, payable monthly at 0.25%
of the outstanding principal balance plus
accrued interest, collateralized by
machinery and equipment and
furniture and fixtures -- 442
Note payable to a bank, principal callable on demand,
due September 1, 1999, interest at 9.50%, payable
monthly, collateralized by machinery and equipment
and furniture and fixtures -- 40
Other 157 37
--------- ---------
Total debt 608 519
Less - current portion (136) (507)
---------- ---------
$ 472 $ 12
========= =========
</TABLE>
The Company signed a promissory note, effective May 1, 1999 in the
amount of $464 evidencing its outstanding obligations to the Bank of Floyd. The
note is payable in sixty monthly payments and bears an interest rate of prime
plus 1%, adjustable annually. The term note is collateralized by machinery and
equipment and furniture and fixtures. As of June 30, 1999, the Company is in
default of the Bank of Floyd Loan Agreement as a result of a cross default
provision. For the purposes of presentation, the amount of long-term debt
related to the The Floyd Agreement, which could, at the option of the lender,
become immediately due and payable, is classified as long-term.
NOTE 4: CONVERTIBLE SUBORDINATED DEBENTURES
On April 24, 1998, Littlefield completed a private offering of $1.2
million in principal amount of 7% Convertible Subordinated Debentures (the
"Debentures"). The participants in the private offering included officers
and directors of the Company and several accredited investors. General terms of
the Debentures include the right to convert, after a period of one year, into
shares of Littlefield common stock at a rate of one and one-third shares of
stock for each dollar of principal amount of the Debentures. Any unconverted
Debentures are payable on demand after eighteen months. Interest is payable
semi-annually on the last day of March and September. The Company, with sixty
days notice, may call the Debentures for a premium after one year. If all of the
Debentures were converted into stock, the additional 1,600,000 shares of common
stock would have represented an increase of 58% in the number of shares
outstanding on the date the
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 8
<PAGE> 9
LITTLEFIELD, ADAMS, & COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Debentures were issued. During the sixty days prior to April 24, 1998,
Littlefield's common stock traded for as low as $0.21 per share and as high
as $2.00 per share as reported on the NASD's Electronic Bulletin Board.
The conversion provision of the Debentures became effective on April
24, 1999. From April 24, 1999, to June 30, 1999, approximately $395 in principal
amount was converted into 526,662 shares of Littlefield common stock. The
remaining liability, as of June 30, 1999, is $805. On June 30, 1999,
Littlefield's common stock traded at a high of $2.1875 per share and a low of
$1.875 per share.
NOTE 5: EARNINGS PER SHARE
Diluted earnings per share have been calculated as follows:
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
---------------------------- -------------------------------
1999(a)(b) 1998 1999(a)(b) 1998(a)(b)
-------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Earnings:
Net income (loss) applicable to
common stock $ (1,205) $ 147 $ (1,427) $ (226)
Net effect of assumed conversion:
Interest applicable to debentures -- 16 -- --
----------- ----------- ----------- -----------
Net income (loss) for diluted earnings
per share $ (1,205) $ 163 $ (1,427) $ (226)
=========== =========== =========== ===========
Shares:
Weighted average number of shares
of common stock outstanding 3,139,425 2,781,815 2,968,621 2,780,941
Weighted average impact of
potential common shares
applicable to:
Stock options -- 278,453 -- --
Convertible subordinated
debentures -- 1,195,605 -- --
----------- ----------- ----------- -----------
Weighted average shares used for
computation of diluted earnings per share 3,139,425 4,255,873 2,968,621 2,780,941
=========== =========== =========== ===========
Diluted earnings (loss) per common share $ (0.38) $ .04 $ (0.48) $ (0.08)
=========== =========== =========== ===========
</TABLE>
(A) The stock options have an antidilutive effect on net loss per share and
are, therefore, excluded from the computation of diluted earnings per
share.
(B) The convertible subordinated debentures have an antidilutive effect on net
loss per share and are, therefore, excluded from the computation of diluted
earnings per share.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 9
<PAGE> 10
LITTLEFIELD, ADAMS, & COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Certain securities that could potentially dilute basic earnings per
share in the future that were not included in the computation of diluted
earnings per share, because to do so would have been antidilutive, were as
follows:
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Stock options:
Range of exercise prices
$1.00 to $6.88 751,538 480,877 754,783 759,166
Convertible subordinated debentures 1,244,911 -- 1,421,468 601,106
------------ ----------- ----------- -----------
Total 1,538,852 480,877 1,766,087 1,360,272
=========== =========== =========== ===========
</TABLE>
NOTE 6: COMMON STOCK
As of June 30, 1999, the Company had issued a total of 3,335,883 shares
of its common stock. Treasury stock consisted of 18,164 shares, making a total
of 3,317,719 shares outstanding.
The Company's Common Stock trades on the NASD's OTC Electronic Bulletin
Board under the symbol "FUNW." The symbol reflects FUNWEAR, a registered
trademark used by the Company.
NOTE 7: COMPREHENSIVE INCOME
In July 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
The objective of SFAS 130 is to report a measure of all changes in the equity of
an enterprise that result from transactions and other economic events of the
period other than transactions with shareholders. Comprehensive income is the
total of net income and all other non-shareholder changes in equity. Effective
January 1, 1998, the Company adopted SFAS 130. The Company has no items of other
comprehensive income in any period presented in these condensed financial
statements.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 10
<PAGE> 11
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides information which management believes
is relevant to assessing and understanding the Registrant's results of
operations and financial condition. This discussion should be read in
conjunction with the condensed financial statements included in this Quarterly
Report on Form 10-Q and their accompanying notes, and also in conjunction with
the Registrant's 1998 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items related to the Company's results of operations as a percentage of net
product sales.
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net product sales (in thousands) $ 3,006 $ 2,908 $ 5,740 $ 3,324
100.0% 100.0% 100.0% 100.0%
Cost of products sold 107.9 69.6 92.1 73.8
----------- ---------- --------- ----------
Gross profit (loss) (7.9) 30.4 7.9 26.2
----------- ---------- --------- ----------
Operational expenses:
Selling expenses 17.7 14.9 17.5 17.3
General and administrative expenses 11.8 9.0 12.1 14.0
---------- ---------- --------- ----------
Total operating expenses 29.5 23.9 29.6 31.3
---------- ---------- --------- ----------
Income (loss) from operations (37.4)% 6.5% (21.7)% (5.1)%
========== ========== ========= ==========
</TABLE>
FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998
Net Product Sales
Second quarter net product sales for 1999 were $3,006,000 an increase
of $98,000 (or 3%) compared to the 1998 second quarter.
During the second quarter of 1999, World Championship Wrestling, Inc.,
a Time Warner Company, ("WCW") licensed products accounted for approximately 84%
of net product sales, The Simpsons and King of the Hill (both owned by Twentieth
Century Fox) licensed products contributed approximately 7% of net product sales
and PepsiCo licensed products added 1% of net product sales. The Company's
proprietary Stix-N-Stones products accounted for approximately 4% of net product
sales in the 1999 second quarter. Approximately 4% of net product sales in the
1999 second quarter were generated from the sale of generic screen printed
products.
In the 1998 second quarter, sales of WCW licensed products generated
71% of net product sales, while shipments of the Simpsons and King of the Hill
licensed products supplied 29% of net product sales.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 11
<PAGE> 12
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's average selling price for goods sold in the 1999 second
quarter was 11% lower than the average selling price in the second quarter of
1998. Contributing to the lower average selling price in the second quarter of
1999 was a higher percentage of youth goods approximately 40% of net sales, as
compared to a more typical historical range for the Company of approximately 24%
of the lower priced generic goods. Additionally, the Company recognized a
downward trend in the average selling price of WCW licensed products.
Sales for the three months ended June 30, 1999 are comparatively flat
as compared to the similar period in 1998; however, because of a substantial
decline in WCW licensed product sales, the Company expects sales for the whole
of 1999 to be substantially below those of the prior year. Sales during the
month of July 1999 were approximately $68,000. As of August 16, 1999, the
Company had bookings for shipments during August and September of 1999 which
totaled approximately $198,000. This compares to sales of approximately
$2,908,000 in July 1998 and August and September bookings (as of July 31, 1998)
of approximately $7,000,000. Not all "bookings" constitute contractual
commitments, and may therefore be subject to cancellation or modification by
customers.
In connection with the Company's WCW licensed, the Company participated
in special promotions with WCW, including live appearances by professional
wrestlers. Additional promotions involving live appearances by professional
wrestlers are scheduled during the remainder of 1999.
Approximately 81% of the goods shipped during the 1999 second quarter
were produced by a third-party screen printing contractor. During the 1998
second quarter, approximately 67% of goods shipped were produced by a
third-party screen printing contractor. The Company has commenced an analysis of
the comparative costs of production between it and those of the third-party
contractor that will be completed in the third quarter, with the possibility
that the Company's production capability could be severely curtailed or
eliminated.
Cost of Products Sold
Gross profit margin, as a percentage of net sales, was (7.9)% in the
second quarter of 1999 as compared to 30.4% in the second quarter of 1998.
Impacting the gross margin in the second quarter of 1999, was the recording of
additional excess or obsolescence inventory charges. Management deemed such
charges prudent as the Company plans to lower inventory levels, especially the
level of raw materials (blank's) by year end 1999. Certain in-house production
expenses required to be included in the cost of products sold are more fixed in
nature, and do not necessarily increase or decrease proportionately with changes
in sales volume. Also reflected in the comparative gross margin decline is an
11% drop in the average selling price per unit. Negatively impacting the average
selling price per unit was the amount of youth goods sold during the second
quarter. Normal wholesale prices and gross profits on youth goods are
approximately 12% to 19% less than comparable adult goods.
Selling and Administrative Expenses
In the 1999 second quarter, selling expenses increased by $99,000 over
the 1998 second quarter primarily due to the increases in royalty and
promotional expenses. Expressed as a percentage of net sales, selling expenses
were 17.7% in the 1999 second quarter, compared to 14.9% in the 1998 second
quarter.
General and administrative expenses increased by $93,000 from the 1998
second quarter to the 1999 second quarter. The change reflects a general
increase in various administrative expenses. Expressed as a percentage of net
sales, general and administrative expenses were 11.8% in the 1999 second
quarter, compared to 9.0% in the 1998 second quarter.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 12
<PAGE> 13
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest Expense
Interest expense in the second quarter of 1999 increased by $39,000
due to increased borrowings resulting from the increase in sales volume, lower
gross profit margins and higher general and administrative expenses compared
with the second quarter of 1998. Interest expense on short-term debt fell
$18,000, while interest expense on long-term debt increased by $57,000 due to a
reduction in short-term debt and an increase in long-term debt and an increase
in the long-term revolving line of credit. The Company's long-term revolving
line of credit facility became effective December 10, 1998. Interest rates on
short-term debt experienced by the Company in the second quarters of 1999 and
1998 did not vary significantly.
FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998
Net Product Sales
Sales for the six months ended June 30, 1999 are comparatively ahead of
sales for the similar period in 1998; however, because of a substantial decline
in WCW licensed product sales, the Company expects sales revenues for the whole
of 1999 to be substantially below those of the prior year. Sales during the
month of July 1999 were approximately $68,000, compared to sales of
approximately $2,908,000 in July 1998. As of August 16, 1999, the Company had
bookings for shipments to be made during August and September 1999, which
totaled approximately $198,000, compared with August and September 1998 booking
(as of July 31, 1998), of approximately $7,000,000. Not all "bookings"
constitute contractual commitments, and may therefore be subject to
cancellation or modification by customers.
Net product sales for the six months ended June 30 were $5,740,000 in
1999 compared to $3,324,000 in 1998, an increase of 73%. The bulk of the
increase in net product sales is due to the addition of WCW licensed products
into the Company's revenue base. Sales of WCW licensed products commenced in
late April 1998, and therefore, did not fully impact net product sales in the
first half of 1998. Sales of WCW licensed products represented approximately 82%
of total net product sales for the first half of 1999 versus 62% in the first
half of 1998. Sales of WCW and Warner Brothers cross licensed products
contributed an additional 3% of net product sales in the first half of 1999.
In the 1999 first half, sales of the Simpsons and King of the Hill
(both owned by Twentieth Century Fox) licensed products accounted for 9% of net
sales. The Company's proprietary Stix-N-Stones products supplied 4% of net sales
and generic printed products furnished 2% of net sales.
In connection with the Company's WCW license of products, the Company
participated in special promotions with WCW, including live appearances by
professional wrestlers. Additional promotions involving live appearances by
professional wrestlers are scheduled during the remainder of 1999.
The Company's average selling price for goods sold in the 1999 first
half was 4% lower than in the same period in 1998.
Approximately 79% of the goods shipped during the first half of 1999
were produced by a third-party screen printing contractor. During the first half
of 1998, approximately 59% of the goods shipped were produced by a third-party
screen printing contractor. The Company has commenced an analysis of the
comparative cost of production between it and those of the third-party
contractor that will be completed in the third quarter, with the possibility
that the Company's production capability would be severely curtailed or
eliminated.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 13
<PAGE> 14
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cost of Products Sold
For the six months ended June 30, gross profit margin, as a percentage
of net sales, was 7.9% in 1999 versus 26.2% in 1998. Impacting the gross margin
in the second quarter of 1999, was the recording of additional excess or
obsolescence inventory charges. Management deemed such changes prudent as the
Company plans to lower inventory levels, especially the level of raw materials
(blanks), by year end 1999. Certain in-house production expenses required to be
included in the cost of products sold are more fixed in nature, and do not
necessarily increase or decrease proportionately with changes in sales volume.
Also reflected in the comparative gross margin decline is a 4% drop in the
average selling price per unit. Negatively impacting the average selling price
per unit was the amount of youth goods sold during the second half of 1999.
Normal wholesale prices and margins on youth goods are approximately 12% to 19%
less than comparable adult goods.
Selling and Administrative Expenses
In the 1999 first half, selling expenses increased by $429,000 over the
1998 first half primarily due to the increases in royalty and promotional
expenses. Expressed as a percentage of net sales, selling expenses were 17.5% in
the 1999 first half, compared to 17.3% in the 1998 first half.
General and administrative expenses increased by $229,000 from the
first six months of 1999, compared with the first six months of 1998. The change
reflects a general increase in various administrative expenses. Expressed as a
percentage of net sales, general and administrative expenses were 12.1% in the
1999 first half, compared to 14.0% in the 1998 first half.
Interest Expense
Interest expense in the first six months of 1999 increased by $127,000
compared to the first six months of 1998 due to increased borrowings resulting
from the increase in sales volume, lower gross profit margins and higher general
and administrative expenses compared with the first half of 1998. Interest
expense on short-term debt fell $22,000, while interest expense on long-term
debt increased by $149,000 due to a reduction in short-term debt and an increase
in long-term debt and an increase in the long-term revolving line of credit.
Interest rates on the short-term debt experienced by the Company in the first
half of 1999 and 1998 did not vary significantly. The Company's long-term
revolving line of credit facility became effective December 10, 1998. The
interest rate of 7% on the Debentures is considerably lower than the interest
rates experienced by the Company on short-term or long-term debt.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 14
<PAGE> 15
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Inventories
The balance of net inventories decreased $1,004,000, or approximately
32%, from December 31, 1998 to June 30, 1999. The reduction in inventory
reflects additional inventory reserves management deemed prudent to take in the
1999 second quarter due to the high carrying value of inventory. The amount of
additional reserves is $750,000. Included in the consideration of additional
reserves are inventories of approximately $2,500,000, at the facility of the
third-party contractor, that may be for the account of the Company, as asserted
by the third-party contractor. The annualized inventory turnover rate for the
six months ended June 30, 1999 was down to 1.4 turns per year compared to an
annualized rate of 4.3 turns per year for the six months ended June 30, 1998.
The lower turnover rate in 1999 is due to lower than planned sales in 1999 first
half, as well as a substantially low inventory balance in the first half of
1998.
Accounts Receivable
Net trade and factor receivables decreased from $7,815,000 at December
31, 1998 to $2,347,000 at June 30, 1999. The reduction in receivables is due to
the decrease in sales volume from the 1998 fourth quarter to the 1999 first
half, and the collection of outstanding receivables.
LIQUIDITY AND CAPITAL SOURCES
Littlefield signed a $10,000,000 Revolving Promissory Note (the "Note")
with The Provident Bank ("Provident") on December 10, 1998. The outstanding
principal balance is due and payable on December 10, 2000. Accrued interest is
payable monthly. The Note is secured by accounts receivable arising from sales
to Wal-Mart, Kmart, and Target stores, and inventories. The Note bears interest
at prime plus an applicable margin. The initial margin was 3%. The prime rate in
effect at June 30, 1999 and December 31, 1998 was 7.75%. The Note provides for
possible reductions in the interest rate charged, down to a rate as low as prime
plus 1%. To achieve such reductions, Littlefield must successfully meet
specified financial milestones. Effective March 1, 1999, the interest rate
charged was reduced to prime plus 2.5%. The Company can borrow amounts up to 80%
of the outstanding eligible receivables, plus 40% of eligible inventories (not
to exceed $750,000 in borrowings against inventory), plus a $100,000
compensating balance the Company is required to maintain at Provident. The total
amount outstanding at any time cannot exceed $10,000,000. Collection of payments
on eligible receivables are directed to a lock box at Provident. The servicing
of the covered accounts receivable is done by Littlefield.
The Loan and Security Agreement between the Company and Provident
contains certain financial maintenance covenants, including a requirement that
the Company maintain a specified minimum consolidated tangible net worth. As of
June 30, 1999, the Company was not in compliance with such minimum tangible net
worth requirement. Such noncompliance constitutes an Event of Default under the
Loan and Security Agreement with Provident. Under cross default provisions in
the Company's Business Loan Agreement with The Bank of Floyd ("Floyd") described
below, the Event of Default under the Provident Agreement also constitutes an
Event of Default under the Floyd Loan Agreement.
The Company has commenced discussions with Provident in order to obtain
a waiver of the breached financial covenant and/or amend the financial covenants
in the Provident Loan Agreements; however, no assurances can be made as to the
outcome of these discussions. If no satisfactory agreement is concluded with
Provident, then as a result of such Event of Default, Provident could at any
time exercise its remedies under the Company's existing loan agreement with
Provident. Such remedies could include demanding the immediate repayment of all
amounts owed by the Company to Provident (approximately $817,000 as of August
13, 1999). In addition, as a result of the cross default provisions in the Floyd
Loan Agreement, Floyd also can, at any time, declare all amounts owed by the
Company to
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 15
<PAGE> 16
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Floyd (approximately $451,000 as of August 13, 1999) to be immediately due and
payable. These lenders would also have the right to commence legal action
against the Company for the repayment of the entire debts owed to them, plus
certain other amounts and, if unpaid, to proceed against the Company's assets.
The Company does not believe that it would be in a position to repay either of
these loans should the lenders demand immediate payment, and such an eventuality
would likely prevent the Company from continuing as a going concern.
As of June 30, 1999 and December 31, 1998, the outstanding balances of
$1,221,000 and $3,125,000, respectively, are classified as long-term
liabilities. The remaining borrowing availability from Provident as of June 30,
1999, was $1,209,000. Although under the Provident Loan Agreement, Provident is
not required to make any additional loans to the Company during the
continuation of the Event of Default discussed above, Provident nevertheless
continues to make additional loans available to the Company under that
agreement.
Effective January 25, 1996, the Company entered into a Discount
Factoring Agreement with Merchant Factors Corp. On December 1, 1998, Littlefield
and Merchant Factors Corp. entered into an Addendum to the Discount Factoring
Agreement (the "Addendum"). The Addendum amends the Discount Factoring Agreement
to provide that: (a) all of the Company's accounts receivable except for those
arising from sales to Wal-Mart, Kmart, and Target stores must be factored; (b)
the effective rate of interest shall be prime plus 2% (with accounts receivable
which Merchant Factors Corp. approves for credit being factored at the rate of 1
1/8%); (c) the Company may receive advances of up to 80% of the net amount of
outstanding approved receivables assigned; (d) payments received against
assigned receivables are held for five business days before being applied
against outstanding advances; (e) the minimum annual amount of factoring
commissions is $50,000, payable monthly; and (f) the Discount Factoring
Agreement, as amended, shall continue in effect until December 31, 2000.
Accounts that are credit approved by Merchant Factors Corp. are at its risk,
which minimizes the Company's credit risk. The Company must factor with
recourse, at a rate of 1-1/8%, accounts that Merchant Factors Corp. does not
approve for credit. The servicing of all factored accounts is done by Merchant
Factors Corp. Borrowings are at an interest rate of prime plus 2% and are
secured by the assigned accounts receivable on which the Company pays 1 1/8% of
the amount assigned. At June 30, 1999 and December 31, 1998, the Company had net
factored receivables amounting to $341,000 and $2,050,000, respectively, most of
which had been approved for credit by Merchant Factors Corp. The remaining
borrowing availability from Merchant Factors Corp. as of June 30, 1999, was
approximately $272,000.
The Company signed a promissory note, effective May 1, 1999, in the
amount of $464 evidencing it outstanding obligations to The Bank of Floyd
("Floyd"). The note is payable in sixty monthly payments and bears an interest
rate of prime plus 1%, adjustable annually. The term note is collateralized by
machinery and equipment and furniture and fixtures. The new term note is
reflected in the current portion of long-term debt and long-term debt, whereas
the previous obligations were reflected in the current portion of long-term
debt. Under a cross-default provision, the defaults described under the
Provident loan agreement have also placed the Company in default under the Floyd
agreement.
For the six months ended June 30, 1999, operating activities provided
net cash of $3,287,000, while net cash of $129,000 was used in investing
activities. The Company borrowed a total of $9,413,000 and repaid $12,576,000
during the 1999 first half, in addition to receiving $4,000 related to a stock
transaction made by a director and, now, officer and $1,000 related to the sale
of common stock to an employee, resulting in net cash used in financing
activities of $3,158,000. During the first six months of 1999, there was no
change in cash.
At June 30, 1999, the Company had working capital of $3,020,000 and a
working capital ratio of 1.69/1. This compares to December 31, 1998, when the
Company had net working capital of $5,548,000 and a working capital ratio of
1.93/1. The Company expects sales revenues for the whole of 1999 to be
substantially below those of the prior year sales during the month of July 1999
were approximately $68,000. As of August 16, 1999, the Company had bookings for
shipments to be made during August and September 1999 that totaled approximately
$198,000. Not all "bookings" constitute contractual commitments, and may,
therefore, be subject to cancellation or modification by customers.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 16
<PAGE> 17
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company continues to pursue new licensed property opportunities
along with developing in-house proprietary and generic artwork. During January
1999, the Company finalized license agreements with World Championship Wrestling
and Warner Brothers to cross-license "WCW" and "nWo" with Looney Tunes cartoon
characters. In February 1999, Littlefield finalized three new license agreements
for characters in the comic strips "Hagar the Horrible", "Free for All", and
"Zits" with Hearst Entertainment, Inc. The comic strips are nationally
syndicated by King Features Syndicate. In May 1999, the Company signed a license
agreement with Tribune Media Services for "Lola". In June 1999, the Company
increased its license products portfolio with the addition of Dilbert, a United
Media owned property created by Scott Adams. The Company's Dilbert license
agreement allows the company to sell to mid-tier and specialty stores in
addition to the mass market. Further expanding the Company's product offering,
the Company added, in July 1999, Garfield, created by Jim Davis. The Company's
Garfield license allows the Company to sell to mid-tier, specialty gift,
department stores and mass marketers.
The Company manufactures and sells imprinted apparel primarily to
national and regional retail discount chains. The success of the Company's
licensed product sales with World Championship Wrestling, World Championship
Wrestling and Warner Brothers' Looney Tunes cross-license, The Simpsons, King of
the Hill, Pepsi and Mountain Dew, Hagar the Horrible, Free for All, Zits and
Kawasaki Motors Corp., U.S.A. is an integral part of that effort. The Company
coordinates the development of marketing and sales strategies with its licensors
and customers as possible.
YEAR 2000 READINESS
The Year 2000 Issue exists because many computer systems and
applications currently use a two-digit year field to represent a four-digit
year, such as 98 to represent 1998. Computer systems that incorrectly process
dates occurring for the year 2000 and beyond can either fail or yield unreliable
and erroneous information. The Company is continuing to assess its Year 2000
readiness with regard to information technology ("IT") systems, which include
the Company's computer systems and applications that provide accounting and
financial reporting, and its non-IT systems, which include the Company's
production, shipping and office equipment.
<TABLE>
<CAPTION>
Projected Estimated
Year 2000 Year 2000 Cost of
Readiness Readiness Year 2000
Status Date Readiness
----------------- -------------- ---------------
<S> <C> <C> <C>
IT Systems:
Computer Hardware Ready
Operating software Ready
Application software Ready
Non-IT Systems:
Production equipment Ready
Shipping equipment Ready
Office Equipment Assessing October 1999 $ 0-$ 20,000
</TABLE>
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 17
<PAGE> 18
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In response to the increases in its 1998 sales volume, the Company
began a process of implementing new management and accounting software in the
first quarter of 1999. The new software will, when fully implemented,
significantly enhance management's access to information related to sales and
inventories. The installation of the new management and accounting software
required the Company to upgrade its computer hardware and operating systems,
which have served the Company for the past five years. The Company installed new
computer hardware, operating systems and application software in the second
quarter of 1999.
In the fourth quarter of 1998, the Company tested, in conjunction with
one of its customers and a third-party network provider, it's Electronic Data
Interchange ("EDI") systems. The EDI systems are used to transact business
electronically with the Company's larger customers. The Company received
confirmation from its third-party network provider that the Company's EDI
systems were Year 2000 ready. Additionally, in January 1999, the Company
received a request from one of its larger customers to upgrade the Company's EDI
software to a newer version. This newer version has certain expanded
capabilities and is engineered to be Year 2000 ready. In the second quarter of
1999, the Company upgraded its EDI software to the newer version and began
transactional testing of its upgraded EDI system with several of its larger
customers who have requested such tests.
In addition to the Company's internal Year 2000 readiness, the Company
initiated, in the fourth quarter of 1998, a communication process with third
parties including its lending and financial institutions and its largest
customers and vendors, to assess their Year 2000 readiness and the potential
risk to the Company. The Company's largest customers have established Year 2000
readiness plans and have communicated their expected readiness. A majority of
the Company's other customers, vendors and third-parties including its lending
and financial institutions have communicated to the Company that they are either
Year 2000 ready or expect to be Year 2000 ready and that they do not anticipate
an interruption in their ability to accept and provide goods and services and to
timely pay for them.
Although the Company expects its critical systems to be compliant by
December 31, 1999, there is no assurance these results will be achieved.
However, the impact of a failure of any of the Company's information systems
would be mitigated to the extent that other alternate processes, including
manual processes, were able to meet processing requirements. Presently,
Littlefield expects alternate procedures would be able to meet the Company's
processing needs.
Littlefield relies on third parties for raw materials, utilities,
transportation and other key services. In addition, the Company is dependent
upon its customers for cash flow. As described above, the Company has initiated
formal communications with its significant suppliers and large customers to
determine the extent to which the Company is vulnerable to those third parties'
failure to eliminate their own Year 2000 Issues. During the 1999 third quarter,
the Company expects to have identified significant customers and suppliers of
goods and services which have either indicated to the Company that they will not
be able to eliminate Year 2000 Issues which may negatively impact Littlefield,
or have not responded to the Company's request for information regarding Year
2000 Issues. At that time, Littlefield will begin developing contingency plans
for potential non-compliance by these identified third parties. Year 2000 Issues
that adversely impact these third parties could also effect the operations of
the Company. There can be no assurance the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The Company has evaluated its Year 2000 Issues, and has provided in the
table above an estimated range of the costs that may be incurred in order to
eliminate any Year 2000 Issues. The total costs that will be incurred by
Littlefield in connection with resolving its Year 2000 Issues will be impacted
by the Company's ability to successfully identify its Year 2000 Issues, the
level of effort required to remediate the issue and the ability of third parties
to successfully address their own Year 2000 Issues. Total costs incurred to date
relative to the remediation of the Company's Year 2000 Issues have been expensed
as incurred and have not been material.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 18
<PAGE> 19
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The costs of the project and the date on which the Company plans to
complete its Year 2000 assessment and remediation are based on management's
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved, and actual results could differ significantly
from those plans. Specific factors that might cause differences from
management's estimates include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
relevant computer codes, and similar uncertainties. Management believes the
Company is devoting the necessary resources to identify and resolve significant
Year 2000 Issues in a timely manner.
This report contains projections and forward-looking statements that
are based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this report, the words
"anticipate," "estimate," "expect," "predict," "project," "believe," and similar
expressions are intended to identify forward looking statements. The
forward-looking statements were prepared on the basis of assumptions which
relate, among other things, to the market acceptance of the Company's products,
including the Company's licensed and proprietary products; the cost of producing
and marketing the Company's products; the prices at which the Company's products
may be sold; and the Company's market share for its products. Such assumptions
may prove not to be accurate or appropriate, and even if such assumptions do
prove to be accurate and appropriate, the actual results of the Company's
operations in the future may vary widely due to increased competition in the
industry, an increase in interest rates, general economic conditions and other
risks and uncertainties, including without limitation, risks associated with
having a very high percentage of the Company's revenues being derived from sales
related to one license. Accordingly, the actual results of the Company's
operations in the future may vary widely from the forward-looking statements
included herein.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 19
<PAGE> 20
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of June 30, 1999, Littlefield had financial instruments which were
sensitive to changes in interest rates. These financial instruments consisted
of: (1) a $10,000,000 line of credit facility with The Provident Bank; (2) a
Discount Factoring Agreement with Merchant Factors Corp.; (3) one promissory
note with The Bank of Floyd; (4) 7% Convertible Subordinated Debentures; (5)
other immaterial debt consisting of notes payable and capital leases; and (6)
factored accounts receivable. Items (1), (2) and (3) have variable rates of
interest based on the "prime rate" plus a specified margin. Items (4) and (5)
have fixed interest rates. On item (6), the Company pays factoring fees of
1.125% of the amounts factored. Maturities related to Items (1) and (3) are
currently subject to the effects, if any, of the Event of Default.
The Company believes the average collection period for factored
receivables is approximately 40 days. The prime rate in effect as of June 30,
1999 was 7.75%. Given today's general economic conditions, management does not
believe there will be significant changes in interest rates in the near future;
however, no assurances can be given that economic conditions or interest rates
will remain stable for any particular period.
INTEREST RATE SENSITIVITY
The table below provides information as of June 30, 1999, about the
Company's financial instruments, primarily debt obligations, that are sensitive
to changes in interest rates. The table presents principal cash flows and
related weighted average interest rates by expected maturity dates. The
information is presented in U.S. dollars, which is the Company's reporting
currency.
<TABLE>
<CAPTION>
Expected maturity date
June 30,
Current 2001 2002 2003 2004 Total Fair Value
------- ---- ---- ---- ---- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Short-term Debt:
Fixed Rate $ 805 $ -- $ -- $ -- $ -- $ 805 $ 805
Average interest rate 7.00% -- -- -- 7.00% 7.00%
Variable Rate $ 20 $ -- $ -- $ -- $ -- $ 20 $ 20
Average interest rate 10.00% -- -- -- 10.00% --
Long-term Debt:
Fixed Rate $ 57 $ 53 $ 47 $ -- $ $ 157 $ 157
Average interest rate 10.13% 10.09% 9.19% -- -- -- --
Variable Rate $ 79 $1,307 $ 94 $ 102 $ 90 $1,672 $ 1,672
Average interest rate 8.75% 10.15% 8.75% 8.75% 8.75% 9.85%
</TABLE>
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 20
<PAGE> 21
LITTLEFIELD, ADAMS & COMPANY
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is currently not involved in any litigation or
other reportable legal proceedings.
Item 3. DEFAULTS UPON SENIOR SECURITIES
The Company is currently in default under the Loan and
Security Agreement dated December 10, 1998 between the Company
and The Provident Bank ("Provident") and under the Business
Loan Agreement dated as of May 1, 1999 between the Company and
the Bank of Floyd ("Floyd") (the "Provident Loan Agreement"
and "Floyd Loan Agreement", respectively).
The Provident Loan Agreement contains certain financial
covenants including, among others, a requirement that the
Company maintain a specified minimum consolidated tangible net
worth. As of June 30, 1999, the Company was not in compliance
with such minimum tangible net worth requirement. Such
noncompliance constitutes an event of Default under the
Provident Loan Agreement. In addition, under cross default
provisions in the Floyd Loan Agreement, the Event of Default
under the Provident Agreement also constitutes an Event of
Default under the Floyd Loan Agreement.
The Company has commenced discussions with Provident in order
to obtain a waiver of the breached financial covenant and/or
amend the financial covenants in the Provident Loan Agreement:
however, no assurances can be made as to the outcome of these
discussions. If no satisfactory agreement is concluded with
Provident, then as a result of such Event of Default,
Provident could at any time exercise its remedies under the
Provident Loan Agreement. Such remedies could include
demanding the immediate repayment of all amounts owed by the
Company to Provident (approximately $817,000 as of August 16,
1999). In addition, as a result of the cross default
provisions in the Floyd Loan Agreement, Floyd also can at any
time declare all amounts owed by the Company to Floyd
(approximately $451,000 as of August 16, 1999) to be
immediately due and payable. These lenders would also have the
right to commence legal action against the Company for the
repayment of the entire debts owed to them, plus certain other
amounts and, if unpaid, to proceed against the Company's
assets. The Company does not believe that it would be in a
position to repay either of these loans should the lenders
demand immediate payment, and such an eventuality could likely
prevent the Company from continuing as a going concern.
Item 5. OTHER INFORMATION
Pursuant to an agreement reached with certain of the Company's
shareholders, on June 9, 1999, the Company postponed its
Annual Meeting of Shareholders, previously scheduled for June
11, 1999. In connection with such agreement the Company has
agreed to reset the record date and revise and recirculate its
Proxy Statement to add two nominees for election as directors
of the Company. The new date for the rescheduled Annual
Meeting has not been determined.
On May 14, 1999, Mr. Marty Shifrin, who served as Chairman of
the Board, resigned as a director. On July 19, 1999, Mr.
Warren L. Rawls resigned his position as Chief Financial
Officer and Director. Also, on July 19, 1999, Mr. John J.
Tsucalas, CFA, and Mr. L. Clarke Hill, Jr., were elected as
Director of the Board. Additionally, Mr. Tsucalas was elected
as interim Chief Financial Officer. On July 27, 1999, Mr.
William E. Goettelman, who has served five years as a
Director, was elected Chairman of the Board of Directors and
Chief Executive Officer following Mr. Michael Balber's
resignation as a Director. Mr. Balber continues to serve as
President of the Company.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 21
<PAGE> 22
LITTLEFIELD, ADAMS & COMPANY
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
10.1 Promissory Note for $463,916.29, dated May 1,
1999, relating to loan number 0106200000, with
The Bank of Floyd, Floyd, Virginia.
10.2 Business Loan Agreement, effective as of May 1,
1999, relating to loan number 0106200000, with
The Bank of Floyd, Floyd, Virginia.
10.3 Commercial Security Agreement, effective as of
May 1, 1999, relating to loan number
0106200000, with The Bank of Floyd, Floyd,
Virginia.
10.4 Agreement between Next, Inc. and Littlefield,
Adams & Company, dated October 15, 1998.
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on 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: August 13, 1999 /s/ William E. Goettelman
--------------------------------------------------
William E. Goettelman
Chairman of the Board and Chief Executive Officer
(principal executive officer)
Date: August 13, 1999 /s/ John J. Tsucalas
---------------------------------------------------
John J. Tsucalas
Director and Interim Chief Financial Officer
(principal financial & accounting officer)
Littlefield, Adams & Company, June 30, 1999 Quarterly Report on Form 10-Q;
Page 23
<PAGE> 1
Exhibit 10.1
PROMISSORY NOTE
Borrower: Littlefield, Adams & Company (TIN: 22-1469846)
6262 Executive Blvd.
Huber Heights, OH 45424
Lender: THE BANK OF FLOYD
P.O. BOX 215
101 JACKSONVILLE CIRCLE
FLOYD, VA 24091
Principal Amount: $463,916.29 Initial Rate: 8.750% Date of Note:
May 1, 1999
PROMISE TO PAY. Littlefield, Adams & Company ("Borrower") promises to pay to
THE BANK OF FLOYD ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Four Hundred Sixty Three Thousand Nine Hundred
Sixteen & 29/100 Dollars ($463,916.29), together with interest on the unpaid
principal balance from May 1, 1999, Until paid in full.
PAYMENT. Subject to any payment changes resulting from changes in the Index,
Borrower will pay this loan in 59 payments of $9,575.62 each payment and an
irregular last payment estimated at $9,575.97. Borrower's first payment is due
May 31, 1999, and all subsequent payments are due on the same day of each month
after that. Borrower's final payment will be due on April 30, 2004, and will be
for all principal, accrued interest, and all other applicable fees, costs and
charges, if any, not yet paid. Payments include principal and interest.
Interest on this Note is computed on a 365/365 simple interest basis; that is,
by applying the ratio of the annual interest rate over the number of days in a
year, multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding. Borrower will pay Lender
at Lender's address shown above or at such other place as Lender may designate
in writing- Unless otherwise agreed or required by applicable law, payments
will be applied first to accrued unpaid interest, then to principal, and any
remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the WALL
STREET JOURNAL PRIME RATE (the "Index"). The Index is not necessarily the
lowest rate charged by Lender on its loans. If the Index becomes unavailable
during the term of this loan, Lender may designate a substitute index after
notice to Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest fate change will not occur more often than
each year on April 1. 2000. The Index currently Is 7.750% per annum. The
interest rate to be applied to the unpaid principal balance of this Note will
be at a rate of 1.000 percentage point over the Index, resulting in an Initial
rate of 8.750% per annum. NOTICE: Under no circumstances will the interest rate
on this Note be more than the maximum rate allowed by applicable law. Whenever
increases occur in the interest rate, Lender, at its option, may do one or more
of the following: (a) increase Borrower's payments to ensure Borrower's loan
will pay off by its original final maturity date, (b) increase Borrower's
payments to cover accruing interest, (c) increase the number of Borrower's
payments, and (d) continue Borrower's payments at the same amount and increase
Borrower's final payment.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Note, Borrower understands that Lender is entitled to a minimum interest
charge of $100.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay all or a portion of the amount owed earlier than it is
due. Early payments will not, unless agreed to by Lender in writing, relieve
Borrower of Borrower's obligation to continue to make payments under the
payment schedule. Rather, they will reduce the principal balance due and may
result in Borrower making fewer payments.
LATE CHARGE. If a payment is 7 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment
<PAGE> 2
05-01-99 PROMISSORY NOTE Page 2
Loan No. 0106200000
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term. obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Any representation or statement made or furnished
to Lender by Borrower or on Borrower's behalf is false or misleading in any
material respect either now or at the time made or furnished- (d) Borrower
becomes insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (e) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a garnishment
of any of Borrower's accounts with Lender. (f) Any guarantor dies or any of the
other events described in this default section occurs with respect to any
guarantor of this Note. (9) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or performance
of the Indebtedness is impaired. (h) Lender in good faith deems itself
insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest, together with all other
applicable fees, costs and charges, if any, immediately due and payable,
without notice, and then Borrower will pay that amount. Furthermore, subject to
any limits under applicable law, upon default, Borrower also agrees to pay
Lender's attorneys' fees, and all of Lender of her collection expenses, whether
or not there is a lawsuit and including without limitation legal expenses for
bankruptcy proceedings. This Note shall be governed by, construed and enforced
in accordance with the laws of the Commonwealth of Virginia. Lender and
Borrower hereby waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either party against the other.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
COLLATERAL- This Note is secured by Financing Statements and Security
Agreements dated 01/17/92 and 12/26/96 and amended May 1, 1999 and Financing
Statement arid Security Agreement dated May 1, 1999 from Littlefield, Adams &
Company to The Bank of Floyd.
SIGNATURES AND SEALS. In witness whereof, I have signed my name and affixed my
seal.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender's security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
Littlefield, Adams & Company
By: By:
/s/ Michael B. Balber, President and CEO /s/ Warren L. Rawls, CFO,
Sec. & Treas.
<PAGE> 1
Exhibit 10.2
BUSINESS LOAN AGREEMENT
Borrower: Littlefield, Adams & Company (TIN: 22-1469846)
6262 Executive Blvd.
Huber Heights, OH 45424
Lender: THE BANK OF FLOYD
P.O. BOX 215
101 JACKSONVILLE CIRCLE
FLOYD, VA 24091
THIS BUSINESS LOAN AGREEMENT between Littlefield, Adams & Company ("Borrower")
and THE BANK OF FLOYD ("Lender") is made on the or following terms and
conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a
loans and other financial accommodations, Including those which may be described
on any exhibit or schedule attached to this Agreement. All such loans and
financial accommodations, together with all future loans and financial
accommodations from Lender to Borrower, are referred to in this Agreement
Individually as the "Loan" and collectively as the "Loans." Borrower understands
and agrees that: (a) In granting, renewing, or extending any Loan, Lender is
relying upon Borrower's representations, warranties, and agreements, as set
forth in this Agreement; (b) the granting, renewing, or extending of any Loan by
Lender at all times shall be subject to Lender's sole judgment and discretion;
and (c) all such Loans shall be and shall remain subject to the following terms
and conditions of this Agreement.
TERM. This Agreement shall be effective as of May 1, 1999, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS- The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America
Agreement. The word "Agreement" means this Business Loan Agreement, as this
Business Loan Agreement may be amended or modified from time to time, together
with all exhibits and schedules attached to this Business Loan Agreement from
time to time.
Borrower. The word "Borrower" means Littlefield, Adams & Company and its
successors and assigns. The word "Borrower" also includes, as applicable, all
subsidiaries and affiliates of Borrower as provided below in the paragraph
tilled "Subsidiaries and Affiliates. "
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980. as amended.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real or
personal property, whether granted directly or indirectly, whether granted now
or in the future, and whether granted in the form of a security interest,
mortgage, deed of trust, assignment, pledge. chattel mortgage, chattel trust,
factor's lien, equipment trust, conditional sale, trust receipt, lien, charge,
lien or title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether created by
law, contract, or otherwise
ERISA. The word "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section titled
"EVENTS OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each and all
of the persons or entities granting a Security Interest in any Collateral for
the Indebtedness, and their personal representatives, successors and assigns.
<PAGE> 2
05-01-1999 BUSINESS LOAN AGREEMENT Page 2
Loan No 0106200000 (Continued)
Guarantor. The word "Guarantor" means and includes without limitation each and
all of the guarantors, sureties, and accommodation parties In connection with
any Indebtedness and their personal representatives, successors and assigns.
Indebtedness. The word "Indebtedness" means and includes without limitation all
Loans, including all principal, interest and other fees, costs and charges, if
any, together with all other present and future liabilities and obligations of
Borrower, or any one or more of them, to Lender, whether direct or indirect,
matured or unmatured, and whether absolute or contingent, joint, several, or
joint and several, and no matter how the same may be evidenced or shall arise.
Lender. The word "Lender" means THE BANK OF FLOYD, its successors and assigns.
Loan. The word "Loan" or "Loans" means and includes without limitation any and
all commercial loans and financial accommodations from Lender to Borrower,
whether now or hereafter existing, and however evidenced, including without
limitation those loans and financial accommodations described herein or
described on any exhibit or schedule attached to this Agreement from time to
time.
Note. The word "Note" means and includes without limitation Borrowers promissory
note or notes, if any, evidencing Borrower's Loan obligations in favor of
Lender, as well as any substitute, replacement or refinancing note or notes
therefor
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes,
assessments, or similar charges either not yet due or being contested in good
faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other
like liens arising in the ordinary course of business and securing obligations
which are not yet delinquent; (d) purchase money liens or purchase money
security interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the date of
this Agreement or permitted to be incurred under the paragraph of this Agreement
titled "Indebtedness and Liens"; (e) liens and security interests which, as of
the date of this Agreement, have been disclosed to and approved by the Lender in
writing; and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to the
net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings or
other agreements, whether created by law, contract, or otherwise, evidencing,
governing, representing, or creating a Security Interest
Security Interest. The words "Security Interest" mean and include without
limitation any and all types of liens and encumbrances, whether created by law,
contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of
1986 as now or hereafter amended.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory to Lender
the following documents for the Loan: (a) the Note, (b) Security Agreements
granting to Lender security interests in the Collateral, (c) Financing
Statements perfecting Lender's Security Interests; (d) evidence of insurance as
required below; and (e) any other 05-
<PAGE> 3
05-01-1999 BUSINESS LOAN AGREEMENT Page 3
Loan No 0106200000 (Continued)
documents required under this Agreement or by Lender or its counsel, including
without limitation any guaranties described below.
Borrower's Authorization. Borrower shall have provided in form and substance
satisfactory to Lender properly certified resolutions, duly authorizing the
execution and delivery of this Agreement, the Note and the Related Documents.
and such other authorizations and other documents and instruments as Lender or
its counsel, in their sole discretion, may require.
Payment of Fees and Expenses- Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as, specified in this
Agreement or any Related Document.
Representations and Warranties. The representations and warranties set forth in
this Agreement, In the Related Documents, and in any document or certificate
delivered to Lender under this Agreement are true and correct.
No Event of Default. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan.
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Ohio and is
validly existing and in good standing in all states in which Borrower is doing
business. Borrower has the full power and authority to own its properties and to
transact the businesses in which it is presently engaged or presently proposes
to engage. Borrower also Is duly qualified as a foreign corporation and is in
good standing in all states in which the failure to so quality would have a
material adverse effect on its businesses or financial condition
Authorization. The execution, delivery, and performance of this Agreement and
all Related Documents by Borrower, to the extent to be executed, delivered or
performed by Borrower, have been duly authorized by all necessary action by
Borrower; do not require the consent or approval of any other person, regulatory
authority or governmental body; and do not conflict with. result in a violation
of, or constitute a default under (a) any provision of its articles of
incorporation or organization, or bylaws, or any agreement or other instrument
binding upon Borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to Lender
truly and completely disclosed Borrower's financial condition as of the date of
the statement, and there has been no material adverse change in Borrower's
financial condition subsequent to the date of the recent financial statement
supplied to Lender. Borrower has no material contingent obligations except as
disclosed in such financial statements.
Legal Effect- This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously disclosed
in Borrower's financial statements or in writing to Lender and as accepted by
Lender, and except for property tax liens for taxes not presently due and
payable, Borrower owns and has good title to all of Borrower's properties free
and clear of all Security Interests, and has not executed any security documents
or financing statements relating to such properties. All of Borrower's
properties are tilled in Borrower's legal name, and Borrower has not used, or
filed a financing statement under. any other name for at least the last five (5)
years.
<PAGE> 4
05-01-1999 BUSINESS LOAN AGREEMENT Page 4
Loan No 0106200000 (Continued)
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant to any
of the foregoing. Except as disclosed to and acknowledged by Lender in writing,
Borrower represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation. manufacture,
storage, treatment, disposal, release or threatened release of any hazardous
waste or substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has been ((i))
any use, generation, manufacture, storage, treatment, disposal, release, or
threatened release of any hazardous waste or substance on, under, about or from
the properties by any prior owners or occupants of any of the properties, or
(ii) any actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent
or other authorized user of any of the properties shall use, generate,
manufacture, store, treat, dispose of, or release any hazardous waste or
substance on, under, about or from any of the properties; and any such activity
shall be conducted in compliance with all applicable federal, state, and local
laws, regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender and its
agents to enter upon the properties to make such inspections and tests as Lender
may deem appropriate to determine compliance of the properties with this section
of the Agreement. Any inspections or tests made by Lender shall be at Borrower's
expense and for Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any other
person. The representations and warranties contained herein are based on
Borrower's due diligence in investigating the properties for hazardous waste and
hazardous substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower becomes
liable (or cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims, losses,
liabilities, damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section of the
Agreement or as a consequence of any use, generation, manufacture, storage,
disposal, release or threatened release of a hazardous waste or substance on the
properties. The provisions of this section of the Agreement, including the
obligation to indemnity, shall survive the payment of the Indebtedness and the
termination or expiration of this Agreement and shall not be affected by
Lender's acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against Borrower
is pending or threatened, and no other event has occurred which may materially
adversely affect Borrower's financial condition or properties, other than
litigation, claims, or other events, if any, that have been disclosed to and
acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all taxes,
assessments and other governmental charges have been paid in full, except those
presently being or to be contested by Borrower in good faith in the ordinary
course of business and for which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or permitted
the filing or attachment of any Security Interests on or affecting any of the
Collateral directly or indirectly securing repayment of Borrower's Loan and
Note, that would be prior or that may in any way be superior to Lender's S
Interests and rights in and to such. Collateral. Borrower has granted Security
Agreements to The Provident Bank relating to the Revolving Promissory Note dated
12/10/98 and in conjunction with various capital leases.
Binding Effect. This Agreement, the Note, all Security Agreements directly or
indirectly securing repayment of Borrower's Loan and Note and all of the Related
Documents are binding upon Borrower as well as upon Borrower's successors,
representatives and assigns, and are legally enforceable in accordance with
their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
<PAGE> 5
05-01-1999 BUSINESS LOAN AGREEMENT Page 5
Loan No 0106200000 (Continued)
Employee Benefit Plans. Each employee benefit plan as to which Borrower may have
any liability complies in all material respects with all applicable requirements
of law and regulations, and ((i)) no Reportable Event nor Prohibited Transaction
(as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower
has not withdrawn from any such plan or Initiated steps to do so, (iii) no steps
have been taken to terminate any such plan, and (iv) there are no unfunded
liabilities other than those previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business, or
Borrower's Chief executive office, if Borrower has more than one place of
business, is located at 6262 Executive Blvd., Huber Heights. OH 45424. Unless
Borrower has designated otherwise in writing this location is also the office or
offices where Borrower keeps its records concerning the Collateral.
Information- All information heretofore or contemporaneously herewith furnished
by Borrower to Lender for the purposes of or in connection with this Agreement
or any transaction contemplated hereby is, and all information hereafter
furnished by or on behalf of Borrower to Lender will be, true and accurate in
every material respect on the date as of which such information is dated or
certified; and none of such information is or will be incomplete by omitting to
state any material fact necessary to make such information not misleading.
Survival of Representations and Warranties. Borrower understands and agrees that
Lender, without independent investigation, is relying upon the above
representations arid warranties in making the above referenced Loan to Borrower.
Borrower further agrees that the foregoing representations and warranties shall
be continuing in nature and shall remain in full force and effect until such
time as Borrower's Indebtedness shall be paid in full, or until this Agreement
shall be terminated in the manner provided above, whichever is the last to
occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor,
Financial Records. Maintain its books and records in accordance with generally
accepted accounting principles, applied on a consistent basis, and permit
Lender to examine and audit Borrower's books and records at all reasonable
times.
Financial Statements. Furnish Lender with, as soon as available, but in no event
later than thirty (30) days after the end of each fiscal year, Borrower's
balance sheet and income statement for the year ended, prepared by Borrower. All
financial reports required to be provided under this Agreement shall be prepared
in accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
Additional Information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables, inventory
schedules, budgets, forecasts, tax returns, and other reports with respect to
Borrower's financial condition and business operations; as Lender may request
from time to time.
Insurance. Maintain fire and other risk insurance, public liability insurance,
and such other insurance as Lender may from time to time reasonably require with
respect to Borrower's properties and operations, in form, amounts, coverages and
with insurance companies acceptable to Lender. Borrower, upon request of Lender,
will deliver to Lender from time to time the policies or certificates of
insurance in form satisfactory to Lender, including stipulations that coverages
will not be cancelled or diminished without at least ten (10) days' prior
written notice to Lender. Each insurance policy also shall include an
endorsement providing that coverage in favor of Lender will not be impaired in
any way by any act, omission or default of Borrower or any other
<PAGE> 6
05-01-1999 BUSINESS LOAN AGREEMENT Page 6
Loan No 0106200000 (Continued)
person. In connection with all policies covering assets in which Lender holds or
is offered a security interest for the Loans, Borrower will provide Lender with
such loss payable or other endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on each
existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties
insured; (e) the then current property values on the basis of which insurance
has been obtained, and the manner of determining those values; and (f) the
expiration date of the policy. In addition, upon request of Lender (however not
more often than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value or
replacement cost of any Collateral. The cost of such appraisal shall be paid by
Borrower.
Other Agreements. Comply with all terms and conditions of all other agreements,
whether now or hereafter existing, between Borrower and any other party and
notify Lender immediately in writing of any default in connection with any other
such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations,
unless specifically consented to the contrary by Lender m writing
Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and
obligations, including without limitation all assessments, taxes, governmental
charges, levies and liens, of every kind and nature, imposed upon Borrower or
its properties, income, or profits, prior to the date on which penalties would
attach, and all lawful claims that, it unpaid, might become a lien or charge
upon any of Borrower's properties, income, or profits. Provided however,
Borrower will not be required to pay and discharge any such assessment, tax,
charge, levy, lien or claim so long as (a) the legality of the same shall be
contested in good faith by appropriate proceedings, and (b) Borrower shall have
established on its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with generally
accepted accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies, liens and
claims and will authorize the appropriate governmental official to deliver to
Lender at any time a written statement of any assessments, taxes, charges,
levies, liens and claims against Borrower's properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions set
forth in this Agreement and in the Related Documents in a timely manner, and
promptly notify Lender if Borrower learns of the occurrence of any event which
constitutes an Event of Default under this Agreement or under any of the Related
Documents.
Operations. Maintain executive and management personnel with substantially the
same qualifications and experience as the present executive and management
personnel; provide written notice to Lender of any change in executive and
management personnel; conduct its business affairs in a reasonable and prudent
manner and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee benefit
plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records and
to make copies and memoranda of Borrower's books, accounts, and records- If
Borrower now or at any time hereafter maintains any records (including without
limitation computer generated records and computer software programs for the
generation of such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of any records
it may request, all at Borrower's expense
<PAGE> 7
05-01-1999 BUSINESS LOAN AGREEMENT Page 7
Loan No 0106200000 (Continued)
Compliance Certificate. Unless waived in writing by Lender, provide Lender at
least annually and at the time of each disbursement of Loan proceeds with a
certificate executed by Borrower's chief financial officer. or other officer or
person acceptable to Lender, certifying that the representations and warranties
set forth in this Agreement are true and correct as of the date of the
certificate and further certifying that, as of the date of the certificate, no
Event of Default exists under this Agreement
Environmental Compliance and Reports. Borrower shall comply in all respects with
all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part of
any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless such
environmental activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within thirty
(30) days after receipt thereof a copy of any notice, summons, lien, citation,
directive, letter or other communication from any governmental agency or
instrumentality concerning any intentional or unintentional action or omission
on Borrower's part in connection with any environmental activity whether or not
there is damage to the environment and/or other natural resources
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loan and to perfect all Security
Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect Borrower shall not, without prior written consent of
Lender:
Indebtedness. Except for trade debt incurred in the normal course of business
including the revolving Line of Credit with The Provident Bank and indebtedness
to Lender contemplated by this, Agreement, create, incur or assume indebtedness
for borrowed money, including capital leases (in excess of $50,000).
Continuity of Operations. (a) Engage in any business activities substantially
different than those in which Borrower is presently engaged, (b) cease
operations, liquidate, merge, transfer, acquire or consolidate with any other
entity, change ownership, change its name, dissolve or transfer or sell
Collateral out of the ordinary course of business, (c) pay any dividends on
Borrower's stock (other than dividends payable in its stock), provided, however
that notwithstanding the foregoing, but only so long as no Event of Default has
occurred and is continuing or would result from the payment of dividends, if
Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue
Code of 1986, as amended), Borrower may pay cash dividends on its stock to its
shareholders from time to time in amounts necessary to enable the shareholders
to pay income taxes and make estimated income tax payments to satisfy their
liabilities under federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership of shares
of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding
shares or alter or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other enterprise or
entity, or (c) incur any obligation as surety or guarantor other than in the
ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other
<PAGE> 8
05-01-1999 BUSINESS LOAN AGREEMENT Page 8
Loan No 0106200000 (Continued)
agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any
Guarantor becomes insolvent, files a petition in bankruptcy or similar
proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse
change in Borrower's financial condition, in the financial condition of any
Guarantor, or in the value of any Collateral securing any Loan; (d) any
Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in
good faith deems itself insecure, even though no Event of Default shall have
occurred.
SIGNATURES AND SEALS. In witness whereof, I have signed my name and affixed my
seal.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness- Failure of Borrower to make any payment when due on the
Indebtedness.
Other Defaults. Failure of Borrower or any Grantor to comply with or to perform
when due any other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents, or failure of Borrower to comply
with or to perform any other term, obligation, covenant or condition contained
in any other agreement between Lender and Borrower.
False Statements. Any warranty, representation or statement made or furnished to
Lender by or on behalf of Borrower or any Grantor under this Agreement or the
Related Documents is false or misleading in any material respect at the time
made or furnished, or becomes false or misleading at any time thereafter.
Defective Collateralization This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and for
any reason.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, or a trustee or receiver is appointed for Borrower or for all or a
substantial portion of the assets of Borrower, or Borrower makes a general
assignment for the benefit of Borrower's creditors, or Borrower files for
bankruptcy, or an involuntary bankruptcy petition is filed against Borrower and
such involuntary petition remains undismissed for sixty (60) days.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method. by any creditor of Borrower, any creditor of any Grantor against
any collateral securing the Indebtedness, or by any governmental agency. This
includes a garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness
Change in Ownership. Borrower is a publicly traded company
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related
<PAGE> 9
05-01-1999 BUSINESS LOAN AGREEMENT Page 9
Loan No 0106200000 (Continued)
Documents, all commitments and obligations of Lender under this Agreement or the
Related Documents or any other agreement immediately will terminate and, at
Lender's option, all sums owing in connection with the Loans, including all
principal, interest, and all other fees, costs and charges. if any, will become
immediately due and payable, all without notice of any kind to Borrower, except
that in the case of an Event of Default of the type described in the
"Insolvency" subsection above, such acceleration shall be automatic and not
optional. In addition, Lender shall have all the rights and remedies provided
in the Related Documents or available at law, in equity, or otherwise. Except
as may be prohibited by applicable law, all of Lender's rights and remedies
shall be cumulative and may be exercised singularly or concurrently. Election
by Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an obligation
of Borrower or of any Grantor shall not affect Lender's right to declare a
default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment.
Applicable Law. This Agreement shall be governed by, construed and enforced in
accordance with the laws of the Commonwealth of Virginia. Lender and Borrower
hereby waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either party against the other.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower under this
Agreement shall be joint and several, and all references to Borrower shall mean
each and every Borrower. This means that each of the persons signing below is
responsible for all obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's sale or
transfer, whether now or later, of one or more participation interests in the
Loans to one or more purchasers, whether related or unrelated to Lender. Lender
may provide, without any limitation whatsoever, to any one or more purchasers,
or potential purchasers, any information or knowledge Lender may have about
Borrower or about any other matter relating to the Loan, and Borrower hereby
waives any rights to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation interests, as
well as all notices of any repurchase of such participation interests. Borrower
also agrees that the purchasers of any such participation interests will be
considered as the absolute owners of such interests in the Loans and will have
all the rights granted under the participation agreement or agreements governing
the sale of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or against
any purchaser of such a participation interest and unconditionally agrees that
either Lender or such purchaser may enforce Borrower's obligation under the
Loans irrespective of the failure or insolvency of any holder of any interest in
the Loans. Borrower further agrees that the purchaser of any such participation
interests may enforce its interests irrespective of any personal claims or
defenses that Borrower may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
out-of-pocket expenses incurred in connection with this Agreement or in
connection with the Loans made pursuant to this Agreement. Subject to any limits
under applicable law, it Lender hires an attorney to help enforce this Agreement
or to collect any Indebtedness, Borrower agrees to pay Lender's attorneys' fees,
and all of Lender's other collection expenses, whether or not there is a lawsuit
and including legal expenses for bankruptcy proceedings.
<PAGE> 10
05-01-1999 BUSINESS LOAN AGREEMENT Page 10
Loan No 0106200000 (Continued)
Notices. All notices required to be given under this Agreement shall be given in
writing, may be sent by telefacsimile (unless otherwise required by law), and
shall be effective when actually delivered if hand delivered or when deposited
with a nationally recognized overnight courier or deposited as certified or
registered mail in the United States mail, first class, postage prepaid,
addressed to the party to whom the notice is to be given at the address shown
above. Any party may change its address for notices under this Agreement by
giving formal written notice to the other parties, specifying that the purpose
of the notice is to change the party's address. To the extent permitted by
applicable law, it there is more than one Borrower, notice to any Borrower will
constitute notice to all Borrowers. For notice purposes, Borrower will keep
Lender informed at all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of this
Agreement to be invalid or unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or unenforceable as to any other
persons or circumstances. It feasible, any such offending provision shall be
deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without limitation
any representation, warranty or covenant, the word "Borrower" as used herein
shall include all subsidiaries and affiliates of Borrower. Notwithstanding the
foregoing however, under no circumstances shall this Agreement be construed to
require Lender to make any Loan or other financial accommodation to any
subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on behalf
of Borrower shall bind its successors and assigns and shall inure to the benefit
of Lender, its successors and assigns. Borrower shall not, however, have the
right to assign its rights under this Agreement or any interest therein, without
the prior written consent of Lender.
Survival. All warranties, representations, and agreements of Borrower in this
Agreement shall survive the making of the Loan or Loans contemplated hereby, and
shall be deemed made and redated by Borrower at the time of the making of each
disbursement of Loan proceeds.
Time Is of the Essence. Time is of the essence in the performance of this
Agreement.
Waiver. Indulgence by Lender with respect to any of the terms and conditions of
this Agreement or the failure of Lender to exercise any of its rights under this
Agreement shall not constitute a waiver thereof, and Borrower shall remain
liable for the strict performance of such terms and conditions until this
Agreement shall be terminated. No provision of this Agreement may be waived or
modified orally, but all such waivers or modifications shall be in writing.
Whenever the consent of Lender is required under this Agreement, the granting of
such consent by Lender in one instance shall not constitute Lender's continuing
consent in subsequent instances, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
Consent to Other Financing Agreements: The "Consent Letter" dated December 10,
1998, from The Bank of Floyd to the Borrower, relating to financing arrangements
with The Provident Bank and Merchant Factors Corp., remains in full force and
effect.
<PAGE> 11
05-01-1999 BUSINESS LOAN AGREEMENT Page 11
Loan No 0106200000 (Continued)
Agreement relating to 7% Convertible Subordinated Debentures: The Agreement
dated April 17, 1998, relating to the private placement of $1,200,000 in
principal amount of 7% convertible subordinated debentures dated April 24, 1998,
remains in full force and effect.
THIS BUSINESS LOAN AGREEMENT IS SIGNED, SEALED AND DELIVERED EFFECTIVE IN ALL
RESPECTS AS OF MAY 1, 1999.
BORROWER:
Littlefield, Adams & Company
By: By:
/s/ Michael B. Balber, President and CEO /s/ Warren L. Rawls, CFO,
Sec. & Treas.
LENDER:
THE BANK OF FLOYD
By: /s/ Lawarance Renfore
Authorized Officer
<PAGE> 1
Exhibit 10.3
COMMERCIAL SECURITY AGREEMENT
Borrower: Littlefield, Adams & Company (TIN: 22-1469846)
6262 Executive Blvd.
Huber Heights, OH 45424
Lender: THE BANK OF FLOYD
P.O. BOX 215
101 JACKSONVILLE CIRCLE
FLOYD, VA 24091
THIS COMMERCIAL SECURITY AGREEMENT is entered Into between Littlefield, Adams &
Company (referred to below as "Grantor"); and THE BANK OF FLOYD (referred to
below as "Lender"). For valuable consideration, Grantor grants to Lender a
security Interest In the Collateral to secure the Indebtedness and agrees that
Lender shall have the rights stated In this Agreement with respect to the
Collateral, In addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Commercial Security Agreement, as
this Commercial Security Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Commercial Security
Agreement from time to time.
Collateral. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
All equipment, together with the following specifically described property: see
attached list
In addition, the word "Collateral" includes all the following, whether now owned
or hereafter acquired, whether now existing or hereafter arising and wherever
located:
(a) All attachments, accessions, accessories, tools, parts, supplies, increases,
and additions to and all replacements of and substitutions for any property
described above.
(b) All products and produce of any of the property described in this Collateral
section, subject to Security Agreement granted to The Provident Bank.
(c) All accounts, general intangibles, instruments, rents, monies, payments, and
all other rights, arising out of a sale, lease, or other disposition of any of
the property described in this Collateral section.
(d) All proceeds (including insurance proceeds) from the sale, destruction,
loss, or other disposition of any of the property described in this Collateral
section.
(e) All records and data relating to any of the property described in this
Collateral section, whether in the form of a writing, photograph, microfilm,
microfiche, or electronic media, together with all of Grantor's right, title,
and interest in and to all computer software required to utilize, create,
maintain, and process any such records or data on electronic media.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below In the section titled
"Events of Default."
Grantor. The word "Grantor" means Littlefield, Adams & Company, its successors
and assigns.
Guarantor. The word "Guarantor" means and includes without limitation each and
all of the guarantors, sureties, and accommodation parties in connection with
the Indebtedness.
<PAGE> 2
05-01-1999 COMMERCIAL SECURITY AGREEMENT Page 2
Loan No 0106200000 (Continued)
Indebtedness. The word "indebtedness" means the indebtedness evidenced by the
Note, including all principal and interest, together with all other indebtedness
and costs and expenses for which Grantor is responsible under this Agreement or
under any of the Related Documents.
Lender. The word "Lender" means THE BANK OF FLOYD, its successors and assigns.
Note. The word "Note" means the note or credit agreement dated May 1, 1999, in
the principal amount of $463,916.29 from Littlefield, Adams & Company to Lender,
together with all renewals of, extensions of, modifications of, refinancings of,
consolidations of and substitutions for the note or credit agreement.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
Perfection of Security Interest. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to perfect
and continue Lender's security interest in the Collateral. Upon request of
Lender, Grantor will deliver to Lender the documents evidencing or constituting
the Collateral, and Grantor will note Lender's interest upon any and all chattel
paper if not delivered to Lender for possession by Lender. Grantor hereby
appoints Lender as its irrevocable attorney-in-fact for the purpose of executing
any documents necessary to perfect or to continue the security interest granted
in this Agreement. Lender may at any time, and without further authorization
from Grantor, file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor will
reimburse Lender for all expenses for the perfection and the continuation of the
perfection of Lender's security interest in the Collateral. Grantor promptly
will notify Lender before any change in Grantor's name including any change to
the assumed business names of Grantor.
No Violation. The execution and delivery of this Agreement will not violate any
law or agreement governing Grantor or to which Grantor is a party, and its
certificate or articles of incorporation and bylaws or code of regulations do
not prohibit any term or condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists of accounts,
chattel paper, or general intangibles, the Collateral is enforceable in
accordance with its terms, is genuine, and complies with applicable laws
concerning form, content and manner of preparation and execution, and all
persons appearing to be obligated on the Collateral have authority and capacity
to contract and are in fact obligated as they appear to be on the Collateral.
Removal of Collateral. Grantor shall keep the Collateral (or to the extent the
Collateral consists of intangible property such as accounts, the records
concerning the Collateral) at Grantor's address shown above, or at such other
locations as are acceptable to Lender. Except in the ordinary course of its
business, including the sales of inventory, Grantor shall not remove the
Collateral from its existing locations without the prior written consent of
Lender. To the extent that the Collateral consists of vehicles, or other titled
property, Grantor shall not take or permit any action which would require
application for certificates of title for the vehicles outside the State of
Ohio, without the prior written consent of Lender.
Transactions Involving Collateral. Except for inventory sold or accounts
collected In the ordinary course of Grantors business, Grantor shall not sell,
offer to sell, or otherwise transfer or dispose of the Collateral. Grantor shall
not pledge, mortgage, encumber or otherwise permit the Collateral to be subject
to any lien, security interest, encumbrance, or charge, other than the security
Interest provided for in this Agreement, without the prior written consent of
Lender. This includes security interests even if junior in right to the security
interests granted under this Agreement. Unless waived by Lender, all proceeds
from any disposition of the Collateral (for whatever reason) shall be held in
trust for Lender and shall not be commingled with any other funds; provided
however, this
<PAGE> 3
05-01-1999 COMMERCIAL SECURITY AGREEMENT Page 3
Loan No 0106200000 (Continued)
requirement shall not constitute consent by Lender to any sale or other
disposition. Upon receipt, Grantor shall immediately deliver any such proceeds
to Lender.
Title. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and encumbrances
except for the lien of this Agreement. No financing statement covering any of
the Collateral is on file in any public office other than those which reflect
the security interest created by this Agreement or to which Lender has
specifically consented. Grantor shall defend Lender's rights in the Collateral
against the claims and demands of all other persons.
Collateral Schedules and Locations. Insofar as the Collateral consists of
equipment, Grantor shall deliver to Lender, as often as Lender shall require,
such lists, descriptions, and designations of such Collateral as Lender may
require to identify the nature, extent, and location of such Collateral. Such
information shall be submitted for Grantor and each of its subsidiaries or
related companies.
Maintenance and Inspection of Collateral. Grantor shall maintain all tangible
Collateral in good condition and repair. Grantor will not commit or permit
damage to or destruction of the Collateral or any part of the Collateral. Lender
and its designated representatives and agents shall have the right at all
reasonable times to examine, inspect, and audit the Collateral wherever located.
Grantor shall immediately notify Lender of all cases involving the return,
rejection, repossession, loss or damage of or to any Collateral; of any request
for credit or adjustment or of any other dispute arising with respect to the
Collateral; and generally of all happenings and events affecting the Collateral
or the value or the amount of the Collateral.
Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments
and liens upon the Collateral, its use or operation, upon this Agreement, upon
any promissory note or notes evidencing the Indebtedness, or upon any of the
other Related Documents. Grantor may withhold any such payment or may elect to
contest any lien if Grantor is in good faith conducting an appropriate
proceeding to contest the obligation to pay and so long as Lender's interest in
the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is
subjected to a lien which is not discharged within fifteen (15) days, Grantor
shall deposit with Lender cash, a sufficient corporate surety bond or other
security satisfactory to Lender in an amount adequate to provide for the
discharge of the lien plus any interest, costs, attorneys' fees or other charges
that could accrue as a result of foreclosure or sale of the Collateral. In any
contest Grantor shall defend itself and Lender and shall satisfy any final
adverse judgment before enforcement against the Collateral. Grantor shall name
Lender as an additional obligee under any surety bond furnished in the contest
proceedings.
Compliance With Governmental Requirements. Grantor shall comply promptly with
all laws, ordinances, rules and regulations of all governmental authorities, now
or hereafter in effect, applicable to the ownership, production, disposition, or
use of the Collateral. Grantor may contest in good faith any such law, ordinance
or regulation and withhold compliance during any proceeding, including
appropriate appeals, so long as Lender's interest in the Collateral, in Lender's
opinion, is not jeopardized.
Hazardous Substances. Grantor represents and warrants that the Collateral never
has been, and never will be so long as this Agreement remains a lien on the
Collateral, used for the generation, manufacture, storage, transportation,
treatment, disposal, release or threatened release of any hazardous waste or
substance, as those terms are defined in the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section
9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of
1986, Pub. L. No 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801, et seq., the Resource Conservation arid Recovery Act,
42 U.S.C. Section 6901, et seq., or other applicable state or Federal laws,
rules, or regulations adopted pursuant to any of the foregoing. The terms
"hazardous waste" and "hazardous substance" shall also include, without
limitation, petroleum and petroleum by-products or any fraction thereof and
asbestos. The representations and warranties contained herein are based on
Grantor's due diligence in investigating the Collateral for hazardous wastes and
substances. Grantor hereby (a) releases and waives any future claims against
Lender for indemnity or contribution in the event Grantor becomes liable for
cleanup or other costs under any such laws, and (b) agrees to indemnify and hold
harmless Lender against any and all claims and losses resulting from a breach of
this provision of this
<PAGE> 4
05-01-1999 COMMERCIAL SECURITY AGREEMENT Page 4
Loan No 0106200000 (Continued)
Agreement. This obligation to indemnify shall survive the payment of the
Indebtedness and the satisfaction of this Agreement.
Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks
insurance, including without limitation fire, theft and liability coverage
together with such other insurance as Lender may require with respect to the
Collateral, in form, amounts, coverages and basis reasonably acceptable to
Lender and issued by a company or companies reasonably acceptable to Lender.
Grantor, upon request of Lender, will deliver to Lender from time to time the
policies or certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at least
ten (10) days' prior written notice to Lender and not including any disclaimer
of the insurer's liability for failure to give such a notice. Each insurance
policy also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Grantor or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require. If
Grantor at any time fails to obtain or maintain any insurance as required under
this Agreement, Lender may (but shall not be obligated to) obtain such insurance
as Lender deems appropriate, including if it so chooses "single interest
insurance," which will cover only Lender's interest in the Collateral.
Application of Insurance Proceeds. Grantor shall promptly notify Lender of any
loss or damage to the Collateral. Lender may make proof of loss if Grantor fails
to do so within fifteen (15) days of the casualty. All proceeds of any insurance
on the Collateral, including accrued proceeds thereon, shall be held by Lender
as part of the Collateral. If Lender consents to repair or replacement of the
damaged or destroyed Collateral, Lender shall, upon satisfactory proof of
expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost
of repair or restoration If Lender does not consent to repair or replacement of
the Collateral, Lender shall retain a sufficient amount of the proceeds to pay
all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds
which have not been disbursed within six (6) months after their receipt and
which Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with Lender reserves
for payment of insurance premiums, which reserves shall be created by monthly
payments from Grantor of a sum estimated by Lender to be sufficient to produce,
at least fifteen (15) days before the premium due date, amounts at least equal
to the insurance premiums to be paid. If fifteen (15) days before payment is
due, the reserve funds are insufficient, Grantor shall upon demand pay any
deficiency to Lender. The reserve funds shall be held by Lender as a general
deposit and shall constitute a non-interest-bearing account which Lender may
satisfy by payment of the insurance premiums required to be paid by Grantor as
they become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance premiums
required to be paid by Grantor. The responsibility for the payment of premiums
shall remain Grantor's sole responsibility.
Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as Lender
may reasonably request including the following: (a) the name of the insurer; (b)
the risks insured; (c) the amount of the policy; (d) the property insured; (e)
the then current value on the basis of which insurance has been obtained and the
manner of determining that value; and (f) the expiration date of the policy. In
addition, Grantor shall upon request by Lender (however not more often than
annually) have an independent appraiser satisfactory to Lender determine, as
applicable, the cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the
tangible personal property and beneficial use of all the Collateral and may use
it in any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor's right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lenders security interest in such Collateral. If
Lender at any time has possession of any Collateral, whether before or after an
Event of Default, Lender shall be deemed to have exercised reasonable care in
the custody and preservation of the Collateral if Lender takes such action for
that purpose as Grantor shall request or as Lender, in Lender's sole discretion,
shall deem appropriate under the circumstances, but failure to honor any request
by Grantor shall not of itself be deemed to be a failure to exercise reasonable
care. Lender shall not be required to take any steps necessary to preserve any
<PAGE> 5
05-01-1999 COMMERCIAL SECURITY AGREEMENT Page 5
Loan No 0106200000 (Continued)
rights in the Collateral against prior parties, nor to protect, preserve or
maintain any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security Interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Grantor to make any payment when due on the
Indebtedness.
Other Defaults. Failure of Grantor to comply with or to perform any other term,
obligation, covenant or condition contained in this Agreement or in any of the
Related Documents or in any other agreement between Lender and Grantor.
False Statements. Any warranty, representation or statement made or furnished to
Lender by or on behalf of Grantor under this Agreement, the Note or the Related
Documents is false or misleading in any material respect, either now or at the
time made or furnished.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any time
and for any reason.
Insolvency. The dissolution or termination of Grantor's existence as a going
business, the insolvency of Grantor, the appointment of a receiver for any part
of Grantor's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Grantor or by any governmental agency against
the Collateral or any other collateral securing the Indebtedness. This includes
a garnishment of any of Grantor's deposit accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any Guarantor of any of the Indebtedness or such Guarantor dies or becomes
incompetent.
Adverse Change. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Ohio Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
<PAGE> 6
05-01-1999 COMMERCIAL SECURITY AGREEMENT Page 6
Loan No 0106200000 (Continued)
Accelerate Indebtedness. Lender may declare the entire Indebtedness, including
any prepayment penalty which Grantor would be required to pay, immediately due
and payable, without notice.
Assemble Collateral. Lender may require Grantor to deliver to Lender all or any
portion of the Collateral and any and all certificates of title and other
documents relating to the Collateral. Lender may require Grantor to assemble the
Collateral and make it available to Lender at a place to be designated by
Lender. Lender also shall have full power to enter upon the property of Grantor
to take possession of and remove the Collateral. If the Collateral contains
other goods not covered by this Agreement at the time of repossession, Grantor
agrees Lender may take such other goods, provided that Lender makes reasonable
efforts to return them to Grantor after repossession.
Sell the Collateral. Lender shall have full power to sell, lease, transfer, or
otherwise deal with the Collateral or proceeds thereof in its own name or that
of Grantor. Lender may sell the Collateral at public auction or private sale.
Unless the Collateral threatens to decline speedily in value or Is of a type
customarily sold on a recognized market, Lender will give Grantor reasonable
notice of the time after which any private sale or any other intended
disposition of the Collateral is to be made. The requirements of reasonable
notice shall be met if such notice is given at least ten (10) days before the
time of the sale or disposition. All expenses relating to the disposition of the
Collateral, including without limitation the expenses of retaking, holding,
insuring, preparing for sale and selling the Collateral, shall become a part of
the Indebtedness secured by this Agreement and shall be payable on demand, with
interest at the Note rate from date of expenditure until repaid.
Appoint Receiver. To the extent permitted by applicable law, Lender shall have
the following rights and remedies regarding the appointment of a receiver: (a)
Lender may have a receiver appointed as a matter of right, (b) the receiver may
be an employee of Lender and may serve without bond, and (c) all fees of the
receiver and his or her attorney shall become part of the Indebtedness secured
by this Agreement and shall be payable on demand, with interest at the Note rate
from date of expenditure until repaid.
Collect Revenues, Apply Accounts. Lender, either itself or through a receiver,
may collect the payments, rents, income, and revenues from the Collateral.
Lender may at any time in its discretion transfer any Collateral into its own
name or that of its nominee and receive the payments, rents, income, and
revenues therefrom and hold the same as security for the Indebtedness or apply
it to payment of the Indebtedness in such order of preference as Lender may
determine. Insofar as the Collateral consists of accounts, general intangibles,
insurance policies, instruments, chattel paper, choses in action, or similar
property, Lender may demand, collect, receipt for, settle, compromise, adjust,
sue for, foreclose, or realize on the Collateral as Lender may determine,
whether or not Indebtedness or Collateral is then due. For these purposes,
Lender may, on behalf of and in the name of Grantor, receive, open and dispose
of mail addressed to Grantor; change any address to which mail and payments are
to be sent; and endorse notes, checks, drafts, money orders, documents of title,
instruments and items pertaining to payment, shipment, or storage of any
Collateral. To facilitate collection, Lender may notify account debtors and
obligors on any Collateral to make payments directly to Lender.
Obtain Deficiency. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining on the
Indebtedness due to Lender after application of all amounts received from the
exercise of the rights provided in this Agreement. Grantor shall be liable for a
deficiency even if the transaction described in this subsection is a sale of
accounts or chattel paper.
Other Rights and Remedies. Lender shall have all the rights and remedies of a
secured creditor under the provisions of the Uniform Commercial Code, as may be
amended from time to time. In addition, Lender shall have and may exercise any
or all other rights and remedies it may have available at law, in equity, or
otherwise.
Cumulative Remedies. All of Lender's rights and remedies, whether evidenced by
this Agreement or the Related Documents or by any other writing, shall be
cumulative and may be exercised singularly or concurrently. Election by Lender
to pursue any remedy shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to perform an obligation of
Grantor under this Agreement, after Grantor's failure to perform, shall not
affect Lender's right to declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
<PAGE> 7
05-01-1999 COMMERCIAL SECURITY AGREEMENT Page 7
Loan No 0106200000 (Continued)
Amendments. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment.
Applicable Law. This Agreement shall be governed by, construed and enforced in
accordance with the laws of the Commonwealth of Virginia. Lender and Grantor
hereby waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either party against the other.
Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's
costs and expenses, including attorneys' fees and Lender's legal expenses,
incurred in connection with the enforcement of this Agreement. Lender may pay
someone else to help enforce this Agreement, and Grantor shall pay the costs and
expenses of such enforcement. Costs and expenses include Lender's attorneys'
fees and legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (and including efforts to
modify or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Grantor also shall pay all court costs and
such additional fees as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
Multiple Parties; Corporate Authority. All obligations of Grantor under this
Agreement shall be joint and several, and all references to Grantor shall mean
each and every Grantor. This means that each of the persons signing below is
responsible for all obligations in this Agreement.
Notices. All notices required to be given under this Agreement shall be given in
writing, may be sent by telefacsimile (unless otherwise required by law), and
shall be effective when actually delivered or when deposited with a nationally
recognized overnight courier or deposited in the United States mail, first
class, postage prepaid, addressed to the party to whom the notice is to be given
at the address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties, specifying
that the purpose of the notice is to change the party's address. To the extent
permitted by applicable law, if there is more than one Grantor, notice to any
Grantor will constitute notice to all Grantors. For notice purposes, Grantor
will keep Lender informed at all times of Grantor's current address(es).
Power of Attorney. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover all
sums of money or other properly which may now or hereafter become due, owing or
payable from the Collateral; (b) to execute, sign and endorse any and all
claims, instruments, receipts, checks, drafts or warrants issued in payment for
the Collateral; (c) to settle or compromise any and all claims arising under the
Collateral, and, in the place and stead of Grantor, to execute and deliver its
release and settlement for the claim; and (d) to file any claim or claims or to
take any action or institute or take part in any proceedings, either in its own
name or in the name of Grantor, or otherwise, which in the discretion of Lender
may seem to be necessary or advisable. This power is given as security for the
Indebtedness, and the authority hereby conferred is and shall be irrevocable and
shall remain in full force and effect until renounced by Lender.
Severability. If a court of competent jurisdiction finds any provision of this
Agreement to be invalid or unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or unenforceable as to any other
persons or circumstances. If feasible, any such offending provision shall be
deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Successor Interests. Subject to the limitations set forth above on transfer of
the Collateral, this Agreement shall be binding upon and inure to the benefit of
the parties, their successors and assigns.
<PAGE> 8
05-01-1999 COMMERCIAL SECURITY AGREEMENT Page 8
Loan No 0106200000 (Continued)
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision or any other provision
of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Grantor, shall constitute a waiver of any of Lender's rights or of
any of Grantor's obligations as to any future transactions. Whenever the consent
of Lender is required under this Agreement, the granting of such consent by
Lender in any instance shall not constitute continuing consent to subsequent
instances where such consent is required and in all cases such consent may be
granted or withheld in the sole discretion of Lender.
SIGNATURES AND SEALS. In witness whereof, I have signed my name and affixed my
seal. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL
SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED MAY
1, 1999.
GRANTOR:
Littlefield, Adams & Company
By: By:
/s/ Michael B. Balber, President and CEO /s/ Warren L. Rawls, CFO,
Sec. & Treas.
<PAGE> 1
Exhibit 10.4
THIS AGREEMENT made and entered into this 15th day of October, 1998, by
and between NEXT, INC. an Indiana corporation, ("Next") and LITTLEFIELD, ADAMS &
COMPANY, a New Jersey corporation, ("LAC").
WHEREAS, LAC holds a license from World Championship Wrestling, Inc., a Time
Warner Company, for the sue of the names, likenesses, characters, trademarks
and/or copyrights of World Championship Wrestling (WCW). The license runs
through March 15, 2001, and covers various wearing apparel categories including
men's and boy's T-shirts, sweatshirts, tank tops, long sleeve knit shirts and
both long and short sleeve henley shirts. In addition, LAC hold's other licenses
covering the same type of wearing apparel ("Products").
WHEREAS, LAC has developed a merchandising organization and programs for the
sale of Products.
WHEREAS, Next has the financial ability and the technical expertise necessary to
acquire blank inventory of garments, provide the required decorating thereon and
do the shipping of the completed Products to fill LAC's customer orders for the
Products ("Processing Services").
WHEREAS, LAC desires to utilize the Processing Services of Next in the
production of the Products and Next is agreeable to providing those services,
subject to certain terms and conditions.
NOW, THEREFORE, for and in consideration of the mutual covenants herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged by each, the parties agree as follows:
1. Term. The term of this agreement shall commence on the date hereof
and shall continue through December 31, 1999, and, may be further extended by
mutual agreement of the parties.
2. Product Sales. As to the sale of Products by LAC to its customers,
LAC shall use the Processing Services of Next and Next agrees to provide the
required Processing Services. The compensation to be paid to Next for the
Processing Services shall be the amounts set forth on Exhibit 1 attached hereto
and made a part hereof, which amounts may periodically be adjusted by mutual
agreement of the parties.
3. LAC Procedure. As to each sale of Products, LAC shall supply the
following to Next:
a) The type or types of garments.
b) The quantity of garments
c) The decorating to be applied to the garments
d) the required shipping instructions and distributions by
date.
e) The identity of the customer.
f) Art and related films to be used.
g) Hang tags
h) Shirt labels
i) Packing lists
The information shall be supplied o the form of Exhibit 2
attached hereto and made a part hereof. Within twenty-four (24) hours of receipt
of each completed form, Next will confirm to LAC the delivery date of the
Products ordered.
4. Processing Services. As to each sale of Products, Next shall provide
the following Processing Services:
a) Acquire the necessary inventory of blank garments.
<PAGE> 2
2
b) Apply or cause to be applied the specified decorating to
the garments within the quality parameters established by LAC's go-by samples.
Production shall be by Next's contractors or sub-contractors for which Next
shall be responsible.
c) Affix to each garment price tickets and hang tags where
applicable to be supplied by LAC.
d) Pack the completed Products for shipping, affixing shipping
labels to be supplied by LAC to the shpiing containers.
e) Ship the products to LAC's customers with shipping charges
to be paid either by LAC or its customers and provide LAC with detail shipping
documentation to bill its customers.
f) Place garments on hangers where applicable.
5. LAC's Obligations. To enable Next to adequately perform the
Processing Service, LAC shall:
a) As to each sale of Products, promptly provide to Next the
information and materials required by paragraph 3 hereof.
b) Provide next with all necessary go-by samples.
c) Provide all necessary labels to be affixed to garments.
d) Arrange for shipping of the Products to its customers.
e) Invoice its customers for each sale.
f) Purchase from Next at Next's cost all excess blank garments
purchased by Next for a particular order within ninety (90) days after
completion of that order.
6. Compensation. As compensation to Next fro providing the Processing
Services, LAC shall pay to Next the Prices set forth on Exhibit 1, as adjusted
from time to time, for all Products shipped by Next to LAC's customers.
Upon shipment of each order, Next shall by overnight delivery forward
to LAC all order documentation including the amount to be paid to next for that
order. Within five (5) working days following receipt thereof, LAC shall pay the
amount due Next by overnight remittance to:
Danny F. Cooke
6430 Cobble Lane
Harrison, Tennessee 37341
(423) 344-9955
(423) 344-6644 (FAX)
7. Factor. LAC's factor, Merchant factors Corp., or any replacement
factor, will acknowledge this agreement and its terms that will allow LAC a
credit facility and related cash availability to pay Next within the above
specified parameters. Merchant Factors Corp. information is:
Walter Kaye, President
1430 Broadway
New York, New York 10013
(212) 840-7575
(212) 869-1752 (FAX)
8. License Validity. LAC represents and warrants to Next that it has
good and valid licenses in good standing for each of the Products, that each of
said licenses shall remain valid and in good standing during the entire term of
this Agreement and that LAC will indemnify and hold Next harmless from any and
all claims based upon or arising out of the invalidity or claimed invalidity of
said licenses.
<PAGE> 3
3
9) Entire Agreement. This Agreement constitutes the entire agreement of
the parties hereto relating to the subject matter hereof and there are no
written or oral terms or representations made by either party other than those
contained herein.
10) Law Governing. The validity, interpretation, construction,
performance and enforcement of this Agreement shall be governed by the laws of
the State of Indiana.
11) Invalidity. The invalidity or unenforceability of any term or terms
of this agreement shall not invalidate, make unenforceable or otherwise affect
any other term of this Agreement, which shall remain in full force and effect.
12) Headings. The headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
13) Binding Effect. This Agreement shall be binding on the parties
hereto, their successors and assigns.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
the day and year first above written.
NEXT, INC. BY: /S/ William Hensley
LITTLEFIELD, ADAMS & COMPANY BY: /S/ Michael Balber
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 107
<SECURITIES> 0
<RECEIVABLES> 2,716
<ALLOWANCES> 369
<INVENTORY> 2,153
<CURRENT-ASSETS> 5,109
<PP&E> 1,366
<DEPRECIATION> 823
<TOTAL-ASSETS> 5,670
<CURRENT-LIABILITIES> 2,089
<BONDS> 1,693
0
0
<COMMON> 3,336
<OTHER-SE> (1,491)
<TOTAL-LIABILITY-AND-EQUITY> 5,670
<SALES> 5,740
<TOTAL-REVENUES> 5,740
<CGS> 5,284
<TOTAL-COSTS> 5,284
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 185
<INCOME-PRETAX> (1,427)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,427)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,427)
<EPS-BASIC> (0.48)
<EPS-DILUTED> (0.48)
<FN>
<F1>Bad debt expense of 0 is included in the 338 reported as General and
Administrative expenses.
</FN>
</TABLE>
