<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
F O R M 1 0 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 1-8176
OR
</TABLE>
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
----- -----
----------------------------------
LITTLEFIELD, ADAMS & COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
NEW JERSEY 22-1469846
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
6262 EXECUTIVE BLVD., HUBER HEIGHTS, OHIO 45424
(Address or principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (937) 236-0660
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
-------------------
COMMON STOCK, $1.00 PAR VALUE
----------------------------------
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant at March 17, 1999, was approximately $6,163,000. On such date,
the last sale price of registrant's common stock was $3.75 per share. Solely for
the purposes of this calculation, shares beneficially owned by directors and
officers of the registrant and persons owning 5% or more of the registrant's
common stock have been excluded in that such persons may be deemed to be
affiliates of the registrant. Such exclusion should not however be deemed a
determination or admission by the registrant that such individuals are, in fact,
affiliates.
Indicate number of shares outstanding of each of the registrant's
classes of common stock, as of March 17, 1999.
<TABLE>
<CAPTION>
CLASS OUTSTANDING ON MARCH 17, 1999
----- -----------------------------
<S> <C> <C>
Common Stock, par value $1.00 per share 2,790,057
DOCUMENTS INCORPORATED BY REFERENCE
PART OF THE FORM 10-K INTO WHICH
DOCUMENT THE DOCUMENT IS INCORPORATED
-------- ----------------------------
Definitive Proxy Statement to Shareholders Part III, Items 10, 11, 12, and 13
</TABLE>
<PAGE> 2
LITTLEFIELD, ADAMS & COMPANY
INDEX TO FORM 10-K
<TABLE>
<CAPTION>
PART I PAGE
----
<S> <C> <C>
Item 1. Business 1
Item 2. Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market for Registrant's Common Equity & Related Stockholder Matters 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 18
Item 8. Financial Statements 19
Item 9. Change in Registrant's Certifying Accountant 19
PART III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners & Management 19
Item 13. Certain Relationships and Related Party Transactions 19
PART IV
Item 14. Financial Statements, Exhibits and Reports on Form 8-K 20
ADDITIONAL INFORMATION 23
SIGNATURES 24
EXHIBITS
Item 601. Exhibit Index Required by Item 601 of Regulation S-K
</TABLE>
This document incorporates into a single document the requirements of
the Securities and Exchange Commission for the Annual Report to Shareholders and
the Form 10-K.
<PAGE> 3
PART I
ITEM 1: BUSINESS
GENERAL INFORMATION
Littlefield, Adams & Company (the "Registrant", the "Company" or
"Littlefield") is a New Jersey corporation which was organized in 1949. The
Registrant is principally engaged in the design, imprinting and distribution of
young men's and boys' active wear products under various license agreements. The
Company also designs and markets apparel products with generic and proprietary
artwork. The accompanying financial statements include the accounts of
Littlefield, Adams & Company and its now dissolved subsidiaries, Medical Sales
Associates, Inc., Cornerstone Laboratories, Inc., and NUTECH, Inc. In January
1996, the three former wholly owned subsidiaries, Medical Sales Associates,
Inc., Cornerstone Laboratories, Inc., and NUTECH, Inc., were dissolved. Neither
Medical Sales Associates, Inc., Cornerstone Laboratories, Inc. nor NUTECH, Inc.,
conducted any business subsequent to 1995. Two other former wholly owned
subsidiaries, Collegiate Pacific Company and Sports Imprints, Inc. (Littlefield
acquired Sports Imprints, Inc. in January, 1993), were merged into the Company
effective June 30, 1995. The Company closed its Collegiate Pacific operations on
August 31, 1995.
The Registrant's principal executive offices and production facilities
are located at 6262 Executive Boulevard, Huber Heights, Ohio 45424. The
Company's telephone number is (937) 236-0660.
The Company also maintains an administrative office and sales showroom
in the Empire State Building, New York, New York.
Substantially all of the Company's operations are conducted in one
industry segment which is the design, imprinting and distribution of young men's
and boys' active wear products. Substantially all of the Company's sales are to
customers within the United States. See the accompanying Financial Statements
for more complete information regarding the Company's revenues, operating profit
or loss and assets.
PRODUCTS
Littlefield's products include imprinted and embroidered T-shirts,
sweatshirts, boxer shorts and related sportswear. The Company produces its own
art designs which are transferred to apparel by the direct textile printing
method generally referred to as "screen printing" (the application of plastisol
inks directly to garments using polyester mesh screens).
Littlefield is continuously developing new graphics, designs, logos and
other art using modern computer equipment and technology; seeking new licenses;
researching different methods of applying artwork to garments and seeking newer
and faster methods for production of the artwork.
The following table discloses the percentage of total product sales
contributed by the classes of products which accounted for the total product
sales during each of the past three fiscal years:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL PRODUCT SALES
PRODUCT CLASS 1998 1997 1996
------------- ---- ---- ----
<S> <C> <C> <C>
T-shirts 97% 98% 88%
Fleece Wear 2% 2% 12%
Boxer Shorts 1% -- --
</TABLE>
Littlefield, Adams & Company 1998 Form 10-K, Page 1
<PAGE> 4
TRADEMARKS
The Company is the owner of the trademark "FunWear", which is
registered with the U.S. Patent and Trademark Office, registration number
1,952,545. This registration is due for renewal in 2006. The Company is also in
the process of applying to register several other trademarks, as follows:
<TABLE>
<CAPTION>
Application
Trademark Number
<S> <C>
"TacoBat" 75/231,960
"Stix-n-Stones" 75/304,749
"Stix-n-Bones" 75/304,741
</TABLE>
LICENSES
Refer to Note 1 of the Notes to the Financial Statements.
MARKETS AND CUSTOMERS
The markets for Littlefield's products are principally retail chain
stores, specialty stores and department stores.
Littlefield sells its products through Company employed sales
personnel, and, to a lesser degree, through a sales force of independent
representatives.
An important part of the Company's ability to compete in the imprinting
industry is its ability to create marketable art designs. The Company has its
own art staff for that purpose, that uses modern computer equipment and
technology. As needed, Littlefield utilizes free-lance artists in various
capacities to assist in that effort.
Sales to two customers during 1998 individually exceeded 10% of the
total sales for the year. Sales to Wal-Mart and Kmart during 1998 amounted to
60% and 28%, respectively, of annual product sales. Refer to Note 1 of the Notes
to the Financial Statements.
Other major customers include: Target, Roses, JC Penney, Meijer, Ames
Department Stores, Sears, Duckwall-Alco Stores, Inc., Fred Meyer, Pamida, Inc.,
and Army and Air Force Exchange Service.
INVENTORY, BACKLOG AND PRODUCTION
The Company maintained an inventory adequate to meet anticipated
demands during a 64 day period in 1998, compared to a 84 day period in 1997 and
a 69 day period in 1996. The total value of such inventory as of December 31,
1998, was $3,157,000. During calendar years 1998, 1997 and 1996, $46,000,
$11,000 and $56,000, respectively, in merchandise, was returned to the Company
by customers.
As of December 31, 1998, 1997 and 1996, the Company had backlogs which
consisted of bookings for orders amounting to approximately $744,000, $123,000
and $26,000, respectively. From January 1, 1999 through March 23, 1999, the
Company received additional bookings from customers for approximately
$4,243,000. Not all "bookings" constitute contractual commitments, and may
therefore be subject to cancellation or modification by customers.
Littlefield, Adams & Company 1998 Form 10-K, Page 2
<PAGE> 5
From time to time, the Company has utilized the services of outside
screen printing contractors. Due to the significant increase in demand for the
Company's products in 1998, the utilization of outside screen printing
contractors became increasingly necessary. Approximately 84% of the goods
produced in 1998 were through the services of contract screen printers. The
boxer shorts sold in 1998 were purchased as finished products and drop shipped
directly to the customer from an outside contractor.
Generally, Littlefield requires payment for goods within 30 to 60 days
after delivery; however, exceptions are made on a case by case basis depending
on circumstances such as sizes of orders, anticipated future business and past
credit experience. As of December 31, 1998, the Company had combined trade and
factored net receivables of $7,815,000, with an average aging period, from
delivery, of 17 days.
SUPPLIERS
The Company currently purchases T-shirts, sweatshirts, sweatpants and
boxer shorts from various mills and other sources, including outside screen
printing contractors. Availability of required garments is usually plentiful,
with some short-term shortages of particularly popular styles and/or colors.
Good relationships with suppliers are very important, and the Company believes
its relationships with its major suppliers are excellent. During 1998, three
suppliers individually provided 10% or more of the Company's total garment
purchases, with one supplier accounting for approximately 65% of apparel goods
purchased in 1998.
EMPLOYEES
As of December 31, 1998, the Company had approximately 50 full time
employees, and the Company believes that employee relations are good.
COMPETITION
The Company competes against a large number of national and regional
manufacturers of similar products and does not have a dominant market share in
the imprinted young men's and boys' active wear industry. The Company believes
that competition is based on popularity of a particular licensed brand, price,
quality of merchandise, artistic creativity and service, including timeliness of
delivery.
There are a significant number of major participants in the imprinted
young men's and boys' active wear industry. Trau & Loevner, Freeze/Central
Mills, Giant Merchandising, Logotel, Inc., Changes, Stanley Desantis, Inc.,
Winterland Productions, Wild Oats, and Red Sun Printed Apparel are among the
Company's most significant competitors.
COST AND EFFECT OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
To the best of management's knowledge, the Company will not be required
to directly incur material expenses in conjunction with federal, state and local
environmental regulations; however, like all other companies, there are many
incalculable indirect expenses associated with compliance by other entities that
affect the prices paid by the Company for goods and services.
Littlefield, Adams & Company 1998 Form 10-K, Page 3
<PAGE> 6
ITEM 2: PROPERTIES
The following tables set forth information with respect to the material
real property owned or leased by the Registrant as of December 31, 1998. For
more detailed information, refer to Note 15 of the Notes to the Financial
Statements.
<TABLE>
<CAPTION>
OWNERSHIP
GENERAL CHARACTER OR EXPIRATION
LOCATION AND USE OF PROPERTY DATE OF LEASE
- -------- ------------------- -------------
<S> <C> <C>
Huber Heights, 64,000 square feet, used for administration and 1999 *
Ohio graphics design, imprinting and shipping.
New York, 2,000 square feet in the Empire State Building, 2004
New York used as a sales showroom and for administration.
</TABLE>
- -------------------------------------------------
* Management is evaluating whether to seek a renewal on the lease for its
Ohio facilities. The lease expires December 31, 1999. Management believes
that either the current lease will be renewed, or a lease for an
alternate facility will be finalized by August 31, 1999.
As of December 31, 1998, the Registrant's facilities and the equipment
located therein were in good working condition and adequate for its needs and
any contemplated future expansion.
ITEM 3: LEGAL PROCEEDINGS
The Company is not involved in any litigation or other reportable legal
proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matters were submitted to a vote
of security holders, through the solicitation of proxies or otherwise.
Littlefield, Adams & Company 1998 Form 10-K, Page 4
<PAGE> 7
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since September 8, 1997, Littlefield's Common Stock has traded on the
NASD's OTC Electronic Bulletin Board ("OTC BB") under the symbol "FUNW". The
symbol reflects FUNWEAR, a registered trademark used by the Company. Prior to
September 8, 1997, the Company's Common Stock was traded on the American Stock
Exchange (the "AMEX") under the symbol "LFA". Because Littlefield did not fully
satisfy all of the guidelines of the AMEX for continued listing, the Company
consented to the removal of its Common Stock from the AMEX. September 5, 1997
was the last day of trading for the Company's Common Stock on the AMEX.
The high and low trading prices of the Registrant's Common Stock, as
reported on the AMEX up to and including September 5, 1997, and as reported on
the OTC BB subsequent to that date, during each of the last two fiscal years,
were as follows:
<TABLE>
<CAPTION>
1998 1997
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 2 1/8 3 3/8 1 1/8
Second Quarter 5 5/16 15/16 3 1
Third Quarter 5 7/16 2 1/2 1 1/4* 3/16**
Fourth Quarter 6 1/8 3 7/8 5/8 1/8
</TABLE>
- ------------------------------
* Occurred prior to September 5, 1997 while the Registrant's Common
Stock was traded on the AMEX.
** Occurred subsequent to September 8, 1997 while the Registrant's
Common Stock was traded on the OTC BB.
Over-the-Counter (Electronic Bulletin Board) quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions and may
not necessarily represent actual transactions.
The Registrant has not paid any dividends on its common stock during
the last two fiscal years and does not expect to pay any cash dividends in the
foreseeable future. The Company's credit facility with The Provident Bank
prohibits the payment of dividends without their consent (see Note 6 of the
Notes to the Financial Statements). There were approximately 542 holders of
record of the Registrant's common stock as of December 31, 1998, including
several holders who are nominees for an undetermined number of beneficial
owners. The Registrant believes there are approximately 1,300 beneficial owners
of the Registrant's common stock.
Littlefield, Adams & Company 1998 Form 10-K, Page 5
<PAGE> 8
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data presented below are derived from the
audited consolidated financial statements of the Company. The data presented
below for the fiscal years ended December 31, 1998, 1997 and 1996, should be
read in conjunction with the financial statements, the notes thereto, and the
other financial information included in this report.
<TABLE>
<CAPTION>
LITTLEFIELD, ADAMS & COMPANY
OPERATING RESULTS (1) 1998 1997 1996 1995 1994
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues $25,917 $ 2,471 $12,036 $14,735 $24,557
Income (loss) before income taxes 2,599 (1,966) 769 (1,006) 951
Income tax benefit (provision) (133) 29 30 14 (294)
Net income (loss) before extraordinary gain 2,466 (1,937) 799 (992) 657
Extraordinary gain, net -- -- 94 -- --
Net income (loss) 2,466 (1,937) 893 (992) 657
Basic earnings per share:
Weighted average common shares outstanding 2,785,536 2,780,057 2,774,169 2,275,701 2,229,321
Net income (loss) per common share:
Before extraordinary gain 0.89 (0.70) 0.29 (0.44) 0.29
Extraordinary gain -- -- 0.03 -- --
---- ------ ---- ----- ----
Net income (loss) per common share 0.89 (0.70) 0.32 (0.44) 0.29
==== ====== ==== ===== ====
Diluted earnings per share:
Weighted average common shares and common
share equivalents outstanding 4,177,919 2,780,057 2,967,812 2,275,701 2,230,391
Net income (loss) per common share:
Before extraordinary gain 0.60 (0.70) 0.27 (0.44) 0.29
Extraordinary gain -- -- 0.03 -- --
---- ------ ---- ----- ----
Net income (loss) per common share 0.60 (0.70) 0.30 (0.44) 0.29
==== ====== ==== ===== ====
FINANCIAL POSITION (1)
- ------------------
Working capital $ 5,548 $ 21 $ 1,336 $ (295) $ 605
Working capital ratio 1.93/1 1.02/1 1.36/1 .94/1 1.09/1
Property, plant and equipment, net 486 416 558 1,109 1,254
Total assets 12,009 1,498 6,120 6,676 9,232
Long term debt, less current portion 3,137 18 1 119 219
Shareholders' investment 2,867 384 2,321 24 1,172
</TABLE>
- ------------------------------
(1) Dollars in thousand except for per share amounts.
Littlefield, Adams & Company 1998 Form 10-K, Page 6
<PAGE> 9
ITEM 7: 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 financial statements included in this report on Form 10-K
and their accompanying notes.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items
related to the Company's results of operations as a percentage of net product
sales.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net product sales (in thousands) $25,917 $2,436 $11,884
100.0% 100.0% 100.0%
Add: Other revenues -- 1.4% 1.3%
Less: Cost of products sold 69.3% 114.3% 70.7%
Selling and administrative expenses 19.1% 81.9% 27.3%
Impairment loss 0.1 15.3% --
------ ------ ------
Income (loss) from operations 11.5% (110.1)% 3.3%
====== ====== ======
</TABLE>
In years prior to 1997, the Company was substantially dependent on
sales of Harley-Davidson Motor Co. (Harley-Davidson) licensed products to
generate cash flow from operations and provide funds to meet the Company's
obligations as they became due. The Company's Harley-Davidson license agreement
expired on December 31, 1996, and was not renewed by Harley-Davidson.
Consequently, the Company's product sales in 1997 were dramatically reduced from
levels attained in 1996 and before, and the Company incurred a net loss of
$1,937,000 for the year ended December 31, 1997.
The diminished revenues experienced by the Company during 1997 and the
first quarter of 1998 had a material adverse effect on its results of operations
and financial condition. In April 1998, the Company finalized a multi-year
license agreement with World Championship Wrestling, Inc. ("WCW"). Littlefield
started shipping WCW licensed products during late April 1998. Demand for the
WCW licensed products exceeded management's expectations, and sales rapidly
increased. With net sales of $2,908,000, $12,274,000 and $10,319,000 in the 1998
second, third and fourth quarters, respectively, the Company generated income
from operations of $188,000, $1,858,000 and $1,284,000 in the respective
quarters. Management believes the significant increase in revenues during the
second, third and fourth quarters of 1998, plus the utilization of the
$1,200,000 in proceeds from the Company's private offering of 7% Convertible
Subordinated Debentures completed on April 24, 1998, are providing sufficient
cash flows for the Company to satisfy its obligations as they become due.
Littlefield, Adams & Company 1998 Form 10-K, Page 7
<PAGE> 10
1998 COMPARED TO 1997
Net Product Sales
Net sales increased sharply in 1998, rising from $2,436,000 in 1997 to
$25,917,000 in 1998. This represents an increase of 964% in net sales from 1997
to 1998. The nearly $26 million in revenues in 1998 places the Company's annual
revenues at their highest level since 1982. During April 1998, the Company and
World Championship Wrestling, Inc., a Time Warner Company, finalized a
merchandising license agreement for the names, likenesses, characters,
trademarks, and/or copyrights of World Championship Wrestling ("WCW") and the
New World Order (the "nWo"). Sales of WCW and nWo (collectively, "WCW") licensed
products exceeded management expectations. Sales of WCW licensed products
accounted for 94% of total 1998 sales.
The Company's WCW licensed products, featuring artwork depicting
professional wrestlers, were extremely popular in 1998. Buyers from the
Company's major customers placed large initial orders without utilizing the
"test order" process common to the industry. Point of sale data from
Littlefield's largest customers indicated that the initial orders for WCW
licensed products were sold at record rates by retailers. The Company's average
selling price for goods sold in 1998 was 21.1% higher than the average selling
price in 1997.
During 1998, sales of "The Simpsons" and "King of the Hill" (Twentieth
Century Fox) licensed products totaled $1,342,000, or approximately 5% of 1998
net sales. In May 1998, the Company entered the boxer shorts segment of the
apparel industry with shipments of approximately $160,000 of boxer shorts. All
boxer shorts sold in 1998 were under the Company's license for The Simpsons. The
boxer shorts sold in 1998 were purchased as finished products and drop shipped
directly to the customer from an outside contractor.
The Company has participated in several special promotions with WCW,
including live appearances by professional wrestlers. Additional promotions
involving live appearances by professional wrestlers are anticipated during
1999. Littlefield is also working with Twentieth Century Fox to develop in-store
advertising promotions for licensed products in 1999. There are no assurances,
however, that such promotions will in fact be conducted, or that the impact, if
any, on the Company's sales of licensed products will be favorable.
Management is assessing the feasibility of utilizing the internet for
marketing and selling "Stix-n-Stones" apparel, the Company's proprietary screen
printed sportswear. There are no assurances, however, that such internet
marketing and sales efforts will in fact be conducted, or that the impact, if
any, on the Company's profits will be favorable.
Cost of Products Sold
In 1998, the cost of products sold rose significantly, reflecting the
large increase in sales. Gross profit margin, as a percentage of net sales, was
31% in 1998. Management elected to utilize the services of contract screen
printers to increase the Company's manufacturing capacity in response to the
demand for WCW licensed products, as an alternative to investing capital to
increase Littlefield's internal manufacturing capacity. Approximately 77% of the
total 1998 cost of products sold relates to work performed by contractors, with
one contractor individually accounting for 76% of the total 1998 cost of goods
sold. The large volume of additional production needed was taken into
consideration when management negotiated the contract printing rates. Overall,
management believes the cost relating to contract screen printing utilized in
1998 was competitive with the cost of internal production, and did not burden
the Company with additional infrastructure.
The 1998 gross profit margin of 31% compares to (14)% in 1997. With the
diminished amount of total net sales experienced in 1997, the cost of products
sold in 1997 exceeded net product sales due to unabsorbed overhead. Certain
expenses required to be included in cost of products sold are more fixed in
nature, and do not necessarily increase or decrease with changes in sales
volume.
Littlefield, Adams & Company 1998 Form 10-K, Page 8
<PAGE> 11
Other Revenues
Littlefield did not have any other revenues in 1998. The $35,000 of
other revenue in 1997 was from the sale of rights to the trademark "Collegiate
Pacific". The Company does not expect to receive any material amounts of other
revenues in 1999.
Selling and Administrative Expenses
In 1998, selling and administrative expenses were $2,961,000 greater
than during 1997, increasing from $1,995,000 to $4,956,000. Royalty expenses
increased by $2,798,000 in 1998 compared with 1997 due to the increase in the
sales of licensed products. Included in 1998 selling and administrative expenses
is $105,000 for executive officers' incentive bonuses which are based on
profitability. Decreases in various overhead accounts moderated the net increase
in selling and administrative expenses, which increased by only $163,000
excluding royalties. As a percentage of net sales, selling and administrative
expenses were 19% in 1998 as compared to 82% in 1997. Lack of sales leverage in
1997 caused the percentage reported to be abnormally high.
Impairment Loss
The Company has assessed, under the guidelines set forth in SFAS No.
121, the recoverability of its investment in long-lived assets. During 1998, the
Company recorded an impairment loss of $34,000 relating to assets held for sale.
The $34,000 impairment loss is included in the calculation of the income from
operations in 1998 (see Note 2 of the Notes to the Financial Statements).
In 1997, the Company determined that the recognition of an impairment
loss, under the guidelines set forth in SFAS No. 121, was required as of
December 31, 1997. Such assessment required the Company to make certain
estimates of future sales volumes and prices which were expected to occur over
the remaining useful lives of its long-lived assets. Based on this analysis, the
Company recognized an impairment loss as of December 31, 1997, in the amount of
$374,000, which eliminated the carrying amount of identified goodwill. The
impairment loss is included in the calculation of the loss from operations in
1997 (see Note 2 of the Notes to the Financial Statements).
Interest Expense
Interest expense on short-term debt increased by $176,000 in 1998
compared to 1997 due to increased borrowings to support the substantial increase
in revenues and resulting substantial increases in inventory purchases.
Additionally, interest expense of $58,000 on the 7% Convertible Subordinated
Debentures which were issued on April 24, 1998, and $8,000 on the long-term
revolving promissory note signed on December 10, 1998, was recorded. Interest
rates on short-term debt experienced by the Company in 1998 and 1997 did not
vary significantly. The interest rate of 7% on the Debentures is considerably
lower than the interest rates experienced by the Company on short-term debt. The
interest rate in effect during December 1998 for the long-term revolving
promissory note was 10.75%.
Littlefield, Adams & Company 1998 Form 10-K, Page 9
<PAGE> 12
Income Taxes
The Company records estimated local, state and federal income taxes,
including alternative minimum taxes. For the year ended December 31, 1998, the
Company reported a net income tax provision of $133,000. For the year ended
December 31, 1997, the Company reported a net income tax benefit of $29,000. The
net tax benefit of $29,000 for 1997 was to adjust certain estimates of income
taxes recorded as of December 31, 1996. A summary of income taxes reported for
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Estimated combined current year
income tax expense $ (133,000) $ --
Refunds and credits reversed -- 29,000
---------- -----------
Total 1998 and 1997 income tax (expense) benefit $ (133,000) $ 29,000
=========== ===========
</TABLE>
As of December 31, 1998, the Company had net operating loss (NOL)
carryforwards of approximately $7,550,000 for federal income tax purposes
available to reduce future taxable income. In addition, the Company had an AMT
credit carryforward of $72,000 available to reduce future tax payments. The NOL
carryforwards expire in 2002 through 2012 if not utilized. The Company's ability
to use its NOL carryforwards to offset future taxable income is subject to
restrictions enacted in the Internal Revenue Code of 1986 as amended (the
"Code"). These restrictions provide for limitations on the Company's utilization
of its NOL carryforwards following certain ownership changes described in the
Code. As a result of ownership changes in 1993, $280,000 of the Company's
existing NOL carryforwards are subject to the limitation of which the maximum
amount which can be utilized is $61,000 per year (see Note 16 of the Notes to
the Financial Statements).
Accounts Receivable
Net trade and factor receivables increased from $187,000 at December
31, 1997 to $7,815,000 at December 31, 1998. The significant increase in sales
volume during 1998, and in particular, the net sales in the fourth quarter,
produced the great increase in receivables. Net product sales during the fourth
quarters of 1997 and 1998 were approximately $616,000 and $10,319,000,
respectively. Customer payment terms did not change significantly from 1997 to
1998. During the 1998 third and fourth quarters, the Company negotiated early
payments, at a discount, from its largest customers in order to stay within
borrowing restraints in place at the time. The Company entered into a revolving
promissory note effective December 10, 1998, which has substantially increased
the Company's borrowing ability (see Note 1 of the Notes to the Financial
Statements).
Inventories
Purchases of new inventories required to support the significant
increases in sales volume during 1998 caused an increase in the level of
inventories. The balance of net inventories increased $2,516,000 from December
31, 1997 to December 31, 1998. The annualized inventory turnover rate for the
year ended December 31, 1998 was up to 5.7 turns per year compared to an
annualized rate of 4.3 turns per year for the year ended December 31, 1997. The
964% increase in annual net product sales volume was primarily responsible for
the increase in annualized inventory turns, although the 1998 inventory turnover
rate was negatively affected by 1998 purchases of inventories for fulfillment of
1999 orders. At December 31, 1998, the net inventories balance was $3,157,000.
Approximately $2,241,000, or 71%, are blank garments to be utilized in the
screen printing process. The largest component of the blank garment inventories
is approximately $1,902,000 of T-shirts (and similar style garments) with
sewn-in WCW labels for use in the screen printing of WCW licensed products (see
Notes 2 and 3 of the Notes to the Financial Statements).
Littlefield, Adams & Company 1998 Form 10-K, Page 10
<PAGE> 13
Accounts Payable
The balance of accounts payable went from $117,000 as of December 31,
1997 to $1,653,000 as of December 31, 1998, an increase of $1,536,000. The
majority of the increase was due to the purchases of inventories in the 1998
fourth quarter and the overall increase in expenditures required to support the
significant increase in revenues in 1998.
Accrued Expenses
The balance of accrued expenses went from $337,000 as of December 31,
1997 to $1,235,000 as of December 31, 1998, an increase of $898,000. The
significant portion of the increase was due to the increase in accrued royalties
from the sales of licensed products (see Note 5 of the Notes to the Financial
Statements).
1997 COMPARED TO 1996
Net Product Sales
Net product sales for 1997 were $2,436,000, a decline of $9,448,000
(80%) compared to 1996. This substantial decrease is due primarily to the
expiration of the Company's Harley-Davidson license on December 31, 1996. Also
contributing to the decrease was the difficulty the Company had faced in 1997
when trying to gain customer acceptance of its then currently licensed products.
Customers were reluctant to place orders for licensed apparel products which
were previously unproven at their stores. Buyers at the Company's major
customers generally evaluate new products by utilizing small test orders and
then assessing point of sale data generated from the retail sales of such
products. Only products which perform well statistically in their test are
generally then reordered by the customer. The competition for retail sales
dollars in the screen printed novelty T-shirts business was fierce in 1997. Weak
overall sales of screen printed novelty T-shirts at the discount retailers,
combined with other factors facing the industry, such as excessive inventory
levels, put great downward pressure on average selling prices. The Company's
average selling price for goods sold in 1997 was 19.4% lower than the average
selling price in 1996.
Cost of Products Sold
With the significant decline in sales during 1997, the cost of products
sold in 1997 exceeded net product sales due to unabsorbed overhead. Certain
expenses required to be included in cost of products sold are more fixed in
nature, and do not necessarily increase or decrease with changes in sales
volume. Gross profit margin, as a percentage of net sales, was 29% in 1996 as
compared to (14)% in 1997. This decline is reflective of the sizable decrease in
sales volume and resultant lack of leverage on fixed costs and a much lower
average selling price.
Other Revenues
Other revenues declined from $152,000 in 1996 to $35,000 in 1997. The
decrease is due to the winding-up, in 1996, of a sub-lease agreement from which
the Company had received monthly revenues. The $35,000 of other revenue in 1997
was from the sale of rights to the trademark "Collegiate Pacific".
Littlefield, Adams & Company 1998 Form 10-K, Page 11
<PAGE> 14
Selling and Administrative Expenses
Selling and administrative expenses, as a percentage of net sales, were
82% in 1997, up from 27% in 1996 due to the lack of sales leverage. Selling and
administrative expenses were $1,995,000 in 1997 compared to $3,242,000 in 1996.
Royalty expenses related to the sales of licensed products amounted to $168,000
and $671,000 in 1997 and 1996, respectively. The change in royalties relates to
the lower sales volume. Total professional fees amounted to approximately
$163,000 and $475,000 in 1997 and 1996, respectively, a reduction of 66%.
Professional fees have declined primarily due to the settlement of numerous
lawsuits.
Impairment Loss
The Company has assessed, under the guidelines set forth in SFAS No.
121, the recoverability of its investment in long-lived assets. These long-lived
assets consist primarily of property, plant and equipment to be held and used in
operations, and prior to its write-off at December 31, 1997, goodwill. The
Company determined that the recognition of an impairment loss was required as of
December 31, 1997. Such assessment required the Company to make certain
estimates of future sales volumes and prices which were expected to occur over
the remaining useful lives of its long-lived assets. Based on this analysis, the
Company recognized an impairment loss as of December 31, 1997, in the amount of
$374,000, which eliminated the carrying amount of identified goodwill. The
impairment loss was included in the calculation of the loss from operations in
1997 (see Note 2 of the Notes to the Financial Statements).
Interest Expense
Decreased average borrowings because of lower inventory levels and
reduced selling and administrative spending allowed interest expense to fall to
$120,000 for 1997, compared to $235,000 in 1996, a decrease of 49% . Interest
rates experienced by the Company in 1997 and 1996 did not play a significant
role in the reduction of interest expense.
Income Taxes
The Company records estimated local, state and federal income taxes,
including federal alternative minimum taxes. For the year ended December 31,
1997, the Company reported a net income tax benefit of $29,000. For the year
ended December 31, 1996, the Company reported a net income tax benefit of
$30,000 before the extraordinary gain. The extraordinary gain of $94,000
reported in 1996 is net of $9,000 of estimated income tax expense. The net tax
benefits for 1997 and 1996 were due to the reversal of excess prior period
accruals of $29,000 and $61,000, respectively, based on the refunds and credits
requested on the Company's 1996 and 1995 income tax returns (see Note 16 of the
Notes to the Financial Statements). A summary of income taxes reported for 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
Estimated combined current year income tax
expense before extraordinary gain $ -- $ (31,000)
Refunds and credits reversed 29,000 61,000
----------- -----------
Net income tax benefit before extraordinary gain 29,000 30,000
Estimated income tax on extraordinary gain -- (9,000)
----------- -----------
Total 1997 and 1996 income tax benefit $ 29,000 $ 21,000
=========== ===========
</TABLE>
Littlefield, Adams & Company 1998 Form 10-K, Page 12
<PAGE> 15
Inventories
Management was successful in its efforts to reduce inventory during
1997. The balance of net inventories fell $938,000 (59%) from 1996 to 1997.
Purchases of new inventory were tightly controlled and unneeded blank goods were
sold to provide working capital for operations. The annualized inventory
turnover rate for 1997 decreased to 4.3 turns per year compared to 5.3 turns per
year for 1996. The 80% decline in sales volume was primarily responsible for the
decrease in annualized inventory turns, even with the 59% reduction in net
inventories (see Notes 2 and 3 of the Notes to the Financial Statements).
Accrued Expenses
The Company was previously a party to a license agreement which expired
on December 31, 1996. In conjunction with the termination of that license
agreement, the Company entered into a Settlement Agreement dated March 1, 1996.
The Company had unpaid royalties of approximately $853,000 relating to sales of
these licensed products which were accrued in periods prior to March 1, 1996.
Management believes that the Company's liability for these unpaid royalties was
discharged under the Settlement Agreement, and that the likelihood of the
licensor successfully asserting a claim for such royalties is remote. The
Company therefore has reversed the accrual of these unpaid royalties and
reported the reversal, net of related estimated legal expenses, as a gain on
claims settlement in the fourth quarter of 1997 (see Note 5 of the Notes to the
Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
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 inventory. The Note bears interest at
prime plus an applicable margin. The initial margin is 3%. The prime rate in
effect at 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. 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 Note contains certain covenants which
include restrictions on the payment of dividends, and the Company maintaining:
(i) a minimum amount of tangible net worth, (ii) a maximum debt to equity ratio,
and (iii) a minimum debt service ratio. As of December 31, 1998, Littlefield was
in compliance with such covenants. As of December 31, 1998, the outstanding
balance of $3,125,000 is classified as a long-term liability. The remaining
borrowing availability from Provident as of December 31, 1998, was $2,519,000.
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 will be factored; (b)
the effective rate of interest shall be prime plus 2%; (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 receivable which Merchant Factors Corp.
approves for credit are being factored at the rate of 1 1/8%. Accounts that are
credit approved by Merchant Factors Corp. are at its risk, which minimizes the
Company's credit risk. The Company, at its option, can factor at a rate of 1
1/8%, with recourse, accounts that Merchant Factors Corp. does not approve for
credit. The servicing of all factored accounts is done by Merchant Factors Corp.
Borrowings are secured by the
Littlefield, Adams & Company 1998 Form 10-K, Page 13
<PAGE> 16
assigned accounts receivable. At December 31, 1998 and 1997, the Company had
factored receivables amounting to $2,050,000 and $182,000, respectively, most of
which had been approved for credit by Merchant Factors Corp. The remaining
borrowing availability from Merchant Factors Corp. as of December 31, 1998, was
approximately $479,000, as compared to approximately $138,000 at December 31,
1997.
For the year ended December 31, 1998, operating activities used net
cash of $5,325,000, while net cash of $233,000 was used in investing activities.
The Company borrowed a total of $25,882,000 during 1998, and repaid $20,286,000.
Additionally, the Company received $12,000 from the sale of common stock upon
exercise of stock options. This resulted in net cash provided by financing
activities of $5,608,000. During 1998, there was a net increase in cash of
$50,000.
At December 31, 1998, the Company had working capital of $5,548,000 and
a working capital ratio of 1.93/1. This compares to December 31, 1997, when the
Company had net working capital of $21,000 and a working capital ratio of
1.02/1.
A major source of trade credit in 1998 was provided by utilizing
arrangements for turn-key contract screen printing services. The negotiated cost
of these services included the contractor providing the necessary garments. The
printing work performed by one such third-party contractor represented 76% of
the Company's total apparel production in 1998. The contractor billed the
Company for services when all work required had been completed, and the finished
products were ready for shipment to Littlefield's customer. In most cases, the
goods were shipped to the Company's customer prior to the required payment date
of the contractor's invoice. This allowed Littlefield to borrow against the
newly created receivables to obtain funds to pay the contractor and provide
working capital for normal operations.
As of December 31, 1998, the Company had a backlog which consisted of
bookings for orders amounting to approximately $744,000. From January 1, 1999
through March 23, 1999, the Company received additional bookings from customers
for approximately $4,243,000. Not all "bookings" constitute contractual
commitments, and may therefore be subject to cancellation or modification by
customers.
The availability of cash flow from operations subsequent to December
31, 1998 is dependent on the ability of the Company to acquire and sell licensed
and proprietary products throughout 1999 and beyond. In order to generate the
funds needed to acquire and develop the Company's new license with WCW and
support general operations, management raised $1.2 million with a private
offering of 7% Convertible Subordinated Debentures (the "Debentures") which was
completed on April 24, 1998. Based on the Company's estimates which include the
funds from the Debentures, as well as the sales and bookings subsequent to
December 31, 1998 discussed above, the Company believes it can sustain itself
for the foreseeable future.
On September 16, 1998, Twentieth Century Fox granted one year
extensions to the original terms of the Company's licenses for The Simpsons and
King of the Hill. The Simpsons license now expires on December 31, 2000, while
the King of the Hill license now concludes on December 31, 2001.
On November 2, 1998, World Championship Wrestling, Inc. (a Time Warner
company), in conjunction with its exclusive licensing agent Leisure Concepts,
Inc. ( the licensing division of 4 Kids Entertainment, Inc.) presented the
Company with the first annual "Golden Goldberg" award to signify Littlefield,
Adams & Company being named the WCW licensee of the year for 1998.
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.
Littlefield, Adams & Company 1998 Form 10-K, Page 14
<PAGE> 17
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
gained entry into the boxer shorts segment of the apparel industry with the
delivery of approximately $160,000 of Simpsons' boxer shorts in May 1998. The
Company coordinates the development of marketing and sales strategies with its
licensors and customers whenever possible.
Purchases and Sales of Property, Plant and Equipment
During 1998, the Company acquired $241,000 of additional property,
plant and equipment. Of the total $241,000, approximately 34% was for office
furniture, fixtures and data processing equipment, 2% was for leasehold
improvements, and 64% was for production equipment. During 1998, the Company
sold fixed assets, with a net book value of $24,000, for $11,000, resulting in a
reported net loss of $13,000. The proceeds were used as working capital and
reduced borrowings.
The Company has a 1999 capital expenditures budget of $250,000.
Legal Matters
The Company is not involved in any litigation or other reportable legal
proceedings.
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 regards 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
---------- ----------- ----------------
IT Systems:
- -----------
<S> <C> <C> <C>
Computer Hardware Not ready May 1999 $ 2,000 - $ 25,000
Operating software Not ready May 1999 $ 5,000 - $ 15,000
Application software Not ready May 1999 $ 2,000 - $ 50,000
Non-IT Systems:
- ---------------
Production equipment Ready
Shipping equipment Ready
Office Equipment Assessing June 1999 $ 0 - $ 20,000
</TABLE>
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 are Year 2000 ready.
Littlefield, Adams & Company 1998 Form 10-K, Page 15
<PAGE> 18
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 second 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 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.
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.
Littlefield, Adams & Company 1998 Form 10-K, Page 16
<PAGE> 19
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING
RESULTS
This report contains various forward looking statements and information
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", and similar
expressions are intended to identify forward looking statements. Such statements
are subject to certain risks, uncertainties and assumptions. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
expected or projected. Among the key factors that may have a direct bearing on
the Company's results are set forth below.
Future trends for revenues and profitability remain difficult to
predict. The Company continues to face many risks and uncertainties, including:
general and specific market economic conditions; lack of diversity in licensed
products revenues with 94% of 1998 revenues coming from sales of World
Championship Wrestling licensed products, reliance on one third-party contractor
for a significant portion (76%) of goods produced in 1998, and overall
competitive factors which includes the possibility that the Company's
competitors may acquire other licenses which prove to have greater consumer
demand than any of the Company's active licenses and therefore, reduce the
Company's market share.
The general economic condition in the United States could affect the
overall consumer buying patterns at the discount retailers. Management believes
most consumers purchase screen printed novelty T-shirts as an impulse buy.
Discretionary purchases of this type could decrease if the consumer viewed the
overall economy as worsening. The price of blank T-shirts bears some
relationship to the commodity price of cotton. Unforeseen factors causing a
material increase or decrease in the price of cotton could cause an increase or
decrease in cost of the Company's primary raw materials. Management is uncertain
if any significant price increases could be passed on to its customers.
Management evaluates potential new licenses based on the anticipated
popularity of the licensed products and other assumptions such as the number of
other existing licensees which would compete with the Company. The Company must
also consider the cost required to secure a license, and limit consideration to
those licenses which management believes are not too costly. If underlying
assumptions prove incorrect, revenues generated from a specific license may not
be sufficient to recover the acquisition costs and minimum royalties which may
be part of the license agreement. Consumer demand for a certain licensed product
is very difficult to predict, and procurement of a specific license does not
guarantee sales. Retailers are reluctant to try for a second time, licensed
products which failed to deliver acceptable sales results when first tested.
The largest potential market for the Company's products is with the
discount retailers. Competition for "open-to-buy" dollars (sales orders) from
the buyers at these retailers is extremely intense. The Company competes
directly with many other screen printers including some garment mills which are
also in the screen printing business. Some of the competitors are larger
companies with more financial resources than Littlefield, Adams & Company.
Companies supplying products to discount retailers must be able to provide
customer required ancillary services such as the ability to transact business
electronically ("EDI"), and generally must absorb the related expenses as part
of the cost of doing business with the discount retailers. The Company is
currently providing the required services, but predicting potential new
requirements which may be placed on the Company in the future, along with the
related costs, is extremely difficult. Competitors with greater financial
resources than the Company would be able to fulfill potential new requirements
more readily if the implementation costs of such new services were to be
substantial.
Littlefield, Adams & Company 1998 Form 10-K, Page 17
<PAGE> 20
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of December 31, 1998, 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) two
promissory notes with The Bank of Floyd; (4) 7% Convertible Subordinated
Debentures; (5) other immaterial debt consisting of notes payable and a capital
lease; 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. The Company believes the
average collection period for factored receivables is approximately 35 days. The
prime rate in effect as of December 31, 1998 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 December 31, 1998, 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
1999 2000 2001 Total Fair value
---- ---- ---- ----- ----------
Liabilities
Short-term Debt:
<S> <C> <C> <C> <C> <C>
Fixed Rate $ 1,241,000 $ -- $ -- $ 1,241,000 $ 1,241,000
Average interest rate 7.05% -- -- 7.05%
Variable Rate 1,327,000 -- -- 1,327,000 1,327,000
Average interest rate 9.75% -- -- 9.75%
Long-term Debt:
Fixed Rate $ 25,000 $ 9,000 $ 3,000 $ 37,000 $ 37,000
Average interest rate 10.44% 13.50% 13.50% 11.43%
Variable Rate 482,000 3,125,000 -- 3,607,000 3,607,000
Average interest rate 8.81% 9.75% -- 9.62%
</TABLE>
Littlefield, Adams & Company 1998 Form 10-K, Page 18
<PAGE> 21
ITEM 8: FINANCIAL STATEMENTS
The financial statements of the Company and the related report of the
Company's independent public accountants thereon are included in this report at
the page indicated.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS:
Balance Sheets at December 31, 1998 and 1997 F-2
Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 F-3
Statements of Shareholders' Investment for the
Years Ended December 31, 1998, 1997 and 1996 F-4
Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 F-5
Notes to Financial Statements F-7
</TABLE>
ITEM 9: CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required is set forth under the captions "Management -
Directors and Executive Officers" in the Company's Definitive Proxy Statement to
be filed pursuant to Regulation 14A and is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information required is set forth under the captions "Management
Compensation" and "Certain Transactions" in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required is set forth under the caption "Security
Ownership of Certain Beneficial Owners" in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required is set forth under the caption "Certain
Transactions" in the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A and is incorporated herein by reference.
Littlefield, Adams & Company 1998 Form 10-K, Page 19
<PAGE> 22
PART IV
ITEM 14: FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Public Accountants
Balance Sheets at December 31, 1998 and 1997
Statements of Operations For the Years Ended December 31, 1998, 1997
and 1996
Statements of Shareholders' Investment For the Years Ended
December 31, 1998, 1997 and 1996
Statements of Cash Flows For the Years Ended December 31, 1998, 1997
and 1996
Notes to Financial Statements
(2) Exhibits
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3.1 Composite copy of the Certificate of
Incorporation of the Registrant. Incorporated by
reference to Exhibit 3.4 to the Registrant's 1994 Annual
Report on Form 10-K, filed March 1995.
3.2 By-laws of the Registrant, as amended. Incorporated
by reference to Exhibit 3.5 to the Registrant's 1995
Annual Report on Form 10-K, filed April 1996.
4 Form of 7% Convertible Subordinated Debenture dated
April 24, 1998. Incorporated by reference to Exhibit
10.4 to the Registrant's March 31, 1998 Quarterly
Report on Form 10-Q, filed May 1998.
10.1 Form of Subscription Agreement for private offering
of $1.2 million in principal amount of 7% Convertible
Subordinated Debentures. Incorporated by reference to
Exhibit 10.3 to the Registrant's March 31, 1998
Quarterly Report on Form 10-Q, filed May 1998.
10.2 Revolving Promissory Note for up to $10,000,000,
dated December 10, 1998, loan number 1016490-1,
payable to The Provident Bank, an Ohio banking
corporation.
10.3 Loan and Security Agreement (Asset Based), dated
December 10, 1998, relating to loan number 1016490-1
with The Provident Bank, an Ohio banking corporation.
10.4 Discount Factoring Agreement with Merchant
Factors Corp., dated January 25, 1996. Incorporated by
reference to Exhibit 10.9 to the Registrant's 1994
Annual Report on Form 10-K, filed March 1995.
10.5 Amendment to Discount Factoring Agreement
with Merchant Factors Corp., dated July 15, 1997.
Incorporated by reference to Exhibit 10.1 to the
Registrant's June 30, 1997 Quarterly Report on Form
10-Q, filed August 1997.
10.6 Addendum to Discount Factoring Agreement with
Merchant Factors Corp., dated December 1, 1998,
amending the January 25, 1996 Discount Factoring
Agreement.
10.7 Intercreditor Agreement relating to Littlefield,
Adams & Company, dated December 3, 1998, between
Merchant Factors Corp. and The Provident Bank.
Littlefield, Adams & Company 1998 Form 10-K, Page 20
<PAGE> 23
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.8 Promissory Note for $142,634.32, dated
February 1, 1997, loan number 0105592300, payable to
The Bank of Floyd, Floyd, Virginia. Incorporated by
reference to Exhibit 10.17 to the Registrant's 1996
Annual Report on Form 10-K, filed March 1997.
10.9 Business Loan Agreement, effective as of
February 1, 1997, relating to loan number 0105592300,
with The Bank of Floyd, Floyd, Virginia. Incorporated
by reference to Exhibit 10.18 to the Registrant's 1996
Annual Report on Form 10-K, filed March 1997.
10.10 Promissory Note for $468,483.83, dated January 31,
1997, loan number 5312501, payable to The Bank of
Floyd, Floyd, Virginia. Incorporated by reference to
Exhibit 10.19 to the Registrant's 1996 Annual Report
on Form 10-K, filed March 1997.
10.11 Business Loan Agreement, effective as of January
31, 1997, relating to loan number 5312501, with The
Bank of Floyd, Floyd, Virginia. Incorporated by
reference to Exhibit 10.20 to the Registrant's 1996
Annual Report on Form 10-K, filed March 1997.
10.12 Commercial Security Agreement, dated January 31,
1997, relating to loan numbers 0105592300 and
5312501, with The Bank of Floyd, Floyd, Virginia.
Incorporated by reference to Exhibit 10.21 to the
Registrant's 1996 Annual Report on Form 10-K, filed
March 1997.
10.13 Littlefield, Adams & Company Incentive Plan, as
amended, Incorporated by reference to Appendix A of
the definitive Proxy Statement (DEF 14A) filed April
1998.
10.14 License Agreement with PepsiCo, Inc., dated as of
February 1, 1996. Incorporated by reference to Exhibit
10.9 to the Registrant's 1995 Annual Report on Form
10-K, filed April 1996.
10.15 Amendment of License Agreement with PepsiCo,
Inc., dated October 1, 1996. Incorporated by reference
to Exhibit 10.9 to the Registrant's 1996 Annual Report
on Form 10-K, filed March 1997.
10.16 Renewal and Amendment of License Agreement, dated
February 1, 1998, to the Merchandising License
Agreement with PepsiCo, Inc., dated as of February 1,
1996. This amendment renews the term for an
additional two years, to be from February 1, 1998
through January 31, 2000.
10.17 Collateral Product License Agreement with Miller
Brewing Company, dated October 31, 1996. Incorporated
by reference to Exhibit 10.10 to the Registrant's 1996
Annual Report on Form 10-K, filed March 1997.
10.18 Merchandising Licensing Agreement with the
Twentieth Century Fox Licensing and Merchandising unit
of Fox, Inc. for "The Simpsons," dated July 15, 1997.
Incorporated by reference to Exhibit 10.1 to the
Registrant's September 30, 1997 Quarterly Report on
Form 10-Q, filed November 1997.
10.19 Amendment Number 1, dated September 16, 1998, to
the Merchandising License Agreement dated July 15, 1997
with the Twentieth Century Fox Licensing and
Merchandising unit of Fox, Inc. for "The Simpsons".
This amendment extends the original term of the license
for The Simpsons by one year until December 31, 2000.
Incorporated by reference to Exhibit 10.1 to the
Registrant's September 30, 1998 Quarterly Report on
Form 10-Q, filed November 1998.
Littlefield, Adams & Company 1998 Form 10-K, Page 21
<PAGE> 24
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.20 Merchandising Licensing Agreement with the
Twentieth Century Fox Licensing and Merchandising unit
of Fox, Inc. for "King of the Hill," dated August 7,
1997. Incorporated by reference to Exhibit 10.11 to the
Registrant's 1997 Annual Report on Form 10-K, filed
March 1998.
10.21 Amendment Number 1, dated September 16, 1998, to
the Merchandising License Agreement dated August 7, 1997
with the Twentieth Century Fox Licensing and
Merchandising unit of Fox, Inc. for "King of the Hill".
This amendment extends the original term of the King of
the Hill license by one year until December 31, 2001.
Incorporated by reference to Exhibit 10.2 to the
Registrant's September 30, 1998 Quarterly Report on Form
10-Q, filed November 1998.
10.22 Merchandising License Agreement with World
Championship Wrestling, Inc. dated February 27, 1998.
Incorporated by reference to Exhibit 10.2 to the
Registrant's March 31, 1998 Quarterly Report on Form
10-Q, filed May 1998.
10.23 Amendment to the Merchandising License Agreement
with World Championship Wrestling, Inc. dated as of
February 27, 1998. The Amendment is effective January
22, 1999. This amendment adds denim and chambray shirts
to the Authorized Articles.
10.24 Employment Agreement with Stanley I. Halbreich,
dated November 16, 1992. Incorporated by reference to
Exhibit 10.14 to the Registrant's 1996 Annual Report on
Form 10-K, filed March 1997.
10.25 Amendment to Employment Agreement with Stanley I.
Halbreich, dated January 4, 1993. Incorporated by
reference to Exhibit 10.15 to the Registrant's 1996
Annual Report on Form 10-K, filed March 1997.
10.26 Employment Agreement with Warren L. Rawls, dated
June 21, 1996. Incorporated by reference to Exhibit
10.16 to the Registrant's 1996 Annual Report on Form
10-K, filed March 1997.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K:
None
Littlefield, Adams & Company 1998 Form 10-K, Page 22
<PAGE> 25
ADDITIONAL INFORMATION
CORPORATE HEADQUARTERS
6262 Executive Boulevard
Huber Heights, OH 45424
(937) 236-0660
INDEPENDENT PUBLIC ACCOUNTANTS
ARTHUR ANDERSEN LLP
Suite 400
Courthouse Plaza SW
Dayton, OH 45402-1873
TRANSFER AGENT
FIRST CITY TRANSFER COMPANY
Suite 303
505 Thornall Street
Edison, New Jersey 08837
(732) 906-9227
Exhibits to the Form 10-K will be provided to shareholders of the
Company upon written request addressed to Warren L. Rawls, Secretary,
Littlefield, Adams & Company, 6262 Executive Boulevard, Huber Heights, OH 45424.
Any exhibits furnished are subject to a reasonable photocopying charge.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THIS FORM 10-K AND ANNUAL REPORT TO SHAREHOLDERS, NOR HAS IT PASSED UPON ITS
ACCURACY OR ADEQUACY.
Littlefield, Adams & Company 1998 Form 10-K, Page 23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ MICHAEL B. BALBER
--------------------
Michael B. Balber
President and Chief Executive Officer
March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ MARTIN B. SHIFRIN Chairman of the Board of Directors March 26, 1999
- ---------------------------
Martin B. Shifrin
/s/ MICHAEL B. BALBER President and Chief Executive Officer March 26, 1999
- --------------------------- (principal executive officer)
Michael B. Balber Director
/s/ WARREN L. RAWLS Chief Financial Officer, Treasurer and Secretary March 26, 1999
- --------------------------- (principal financial and accounting officer)
Warren L. Rawls Director
/s/ WILLIAM E. GOETTELMAN Director March 26, 1999
- ---------------------------
William E. Goettelman
</TABLE>
Littlefield, Adams & Company 1998 Form 10-K, Page 24
<PAGE> 27
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Littlefield, Adams & Company:
We have audited the accompanying balance sheets of Littlefield, Adams & Company
(a New Jersey corporation) as of December 31, 1998 and 1997, and the related
statements of operations, shareholders' investment and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Littlefield, Adams & Company as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Dayton, Ohio /S/ ARTHUR ANDERSEN LLP
February 25, 1999
F-1
<PAGE> 28
LITTLEFIELD, ADAMS & COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1998 1997
---------------- -----------------
(DOLLARS IN THOUSANDS)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 107 $ 57
Accounts receivable:
Trade, net of allowances of $352 and $11,
for 1998 and 1997, respectively 5,765 5
Due from factor, net of allowances of $208 and $0
for 1998 and 1997, respectively 2,050 182
Other 33 33
Inventories 3,157 641
Prepaid expenses and other 399 155
---------------- -----------------
Total current assets 11,511 1,073
PROPERTY, PLANT AND EQUIPMENT, NET 486 416
OTHER ASSETS 12 9
---------------- -----------------
TOTAL ASSETS $ 12,009 $ 1,498
================ =================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Notes payable $ 41 $ 17
Factor borrowings 1,327 11
Current portion of long-term debt 507 570
Convertible subordinated debentures 1,200 --
Accounts payable 1,653 117
Accrued expenses 1,235 337
---------------- -----------------
Total current liabilities 5,963 1,052
LONG-TERM DEBT, LESS CURRENT PORTION 12 18
LONG-TERM REVOLVING LINE OF CREDIT 3,125 --
DEFERRED COMPENSATION 42 44
---------------- -----------------
Total Liabilities 9,142 1,114
---------------- -----------------
COMMITMENTS AND CONTINGENCIES (NOTE 15)
SHAREHOLDERS' INVESTMENT:
Common stock, $1.00 par; authorized 25,000,000;
issued 2,808,221 and 2,798,221 for 1998 and 1997, respectively;
outstanding 2,790,057 and 2,780,057 for 1998 and 1997, respectively 2,808 2,798
Capital in excess of par value 6,325 6,318
Accumulated deficit (6,153) (8,619)
----------------- -----------------
2,980 497
Treasury stock, at cost - shares of 18,164 for 1998 and (113) (113)
1997 ----------------- -----------------
2,867 384
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 12,009 $ 1,498
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 29
LITTLEFIELD, ADAMS & COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- --------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Net product sales $ 25,917 $ 2,436 $ 11,884
Other revenues -- 35 152
--------------------- --------------------- --------------------
Total revenues 25,917 2,471 12,036
--------------------- --------------------- --------------------
Costs and expenses:
Cost of products sold 17,953 2,785 8,403
Selling and administrative 4,956 1,995 3,242
Impairment loss (Note 2) 34 374 --
--------------------- --------------------- --------------------
Total costs and expenses 22,943 5,154 11,645
--------------------- --------------------- --------------------
Income (loss) from operations 2,974 (2,683) 391
Other income (expense):
Gain (loss) on sale of property and equipment (13) (1) 218
Gain on claims settlement (Note 5) -- 843 --
Litigation settlements, net -- (5) 395
Interest (362) (120) (235)
--------------------- --------------------- --------------------
Net other income (expense) (375) 717 378
--------------------- --------------------- --------------------
Income (loss) before income taxes 2,599 (1,966) 769
Income tax (provision) benefit (133) 29 30
--------------------- --------------------- --------------------
Net income (loss) before extraordinary gain 2,466 (1,937) 799
Extraordinary gain, net of
income tax provision -- -- 94
--------------------- --------------------- --------------------
Net income (loss) $ 2,466 $ (1,937) $ 893
===================== ===================== ====================
Weighted average common shares for:
Basic earnings per share 2,785,536 2,780,057 2,774,169
Diluted earnings per share 4,177,919 2,780,057 2,967,812
Basic earnings per common share:
Net income (loss) before extraordinary gain $ 0.89 $ (0.70) $ 0.29
Extraordinary gain -- -- 0.03
--------------------- --------------------- --------------------
Net income (loss) per share $ 0.89 $ (0.70) $ 0.32
===================== ===================== ====================
Diluted earnings per common share:
Net income (loss) before extraordinary gain $ 0.60 $ (0.70) $ 0.27
Extraordinary gain -- -- 0.03
--------------------- --------------------- --------------------
Net income (loss) per share $ 0.60 $ (0.70) $ 0.30
===================== ===================== ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 30
LITTLEFIELD, ADAMS & COMPANY
STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock
------------------------------
Capital in
Excess of Accumulated Treasury
Shares Amount Par Value Deficit Stock
-------------- --------------- --------------- ---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 2,296,145 $ 2,296 $ 5,406 $ (7,575) $ (103)
Acquisition of 1,666 unvested, forfeited shares
originally granted to a former outside -- -- -- -- (10)
director
Purchase of rights to shares due a former
officer and director as a contingent
acquisition consideration -- -- (36) -- --
Accrual of approximately 495,000 shares
to be issued in settlement of litigation -- -- 1,450 -- --
Net income -- -- -- 893 --
-------------- --------------- --------------- ---------------- -----------------
Balances at December 31, 1996 2,296,145 2,296 6,820 (6,682) ` (113)
Issuance of 502,076 shares in settlement
of litigation 502,076 502 (502) -- --
Net loss -- -- -- (1,937) --
-------------- --------------- --------------- ---------------- -----------------
Balances at December 31, 1997 2,798,221 2,798 6,318 (8,619) (113)
Sale of 10,000 shares of common stock in
conjunction with the exercise of stock options 10,000 10 2 -- --
Issuance of 2,500 stock options to a
third-party contractor -- -- 5 -- --
Net income -- -- -- 2,466 --
-------------- --------------- --------------- ---------------- -----------------
Balances at December 31, 1998 2,808,221 $ 2,808 $ 6,325 $ (6,153) $ (113)
============== =============== =============== ================ =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 31
LITTLEFIELD, ADAMS & COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,466 $ (1,937) $ 893
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 113 209 266
Impairment loss 34 374 --
(Gain) loss on sale of property and equipment 13 1 (218)
Extraordinary gain on debt extinguishment -- -- (109)
Stock options granted for contractor services 5 -- --
Changes in operating assets and liabilities:
Accounts and other receivables, net (7,628) 3,093 (2,260)
Inventories, net (2,516) 938 1,753
Prepaid expenses and other (244) (13) 21
Accounts payable 1,536 (857) (67)
Accrued expenses and other 896 (1,366) (54)
------------------ ------------------ -----------------
Net cash provided by (used in) operating (5,325) 442 225
activities ------------------ ------------------ -----------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 11 28 663
Purchase of property, plant and equipment (241) (21) (95)
Notes receivable and other assets (3) 16 229
------------------ ------------------ -----------------
Net cash provided by (used in) investing activities (233) 23 797
------------------ ------------------ -----------------
Cash flows from financing activities:
Proceeds from (payments of) line of credit and
factor borrowings, net 1,316 (425) (849)
Proceeds from long-term line of credit, net 3,125 -- --
Proceeds from bank and other notes payable 396 130 80
Payments of bank and other notes payable (441) (167) (404)
Proceeds from sale of convertible
subordinated debentures 1,200 -- --
Proceeds from sale of common stock 12 -- --
Purchase of rights to stock -- -- (36)
------------------ ------------------ -----------------
Net cash provided by (used in) financing activities 5,608 (462) (1,209)
------------------ ------------------ -----------------
Net increase (decrease) in cash 50 3 (187)
Cash at beginning of year 57 54 241
------------------ ------------------ -----------------
Cash at end of year $ 107 $ 57 $ 54
================== ================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 32
LITTLEFIELD, ADAMS & COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Supplemental disclosures of cash flows information:
Cash paid during the year for interest $ 342 $ 125 $ 243
Cash paid during the year for income taxes $ 77 $ 25 $ 31
</TABLE>
Supplemental schedule of noncash investing and financing activities:
In 1997, the Company issued 502,076 shares in settlement of litigation
(Note 1).
In 1996, the Company accrued 495,000 shares of common stock to be issued
in the settlement of litigation which represented $1,450 of capital in
excess of par value (Note 1).
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 33
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Note 1: The Company
The Company is principally engaged in the imprinting and distribution
of young men's and boys' active wear products under various license agreements.
In years prior to 1997, the Company was substantially dependent on
sales of Harley-Davidson Motor Co. (Harley-Davidson) licensed products to
generate cash flow from operations and provide funds to meet the Company's
obligations as they became due. The Company's Harley-Davidson license agreement
expired on December 31, 1996 and was not renewed by Harley-Davidson.
Consequently, the Company's product sales in 1997 were dramatically reduced from
levels attained in 1996 and before, and the Company incurred a net loss of
$1,937 for the year ended December 31, 1997.
The diminished revenues experienced by the Company during 1997 and the
first quarter of 1998 had a material adverse effect on its results of operations
and financial condition. In April 1998, the Company finalized a multi-year
license agreement with World Championship Wrestling, Inc. ("WCW"). Littlefield
started shipping WCW licensed products during late April 1998. With net sales of
$2,908, $12,274 and $10,319 in the 1998 second, third and fourth quarters,
respectively, the Company generated income from operations of $188, $1,858 and
$1,284 in the respective quarters (the quarterly financial information provided
is unaudited). The significant increase in revenues during the second, third and
fourth quarters of 1998, plus the utilization of the $1,200 in proceeds from the
Company's private offering of 7% Convertible Subordinated Debentures completed
on April 24, 1998, provided sufficient cash flows for the Company to satisfy its
obligations as they became due.
The Company's customers are primarily national and regional discount
retail chains. Effective December 10, 1998, the Company signed a revolving
promissory note with a bank which is secured by the accounts receivable arising
from sales to three of the Company's largest customers, and inventories.
Littlefield services these three accounts and also assumes the credit risk. All
of the Company's other accounts are factored under a discount factoring
agreement dated January 25, 1996, as amended effective December 1, 1998.
Accounts that are credit approved by the factor are at the factor's risk, which
minimizes the Company's credit risk. The Company, at its option and its credit
risk, can factor accounts receivable that the factor does not approve for credit
(Note 6). Historically, bad debt expense has been minimal.
Sales to customers which individually exceeded 10% of total net product
sales were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Customer 1 60% 4% 56%
Customer 2 28% 48% 16%
--- ---- ---
Total 88% 52% 72%
=== ==== ====
</TABLE>
Trade and factored receivable balances relating to these two customers
were approximately $5,513 and $1,964 at December 31, 1998. The trade and
factored receivable balances relating to the two customers were $14 and $16 at
December 31, 1997.
(Continued)
F-7
<PAGE> 34
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
During 1998, three suppliers individually provided 10% or more of the
Company's total garment purchases, with one supplier accounting for
approximately 65% of apparel goods purchased in 1998. The largest supplier is an
outside screen printing contractor which individually produced approximately 76%
of the Company's total production in 1998.
During 1998, the Company had one significant license which individually
accounted for more than 10% of net product sales. Sales of World Championship
Wrestling, Inc. licensed products were 94% of 1998 sales. During 1997, the
Company had two active licenses which individually accounted for more than 10%
of net product sales. Sales of PepsiCo, Inc. and Miller Brewing Company (which
expired December 31, 1998) licensed products were 23% and 20%, respectively, of
1997 sales. Approximately 29% of 1997 revenues were attributable to 1996
Harley-Davidson licensed products, representing sales that were contractually
consummated prior to December 31, 1996, but the accounting recognition of which
was deferred to the first quarter of 1997 in accordance with generally accepted
accounting principles. During 1996, the Company had one significant license,
Harley-Davidson, which expired on December 31, 1996. Harley-Davidson licensed
sales accounted for 90% of net product sales in 1996.
Current licenses and their respective expiration dates are as follows:
<TABLE>
<CAPTION>
LICENSE EXPIRATION
------- ----------
<S> <C>
WCW and nWo (World Championship Wrestling, Inc.) March 2001
WCW and nWo/Looney Tunes cross-license (World Championship
Wrestling, Inc. and Warner Brothers) October 1999
The Simpsons (Twentieth Century Fox) December 2000
King of the Hill (Twentieth Century Fox) December 2001
Pepsi and Mountain Dew (PepsiCo, Inc.) January 2000
Hagar the Horrible (Hearst Entertainment, Inc.) December 2000
Free for All (Hearst Entertainment, Inc.) December 2000
Zits (Hearst Entertainment, Inc.) December 2000
Kawasaki Motorcycles (Kawasaki Motors Corp., U.S.A.) February 2000
</TABLE>
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.
As of December 31, 1998, the minimum royalties to be paid in future
years are:
<TABLE>
<S> <C>
1999 $ 100
2000 40
---
$ 140
===
</TABLE>
(Continued)
F-8
<PAGE> 35
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Note 2: Summary of Significant Accounting Policies
Basis of Presentation -
The accompanying financial statements include the accounts of
Littlefield, Adams & Company and its now dissolved subsidiaries, Medical Sales
Associates, Inc., Cornerstone Laboratories, Inc. and NUTECH, Inc. ("the Company"
and "Littlefield"). Medical Sales Associates, Inc., Cornerstone Laboratories,
Inc., and NUTECH, Inc., were dissolved in January 1996, and had no significant
operations in the year ended December 31, 1996, and had no consolidated assets
or liabilities as of December 31, 1996. All significant intercompany accounts
and transactions have been eliminated.
Reclassifications -
Certain reclassifications have been made to prior year amounts to
conform to current year presentations.
Cash Equivalents -
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
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 (Note 3).
Property, Plant and Equipment -
Property, plant and equipment are carried at historical cost less
accumulated depreciation and amortization. Depreciation is generally recorded on
the straight-line basis over the estimated useful lives of the related assets.
These are as follows:
Leasehold improvements 10-30 years
Machinery and equipment 3-10 years
Leasehold improvements are amortized on a straight-line basis over the
shorter of the terms of the respective leases or their estimated useful lives.
Major renewals and betterments are capitalized. Maintenance and repairs which do
not extend the useful lives of property, plant and equipment are expensed as
incurred. When property, plant and equipment are retired or otherwise disposed
of, related cost and accumulated depreciation and amortization are removed from
the accounts, and any gain or loss is reflected in the determination of income
(Note 4).
(Continued)
F-9
<PAGE> 36
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
During the 1998 third quarter, the Company removed from day-to-day
operations certain equipment used in its manufacturing process. For the most
part, this equipment was replaced with newly acquired equipment of a type more
suited to the Company's current manufacturing needs. Management has decided to
sell all the equipment removed from operations. The Company has assessed, under
the guidelines set forth in SFAS No. 121, the carrying value of its assets held
for sale. The Company determined that the recognition of an impairment loss was
required as of September 30, 1998. Such assessment required the Company to make
certain estimates of amounts to be recovered from the future sale of these
assets. Based on this analysis, the Company recognized an impairment loss as of
September 30, 1998, in the amount of $34. The $34 impairment loss is included in
the calculation of the income from operations for 1998.
The assessment of the recoverability of its investment in long-lived
assets at December 31, 1997, required the Company to make certain estimates of
future sales volumes and prices which were expected to occur over the remaining
useful lives of its long-lived assets. Based on this analysis, the Company
recognized an impairment loss as of December 31, 1997, in the amount of $374,
which eliminated the carrying amount of identified goodwill. The $374 impairment
loss is included in the calculation of the loss from operations for 1997.
Although the Company believes it has a reasonable basis for its
estimates of the fair value of its long-lived assets, it is reasonably possible
that the actual fair value of its long-lived assets could materially differ from
such estimates. Management believes that if such estimates are not confirmed,
revisions to the estimated fair value of long-lived assets could result in the
recognition of an additional impairment loss on its long-lived assets
constituting all or a material portion of the carrying value of the Company's
property, plant and equipment which was $486 at December 31, 1998.
Goodwill -
The Company had previously classified as goodwill the cost in excess of
the fair value of the net assets of Sports Imprints, Inc., acquired in a
purchase transaction in 1993. Through 1997, goodwill was being amortized on a
straight-line basis over 10 years. The Company assessed that the recoverability
of this long-lived asset was impaired. An impairment loss of $374 was recognized
as of December 31, 1997, which eliminated the carrying amount of identified
goodwill.
Income Taxes -
The provision for income taxes includes federal, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities (Note
16).
Treasury Stock -
The purchase of the Company's treasury stock is recorded using the cost
method. Issuances of treasury stock are recorded at average cost (Note 13).
(Continued)
F-10
<PAGE> 37
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue Recognition -
Revenues are generally recognized when products are shipped or legal
ownership of the products otherwise passes to the customer, and are presented
net of sales returns and allowances.
Net Income (Loss) Per Share -
Effective October 1, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share". Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are computed by dividing net income (as adjusted for the net
effect of the reduction in interest expense from the assumed conversion of the
convertible subordinated debentures) by the sum of the weighted average number
of shares outstanding during the period and the weighted average impact of
potential shares applicable to stock options and the convertible subordinated
debentures. Basic and diluted earnings per share for 1996 reflect the
approximate 495,000 shares of the Company's stock to be issued in the securities
class action and derivative action settlements. In May 1997, the Company issued
a total of 502,076 shares in settlement of the class and derivative actions.
Such shares were considered to be outstanding during all of 1997 for purposes of
determining net loss per share (Note 14).
Estimates in the Financial Statements -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
Note 3: Inventories
Inventories at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 2,735 $ 700
Finished goods 622 46
Allowance for inventory obsolescence (200) (105)
----- ------
$ 3,157 $ 641
===== ======
</TABLE>
(Continued)
F-11
<PAGE> 38
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Note 4: Property, Plant and Equipment
Property, plant and equipment at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Leasehold improvements $ 267 $ 265
Machinery and equipment 969 823
------ ------
1,236 1,088
Less: Accumulated depreciation and amortization (750) (672)
------ ------
$ 486 $ 416
====== ======
</TABLE>
Note 5: Accrued Expenses
Included in accrued expenses at December 31, 1998, are $686 of accrued
royalties.
Included in accrued expenses at December 31, 1997, are $89 of accrued
professional fees. The Company was previously a party to a license agreement
which expired on December 31, 1996. In conjunction with the termination of that
license agreement, the Company entered into a Settlement Agreement dated March
1, 1996. The Company had unpaid royalties of approximately $853 relating to
sales of these licensed products which were accrued in periods prior to March 1,
1996. Management believes that the Company's liability for these unpaid
royalties was discharged under the Settlement Agreement, and that the likelihood
of the licensor successfully asserting a claim for such royalties is remote. The
Company therefore has reversed the accrual of these unpaid royalties and
reported the reversal, net of related estimated legal expenses, as a gain on
claims settlement in the fourth quarter of 1997.
Note 6: Revolving Lines of Credit
Littlefield signed a $10,000 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 inventory. The Note bears interest at
prime plus an applicable margin. The initial margin is 3%. The prime rate in
effect at 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. The Company can borrow amounts up to 80% of the outstanding eligible
receivables, plus 40% of eligible inventories (not to exceed $750 in borrowings
against inventory), plus a $100 compensating balance the Company is required to
maintain at Provident. The total amount outstanding at any time cannot exceed
$10,000. 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 Note contains certain covenants which include restrictions on
the payment of dividends, and the Company maintaining: (i) a minimum amount of
tangible net worth, (ii) a maximum debt to equity ratio, and (iii) a minimum
debt service ratio. As of December 31, 1998, Littlefield was in compliance with
such covenants. As of December 31, 1998, the outstanding balance of $3,125 is
classified as a long-term liability. The remaining borrowing availability from
Provident as of December 31, 1998, was $2,519.
(Continued)
F-12
<PAGE> 39
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 will be factored; (b)
the effective rate of interest shall be prime plus 2%; (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, payable monthly;
and (f) the Discount Factoring Agreement, as amended, shall continue in effect
until December 31, 2000. Accounts receivable which Merchant Factors Corp.
approves for credit are being factored at the rate of 1 1/8%. Accounts that are
credit approved by Merchant Factors Corp. are at its risk, which minimizes the
Company's credit risk. The Company, at its option, can factor at a rate of
1 1/8%, with recourse, accounts that Merchant Factors Corp. does not approve for
credit. The servicing of all factored accounts is done by Merchant Factors Corp.
Borrowings are secured by the assigned accounts receivable. At December 31, 1998
and 1997, the Company had factored receivables amounting to $2,050 and $182,
respectively, most of which had been approved for credit by Merchant Factors
Corp. The remaining borrowing availability from Merchant Factors Corp. as of
December 31, 1998, was approximately $479.
The weighted average interest rates on short-term borrowings were
11.6%, 11.4% and 11.0% as of December 31, 1998, 1997 and 1996, respectively.
Outstanding balances are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
The Provident Bank - long-term revolving line of credit $ 3,125 $ --
Merchant Factors Corp. - factor borrowings 1,327 11
----- -------
Total $ 4,452 $ 11
===== =======
</TABLE>
(Continued)
F-13
<PAGE> 40
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Note 7: Long-Term Debt
Long-term debt balances are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
Note payable to a bank, principal callable on demand; interest at prime plus
1.0%, prime at December 31, 1998 was 7.75%; payable monthly at 0.25% of
the outstanding principal balance plus accrued interest; collateralized
by machinery and equipment and furniture and fixtures. $ 442 $ 455
Note payable to a bank, principal callable on demand; due September 1, 1999,
interest at prime plus 1.0%, adjusted once each year, prime at the last
adjustment was 8.5%; payable monthly; collateralized by machinery
and equipment and furniture and fixtures 40 96
Other 37 37
------ -----
Total debt 519 588
Less - current portion 507 570
------ -----
$ 12 $ 18
====== =====
</TABLE>
The non-current portion of long-term debt of $12 is payable as follows
- -- $9 in 2000, and $3 in 2001.
Note 8: Convertible Subordinated Debentures
On April 24, 1998, Littlefield completed a private offering of $1,200
in principal amount of 7% Convertible Subordinated Debentures (the
"Debentures"). The participants in the private offering included four 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 beginning one year after
issuance. The required premium amount declines over time such that as of April
1, 2003, and thereafter, the Company may call the Debentures at face value. If
all of the Debentures are 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 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 OTC
Electronic Bulletin Board. The last sale price of the Company's common stock as
reported on the NASD's OTC Electronic Bulletin Board on December 31, 1998, was
$4.5625 per share.
The $1,200 balance was classified as a long-term liability as of June
30, 1998 and September 30, 1998. As of December 31, 1998, the balance is
classified as a current liability because any unconverted debentures are payable
on demand beginning October 24, 1999.
(Continued)
F-14
<PAGE> 41
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Note 9: Creditor's Debt Settlement
In December 1991, Sports Imprints, Inc., (the Company's former wholly
owned subsidiary acquired in 1993) entered into a plan of reorganization with
its creditors and a bank pursuant to Chapter 11 of the U.S. Bankruptcy Code. As
a result, Sports Imprints, Inc., negotiated a payment plan with its creditors
that included extending payments through 1996.
In July 1996, an order was entered by a court relieving the Company of
$109 of liability for the settlement of the creditors' debt. As a result, an
extraordinary gain from the extinguishment of debt was recognized in 1996 as
follows:
<TABLE>
<S> <C>
Extinguishment of debt $ 109
Legal costs (6)
---
103
Income taxes (9)
---
Extraordinary gain, net $ 94
===
</TABLE>
Note 10: Deferred Compensation
The Company has deferred compensation agreements with certain retired
employees under which the Company agreed to pay certain amounts annually over a
ten-year period subsequent to retirement. The present value of such payments was
charged ratably to expense over the years of active employment. In addition, the
Company has incentive plans for which charges to operations have been made
generally based upon certain defined levels of income before taxes. The plan has
been frozen and no additional benefits are accruing. The accrued but unfunded
liability at December 31, 1998 and 1997, amounted to $72 and $76, respectively.
The amount currently due of $30 is included in accrued expenses at December 31,
1998.
Note 11: Related-Party Transactions
In March, 1998, certain individuals, which included some officers and
shareholders of the Company, loaned an aggregate of $240 to the Company. These
loans were non-interest bearing and payable on demand. The individuals making
these loans were offered the opportunity to participate in a private offering of
7% Convertible Subordinated Debentures, which was completed on April 24, 1998.
In April, 1998, all of the loans were either converted into such Debentures or
repaid (Note 8).
(Continued)
F-15
<PAGE> 42
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Note 12: Common Stock
As of December 31, 1998, the Company had issued a total of 2,808,221
shares of its common stock. Treasury stock consisted of 18,164 shares, making a
total of 2,790,057 shares outstanding. The Company sold 10,000 shares of common
stock in June, 1998 in conjunction with the exercise of stock options granted to
an employee.
Note 13: Sales and Repurchases of Treasury Stock
During 1996, the Company reacquired 1,666 unvested, forfeited shares
which were originally granted to an outside director.
Note 14: Earnings Per Share
Effective October 1, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share". All periods prior to October 1, 1997, have been restated to conform
with the requirements of SFAS No. 128. The adoption of SFAS No. 128 affected
previously reported earnings per share as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
Earnings Per Share (EPS): 1996
------------------------ ---------
<S> <C>
Primary EPS as previously reported $ 0.30
Effect of SFAS No. 128 0.02
---------
Basic EPS as restated $ 0.32
=========
Fully diluted EPS as previously reported $ 0.30
Effect of SFAS No. 128 --
---------
Diluted EPS as restated $ 0.30
=========
</TABLE>
(Continued)
F-16
<PAGE> 43
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Diluted earnings per share have been calculated as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1998 1997 (a) 1996
--------- --------- ---------
Earnings:
<S> <C> <C> <C>
Net income (loss) applicable to common stock:
Before extraordinary gain $ 2,466 $ (1,937) $ 799
Net effect of assumed conversion:
Interest applicable to debentures 55 -- --
--------- --------- ---------
Net income (loss) before extraordinary gain
for diluted earnings per share 2,521 (1,937) 799
Extraordinary gain -- -- 94
--------- --------- ---------
Net income (loss) for diluted earnings per share $ 2,521 $ (1,937) $ 893
========= ========= =========
Shares:
Weighted average number of shares
of common stock outstanding 2,785,536 2,780,057 2,279,169
Weighted average impact of potential
common shares applicable to:
Stock options 287,725 -- 193,643
Shares to be issued in settlement of litigation -- -- 495,000
Convertible subordinated debentures 1,104,658 -- --
---------- ---------- ----------
Weighted average shares used for computation 4,177,919 2,780,057 2,967,812
========== ========== ==========
Diluted earnings per common share:
Net income (loss) applicable to common stock -
Before extraordinary gain $ 0.60 $ (0.70) $ 0.27
Extraordinary gain -- -- 0.03
--------- --------- ---------
Net income (loss) per common share $ 0.60 $ (0.70) $ 0.30
======== ========= =========
</TABLE>
- -------------------------------------------
(a) The stock options have an antidilutive effect on net loss per share in 1997
and are, therefore, excluded from the computation of diluted earnings per
share.
Securities that could potentially dilute basic earnings per share in
the future that were not included in the computation of dilutive earnings per
share because to do so would have been antidilutive were as follows:
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Outstanding options to purchase common stock 32,500 759,000 60,000
Range of exercise prices per share $6.13 to $6.88 $1.00 to $6.88 $3.38 to $6.88
</TABLE>
(Continued)
F-17
<PAGE> 44
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Note 15: Leases
In March 1987, the Company shut down its Gardena, California facility,
and in conjunction therewith, sold the machinery and equipment at that location
to an unrelated third party through a "sales type" lease agreement. Under this
agreement, the Company would receive payments of approximately $2 per month for
10 years. The Company also renegotiated its lease of the California facility.
The agreement provided for annual rentals of $72 over a ten-year period
beginning July 1, 1987. The Company also entered into another agreement to
sublease the facility at $188 annually over the same period of the principal
lease. Rental income under these agreements (before payments to the lessor) was
$111 in 1996.
In June 1996, the Company and the sub-lessee agreed to a settlement of
the remaining payments owed under the sub-lease agreement. The settlement
required the sub-lessee to deliver $100 of blank T-shirts to the Company, which
were delivered to the Company in 1996.
In August 1996, the Company and the lessor agreed to a settlement of
the lease agreement for $36, payable in twelve equal monthly payments, without
interest. Payment of the settlement amount was completed in May, 1997.
The Company leases production, office and warehouse space in Huber
Heights, Ohio. Lease payments are $202 for 1999.
The Company leases showroom and office space in the Empire State
Building, New York, New York, with payments of $61 per year through 2003 and $56
in 2004.
Total rent expense was $258, $250 and $313 for 1998, 1997 and 1996,
respectively.
Following are the future minimum lease payments under non-cancelable
operating leases as of December 31, 1998:
<TABLE>
<S> <C>
1999 $ 263
2000 61
2001 61
2002 61
2003 61
Thereafter 56
-------
Total $ 563
=======
</TABLE>
(Continued)
F-18
<PAGE> 45
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Note 16: Income Taxes
Composition of the income tax (provision) benefit consisted of the
following:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Federal -
Current $ (72) $ 5 $ (3)
Deferred -- -- --
---------------- ---------------- ----------------
(72) 5 (3)
---------------- ---------------- ----------------
Local and State -
Current (61) 24 33
Deferred -- -- --
---------------- ---------------- ----------------
(61) 24 33
---------------- ---------------- ----------------
Total -
Current (133) 29 30
Deferred -- -- --
---------------- ----------------
================
$ (133) $ 29 $ 30
================ ================ ================
</TABLE>
The following summarizes the estimated tax effect of significant
cumulative temporary differences which comprise the deferred tax assets:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Differences in depreciation and amortization $ 77 $ 77
Accruals and reserves not deducted for tax purposes until paid 316 35
Net operating loss and AMT credit carryforwards 2,639 3,763
----------------- -----------------
Deferred tax assets 3,032 3,875
Valuation allowance (3,032) (3,875)
----------------- -----------------
$ -- $ --
================= =================
</TABLE>
(Continued)
F-19
<PAGE> 46
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company has recorded valuation allowances for the net amount of
deferred income tax assets and net operating loss carryforwards and AMT credit
carryforwards at December 31, 1998 and 1997. As of December 31, 1998, the
Company had net operating loss (NOL) carryforwards of approximately $7,550 for
federal income tax purposes available to reduce future taxable income. In
addition, the Company had an AMT credit carryforward of $72 available to reduce
future tax payments. The NOL carryforwards expire in 2002 through 2012 if not
utilized.
The Company's ability to use its NOL carryforwards to offset future
taxable income is subject to restrictions enacted in the Internal Revenue Code
of 1986 as amended (the "Code"). These restrictions provide for limitations on
the Company's utilization of its NOL carryforwards following certain ownership
changes described in the Code. As a result of ownership changes in 1993, $280 of
the Company's existing NOL carryforwards are subject to the limitation of which
the maximum amount which can be utilized is $61 per year.
The reconciliation of the U.S. statutory tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
United States statutory rate 34.0% (34.0)% 34.0%
Amortization of goodwill -- 1.2 3.2
Impairment and other 0.6 6.7 1.5
State income taxes 2.4 (1.2) (4.3)
NOL benefit (recognized) unrecognized (31.9) 25.8 (38.3)
------------- ------------- -------------
5.1% (1.5)% (3.9)%
============= ============= =============
</TABLE>
Note 17: 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 financial statements.
(Continued)
F-20
<PAGE> 47
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Note 18: Incentive Plan (the "Plan")
During 1994, the Company adopted the Littlefield, Adams & Company
Incentive Plan (the "Plan"). All options referred to herein were granted, and
are governed, under the Plan. There are a maximum of 1,000,000 shares of the
Company's common stock available for issuance under the Plan. Under the Plan,
incentive stock options, nonstatutory stock options, performance units,
restricted stock awards, stock appreciation rights, and cash and stock bonus
awards may be granted to key employees, directors, and certain consultants and
advisors of the Company. Awards granted are approved by a committee of the
Company's Board of Directors. Each award will vest pursuant to individual award
agreements. Through December 31, 1998, stock options granted pursuant to the
Plan to employees and directors have been one hundred percent vested on the date
of grant. Unexercised stock options will expire at the end of the term set forth
pursuant to the individual option agreements, or ten years from the date of
grant, whichever is sooner. The exercise price allowable for stock options
granted under the Plan depends on the type of option but, in any case, may not
be less than the greater of either (a) the par value per share of the stock, or
(b) fifty percent of the fair market value (as defined in the Plan) per share of
the stock on the date of grant. Through December 31, 1998, stock options granted
to employees and directors pursuant to the Plan have had an exercise price equal
to one hundred percent of the fair market value (as defined in the Plan) per
share of the stock on the date of grant, or par value, whichever was greater.
During the year ended December 31, 1998, stock options were granted to a
third-party contractor pursuant to the Plan with an exercise price greater than
one hundred percent of the fair market value (as defined in the Plan) per share
of the stock on the date of grant, and with a provision that the options could
not be exercised for a period of one year from the date of grant.
A summary of the status of options granted pursuant to the Plan at
December 31, 1998, 1997 and 1996, and changes during the years then ended, is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 759,000 $ 1.90 684,000 $ 1.50 352,500 $ 6.02
Granted 12,500 4.47 302,000 2.69 645,000 1.22
Exercised (10,000) 1.20 -- -- -- --
Forfeited (6,000) 1.17 (227,000) 1.73 (313,500) 6.01
Expired -- -- -- -- -- --
------- ------- -------
Outstanding at end of year 755,500 1.96 759,000 1.90 684,000 1.50
------- ------- -------
Exercisable at end of year 753,000 $ 1.95 759,000 $ 1.90 684,000 $ 1.50
Weighted average fair
value of options granted $ 2.24 $ 1.33 $ 0.68
</TABLE>
(Continued)
F-21
<PAGE> 48
LITTLEFIELD, ADAMS & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------ Options Exercisable
Weighted --------------------------
Average Weighted Number Weighted
Remaining Average Exercisable at Average
Grant Exercise Number Contractual Exercise December 31, Exercise
Date Price Outstanding Life Price 1998 Price
- ------------------- ---------- ------------ ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
October 21, 1994 $ 6.13 25,000 5.8 years $ 6.13 25,000 $ 6.13
May 9, 1995 6.88 5,000 6.4 years 6.88 5,000 6.88
December 2, 1995 2.19 10,000 6.9 years 2.19 10,000 2.19
May 28, 1996 1.25 200,000 7.4 years 1.25 200,000 1.25
June 4, 1996 2.00 5,000 7.4 years 2.00 5,000 2.00
August 5, 1996 1.00 225,000 7.6 years 1.00 225,000 1.00
December 4, 1996 3.38 25,000 7.9 years 3.38 25,000 3.38
January 23, 1997 3.25 150,000 8.1 years 3.25 150,000 3.25
March 8, 1997 2.44 27,000 8.2 years 2.44 27,000 2.44
April 11, 1997 2.50 15,000 8.3 years 2.50 15,000 2.50
December 9, 1997 1.00 56,000 8.9 years 1.00 56,000 1.00
June 12, 1998 4.05 10,000 9.4 years 4.05 10,000 4.05
September 28, 1998 6.15 2,500 3.5 years 6.15 -- --
------- -------
755,500 7.7 years $ 1.96 753,000 $ 1.95
======= =======
</TABLE>
The Company accounts for the Plan under APB Opinion No. 25, under which
no compensation cost has been recognized for stock options granted to employees
and directors under the Plan. Had compensation cost for stock options granted to
employees and directors under the Plan been determined consistent with SFAS
Statement No. 123, the Company's net income (loss) and net income (loss) per
share would have been the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <,C> <C>
Net income (loss) As reported $ 2,466 $ (1,937) $ 893
Pro forma $ 2,449 $ (2,140) $ 511
Net income (loss) per share:
Basic earnings per share As reported $ 0.89 $ (0.70) $ 0.32
Pro forma $ 0.88 $ (0.77) $ 0.18
Diluted earnings per share As reported $ 0.60 $ (0.70) $ 0.30
Pro forma $ 0.60 $ (0.77) $ 0.17
</TABLE>
(Continued)
F-22
<PAGE> 49
LITTLEFIELD, ADAMS & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The fair value of each grant is estimated on the date of the grant
using the Modified Black-Scholes American option pricing model with the
following weighted average assumptions used:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate 5.2% 6.1% 6.1%
Estimated dividend yield 0.0% 0.0% 0.0%
Estimated expected lives 4.0 years 3.3 years 3.2 years
Estimated expected volatility 67% 83% 77%
</TABLE>
During 1998, 1997 and 1996 no compensation expense was recorded for
options granted to employees and directors because the exercise price was equal
to or greater than fair market value on such measurement date. During 1998, the
Company recorded $5 in expense relating to 2,500 options granted pursuant to the
Plan to a third-party contractor. The expense of $5 was determined by estimating
the fair value of these options using the Modified Black-Scholes American option
pricing model as discussed above.
F-23
<PAGE> 50
EXHIBIT INDEX REQUIRED BY ITEM 601 OF REGULATION S-K
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1 Composite copy of the Certificate of Incorporation of
the Registrant. Incorporated by reference to Exhibit 3.4 to
the Registrant's 1994 Annual Report on Form 10-K, filed March
1995.
3.2 By-laws of the Registrant, as amended. Incorporated by
reference to Exhibit 3.5 to the Registrant's 1995 Annual
Report on Form 10-K, filed April 1996.
4 Form of 7% Convertible Subordinated Debenture dated
April 24, 1998. Incorporated by reference to Exhibit 10.4 to
the Registrant's March 31, 1998 Quarterly Report on Form 10-Q,
filed May 1998.
10.1 Form of Subscription Agreement for private offering of
$1.2 million in principal amount of 7% Convertible
Subordinated Debentures. Incorporated by reference to Exhibit
10.3 to the Registrant's March 31, 1998 Quarterly Report on
Form 10-Q, filed May 1998.
10.2 Revolving Promissory Note for up to $10,000,000, dated
December 10, 1998, loan number 1016490-1, payable to The
Provident Bank, an Ohio banking corporation.
10.3 Loan and Security Agreement (Asset Based), dated
December 10, 1998, relating to loan number 1016490-1 with The
Provident Bank, an Ohio banking corporation.
10.4 Discount Factoring Agreement with Merchant Factors
Corp., dated January 25, 1996. Incorporated by reference to
Exhibit 10.9 to the Registrant's 1994 Annual Report on Form
10-K, filed March 1995.
10.5 Amendment to Discount Factoring Agreement with Merchant
Factors Corp., dated July 15, 1997. Incorporated by reference
to Exhibit 10.1 to the Registrant's June 30, 1997 Quarterly
Report on Form 10-Q, filed August 1997.
10.6 Addendum to Discount Factoring Agreement with Merchant
Factors Corp., dated December 1, 1998, amending the January
25, 1996 Discount Factoring Agreement.
10.7 Intercreditor Agreement relating to Littlefield, Adams
& Company, dated December 3, 1998, between Merchant Factors
Corp. and The Provident Bank.
10.8 Promissory Note for $142,634.32, dated February 1,
1997, loan number 0105592300, payable to The Bank of Floyd,
Floyd, Virginia. Incorporated by reference to Exhibit 10.17 to
the Registrant's 1996 Annual Report on Form 10-K, filed March
1997.
10.9 Business Loan Agreement, effective as of February 1,
1997, relating to loan number 0105592300, with The Bank of
Floyd, Floyd, Virginia. Incorporated by reference to Exhibit
10.18 to the Registrant's 1996 Annual Report on Form 10-K,
filed March 1997.
10.10 Promissory Note for $468,483.83, dated January 31,
1997, loan number 5312501, payable to The Bank of Floyd,
Floyd, Virginia. Incorporated by reference to Exhibit 10.19 to
the Registrant's 1996 Annual Report on Form 10-K, filed March
1997.
10.11 Business Loan Agreement, effective as of January 31,
1997, relating to loan number 5312501, with The Bank of Floyd,
Floyd, Virginia. Incorporated by reference to Exhibit 10.20 to
the Registrant's 1996 Annual Report on Form 10-K, filed March
1997.
Littlefield, Adams & Company 1998 Annual Report on Form 10-K
<PAGE> 51
EXHIBIT INDEX REQUIRED BY ITEM 601 REGULATION S-K
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.12 Commercial Security Agreement, dated January 31, 1997,
relating to loan numbers 0105592300 and 5312501, with The Bank
of Floyd, Floyd, Virginia. Incorporated by reference to
Exhibit 10.21 to the Registrant's 1996 Annual Report on Form
10-K, filed March 1997.
10.13 Littlefield, Adams & Company Incentive Plan, as
amended, Incorporated by reference to Appendix A of the
definitive Proxy Statement (DEF 14A) filed April 1998.
10.14 License Agreement with PepsiCo, Inc., dated as of
February 1, 1996. Incorporated by reference to Exhibit 10.9 to
the Registrant's 1995 Annual Report on Form 10-K, filed April
1996.
10.15 Amendment of License Agreement with PepsiCo, Inc.,
dated October 1, 1996. Incorporated by reference to Exhibit
10.9 to the Registrant's 1996 Annual Report on Form 10-K,
filed March 1997.
10.16 Renewal and Amendment of License Agreement, dated
February 1, 1998, to the Merchandising License Agreement with
PepsiCo, Inc., dated as of February 1, 1996. This amendment
renews the term for an additional two years, to be from
February 1, 1998 through January 31, 2000.
10.17 Collateral Product License Agreement with Miller
Brewing Company, dated October 31, 1996. Incorporated by
reference to Exhibit 10.10 to the Registrant's 1996 Annual
Report on Form 10-K, filed March 1997.
10.18 Merchandising Licensing Agreement with the Twentieth
Century Fox Licensing and Merchandising unit of Fox, Inc. for
"The Simpsons," dated July 15, 1997. Incorporated by reference
to Exhibit 10.1 to the Registrant's September 30, 1997
Quarterly Report on Form 10-Q, filed November 1997.
10.19 Amendment Number 1, dated September 16, 1998, to the
Merchandising License Agreement dated July 15, 1997 with the
Twentieth Century Fox Licensing and Merchandising unit of Fox,
Inc. for "The Simpsons". This amendment extends the original
term of the license for The Simpsons by one year until
December 31, 2000. Incorporated by reference to Exhibit 10.1
to the Registrant's September 30, 1998 Quarterly Report on
Form 10-Q, filed November 1998.
10.20 Merchandising Licensing Agreement with the Twentieth
Century Fox Licensing and Merchandising unit of Fox, Inc. for
"King of the Hill," dated August 7, 1997. Incorporated by
reference to Exhibit 10.11 to the Registrant's 1997 Annual
Report on Form 10-K, filed March 1998.
10.21 Amendment Number 1, dated September 16, 1998, to the
Merchandising License Agreement dated August 7, 1997 with the
Twentieth Century Fox Licensing and Merchandising unit of Fox,
Inc. for "King of the Hill". This amendment extends the
original term of the King of the Hill license by one year
until December 31, 2001. Incorporated by reference to Exhibit
10.2 to the Registrant's September 30, 1998 Quarterly Report
on Form 10-Q, filed November 1998.
Littlefield, Adams & Company 1998 Annual Report on Form 10-K
<PAGE> 52
EXHIBIT INDEX REQUIRED BY ITEM 601 OF REGULATION S-K
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.22 Merchandising License Agreement with World Championship
Wrestling, Inc. dated February 27, 1998. Incorporated by
reference to Exhibit 10.2 to the Registrant's March 31, 1998
Quarterly Report on Form 10-Q, filed May 1998.
10.23 Amendment to the Merchandising License Agreement with
World Championship Wrestling, Inc. dated as of February 27,
1998. The Amendment is effective January 22, 1999. This
amendment adds denim and chambray shirts to the Authorized
Articles.
10.24 Employment Agreement with Stanley I. Halbreich, dated
November 16, 1992. Incorporated by reference to Exhibit 10.14
to the Registrant's 1996 Annual Report on Form 10-K, filed
March 1997.
10.25 Amendment to Employment Agreement with Stanley I.
Halbreich, dated January 4, 1993. Incorporated by reference to
Exhibit 10.15 to the Registrant's 1996 Annual Report on Form
10-K, filed March 1997.
10.26 Employment Agreement with Warren L. Rawls, dated June
21, 1996. Incorporated by reference to Exhibit 10.16 to the
Registrant's 1996 Annual Report on Form 10-K, filed March
1997.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule.
Littlefield, Adams & Company 1998 Annual Report on Form 10-K
<PAGE> 1
EXHIBIT 10.2
REVOLVING PROMISSORY NOTE
$10,000,000 Dayton, Ohio December 10, 1998
The undersigned, for value received, promises to pay to the order of
THE PROVIDENT BANK (the "Bank"), at any of its offices, the principal sum of TEN
MILLION DOLLARS ($10,000,000) (the "Maximum Credit"), or so much thereof as may
be outstanding from time to time pursuant to the provisions hereof, together
with interest until demand or maturity at the rate provided in the Loan and
Security Agreement of even date herewith between Bank and the undersigned, as
the same may be amended from time to time (the "Loan Agreement"). Accrued
interest shall be due and payable on the 1st day of each month, commencing
January 1, 1999, and at maturity. Principal shall be due and payable on December
10, 2000.
The undersigned hereby state(s) that the purpose of the loan evidenced
by this Note is workingcapital.
This Note is the Revolving Note referred to in the Loan Agreement and
is subject to the terms and conditions set forth in the Loan Agreement. Payment
of this Note is secured as provided in the Loan Agreement. This Note shall be
subject to mandatory prepayment under the circumstances described in the Loan
Agreement.
If an Event of Default (as defined in the Loan Agreement) occurs and is
continuing, the principal amount of this Note and all accrued interest shall, at
the option of the holder, become immediately due and payable, without demand or
notice.
There will be a minimum finance charge of $50.00 for each billing
period. If any payment of principal or interest is not paid when due or if the
undersigned otherwise defaults in the performance of its obligations hereunder
or under any other note or agreement with the holder, and if such failure to pay
or failure to perform extends beyond any applicable grace period, the holder at
its option, may charge and collect, or add to the unpaid balance hereof, a late
charge of up to $250 for each such delinquency to cover the extra expense
incident to handling delinquent accounts, and/or increase the interest rate on
the unpaid balance to the Default Rate (as defined in the Loan Agreement). The
holder may charge interest at the rate provided herein on all interest and other
amounts owing hereunder which are not paid when due.
The undersigned and all endorsers authorize any attorney at law,
including an attorney engaged by the holder, to appear in any court of record in
the State of Ohio or any other State or Territory of the United States, after
the indebtedness evidenced hereby, or any part thereof, becomes due and waive
the issuance and service of process and confess judgment against any one or more
than one of the undersigned and all endorsers in favor of the holder, for the
amount then appearing due, together with costs of suit and, thereupon, to
release all errors and waive all rights of appeal and stay of execution, but no
such judgment or judgments against any one of the undersigned shall be a bar to
a subsequent judgment or judgments against any one or more than one of such
persons against whom judgment has not been obtained hereon. This warranty of
attorney to confess judgment is a joint and several warrant of attorney. The
foregoing warrant of attorney shall survive any judgment; and if any judgment be
vacated for any reason, the holder hereof nevertheless may thereafter use the
foregoing warrant of attorney to obtain an additional judgment or judgments
against the undersigned and all endorsers or any one or more of them. The
undersigned and all endorsers hereby expressly waive any conflict of interest
that the holder's attorney may have in confessing such judgment against such
parties and expressly consent to the confessing attorney receiving a legal fee
from the holder for confessing such judgment against such parties.
<PAGE> 2
THE PROVISIONS OF THIS NOTE SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE
WITH THE LAWS OF OHIO. AS A SPECIFICALLY BARGAINED INDUCEMENT FOR THE HOLDER TO
EXTEND CREDIT TO THE UNDERSIGNED AND AFTER HAVING THE OPPORTUNITY TO CONSULT
COUNSEL, THE UNDERSIGNED AND ALL ENDORSERS HEREBY EXPRESSLY WAIVE THE RIGHT TO
TRIAL BY JURY IN ANY LAWSUIT OR PROCEEDING RELATED TO THIS NOTE OR ARISING IN
ANY WAY FROM ANY INDEBTEDNESS OR OTHER TRANSACTIONS INVOLVING THE HOLDER AND THE
UNDERSIGNED. THE UNDERSIGNED HEREBY DESIGNATE(S) ALL COURTS OF RECORD SITTING IN
MONTGOMERY COUNTY OR HAMILTON COUNTY, OHIO AND HAVING JURISDICTION OVER THE
SUBJECT MATTER, STATE AND FEDERAL, AS FORUMS WHERE ANY ACTION, SUIT OR
PROCEEDING IN RESPECT OF OR ARISING FROM OR OUT OF THIS NOTE, ITS MAKING,
VALIDITY OR PERFORMANCE, MAY BE PROSECUTED AS TO ALL PARTIES, THEIR SUCCESSORS
AND ASSIGNS, AND BY THE FOREGOING DESIGNATION THE UNDERSIGNED CONSENT(S) TO THE
JURISDICTION AND VENUE OF SUCH COURTS.
WARNING - BY SIGNING THIS PAPER, YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE, AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT
OR ANY OTHER CAUSE.
LITTLEFIELD, ADAMS & COMPANY
By: /s/ Warren L. Rawls
Name: Warren L. Rawls
Title: CFO, Treasurer and Secretary
Address:
6262 Executive Boulevard
Huber Heights, OH 45424
-2-
<PAGE> 1
EXHIBIT 10.3
ASSET BASED
LOAN AND SECURITY AGREEMENT
THIS AGREEMENT is made this 10th day of December, 1998 between
LITTLEFIELD, ADAMS & COMPANY, a New Jersey corporation ("Borrower") whose
mailing address is 6262 Executive Boulevard, Huber Heights, Ohio 45424, and THE
PROVIDENT BANK ("Bank"), an Ohio banking corporation whose mailing address is
One East Fourth Street, Cincinnati, Ohio 45202.
1. Definitions. As used herein, the following terms, when initial
capital letters are used, shall have the respective meanings set forth below. In
addition, all terms defined in the Uniform Commercial Code as adopted in Ohio
shall have the meanings given therein unless otherwise defined herein.
"Accounts" means all of Borrower's accounts (as that term is defined in
the Uniform Commercial Code), accounts receivable, chattel paper, contract
rights, documents and instruments; all other obligations or indebtedness owed to
Borrower from whatever source arising; all guarantees of any of the foregoing
and all security therefor; all of the right, title and interest of Borrower in
and with respect to the goods, services or other property which gave rise to or
which secure any of the foregoing and all insurance policies and proceeds
relating thereto; all of the foregoing whether now owned by Borrower or
hereafter acquired or in existence.
"Affiliate" means any person, company or business entity controlling,
controlled by or under common control with, Borrower, whether such common
control is direct or indirect, and all of the officers and directors of Borrower
and such entities.
"Applicable Margin" has the meaning given in Section 2.2.
"Borrowing Base Certificate" has the meaning given in Section 2.1.
"Cash Collateral Account" means that deposit account(s) maintained by
Borrower at Bank into which all collections on the collateral shall be deposited
and over which Bank shall have the sole power of withdrawal.
"Change of Control" means the acquisition by any person, or two or more
person acting in concert, of "beneficial ownership" (as defined for purposes of
Rule 13d-3 adopted under the Securities Exchange Act of 1934) of 25% or more of
the voting power of Borrower's outstanding capital stock.
"Collateral" means (a) all of Borrower's Accounts, Equipment, General
Intangibles, Inventory and all other items of personal property now owned or
hereafter acquired by Borrower or in which Borrower has granted or may in the
future grant a security interest to Bank hereunder or in any supplement hereto
or otherwise; (b) all of Borrower's right, title and interest in and to all
goods or other property represented by or securing any of the Accounts,
including all goods that may be reclaimed or repossessed from or returned by
Debtors; (c) all of Borrowers rights as an unpaid seller, including stoppage in
transit, detinue and reclamation; (d) all additional amounts due to Borrower
from any Debtor, irrespective of whether such additional amounts have been
specifically assigned to Bank; (e) all guaranties, or other agreements or
property securing or relating to any of the items referred to in (a) above, or
acquired for the purpose of securing and enforcing any of such items; (f) all
instruments, documents, securities, cash, property, deposit accounts (including
but not limited to deposits made to Borrower's Cash Collateral Account), and the
proceeds of any of the foregoing, owned by Borrower or in which Borrower has an
interest, which are now or may hereafter be in the possession or control of Bank
or in transit by mail or carrier to or from Bank, or
<PAGE> 2
in possession of any third party acting on behalf of Bank, without
regard to whether Bank received same in pledge, for safekeeping, as agent for
collection or transmission or otherwise or whether Bank had conditionally
released the same; (g) all ledger sheets, files, records, documents, blueprints,
drawings and instruments (including, without limitation, computer programs,
tapes and related electronic data processing sol.are) evidencing an interest in
or relating to the foregoing; and (h) all proceeds and products of the
collateral described above, including, without limitation, all claims against
third parties for damage to or loss or destruction of any of the foregoing,
including insurance proceeds, and accounts, contract rights, chattel paper and
general intangibles arising out of any sale, lease or other disposition of any
of the foregoing.
"Debtor" means the account debtor with respect to any of Borrower's
Accounts.
"Default Rate" has the meaning given in Section 2.2.
"Designated Accounts" means Accounts arising from sales by Borrower to:
(i) the Wal-Mart store operations of Wal-Mart Stores, Inc. and its Affiliates,
(ii) the Target store operations of Dayton Hudson Corporation and its
Affiliates, and (iii) the Kmart store operations of Kmart Corporation and its
Affiliates.
"Eligible Accounts" means such of the Designated Accounts as to which
each of the following is accurate, to the reasonable satisfaction of Bank: (i)
Bank has a perfected first priority security interest in such Account; (ii)
delivery of the merchandise or the rendition of services giving rise to such
Account has been completed; (iii) such merchandise or services tlave been
finally accepted by the customer and are not subject to return or rejection;
(iv) such Account continues to be in full conformity with the representations
and warranties made by Borrower to Bank with respect thereto; (v) no more than
90 days have elapsed from the invoice date with respect to such Account; and
(vi) Bank is and continues to be satisfied with the credit standing of the
Debtor in relation to the amount of credit extended. A Designated Account shall
not be considered eligible to the extent of: (i) any return, rejection or
repossession of the merchandise or services the provision of which gave rise to
the Account, and (ii) any dispute, offset, defense or counterclaim of the
customer with respect to the Account or the merchandise or services giving rise
to the Account.
"Eligible Inventory" means such of Borrower's Inventory as to which
each of the following. is accurate, to the reasonable satisfaction of Bank: (i)
such Inventory consists of unprinted shirts; (ii) such Inventory is located at
Borrower's facility at 6262 Executive Boulevard, Huber Heights, Ohio; (iii) Bank
has a perfected security interest in such Inventory; and (iv) such Inventory is
and at all times continues to be acceptable to Bank in its sole discretion.
"Equipment" means all of Borrower's equipment (as that term is defined
in the Uniform Commercial Code), including, without limitation, all furniture,
fixtures, machinery and other equipment of any kind and all substitutions and
replacements thereof and accessories and parts therefor, all whether now owned
or hereafter acquired by Borrower.
"Event of Default" means any event described in Section 10.1.
"Floyd Consent" means consent of The Bank of Floyd to the transactions
contemplated by this Agreement, which shall be in form and substance
satisfactory to Bank, in its sole discretion.
"GAAP" means U.S. generally accepted accounting principles,
consistently applied.
"General Intangibles" means all of Borrower's general intangibles (as
that term is defined in the Uniform Commercial Code), including, without
limitation, all goodwill, patents, formulas, blueprints, proprietary
manufacturing processes, trademarks, trade names, licenses (but only to the
extent that Borrower has the right to assign its rights under the license or to
grant a security interest therein), franchises, beneficial interests in trusts,
joint venture interests, partnership interests, rights to tax refunds, rights to
-2-
<PAGE> 3
insurance proceeds, causes of action, pension plan overfundings, literary rights
and other contractual rights of Borrower, all whether now owned or hereafter
acquired by Borrower.
"Intercreditor Agreement" means an agreement between Bank, Borrower and
Merchant Factors Corp. in form and substance acceptable to Bank in its sole
discretion.
"Inventory" means all of Borrower's inventory (as that term is defined
in the Uniform Commercial Code), including, without limitation, all goods,
merchandise and other personal property which are held for sale or lease, or are
furnished or to be furnished under any contract of service by Borrower, or are
raw materials, work-in-progress, supplies or materials used or consumed in
Borrower's business, and all products thereof, and all substitutions,
replacements, additions and accessories thereto, all whether now owned or
hereafter acquired by Borrower, and all of Borrower's right, title and interest
in and to any leases or rental agreements for such inventory.
"Leverage Ratio" means the ratio calculated as provided in Section
5.17(b) as of the specified date.
"Loan Documents" means this Agreement, the Note and the other
agreements and documents contemplated by either of the foregoing.
"Loans" means the Revolving Loans.
"Material Adverse Affect" means a material adverse affect on Borrower's
assets, liabilities, business, properties, prospects, financial condition or
results of operations, as reasonably determined by Bank.
"Maximum Loan Amount" has the meaning set forth in Section 2.1.
"Next Agreement" means the Agreement dated October 15, 1998 between
Next, Inc. and Borrower.
"Note" means the Revolving Note, as defined in Section 2.1.
"Obligations" means, without limitation, all Loans and all other debts,
obligations, or liabilities of every kind and description of Borrower to Bank,
now due or to become due, direct or indirect, absolute or contingent, presently
existing or hereafter arising, joint or several, secured or unsecured, whether
for payment or performance, regardless of how the same arise or by what
instrument, agreement or book account they may be evidenced, or whether
evidenced by any instrument, agreement or book account, including, without
limitation, all loans (including any loan by renewal or extension), all
overdrafts, all guarantees, all bankers acceptances, all agreements, all letters
of credit issued by Bank for Borrower and the applications relating thereto, all
indebtedness of Borrower to Bank, all undertakings to take or refrain from
taking any action and all indebtedness, liabilities and obligations owing from
Borrower to others which Bank may obtain by purchase, negotiation, discount,
assignment or otherwise. Obligations also shall include all interest and other
charges chargeable to Borrower or due from Borrower to Bank from time to time
and all costs and expenses referred to in Section 11.
"Permitted Equipment Lien" means the security interest and lien of The
Bank of Floyd in the equipment of Borrower, which secures obligations of
Borrower to The Bank of Floyd (as such obligations may be modified, amended or
extended, but not increased in principal amount) in a principal amount which
does not exceed $518,000 in the aggregate.
-3-
<PAGE> 4
"Permitted Factor Lien" means the security interest and lien of
Merchant Factors Corp. pursuant to the Permitted Factoring Agreement, as
modified by the Intercreditor Agreement.
"Permitted Factoring Agreement" means the Factoring Agreement dated
January 25, 1996, as amended, between Borrower and Merchant Factors Corp.
"Permitted Liens" means the liens and interests in favor of Bank
granted in connection herewith and the following:
(i) liens arising by operation of law for taxes and assessments not
yet due and payable;
(ii) statutory liens of mechanics, materialmen, shippers and
warehousemen for services or materials for which payment is not yet due;
(iii) liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security;
(iv) the Permitted Factor Lien;
(v) the Permitted Equipment Lien;
(vi) liens, if any, specifically permitted by Bank from time to time
in writing; and
(vii) the following if the validity or amount thereof is being
contested in good faith and by appropriate and lawful proceedings promptly
initiated and diligently conducted of which Borrower has given prior notice to
Bank and for which appropriate reserves (in Bank's reasonable judgment) have
been established and so long as levy and execution have been and continue to be
stayed: claims and liens for taxes and assessment due and payable and claims of
mechanics, materialmen, shippers, warehousemen, carriers and landlords.
"Prime Rate" has the meaning given in Section 2.2.
"Revolving Loans" has the meaning given in Section 2.1.
"Subordinated Debentures" means Borrower's 7% Convertible Subordinated
Debentures issued on April 24, 1998 in an aggregate principal amount not
exceeding $1,200,000.
"Systems" has the meaning given in Section 4.16.
"Termination Date" means the earlier of: (i) December 10, 2000, (ii)
the date as of which Borrower has terminated Bank's commitment to make
additional Revolving Loans pursuant to Section 2.6, or (iii) the date on which
an Event of Default occurs, unless the termination of Bank's commitment in
connection with such Event of Default is waived in writing by Bank.
"WCW License" means the License Agreement dated as of February 27, 1998
between Borrower and World Championship Wrestling, Inc. with respect to the
names, likenesses, characters, trademarks and/or copyrights of World
Championship Wrestling and New World Order.
-4-
<PAGE> 5
2. Loans and Interest
2.1 Revolving Loans. So long as no Event of Default has occurred and is
continuing, Bank shall make revolving loans ("Revolving Loans") to Borrower from
time to time from the date hereof through the Termination Date in an aggregate
amount outstanding at any time not to exceed the lesser of(i) $10,000,000, or
(ii) the sum of(a) 80% of the outstanding amount of Eligible Accounts, plus (b)
the lesser of (x) $750,000, or (y) 40% of the lower of the cost or market value
of Eligible Inventory, plus (c) 100% of the balance of the Cash Collateral
Account (the lesser of (i) or (ii) hereinafter being referred to as the "Maximum
Loan Amount"). Bank may require Borrower from time to time and, in any event,
prior to the making of a Revolving Loan and at least once each week (or, if Bank
so determines, once each day) while any Revolving Loans are outstanding to
deliver to Bank a certificate (a "Borrowing Base Certificate") in a form
satisfactory to Bank which sets forth a current calculation of the Maximum Loan
Amount and such other matters as Bank reasonably may specify. Should the
aggregate amount of outstanding Revolving Loans at any time exceed the Maximum
Loan Amount, Borrower immediately shall repay such excess amount. Revolving
Loans may be made in excess of the Maximum Loan Amount in the sole discretion of
Bank. The Revolving Loans shall be evidenced by a promissory note executed by
the Borrower (the "Revolving Note") in form satisfactory to Bank.
2.2 Interest. The Revolving Loans shall bear interest on the principal
balance from time to time outstanding at a rate per annum equal to Bank's Prime
Rate plus the Applicable Margin until maturity, whether by acceleration or
otherwise, and thereafter at a rate equal to 4.5% per annum plus the rate
otherwise prevailing hereunder (the "Default Rate"), but in no event to exceed
the maximum rate permitted to be paid by Borrower or received by Bank with
respect to the Revolving Loans under applicable law. Interest shall be payable
to the extent then accrued on the first day of each consecutive calendar month,
commencing on January 1, 1999, and at maturity (whether by acceleration or
otherwise) and from and after such maturity, on demand. The rate of interest
borne by the Revolving Loans shall change as and when the Bank's Prime Rate
changes and if, as and when the Applicable Margin changes.
"Prime Rate" is that annual percentage rate of interest which is
established by Bank from time to time as its prime rate, whether or not such
rate is publicly announced, and which provides a base to which loan rates may be
referenced. Prime Rate is not necessarily the lowest lending rate of Bank. A
rate based on Prime Rate will change each time and as of the date that Prime
Rate changes.
"Applicable Margin" shall be 3% per annum; provided, however, that the
Applicable Margin shall be adjusted in accordance with all of the following
provisions:
(i) If Borrower's Leverage Ratio as of the end of any fiscal
quarter ending on or after a date (a "Reference Date") set forth in the first
column of the following table (the "Margin Table") is less than the ratio set
forth in the second column of the Margin Table opposite such Reference Date, the
Applicable Margin shall be reduced to the percentage set forth in the third
column of the Margin Table opposite such Reference Date and ratio.
<TABLE>
<CAPTION>
MARGIN TABLE
Reference Date Leverage Ratio Less Than Applicable Margin
<S> <C> <C>
December 31, 1998 2.00 to 1 2.5%
March 31, 1999 1.50 to 1 2.0%
June 30, 1999 1.25 to 1 1.5%
December 31, 1999 1.00 to 1 1.0%
</TABLE>
-5-
<PAGE> 6
(ii) If as of the end of any fiscal quarter (x) the
Applicable Margin is less than 3%, and (y) Borrower's Leverage Ratio is not less
than the ratio set forth in the second column of the Margin Table opposite the
Applicable Margin which then is in effect, the Applicable Margin shall be
increased to the rate per annum set forth in the third column of the Margin
Table opposite the highest ratio in the second column which is less than
Borrower's Leverage Ratio; provided, however, that if as of the end of any
fiscal quarter Borrower's Leverage Ratio is 2.00 to 1 or greater, the Applicable
Margin shall, as the case may be, continue at, or shall be increased to, 3% per
annum.
(iii) Each adjustment to the Applicable Margin pursuant to
clause (i) or (ii) above shall become effective as of the first day of the first
month following the month in which Borrower delivers to Bank financial
statements pursuant to Section 5.5 or 5.6 establishing that Borrower's Leverage
Ratio requires an adjustment pursuant to such clause.
(iv) If as of the end of any fiscal quarter (x) the
Applicable Margin is less than 3%, and (y) Borrower fails to deliver financial
statements with respect to such fiscal quarter within the applicable time period
specified in Section 5.5 or 5.6, the Applicable Margin shall be increased to 3%
per annum, effective the first day following the end of such applicable time
period.
(v) In no event shall the Applicable Margin be reduced, as
the result of any single adjustment, to a percentage which is less than the
lesser of: (i) 0.5% less than the Applicable Margin which was in effect
immediately prior to such adjustment, or (ii) the lowest Applicable Margin which
was in effect hereunder at any time prior to such adjustment.
(vi) The Applicable Margin shall not be reduced unless at the
time of such reduction no Event of Default has occurred and is continuing.
In case of any change in law or governmental roles, regulations,
guidelines or orders (or any interpretations thereof) or the introduction of new
laws, regulations or guidelines, which require Bank to reserve for unfunded
credit commitments, Bank may charge Borrower an additional fee which will
compensate Bank for complying with such requirements in connection with this
Agreement.
2.3 Loan Payments. All payments of interest, principal and all other
amounts owing hereunder or under the Note shall be made by Borrower to Bank in
immediately available funds at its principal office in Cincinnati, Ohio or at
such other place as Bank may designate in writing, at such times as shall be set
forth herein or in the Note. Borrower hereby authorizes Bank, at Bank's option,
to charge any account or charge or increase any Loan balance of Borrower at Bank
for the payment or repayment of any interest or principal of the Loans or any
fees, charges or other amounts due to Bank hereunder (after giving effect to any
applicable grace periods hereunder).
2.4 Conditions to Initial Loan. As a condition to Bank's obligation to
make the initial Loan under this Agreement, Borrower shall deliver the following
to Bank:
(i) the executed Revolving Note;
(ii) an executed Borrowing Base Certificate;
(iii) executed UCC-1 financing statements in form satisfactory to
Bank;
(iv) the executed Intercreditor Agreement and the executed Floyd
Consent;
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<PAGE> 7
(v) the Articles or Certificate of Incorporation of Borrower,
certified by the Secretary of State (or other equivalent officer) of the
jurisdiction of Borrower's incorporation;
(vi) the By-laws or other similar governing document of Borrower,
together with all amendments thereto, certified as true and complete by the
Secretary or an Assistant Secretary of Borrower;
(vii) a certificate issued by the Secretary of State (or other
equivalent officer) of the state in which Borrower is incorporated and by the
Secretary of State (or other equivalent officer) of Ohio and each other state in
which Borrower is qualified to do business, with respect to the good standing of
such Borrower in each such state;
(viii) resolutions adopted by the Board of Directors (or other body
performing a similar function) of Borrower authorizing execution, delivery and
performance of the Loan Documents by Borrower, certified as true and correct and
in full force and effect by the Secretary or an Assistant Secretary of Borrower;
(ix) an opinion of counsel to Borrower in form reasonably acceptable
to Bank;
(x) a closing fee in the amount of $50,000 (less the $10,000
previously paid by Borrower) plus $1,000 as the Collateral monitoring fee for
December 1998 which is payable pursuant to Section 8.
(xi) such other documents and instruments as Bank reasonably may
request.
2.5 Conditions to Subsequent Loans. Bank's obligation under Section 2.1
to make subsequent Loans after the initial Loan under this Agreement shall be
conditioned upon satisfaction of all of the following additional conditions: (i)
Borrower shall have delivered to Bank an executed Borrowing Base Certificate as
of the date of such subsequent Loan, (ii) no Event of Default shall have
occurred and be continuing, (iii) Borrower shall be in compliance with all of
its covenants under Sections 5 and 6, and (iv) the representations and
warranties set forth in Section 4 shall be true and correct in all material
respects as of the date of such subsequent Loan, except to the extent such
representations and warranties expressly relate to an earlier date..
2.6 Termination Fee. Borrower may terminate Bank's commitment to make
any additional Revolving Loans by doing all of the following: (i) Borrower shall
give Bank 30 days prior written notice of Borrower's intention to do so as of a
specified date at least 30 days after the date such notice is given, (ii)
Borrower shall pay all principal, interest and other amounts due to Bank under
this Agreement, the Note and all other Loan Documents through the specified date
of termination, and (iii) Borrower shall pay to Bank a termination fee in the
amount of $200,000, if the specified date of termination is prior to December
10, 2000.
3. Grant of Security Interest. To secure the payment and performance of
all of the Obligations, as herein defined, Borrower hereby grants to Bank a
continuing security interest in and assigns to Bank all of the Collateral.
4. Representations and Warranties. Borrower hereby represents and
warrants to Bank that:
4.1 Organization and Authority. (a) Borrower is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation and has the corporate power and authority to conduct its
business as now conducted and as proposed to be conducted; (b) the execution and
delivery of this Agreement, the Note and the other Loan Documents to which
Borrower is a party and the performance of the transactions contemplated hereby
and thereby are within the authority of Borrower and have been duly authorized
by all proper and necessary action on the part of Borrower; (c) the execution
and delivery by Borrower of this Agreement, the Note and the other Loan
Documents to which Borrower is a party and the
-7-
<PAGE> 8
performance by Borrower of the transactions contemplated hereby and thereby will
not violate or contravene any provisions of law or the articles or certificate
of incorporation or the bylaws or any other governing document of Borrower or
result in a breach or default in respect of the terms of any other agreement to
which Borrower is a party or by which it or any of its property is bound (which
breach or default would have a Material Adverse Effect; and (d) Borrower is duly
qualified to transact business and is in good standing in every jurisdiction
where the nature of its properties or the conduct of its business requires such
qualification.
4.2 Binding Effect of Documents. This Agreement, the Note and the other
Loan Documents to which Borrower is a party are legal and binding obligations of
Borrower enforceable in accordance with their respective terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws affecting creditors' fights generally and
by general principles of equity (regardless of whether enforcement is sought in
equity or at law).
4.3 Consents. The execution and delivery of this Agreement, the Note
and the other Loan Documents to which Borrower is a party by Borrower and the
performance by Borrower of the transactions contemplated hereby and thereby do
not require any approval or consent of any governmental agency or authority or
of any other party other than such approvals or consents as have been obtained
and remain in full force and effect.
4.4 Financial Statements. Borrower has delivered to Bank copies of its
consolidated and consolidating financial statements as of and for the year
ending December 31, 1997 and as of and for each of the three fiscal quarters
ended thereafter (collectively, the "Financial Statements"). All of the
Financial Statements have been prepared in accordance with GAAP applied on a
basis consistent with prior periods and fairly present the financial condition
of Borrower and the results of its operations as at the dates thereof and for
the periods then ended, except that the quarterly statements included in the
Financial Statements are subject to normal year-end adjustments.
4.5 No Change in Financial. Condition. Since December 31, 1997, there
has been no change in the assets, liabilities, financial condition or operation
of Borrower, other than changes in the ordinary course of business which,
individually or in the aggregate, do not have a Material Adverse Effect.
4.6 No Other Liabilities. Except: (i) to the extent reflected in the
most recent financial statements delivered by Borrower to Bank pursuant to this
Agreement prior to the time this representation and warranty is made, (ii)
liabilities and obligations incurred in the ordinary course of business since
the date of such most recent financial statements, (iii) liabilities and
obligations to Bank under this Agreement and, to the extent permitted by this
Agreement, liabilities and obligations to Merchant Factors Corp. and to The Bank
of Floyd, (iv) liabilities and obligations under the Next Agreement, and (v)
liabilities and obligations which, individually or in the aggregate, do not have
a Material Adverse Effect, there is no basis for the assertion against Borrower
of any liabilities or obligations of any nature, direct or indirect, accrued,
absolute or contingent (including, without limitation, liabilities for taxes
then due or to become due whether incurred in respect of or measured by the
income of Borrower for any period prior to the time this representation and
warranty is made or arising out of transactions entered into, or any state of
facts existing prior to, the time this representation and warranty is made).
4.7 Taxes. Borrower has filed all federal, state, local and other tax
returns and reports required to be filed by it and such returns and reports are
true and correct in all material respects. Borrower has paid all taxes,
assessments and other governmental charges lawfully levied or imposed on or
against it or its properties, other than: (i) those presently payable without
penalty or interest, and (ii) those being contested in good faith by Borrower
and for which Borrower has posted a bond or other security required by
applicable law and has accrued a reserve on its books and in its financial
statements in accordance with GAAP.
-8-
<PAGE> 9
4.8 No Litigation. Except as described on Schedule 4.8 or as Borrower
otherwise may have disclosed in writing to Bank prior to the time this
representation and warranty is made, there is no litigation or proceeding or
governmental investigation pending or, to the knowledge of Borrower, threatened
against or relating to Borrower or any of its properties or business.
4.9 Compliance with Laws. Borrower is not in violation of or default
under any statute, regulation, license, permit, order, writ, injunction or
decree of any government, governmental department, commission, board, bureau,
agency, instrumentality or court, which violation or default could have a
Material Adverse Effect.
4.10 No Default. Borrower is not in default under any order, writ,
judgment, injunction, decree, indenture, agreement, lease or other instrument or
contract, which default would have a Material Adverse Effect. No holder of any
indebtedness of Borrower has given notice of any asserted default thereunder;
and no liquidation or dissolution of Borrower, and no receivership, insolvency,
bankruptcy, reorganization or other similar proceedings relative to Borrower or
any of its properties is pending or, to the knowledge of Borrower, is threatened
against Borrower or any of its properties.
4.11 Location of Collateral. Borrower maintains places of business only
at 6262 Executive Boulevard, Huber Heights, Ohio 45424 and 350 Fifth Avenue,
Suite 4213, New York City, New York 10118-1188. Borrower maintains its books of
account and records (including all records concerning Collateral) only at, and
maintains its chief executive office at, 6262 Executive Boulevard, Huber
Heights, Ohio 45424.
4.12 Title to Collateral. With respect to the Collateral, at the time
the Collateral becomes subject to Bank's security interest, Borrower is and at
all times will be the sole owner of and have good and marketable title to the
Collateral, free from all liens, encumbrances and security interests in favor of
any person, other than Permitted Liens, and has full right and power to grant
Bank a security interest therein. All information furnished to Bank concerning
the Collateral is and will be complete, accurate and correct in all material
respects when furnished. The Permitted Equipment Lien covering the equipment of
Borrower secures the obligations of Borrower to The Bank of Floyd in a principal
amount which does not exceed $518,000 in the aggregate.
4.13 Accounts. As to each and every Designated Account which Borrower
has shown as an Eligible Receivable on the most recent Borrowing Base
Certificate delivered to Bank: (a) such Designated Account is a valid bona fide
existing obligation of the Debtor for a sum certain for sales of goods shipped
or delivered, or goods leased, or services rendered in the ordinary course of
business; (b) all supporting documents, instruments, chattel paper and other
evidence of indebtedness, if any, delivered to Bank are complete and correct and
valid and enforceable in accordance with their terms, and all signatures and
endorsements that appear thereon are genuine, and all signatories and endorsers
have full capacity to contract; (c) the Debtor is liable for the amount
expressed in such Account according to its terms, and such Debtor has no right
to reject or return the goods the sale of which gave rise to such Account to
Borrower for a refund or discount; (d) such Account is subject to no discount,
allowance or special terms of payment without the prior approval of Bank; (e)
such Account is subject to no dispute, defense or offset, real or claimed; (f)
such Account is subject to no prohibition or limitation upon assignment; and (g)
Borrower has full right and power to grant Bank a security interest therein, and
the security interest granted in such Account to Bank pursuant to Section 3 is a
valid first priority security interest inuring to the benefit of Bank without
further action. The warranties set out herein shall be deemed to have been made
with respect to each and every Designated Account shown by Borrower as an
Eligible Account on any Borrowing Base Certificate hereafter delivered to Bank
by Borrower.
-9-
<PAGE> 10
4.14 Rights of Borrower in Inventory. Except as otherwise provided in
Schedule 4.14, all of the Inventory (a) is of good and merchantable quality,
free from defects, and (b) is stored at Borrower's facility at 6262 Executive
Boulevard, Huber Heights, Ohio.
4.15 Employee Benefit Plans. Other than the plans described on Schedule
4.15 (the "Plans"), Borrower maintains no plans which are subject to regulation
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Borrower has not received any notice to the effect that it is not in full
compliance with any of the requirements of ERISA, and no fact or situation,
including but not limited to any "Reportable Event," or "Prohibited
Transaction," as such terms are defined in ERISA, exists which is a violation of
ERISA in connection with any Plan. Borrower has complied with all applicable
provisions of ERISA, including minimum funding requirements; has made all
filings required to be made by Borrower or any Plans (now or at any time in the
past maintained) under ERISA; has no application pending for any extension of
time in which to make contributions to any Plan maintained by it or to which it
is, or has been, required to contribute; has timely made all contributions and
paid all premiums required to be paid to the Pension Benefit Guaranty
Corporation; and no matters are presently pending before the United States Labor
Department or the Internal Revenue Service concerning any Plan maintained (now
or at any time in the past) by Borrower or to which it is or was required to
contribute. Each employee pension benefit plan (as defined in Section 3(2) of
ERISA) maintained by Borrower is qualified and tax exempt under the Internal
Revenue Code. Borrower has never had any obligation or liability with respect to
a multi-employer plan, as defined in Section 3(37) of ERISA.
4.16 Year 2000 Compatibility. (a) Except as would not have a Material
Adverse Effect: (i) all date-sensitive hardware, software, processes,
procedures, interfaces and operating systems and core business functions
(jointly referred to as "Systems") used within the Borrower's operations contain
acceptable design and performance specifications so that such Systems will not
abruptly end or provide invalid or incorrect results during the operation of
Borrower's business on or after January 1, 2000, and (ii) all such Systems have
been designed to ensure year 2000 compatibility including, but not be limited
to: date data century recognition, calculations that accommodate same century
and multi-century formulas and date values, date data interface values that
reflect the century, and which include year 2000 leap year calculations.
(b) Borrower has confirmed with all of its material suppliers that all
data-sensitive hardware, software, processes, procedures, interfaces and
operating Systems used within the supplier's operations relevant to Borrower
contain acceptable design and performance specifications so that such Systems
will not abruptly end or provide invalid or incorrect results during the
operation of Borrower's business on or alter January 1, 2000 and that all such
Systems have been designed to ensure year 2000 compatibility including, but not
be limited to: date data century recognition, calculations that accommodate same
century and multi-century formulas and date values, date data interface values
that reflect the century, and which include year 2000 leap year calculations.
4.17 Accuracy of Representations. No representation or warranty by or
with respect to Borrower contained herein or in any certificate or other
document furnished by Borrower pursuant hereto contains any untrue statement of
a material fact or omits to state a material fact necessary to make such
representation or warranty not misleading in light of the circumstances under
which it was made.
4.18 Representations as Inducement to Bank. The foregoing
representations and warranties are made by Borrower with the knowledge and
intention that Bank will rely thereon, and shall survive the execution and
delivery of this Agreement and the making of all Loans hereunder. The receipt by
Borrower of a Loan advance shall constitute a representation and warranty by
Borrower that the representations and warranties contained in this Section 4 are
true and correct in all material respects as of the date of such Loan
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<PAGE> 11
advance, except to the extent such representations and warranties expressly
relate to an earlier date.
5. Affirmative Covenants. Borrower covenants and agrees that, until
all of the Obligations have been paid in full, unless Bank otherwise consents in
writing, Borrower shall, and shall cause each of its subsidiaries, if any, to:
5.1 Books and Records. Maintain complete and accurate books of account
and records pertaining to the Collateral and the operations of Borrower and all
such books of account and records shall be kept and maintained at the location
specified in Section 4.11. Borrower shall not move such books of account and
records or change its chief executive office without giving Bank at least 30
days prior written notice. Prior to moving any of such books of account and
records or changing the location of such chief executive office, Borrower shall
execute and deliver to Bank financing statements satisfactory to Bank. All
financial statements and reports furnished to Bank shall be maintained and
prepared in accordance with GAAP applied on a basis consistent with prior
periods.
5.2 Access to Information. Grant Bank, or its representatives, full and
complete access to the Collateral and to all books of account, records,
correspondence and other papers relating to the Collateral during normal
business hours and without undue disruption to the operation of Borrower's
business and the right to inspect, examine, verify and make abstracts from the
copies of such books of account, records, correspondence and other papers, and
to investigate such other records, activities and business of Borrower as they
reasonably may deem necessary or appropriate at the time.
5.3 Year 2000 Compliance. Provide Bank with such certifications, test
results and other assurances reasonably requested by Bank showing all of
Borrower's core and material Systems to be year 2000 compliant, as represented
and warranted by Borrower in Section 4.16, and provide any representative of
Bank with access during all business hours to, and permit any such
representative to examine, copy or make excerpts from, any and all books,
records and documents of or in the possession of Borrower to inspect any Systems
and properties of Borrower or to project-test Systems (at Bank's expense) to
determine if they are year 2000 complaint in the integrated environment.
5.4 Evidence of Accounts. Upon the creation of Accounts, or from time
to time as Bank may require, deliver to Bank schedules of all outstanding
Accounts. Such schedules shall be in form satisfactory to Bank and shall show
the age of such Accounts in intervals of not more than 30 days, and contain such
other information and be accompanied by such supporting documents as Bank from
time to time reasonably may prescribe. Borrower also shall deliver to Bank
copies of Debtors' invoices, evidences of shipment or delivery and such other
schedules and information as Bank may reasonably request. The items to be
provided under this section are to be prepared and delivered to Bank from time
to time solely for its convenience in maintaining records of the Collateral, and
Borrower's failure to give any of such items to Bank shall not affect,
terminate, modify or otherwise limit Bank's security interest granted herein.
5.5 Annual Financial Information. Deliver to Bank not more than 95 days
after the close of each fiscal year of Borrower annual consolidated and
consolidating financial statements of Borrower, including a balance sheet and
related income statement, prepared in accordance with GAAP together with, in the
case of such consolidated financial statements, the unqualified opinion of
Borrower's independent certified public accountants (who shall be reasonably
acceptable to Bank) with respect thereto.
5.6 Interim Financial Information. Deliver to Bank not more than 50
business days after the end of each fiscal quarter (or, if Bank so requests, as
of the end of each calendar month), consolidated and consolidating financial
statements of Borrower as of the end of such quarter (or such month, if Bank has
requested monthly statements) and for such period and the portion of ttie fiscal
year then ended, including a balance sheet with related profit and loss
statement, prepared in accordance with GAAP (subject to normal
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<PAGE> 12
year end audit adjustments) and certified as true and correct in all material
respects by the chief financial officer of Borrower.
5.7 Other Information. Promptly furnish to Bank (a) copies of all
reports, statements, registration statements and other documents filed by
Borrower with the Securities and Exchange Commission or any stock exchange on
which its securities may be traded, (b) copies of all communications sent
generally by Borrower to its security holders, and (c) such other financial and
business information and reports in form and substance reasonably satisfactory
to Bank as and when Bank from time to time reasonably may request.
5.8 Maintenance of Existence and Licenses. While this Agreement
remains in effect and until the Obligations have been paid in full: (a) maintain
its corporate existence in good standing; (b) make no material change in the
nature or character of its business or engage in any business which is
materially different from a business in which it was engaged on the date of this
Agreement; (c) maintain and keep in full force and effect all licenses and
permits necessary to the proper conduct of its business and (d) qualify as a
foreign corporation and obtain all requisite licenses and permits in each state
(other than the state of its incorporation) in which Borrower does business,
unless the failure so to qualify or to obtain any such license or permit would
not have a Material Adverse Effect.
5.9 Maintenance and Insurance of Properties. Maintain and keep all of
its properties, real and personal, in good working order, condition and repair
(ordinary wear and tear excepted) and insure and keep insured all such
properties at all times against loss of damage by fire, theft, and such other
risks and hazards, and in such amounts, as are customarily insured against by
businesses in similar circumstances with insurers reasonably acceptable to Bank.
If Borrower fails to do so, Bank may obtain such insurance and charge the cost
thereof to Borrower's account and add it to the Obligations. If any insured loss
should occur, the proceeds of all such insurance policies may be applied to the
payment of all or any part of the Obligations, as Bank may direct. Bank shall be
named loss payee on such insurance policies to the extent that such policies
insure the Collateral. All policies shall provide for at least 30 days prior
written notice of cancellation to Bank. Borrower shall deliver at least annually
to Bank, or more frequently if requested by Bank, certificates of insurance
evidencing Borrower's compliance herewith. Bank or Bank's designated agent is
hereby irrevocably constituted and appointed attorney-in-fact for Borrower
(either in the name of Borrower or in the name of Bank), during the continuance
of an Event of Default, to make adjustments of all insurance losses, sign all
applications, releases and other papers necessary for the collection of any such
loss, make settlements and endorse and collect all instruments payable to
Borrower or issued in connection therewith.
5.10 Liability Insurance. At all times, maintain in full force and
effect such liability insurance with respect to its activities and business
interruption and other insurance as may be required by Bank, such insurance to
be provided by insurer(s) reasonably acceptable to Bank, and if requested by
Bank, such insurance shall name Bank as an additional insured. Borrower shall
deliver at least annually to Bank, or more frequently if requested by Bank,
certificates of insurance evidencing Borrower's compliance herewith.
5.11 Notice of Certain Events. Give prompt notice in writing to Bank of
any Event of Default hereunder, or of any condition which with the passage of
time or the giving of notice or both would give rise to an Event of Default, and
of any development, financial or otherwise, which could have a Material Adverse
Effect or which otherwise might adversely affect the ability or obligation of
Borrower to perform this Agreement or any of the other Loan Documents.
5.12 Payment of Taxes. Pay all taxes, assessments and governmental
charges lawfully levied or imposed on or against it and its properties prior to
the date when such taxes, assessments or charges shall become delinquent, unless
Borrower is contesting the validity thereof in good faith and has posted any
bond or other security required by applicable law against payment thereof.
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<PAGE> 13
5.13 Dealings in Inventory. With respect to the Inventory (a) sell or
dispose of Inventory only to buyers in the ordinary course of business, (b)
promptly notify Bank of any change in location of any of the Inventory and,
prior to any such change, execute and deliver to Bank such financing statements
satisfactory to Bank as Bank may request and (c) report, in form satisfactory to
Bank and with such frequency as reasonably determined by Bank, such information
as Bank reasonably may request regarding the Inventory.
5.14 Claims Against Borrower. Promptly upon learning thereof, report to
Bank any reclamation, return or repossession of goods, any claim or dispute
asserted by any Debtor and any other matters affecting the value and
enforceability or collectibility of any of the Collateral.
5.15 Defense of Collateral. Defend the Collateral against all claims
and demands (other than Permitted Liens) of all persons at any time claiming the
same or any interest therein and pay all costs and expenses (including
attorneys' fees) incurred in connection with such defense.
5.16 Financing Statements. At the request of Bank, execute and deliver
such financing statements, documents and instruments, and perform all other acts
as Bank reasonably deems necessary or desirable to carry out and perform the
intent and purpose of this Agreement, and pay, upon demand, all expenses
(including attorneys' fees) incurred by Bank in connection therewith. If
Borrower refuses or is unable to execute an appropriate financing statement
promptly upon demand by Bank, a photocopy of this Agreement shall be sufficient
as a financing statement and may be filed in any appropriate office in lieu
thereof.
5.17 Financial Covenants. Maintain at all times:
(a) Consolidated Tangible Net Worth greater than the greater of: (i)
the following amounts from and after the dates indicated:
<TABLE>
<CAPTION>
Date Amount
<S> <C>
December 1, 1998 $2,750,000
January 1, 1998 $3,250,000
July 1, 1999 $3,500,000
January 1, 2000 $3,750,000
</TABLE>
or (ii) the highest Consolidated Tangible Net Worth of Borrower as of the end of
any fiscal quarter ending after the date of this Agreement and prior to the date
of determination, less $400,000;
(b) A ratio of Consolidated Liabilities to Consolidated Tangible Net
Worth of not more than 2.75 to 1; and
(c) A ratio of (i) the sum of Borrower's net income plus non-cash
expenses plus interest expense for the most recently-ended four consecutive
fiscal quarters to (ii) the sum of Borrower's interest expense plus all
principal paid or due to be paid on any indebtedness of Borrower during the same
four consecutive fiscal quarters, all determined in accordance with GAAP, of not
less than 1.50 to 1.
The following terms shall have the following meaning when used herein:
"Consolidated Liabilities" mean all indebtedness, obligations and other
liabilities of Borrower and its subsidiaries, whether matured or unmatured,
liquidated or unliquidated, direct or contingent or joint or several, that
should, in accordance with GAAP, be classified as liabilities on a consolidated
balance sheet of Borrower, but excluding the Subordinated Debentures.
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<PAGE> 14
"Consolidated Tangible Net Worth" means, at any time, Stockholder's
Equity, less the sum of (i) any surplus resulting from any write-up of assets
subsequent to December 31, 1997, (ii) goodwill, including any amounts, however
designated on a consolidated balance sheet of Borrower and its subsidiaries,
representing the excess of the purchase price paid for assets or stock acquired
over the value assigned thereto on the books of Borrower, (iii) patents,
trademarks, tradenames and copyrights, (iv) any amount at which shares of
capital stock of Borrower appear as an asset on Borrower's consolidated balance
sheet, (v) deferred expenses and (vi) any other amount in respect of an
intangible that should be classified as an asset on a consolidated balance sheet
of Borrower in accordance with GAAP.
"Stockholder's Equity" means, at any time, the aggregate of the
following amounts set forth on a consolidated balance sheet of Borrower prepared
in accordance with GAAP: (i) the par or stated value of all outstanding capital
stock, (ii) capital surplus (iii) retained earnings, and (iv) all indebtedness
which is subordinated to the Loans in a manner satisfactory to Bank, in its sole
discretion.
5.18 Maintenance of Bank Accounts. Maintain its primary banking
relationship with Bank and maintain combined collected balances in a demand
deposit account with Bank of at least $100,000. The amount of any deficiency in
such balance shall bear interest at the Prime Rate plus 3% per annum and shall
be payable in arrears within 30 days of the end of the month in which the
deficiency occurs. The collected balances in Borrower's demand deposit account
shall earn interest credits according to Bank's customary method of calculation,
which interest credits may be applied by Borrower only to offset service charges
due from Borrower with respect to activity in its demand deposit account.
5.19 Termination of Financing Statements. Within 60 days after the date
of this Agreement, provide Bank with evidence reasonably satisfactory to Bank of
the termination of all current financing statements of record showing Borrower
(or Fun Wear or Sports Imprints) as debtor and which evidence any lien or
security interest other than the security interest created under this Agreement,
the Permitted Factor Lien and the Permitted Equipment Lien.
6. Negative Covenants. Until the Obligations have been paid in full,
unless Bank shall consent in advance in writing, Borrower shall not, and shall
not permit any subsidiary, if any, to:
6.1 Sale of Assets or Merger. Discontinue its business or liquidate,
sell, transfer, assign or otherwise dispose of a material part of its assets or
of the Collateral, by sale, merger, consolidation or otherwise, provided,
however, that it may: (i) sell Inventory in the ordinary course of business, and
(ii) continue to sell Accounts which are not Designated Accounts in accordance
with the Permitted Factoring Agreement.
6.2 Liens and Encumbrances. Sell, assign, pledge, grant or suffer to
exist a security interest, lien, mortgage or other encumbrance on any of the
Collateral to any person other than Bank, or permit any lien, encumbrance or
security interest to attach to any of the Collateral, except Permitted Liens.
6.3 Contingent Liabilities. Endorse, guarantee or become surety for
the obligations of any person, firm or corporation, except: (i) pursuant to the
Next Agreement, and (ii) Borrower may endorse checks and negotiable instruments
for collection or deposit in the ordinary course of business.
6.4 Loans. Make any loan to any Affiliate of Borrower or repay any
existing loan made to it by any such Affiliate.
6.5 Distributions. Declare or pay any dividends or make any other
payments on its capital stock, redeem, repurchase or retire any of its capital
stock, or make any other distribution to its stockholders.
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<PAGE> 15
6.6 Dealings with Accounts. Compromise or discount any Account except
for: (i) ordinary trade discounts or allowances for prompt payment and other
discounts and compromises made in the ordinary course of business, and (ii) the
sale of Accounts which are not Designated Accounts in accordance with the
Permitted Factoring Agreement.
6.7 Investments. (a) Change its name or consolidate or merge with any
other entity or acquire or purchase for cash any equity interest in any other
entity, including shares of stock of other corporations, or acquire or purchase
any assets or assume any obligations of any other entity the value of which
exceeds 10% of Borrower's Eligible Accounts (whether in one transaction or in a
series of transactions), except that Borrower may own notes and other
receivables acquired in the ordinary course of business.
(b) Subscribe for any stock or other equity interest in or otherwise
organize or form any subsidiary corporation or entity.
6.8 Change in Management or Business. Change its management or make
any material change in any of its business objectives, purposes and operations
which, in either such case, might in any way adversely affect the repayment of
the Loans.
6.9 Transaction with Affiliates. Enter into, or be a party to, any
transaction with any Affiliate of Borrower except in the ordinary course of
business, pursuant to the reasonable requirements of the business of Borrower
and upon fair and reasonable terms which are fully disclosed to Bank and are no
less favorable to Borrower than Borrower could obtain in a comparable arm's
length transaction with a person not an Affiliate of a Borrower.
6.10 Indebtedness. Directly or indirectly create, incur, assume,
guaranty or be or remain liable with respect to any indebtedness, except for (a)
the Obligations, (b) the indebtedness represented by the Subordinated Debentures
disclosed in the Financial Statements, (c) purchase money indebtedness (other
than capitalized lease obligations) not to exceed $100,000 per year, (d) lease
obligations which are required to be capitalized under GAAP and which, in the
aggregate with all purchase money indebtedness incurred pursuant to the
preceding clause (e), do not exceed $500,000, (f) indebtedness incurred under
the Permitted Factoring Agreement in an aggregate amount not to exceed at any
time the net amount of all outstanding Accounts other than Designated Accounts,
(g) indebtedness existing as of the date of this Agreement to The Bank of Floyd
secured by the Permitted Equipment Lien (as such indebtedness may be modified,
amended or extended, but not increased in principal amount); and (h) any other
indebtedness to which Bank consents in writing.
6.11 Capital Expenditures. Permit the aggregate amount of all capital
expenditures by Borrower in any fiscal year to exceed $500,000.
7. Collection of Collateral and Notice of Assignment.
7.1 Collections on Collateral. All collections on the Collateral shall
be directed to a lock box at Bank. All collections on the Collateral shall be
the property of Bank, shall be held in trust for Bank by Borrower and shall not
be commingled with Borrower's other funds or be deposited in any bank account of
Borrower (except for the Cash Collateral Account), or used in any manner except
to pay the Obligations. Borrower immediately shall deposit any collections on
the Collateral which are received by Borrower in the Cash Collateral Account
maintained at Bank for that purpose, over which Bank alone shall have the sole
power of withdrawal. On a daily basis, Bank will apply all or part of the
collected balance of the Cash Collateral Account against the Obligations (to the
extent outstanding), with the amount, order and method of such application to be
in the sole discretion of Bank. In no event shall Bank be obligated to apply any
funds deposited in the Cash Collateral Account before the second business day
after the day of deposit. Any part of the collected balance in the Cash
Collateral Account which Bank elects not to apply to Borrower's
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<PAGE> 16
obligations shall be paid over and deposited by Bank to Borrower's commercial
account. The crediting of items deposited in the Cash Collateral Account to the
reduction of the Obligations shall be conditioned upon final payment of the item
and if any item is not so paid, the amount of any credit given for it may be
charged to the Obligations or to any other deposit account of Borrower, whether
or not the item is returned.
7.2 Notice of Assignment. Bank shall have the right at any time during
the continuance of an Event of Default to notify Debtors of its security
interest in the Designated Accounts and, subject to the Intercreditors
Agreement, the other Accounts and to require payments to be made directly to
Bank. Upon request of Bank at any time during the continuance of an Event of
Default, Borrower shall so notify the account Debtors and will indicate on all
billings to the account Debtors that the Accounts are payable to Bank. To
facilitate direct collection, Borrower hereby appoints Bank and any officer or
employee of Bank, as Bank from time to time may designate, as attorney-in-fact
for Borrower to, after the occurrence of an Event of Default: (a) receive, open
and dispose of all mail addressed to Borrower and take therefrom any payments on
or proceeds of Accounts; (b) take over Borrower's post office boxes or make
other arrangements, in which Borrower shall cooperate, to receive Borrower's
mail, including notifying the post office authorities to change the address for
delivery of mail addressed to Borrower to such address as Bank shall designate;
(c) endorse the name of Borrower in favor of Bank upon any and all checks,
drafts, money orders, notes, acceptances or other evidences of payment or
Collateral that may come into Bank's possession; (d) sign and endorse the name
of Borrower on any invoice or bill of lading relating to any of the Accounts, on
verifications of Accounts sent to any Debtor, to drafts against Debtors, to
assignments of Accounts and to notices to Debtors; and (e) do all other acts and
things necessary to carry out this Agreement, including signing the name of
Borrower on any instruments required by law in connection with the transactions
contemplated hereby and on financing statements as permitted by the Uniform
Commercial Code. Borrower hereby ratifies and approves all acts of such
attorneys-in-fact, and neither Bank nor any other such attorney-in-fact shall be
liable for any acts of commission or omission, or for any error of judgment or
mistake of fact or law. This power, being coupled with an interest, is
irrevocable so long as any of the Obligations remain unsatisfied.
7.3 Enforcement of Accounts. Bank shall not, under any circumstances,
be liable for any error or omission or delay of any kind occurring in the
settlement, collection or payment of any Accounts or any instruments received in
payment thereof or for any damage resulting therefrom. During the continuance of
an Event of Default, Bank may, without notice to or consent from Borrower, sue
upon or otherwise collect, extend the time of payment of, or compromise or
settle for cash, credit or otherwise upon any terms, any of the Accounts or any
securities, instruments or insurance applicable thereto and/or release the
obligator thereon. During the continuance of an Event of Default, Bank is
authorized to accept the return of the goods represented by any of the Accounts,
without notice to or consent by Borrower or without discharging or any way
affecting the Obligations hereunder.
7.4 Limitation of Bank's Liability. Bank shall not be liable for or
prejudiced by any loss, depreciation or other damage to Accounts or other
Collateral unless caused by Bank's willful and malicious act, and, to the extent
permitted by applicable law, Bank shall have no duty to take any action to
preserve or collect any Account or other Collateral.
7.5 Verification of Accounts. Bank may confirm and verify all Accounts
in any reasonable manner at any time. Bank shall have no obligation to disclose
or discuss with Borrower the names or identities of any customers from whom Bank
obtains or requests information as to Accounts. Borrower shall cooperate with
Bank in the confirmation and verification of any Accounts, or reconciling any
discrepancy between those amounts verified by Bank and information provided to
Bank by Borrower.
8. Service Charges. In addition to the principal and interest on the
Loans and the reimbursement of expenses to Bank pursuant to this Agreement,
Borrower shall pay to Bank a Collateral monitoring fee of $1,000 per month while
this Agreement remains in effect, payable in advance on the first day of each
month.
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<PAGE> 17
In addition to the monthly Collateral monitoring fee, Borrower shall pay to Bank
a service charge of $50 per day for each day on which the outstanding principal
balance of the Loans exceeds the Maximum Loan Amount. All service charges shall
be payable monthly on the due date for the payment of principal and/or interest
on the Loans.
9. One General Obligation: Cross Collateral. All loans and advances
by Bank to Borrower under this Agreement and under all other agreements
constitute one loan, and all indebtedness and obligations of Borrower to Bank
under this and under all other agreements, present and future, constitute one
general obligation secured by the Collateral and security held and to be held by
Bank hereunder and by virtue of all other assignments and security agreements
between Borrower and Bank now and hereafter existing. It is expressly understood
and agreed that all of the rights of Bank contained in this Agreement shall
likewise apply insofar as applicable to any modification of or supplement to
this Agreement and to any other agreements, present and future, between Bank and
Borrower.
10. Events of Default and Remedies.
10.1 Event of Default. The following shall constitute Events of Default
under this Agreement, it being agreed that time is of the essence hereof: (a)
failure of Borrower to pay any of the Obligations when due or, in the case of
Obligations which consist of interest or service charges payable under Section
8, within three days of the date when due; (b) failure of Borrower to observe or
perform any covenant contained in this Agreement or in any other agreement
between Borrower and Bank when due; (c) any representation or warranty at any
time made by Borrower or any guarantor to Bank orally or in this Agreement or in
any other agreement between Borrower and/or any guarantor and Bank, or in any
document or instrument delivered to Bank pursuant to this Agreement or any such
other agreement is, or becomes, untrue or misleading in any material respect;
(d) Borrower shall be in default or breach under any obligation for the payment
of borrowed money or for the payment of rent under any lease agreement covering
real or personal property in either case; (e) failure of Borrower or any
guarantor, alter request by Bank, to furnish financial information or to permit
the inspection of its books of account and records; (f) suspension by Borrower
or any guarantor of the operation of its present business, or the insolvency of
Borrower or any guarantor, or the inability of Borrower or any guarantor to meet
its debts as they mature, or its admission in writing to such effect, or its
calling any meeting of all or any of its creditors or committing any act of
bankruptcy, or the filing by or against Borrower or any guarantor of any
petition under any provision of Bankruptcy Act, as amended, or the entry of any
judgment or filing of any lien against Borrower or any guarantor; (g) any
material adverse change occurs in the condition or affairs (financial or
otherwise) of Borrower or in any endorser, guarantor of surety for any of the
Obligations; (h) any loss, theft, damage, destruction or encumbrance of
Collateral with a value in excess of $250,000 in the aggregate; (i) any levy,
seizure or attachment of any of the Collateral; (j) any guarantor of the
Obligations denies his or its obligation to guarantee any Obligations then
existing or attempts to limit or terminate his or its obligation to guarantee
any future Obligations, including future Loan advances; (k) occurrence of any
default or event of default under any other Loan Documents which continues
beyond the applicable period for cure, if any; (1) payment by or on behalf of
Borrower of any principal outstanding under the subordinated Debentures without
the prior written consent of Bank; (m) termination or cancellation, for any
reason whatsoever, of the WCW License or the occurrence of any event which Bank
deems, in its sole discretion, to constitute a material adverse change in the
relationship of Borrower with World Championship Wrestling, Inc. or in
Borrower's rights under the WCW License, or (n) occurrence of any Change of
Control of Borrower.
10.2 Rights of Bank upon Default. Upon the occurrence of an Event of
Default described in Section 10.1, Bank at its option may: (a) declare the
Obligations immediately due and payable, without presentment, notice, protest or
demand of any kind for the payment of all or any part of the Obligations (all of
which are expressly waived by Borrower) and exercise all of its rights and
remedies against Borrower and any Collateral provided herein, in any other
agreement or at law or in equity and (b) exercise all rights granted to a
secured party under the applicable Uniform Commercial Code or other applicable
law. Upon the
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<PAGE> 18
occurrence of an Event of Default, Bank may take possession of the Collateral,
or any part thereof, and Borrower hereby grants Bank authority to enter upon any
premises on which the Collateral may be situated, and remove the Collateral from
such premises or use such premises, together with the materials, supplies, books
and records of Borrower, to maintain possession and/or the condition of the
Collateral and to prepare the Collateral for sale. Borrower shall, upon demand
by Bank, assemble the Collateral and make it available at a place designated by
Bank. Unless the Collateral is perishable or threatens to decline speedily in
value or is of a type customarily sold on a recognized market, Bank will give
Borrower reasonable notice of the time and place of any public sale thereof or
of the time after which any private sales or other intended disposition thereof
is to be made. The requirement of reasonable notice shall be met if such notice
is mailed, postage prepaid, to the address of Borrower shown at the beginning of
this Agreement at least ten days prior to the time of such sale or disposition.
10.3 Application of Proceeds. Bank shall have the right to apply the
proceeds of any disposition of the Collateral to the payment of the Obligations
in such order of application as Bank, may, in its sole discretion, elect. Bank
shall have no obligation to marshall any assets in favor of Borrower or any
other party.
10.4 Remedies Cumulative. The rights, options and remedies of Bank
shall be cumulative and no failure or delay by Bank in exercising any right,
option or remedy shall be deemed a waiver thereof or of any other right, option
or remedy, or waiver of any Event of Default hereunder, nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy
hereunder. Bank shall not be deemed to have waived any of Bank's rights
hereunder or under any other agreement, instrument or paper signed by Borrower
unless such waiver be in writing and signed by Bank.
11. Miscellaneous.
11.1 Governing Law: Jurisdiction and Vetme. The provisions of this
Agreement shall be governed by and interpreted in accordance with the laws of
the State of Ohio. Bank and Borrower hereby designate all courts of record
sitting in either Hamilton County, Ohio or Montgomery County, Ohio, both state
and federal, as forums where any action, suit or proceeding in respect of or
arising out of this Agreement or the transactions contemplated by this Agreement
may be prosecuted as to all parties, their successors and assigns, and by the
foregoing designation Bank and Borrower consent to the jurisdiction and venue of
such courts.
11.2 MUTUAL WAIVER OF JURY TRIAl. AS A SPECIFICALLY BARGAINED
INDUCEMENT FOR BANK TO EXTEND CREDIT TO BORROWER AND FOR BORROWER TO BORROW FROM
BANK, AND AFTER HAVING THE OPPORTUNITY TO CONSLILT COUNSEL, BORROWER AND BANK
HEREBY EXPRESSLY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY LAWSUIT OR PROCEEDING
RELATING TO THIS AGREEMENT OR ARISING IN ANY WAY FROM THE OBLIGATIONS.
11.3 Other Waivers. Borrower hereby waives notice of nonpayment,
demand, notice of demand, presentment, protest and notice of protest with
respect to the Obligations, or notice of acceptance hereof, notice of Loans
made, credit extended, Collateral received or delivered, or any other action
taken in reliance hereon, and all other demands and notices of any description,
except such as are expressly provided for herein.
11.4 Collection Costs. All reasonable costs and expenses incurred by
Bank to obtain, enforce or preserve the security interests granted by this
Agreement and to collect the Obligations, including, without limitation,
stationery and postage, telephone and telegraph, secretarial and clerical
expenses, the fees or salaries of any collection agents utilized, all costs to
maintain and preserve the Collateral and all reasonable
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<PAGE> 19
attorneys' fees and legal expenses incurred in obtaining or enforcing payment of
any of the Obligations or foreclosing Bank's security interest in any of the
Collateral, whether through judicial proceedings or otherwise, or in enforcing
or protecting its rights and interests under this Agreement or under any other
Loan Document, or in protecting the rights of any holder or holders with respect
thereto, or in defending or prosecuting any actions or proceedings arising out
of or relating to the transactions contemplated hereby, shall be paid by
Borrower to Bank, upon demand, or, at Bank's election, charged to Borrower's
account and added to the Obligations, and Bank may take judgment against any or
all of the Borrower for all such costs, expense and fees in addition to all
other amounts due from Borrower hereunder.
11.5 Expenses. Borrower shall reimburse Bank for all reasonable
out-of-pocket costs and expenses incurred by Bank in connection with the
preparation of this Agreement and the making of the Loans hereunder, including
the reasonable fees and expenses of Bank's counsel, and for all UCC search,
filing, recording and other costs connected with the perfection of Bank's
security interest in the Collateral.
11.6 Notices. All notices, requests, directions, demands, waivers and
other communications provided for herein shall be in writing and shall be deemed
to have been given or made when delivered personally, by telecopy (with receipt
acknowledged), or sent by registered or certified mail, postage prepaid and
return receipt requested, addressed to Borrower or Bank, as the case may be, at
their respective addresses set forth at the beginning of this Agreement. Notices
of changes of address shall be given in the same manner.
11.7 Severability. Any provision of this Agreement which is prohibited
and unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
11.8 Entire Agreement. Modification. Benefit. This Agreement shall
constitute the entire agreement of the parties and no provision of this
Agreement, including the provisions of this section, may be modified, deleted or
amended in any manner except by agreement in writing executed by the parties.
All terms of this Agreement shall be binding upon, inure to the benefit of and
be enforceable by the parties hereto and their respective successors and
assigns; provided, however, that Borrower shall not assign or transfer its
fights hereunder, and Bank shall not assign or transfer its rights hereunder to
any person which, directly or through an Affiliate, is engaged in substantially
the same business as Borrower.
11.9 Construction. All references in this Agreement to the single
number and neuter gender shall be deemed to mean and include the plural number
and all genders, and vice versa, unless the context shall otherwise require.
11.10 Headings. The underlined headings contained herein are for
convenience only and shall not affect the interpretation of this Agreement.
11.11 Counterparts. This Agreement may be executed in more than one
counterpart, each of which shall be deemed an original.
11.12 Nonliability of Bank. The relationship between Borrower and Bank
shall be solely that of borrower and lender. Bank shall not have any fiduciary
responsibilities to Borrower. Bank undertakes no responsibility to Borrower to
review or inform Borrower of any matter in connection with any phase of
Borrower's business or operations.
11.13 Limitation of Liability. No claim may be made by Borrower against
Bank or any Affiliate, director, officer, employee, attorney or agent of Bank
for any special, consequential or punitive damages in
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<PAGE> 20
respect of any claim for breach of contract or any other theory of liability
arising out of or related to the transactions contemplated by this Agreement, or
any act, omission or event occurring in connection therewith, and Borrower
hereby waives, releases and agrees not to sue upon any such claim for any such
damages, whether or not accrued and whether or not known or suspected to exist
in its favor.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers.
"Borrower"
LITTLEFIELD, ADAMS & COMPANY
By: /s/ Warren L. Rawls
Name: Warren L. Rawls
Title: CFO, Treasurer and Secretary
"Bank"
THE PROVIDENT BANK
By: /s/ Cliff Bishop
Name: Cliff Bishop
Title: Vice President
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<PAGE> 21
SCHEDULE 4.8
LITIGATION
NONE.
<PAGE> 22
SCHEDULE 4.14
LOCATION OF INVENTORY
a. Inventories are stated at the lower of cost (using the FIFO) method) or
market (net realizable value) in accordance with GAAP. In the normal course of
business, the Company may have some inventories which include amounts of
misprints, over-runs, and mill defects (minor garment defects) which have been
appropriately valued.
b. The Company, from time to time, has inventories at certain contract screen
printers' production facilities as part of normal business operations. The
inventories at the contractors' facilities may be blank goods, work-in-process
goods, or finished goods.
During the six months prior to December 10, 1998, the Company has utilized, and
therefore had inventories at, the following contract screen printers:
Next, Inc.
1295 Vernon Street
P.O. Box 684
Wabash, IN 46992
Phone: (219) 563-2186
Fax: (219) 569-0921
Creative Silkscreen and Design
1100 Buchanan Street
Rockford, IL 61101
Phone: (815) 963-7733
Fax: (815) 963-7722
Creative Images & Innovations
52-08 Grand Ave.
Maspeth, NY 11378
Phone: (718) 821-8700
Fax: (718) 894-2412
A to Z Clothing Services, Inc.
5339 State Route 571 East
Greenville, OH 45331
Phone: (937) 548-4454
As of December 10, 1998, the only contractor facility with Company inventories
is Next, Inc.
<PAGE> 23
SCHEDULE 4.15
ERISA PLANS
As of December 10, 1998, the Company has the following plans which are subject
to ERISA:
Littlefield, Adams & Company Cafeteria Benefit Plan (a section 125
fringe benefit plan).
<PAGE> 1
EXHIBIT 10.6
MERCHANT FACTORS CORP.
1430 Broadway, New York, New York 10018 (212) 840-7575 Fax (212) 869-1752
ADDENDUM TO FACTORING AGREEMENT
Littlefield Adams & Co.
6254 Executive Blvd.
Huber Heights, OH 45424
Re: Discount Factoring Agreement
Gentlemen:
We refer to the Discount Factoring Agreement which we entered into on January
25, 1996 ("the Agreement"). We hereby agree that the Agreement be amended as
follows with effect from December 1, 1998:
Re: Paragraph 1 "Receivables" shall mean and include all accounts
except Walmart, KMart and Target Stores.
Re: Paragraph 5 The "effective rate" of interest shall be amended to
two percent (2%) in excess of the prime commercial
interest rate as defined.
The provision that the effective rate of interest
hereunder shall not be less than twelve percent (12%)
per annum is hereby deleted.
Re: Paragraph 6(b) Advances against the purchase price for net amount of
outstanding approved receivables assigned, as defined
shall be amended to an amount up to eighty percent
(80%) of the net amount thereof.
"Collection Days" shall mean five (5) business days
for the collection of checks and other instruments.
Re: Paragraph 7 The minimum aggregate commissions payable under this
agreement shall be amended to Fifty Thousand Dollars
($50,000) per calendar year. The minimum commission
payable for each month shall be Four Thousand One
Hundred and Sixty-six Dollare and Sixty-seven cents
($4,166.67) but should commissions payable during the
calendar year at any time aggregate more than the
foregoing annual minimum, then the previously charged
minimum commissions shall be rebated to you.
1
<PAGE> 2
Re: Paragraph 14 This Agreement shall continue in effect until
December 31, 2000 and shall be automatically renewed
for successive periods of one (1) year unless
terminated under the terms of the Agreement.
All other terms and conditions of the Agreement shall remain unchanged.
Very truly yours,
MERCHANT FACTORS CORP.
/s/ Walter Kaye
Walter Kaye
President
ACCEPTED, AGREED AND ACKNOWLEDGED:
LITTLEFIELD, ADAMS & CO. ATTEST: (SEAL)
By: /s/ Michael Balber /s/ Warren L. Rawls
MICHAEL BALBER, WARREN L. RAWLS
PRESIDENT SECRETARY
2
<PAGE> 1
EXHIBIT 10.7
MERCHANT FACTORS CORP.
1430 BROADWAY
NEW YORK, NEW YORK 10018
December 3, 1998
Provident Bank
10 W. Second St. Suite 1100
Dayton, OH 45402
Re: Intercreditor Agreement relating to
Littlefield Adams & Company (the "Company")
Gentlemen:
Pursuant to our factoring agreement dated January 25, 1996 as
amended from time to time (the "Factoring Agreement") and related documents with
the Company, we have been granted a lien on and security interest in certain
assets of the Company, including but not limited to its accounts, contract
rights, general intangibles, chattel paper, instruments, documents, all proceeds
thereof and all returned and repossessed goods represented thereby (the
"Accounts") arising from all of the Company's sales, as security for any
indebtedness or obligations now or hereafter owing to us by the Company, all as
more fully set forth in the Factoring Agreement and related documents between us
and the Company. The Accounts include accounts generated by the sale of
merchandise by the Company to stores operated under the names Wal-Mart, K-Mart
and Target Stores (the "Specified Accounts") as well as by sales to all other
customers (the "Other Accounts").
We understand that pursuant to agreements entered into between
you and the Company you have also been granted a lien on or security interest in
the Accounts, as well as in certain of the other assets of the Company. Each of
us has filed or will file financing statements under the Uniform Commercial Code
covering our security interests.
The purpose of this letter is to set forth, as between you and
us, our understanding relative to our respective positions in the Accounts.
Notwithstanding any agreement or arrangement which you may now or hereafter have
with the Company, or any rule of law, and notwithstanding the time, order or
method of attachment, perfection, filing or recording, you hereby agree and
acknowledge that (a) any security interest, lien, claim or right now or
hereafter asserted by you with respect to the Other Accounts shall be subject,
junior and subordinate to any security interest, lien, claim or right now or
hereafter asserted by us with respect to the Other Accounts; (b) any security
interest, lien, claim or right now or hereafter asserted by us with respect to
the Specified Accounts shall be subject, junior and subordinate to any security
interest, lien, claim or right now or hereafter asserted by you with respect to
the Specified Accounts; (c) we have not been granted a lien or security interest
by the Company in any collateral other than the Accounts; (d) we agree not to
make loans or advances to the Company under the Factoring Agreement, or
otherwise, secured either by (i) any of the Specified Accounts, or (ii) by any
of the Other Accounts which have not been credit approved
<PAGE> 2
by us or our re-factor; (e) upon default by the Company in any of its
obligations to you, you will give us prompt written notice thereof and will take
no action to enforce or realize upon your security interest in the Other
Accounts until we have advised you in writing that the Company has satisfied in
full its obligations to us; and (f) upon default by the Company in any of its
obligations to us, we will give you prompt written notice thereof and will take
no action to enforce or realize upon our security interest in the Specified
Accounts until you have advised us in writing that the Company has satisfied in
full its obligations to you.
Unless and until you have notified us in writing that you have
been paid in full, if we receive any of the Specified Accounts or any proceeds
thereof we will hold the same in trust for your benefit and promptly deliver the
same to you. Unless and until we have notified you that we have been paid in
full, if you receive any of the Other Accounts or any proceeds thereof you shall
hold the same in trust for our benefit and shall promptly deliver the same to
us.
At any time either of us may, without notice to the other,
enter into such agreements with the Company as we may deem proper extending the
time of payment or renewing or otherwise altering the terms of all or any of the
obligations of the Company to us, or affecting any security for any such
obligations, or we may exchange, sell, surrender or otherwise deal with any such
security or may release any funds of the Company held by us (except in violation
of the preceding paragraph) without impairing or affecting this Agreement in any
way.
Except as herein otherwise specifically provided, the rights and
priorities of the parties shall be determined in accordance with applicable law.
This agreement shall be governed by the laws of the State of New York and,
unless the context of this agreement otherwise requires, all terms used herein
which are defined in the Uniform Commercial Code shall have the meanings therein
stated.
This agreement is solely for the benefit of both of us, and our
respective successors and assigns. No other person, firm, entity or corporation
shall have any right, benefit, priority or interest under, or because of, the
existence of this agreement.
If the foregoing is in accordance with our understanding, please
sign and return to us the enclosed copy of this letter to so indicate.
Very truly yours,
MERCHANT FACTORS CORP.
By: /s/ Walter Kaye
Title: President
ACCEPTED AND AGREED TO:
PROVIDENT BANK
By: /s/ Cliff Bishop
Title: Vice President
ACKNOWLEDGED:
LITTLEFIELD ADAMS & COMPANY
By: /s/ Warren L. Rawls
as CFO for
Littlefield, Adams & Co.
-2-
<PAGE> 1
EXHIBIT 10.16
U.S.A.
RENEWAL AND AMENDMENT
OF LICENSE AGREEMENT
THIS RENEWAL AND AMENDMENT AGREEMENT effective as of the 1st day
of February, 1998 by and between PepsiCo, Inc., a corporation of the State of
North Carolina, with its principal place of business at 700 Anderson Hill Road,
Purchase, New York 10577, U.S.A. (hereinafter referred to as "LICENSOR") and
Littlefield Adams & Co., a corporation of the State of New Jersey, with its
principal place of business at 6254 Executive Blvd., Huber Heights, Ohio 45424
(hereinafter referred to as "LICENSEE").
WHEREAS, LICENSOR and LICENSEE are parties to a certain License
Agreement dated February 1, 1996, amended on October 1, 1996, and wish to renew
and amend said Agreement only as specifically set forth below; without
modifying, changing or otherwise amending any other provisions of said
Agreement, and therefore the parties agree as follows:
To renew for two (2) years, namely, February 1, 1998 through January
31, 2000.
IN WITNESS WHEREOF, the parties hereto have executed this
Renewal Agreement effective as of the date and year first set forth hereinabove.
PepsiCo, Inc. (LICENSOR)
By: /s/ William S. Finkelstein
Name: William S. Finkelstein
Title: Vice President
Littlefield Adams & Co. (LICENSEE)
By: /s/ Michael B. Balber
Name: Michael B. Balber
Title: Executive Vice President
<PAGE> 1
EXHIBIT 10.23
LEISURE CONCEPTS INCORPORATED
January 22, 1999
Mr. Michael Balber
Littlefield, Adams & Company
6262 Executive Blvd.
Huber Heights, OH 45424
Dear Mr. Balber:
This has reference to the World Championship Wrestling agreement
between World Championship Wrestling, Inc. ("Licensor") and Littlefield, Adams &
Company ("Licensee") dated February 27, 1998, covering the WCW/NWO Property
(hereinafter the "License Agreement"). The License Agreement is amended as
follows.
1. It is understood and agreed that Paragraph 2: Authorized Articles is hereby
revised in its entirety to read as follows:
"Authorized Articles: Knit shirts, tank tops, muscle shirts,
henley shirts, sweatshirts, long-sleeve
shirts, t-shirts, denim long and short
sleeve shirts, chambray long and short
sleeve shirts."
2. It is understood and agreed that Paragraph 6: Royalty Rate is hereby revised
in its entirety to read as follows:
"Royalty Rate: 10% Net Sales (knit shirts; tank tops;
muscle shirts; henley
shirts; sweatshirts;
long-sleeve shirts; and
t-shirts)
12% Net Sales (denim long and short
sleeve shirts; and chambray
long and short sleeve
shirts)"
Except as herein provided all terms and conditions of the License
Agreement remain in full force and effect. Please indicate your agreement with
the foregoing by signing where specified below and by returning all four copies
of this amendment to Stella Guzman at the address below. A fully executed copy
will be returned to you in due course.
Accepted and Agreed to: Very truly yours,
Littlefield, Adams and Company World Championship
("Licensee") Wrestling, Inc.
("Licensor")
By: /s/ Casey T. Collins
By: /s/ Michael Balber
Michael Balber
President: and
Chief Executive Officer
LEISURE CONCEPTS INC.(R) 1414 AVENUE OF THE AMERICAS NEW YORK, NY 10019
(212) 758-7666 - FAX (212) 980-0933
NEW YORK LONDON LOS ANGELES
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statement on Form S-8 (No. 333-49167) of
Littlefield, Adams & Company (the "Company") of our report dated February 25,
1999 appearing on page F-1 of this December 31, 1998 Form 10-K. It should be
noted that we have not audited any financial statements of the Company
subsequent to December 31, 1998, or performed any audit procedures subsequent to
the date of our report.
Dayton, Ohio /S/ ARTHUR ANDERSEN LLP
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 107
<SECURITIES> 0
<RECEIVABLES> 8,375
<ALLOWANCES> 560
<INVENTORY> 3,157
<CURRENT-ASSETS> 11,511
<PP&E> 1,236
<DEPRECIATION> 750
<TOTAL-ASSETS> 12,009
<CURRENT-LIABILITIES> 5,963
<BONDS> 3,137
0
0
<COMMON> 2,808
<OTHER-SE> 59
<TOTAL-LIABILITY-AND-EQUITY> 12,009
<SALES> 25,917
<TOTAL-REVENUES> 25,917
<CGS> 17,953
<TOTAL-COSTS> 17,953
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 362
<INCOME-PRETAX> 2,599
<INCOME-TAX> 133
<INCOME-CONTINUING> 2,466
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,466
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.60
<FN>
<F1>Bad debt expense of 19 is included in the 4,956 reported as Selling and
Administrative expenses.
</FN>
</TABLE>
