<PAGE> 1
As Filed with the SEC on November 15, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission file number 1-8176
------
LITTLEFIELD, ADAMS & COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey #22-1469846
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6262 Executive Blvd., Huber Heights, OH 45424
- --------------------------------------------------------------------------------
(Address of principal executive offices, and Zip Code)
Registrant's telephone number, including area code (937) 236-0660
---------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at November 12, 1999
----------------------- ---------------------------------
<S> <C>
Common Stock, par value 3,342,719 shares
$1.00 per share
</TABLE>
As Filed with the SEC on November 15, 1999
<PAGE> 2
LITTLEFIELD, ADAMS & COMPANY
<TABLE>
<CAPTION>
INDEX Page No.
----- --------
<S> <C>
Part I. Financial Information
Item 1. Condensed Financial Statements (Unaudited)
Condensed Balance Sheets -
September 30, 1999, and December 31, 1998 3
Condensed Statements of Operations -
for the three and nine months ended
September 30, 1999, and 1998 4
Condensed Statements of Cash Flows -
for the nine months ended
September 30, 1999, and 1998 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Part II. Other Information
Item 1. Legal Proceedings 23
Item 3. Defaults Upon Senior Securities 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 25
</TABLE>
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 2
<PAGE> 3
LITTLEFIELD, ADAMS & COMPANY
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 101 $ 107
Accounts receivable:
Trade, net of allowances of $218 at 9/30/99
and $352 at 12/31/98 317 5,765
Due from factor, net of allowances of $10 at
9/30/99 and $208 at 12/31/98 63 2,050
Other 26 33
Inventories 2,407 3,157
Prepaid expenses and other 341 399
-------- --------
Total current assets 3,255 11,511
PROPERTY, PLANT AND EQUIPMENT, NET (Note 3) 280 486
OTHER ASSETS 18 12
-------- --------
TOTAL ASSETS $ 3,553 $ 12,009
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Notes payable $ -- $ 41
Factor borrowings 3 1,327
Accelerated long-term revolving line of credit (Note 1) 358 --
Current portion of long-term debt (Notes 1 and 4) 486 507
Convertible subordinated debentures 805 1,200
Accounts payable 698 1,653
Accrued expenses 623 1,235
-------- --------
Total current liabilities 2,973 5,963
LONG-TERM DEBT, LESS CURRENT PORTION (Notes 1 and 4) 86 12
LONG-TERM REVOLVING LINE OF CREDIT (Note 1) -- 3,125
DEFERRED COMPENSATION 40 42
-------- --------
Total liabilities 3,099 9,142
-------- --------
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' INVESTMENT:
Common stock, $1.00 par; authorized 25,000,000;
issued 3,360,883 for 1999 and 2,808,221 for 1998;
outstanding 3,342,719 for 1999 and 2,790,057 for 1998 3,361 2,808
Capital in excess of par value 6,202 6,325
Accumulated deficit (8,996) (6,153)
-------- --------
567 2,980
Treasury stock, at cost - shares of 18,164 for 1999 and 1998 (113) (113)
-------- --------
454 2,867
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 3,553 $ 12,009
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 3
<PAGE> 4
LITTLEFIELD, ADAMS & COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------------ --------------------------
1999 1998 1999 1998
----------- --------- ----------- -----------
(DOLLARS IN THOUSANDS, (DOLLARS IN THOUSANDS,
Except per share amounts) Except per share amounts)
<S> <C> <C> <C> <C>
Net product sales $ 286 $ 12,274 $ 6,026 $ 15,598
Cost of products sold 497 8,357 5,781 10,809
----------- ----------- ----------- -----------
Gross profit (loss) (211) 3,917 245 4,789
----------- ----------- ----------- -----------
Operating expenses:
Selling expenses 245 1,598 1,249 2,173
General and administrative expenses 596 427 1,290 892
Impairment loss 233 34 233 34
Other operating expenses 91 -- 91 --
----------- ----------- ----------- -----------
Total operating expenses 1,165 2,059 2,863 3,099
----------- ----------- ----------- -----------
Income (loss) from operations (1,376) 1,858 (2,618) 1,690
Other expense:
Loss on sale of property and equipment -- (10) -- (10)
Interest (40) (144) (225) (202)
----------- ----------- ----------- -----------
Total other expense (40) (154) (225) (212)
----------- ----------- ----------- -----------
Income (loss) before income taxes (1,416) 1,704 (2,843) 1,478
Provision for income taxes -- (77) -- (77)
----------- ----------- ----------- -----------
Net income (loss) $ (1,416) $ 1,627 $ (2,843) $ 1,401
=========== =========== =========== ===========
Weighted average common shares for:
Basic earnings per share 3,322,572 2,790,057 3,091,120 2,784,013
Diluted earnings per share 3,322,572 4,799,183 3,091,120 3,950,936
Basic earnings per common share:
Net earnings (loss) per share $ (0.43) $ 0.58 $ (0.92) $ 0.50
=========== =========== =========== ===========
Diluted earnings per common share:
Net earnings (loss) per share $ (0.43) $ 0.34 $ (0.92) $ 0.36
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 4
<PAGE> 5
LITTLEFIELD, ADAMS & COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended September 30,
1999 1998
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,843) $ 1,401
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 104 82
Impairment loss 233 34
Loss on sale of property and equipment -- 10
Stock options granted for contractor services 5 --
Changes in operating assets and liabilities:
Accounts and other receivables, net 7,435 (6,957)
Inventories, net 750 (1,351)
Prepaid expenses and other 58 (120)
Accounts payable (955) 3,351
Accrued expenses and other (612) 928
------- -------
Net cash provided by (used in) operating activities 4,175 (2,622)
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (131) (205)
Other (1) (4)
------- -------
Net cash used in investing activities (132) (209)
------- -------
Cash flows from financing activities:
Proceeds from (payments of) line of credit
and factor borrowings, net (1,324) 1,624
Payments of long-term line of credit, net (2,767) --
Proceeds from bank and other notes payable 136 375
Payments of bank and other notes payable (124) (368)
Proceeds from director's stock transaction 4 --
Proceeds from sale of convertible subordinated debentures -- 1,200
Proceeds from sale of common stock 26 12
------- -------
Net cash provided by (used in) financing activities (4,049) 2,843
------- -------
Net increase (decrease) in cash (6) 12
Cash at beginning of period 107 57
------- -------
Cash at end of period $ 101 $ 69
======= =======
Supplemental disclosure of cash flows information:
Cash paid during the period for interest $ 247 $ 202
Cash paid during the period for income taxes $ 43 $ 2
Supplemental disclosure of non-cash transactions:
Exercise of convertible subordinated debentures $ 395 $ --
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 5
<PAGE> 6
LITTLEFIELD, ADAMS, & COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Littlefield, Adams & Company (the "Company," "Littlefield," and the
"Registrant"), (Trading of the Company's Common Stock is reported on the NASD's
OTC Electronic Bulletin Board under the symbol "FUNW").
The condensed balance sheet at September 30, 1999, the condensed
statements of operations for the three and nine months ended September 30, 1999
and 1998, and the condensed statements of cash flows for the nine months ended
September 30, 1999 and 1998, have been prepared by the Company without audit. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments and adjustments to reserves, necessary to fairly present the
financial position, results of operations and cash flows have been made.
However, it should be understood that accounting measurements at interim dates
may be less precise than at year end. The results of operations for the interim
periods are not necessarily indicative of the operating results for a full year
or of future operations.
Certain information normally included in financial statements prepared
in accordance with generally accepted accounting principles has been condensed
or omitted. The accompanying condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Certain prior period amounts have been reclassified for comparative
purposes. The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company considers
its reported net income (loss) to be its comprehensive income (loss) as defined
by SFAS No. 130.
The Company was in default, as of June 30, 1999, under the Loan and
Security Agreement dated December 10, 1998 between the Company and The Provident
Bank ("Provident") and, through cross default provisions under the Business Loan
Agreement dated as of May 1, 1999 between the Company and The Bank of Floyd
("Floyd") (the "Provident Loan Agreement" and "Floyd Loan Agreement",
respectively).
In August 1999, the Company commenced discussions with Provident and
Floyd in order to obtain a waiver of the breached financial covenants and amend
the financial covenants in the Provident Loan Agreement. The Company was
unsuccessful in obtaining such waiver of the breached financial covenants and
amendments to the financial covenants. In October 1999, the Company reached an
agreement to repay all borrowings from Provident (including accrued interest)
and accordingly repaid all amounts due to Provident on October 20, 1999.
The amounts paid to Provident were obtained through a bridge
refinancing carried out with Mr. Andrew E. Trolio of Broomall, Pennsylvania. The
$500 bridge loan is secured by the Company's inventories and substantially all
of its accounts receivable, and is guaranteed by an officer of the Company and
his wife (with regard to any deficiencies in payments in her case). The bridge
loan is repayable in two installments, with $100 due on November 30, 1999, and
the remaining $400 due on December 14, 1999, and bears interest (calculated
based on the original principal amount for the 60-day term notwithstanding any
repayments or prepayments of principal) at the rate of 15% per annum. The
Company paid a closing fee of $15 and, in addition, issued five-year warrants to
the lender to purchase up to 71,429 shares of the Company's stock, exercisable
at a price of $.70 per share. A similar warrant for the same number of shares is
being issued by the Company to the officer of the Company in consideration for
the guaranty that he and his wife provided and that was a condition to the
closing of the loan. Although the Company believes that it will be able to repay
the bridge loan, no assurances can be given the Company will be able to and in
the event that the Company is unable to repay the bridge loan, the Company would
be unlikely to continue as a going concern.
In October 1999, based on information the Company had provided Floyd
regarding the reduced value of Floyd's collateral, Floyd deemed itself insecure,
which is an Event of Default under the Floyd Loan Agreement. The Company
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 6
<PAGE> 7
LITTLEFIELD, ADAMS, & COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
reached an agreement with Floyd whereby Floyd will forbear exercising its rights
under the Floyd Loan Agreement including, but not limited to, acceleration of
all sums due. The forbearance is contingent upon: (a) proceeds from the sale of
a certain press and dryer to be paid in full to Floyd, which was accomplished in
October 1999; (b) the Company continuing to make monthly installments required
under the terms of the Floyd Loan Agreement; and (c) payment by the Company of
three additional installments of approximately equal amounts on October 15,
November 15, and December 15, 1999, which will collectively pay in full all sums
due under the Floyd Loan Agreement. As of November 12, 1999, the Company is in
compliance with the conditions of the forbearance. There can be no assurance
that the Company will be able to maintain its compliance with the conditions
required for the continuance of the forbearance. If such forbearance is not
continued, then Floyd can at any time declare all amounts owed by the Company to
Floyd to be immediately due and payable. Floyd would also have the right to
commence legal action against the Company for the repayment of the entire debt
owed to them, plus certain other amounts and, if unpaid, to proceed against the
Company's assets. The Company does not believe that it would be in a position to
repay Floyd should Floyd demand immediate payment and in such an event, the
Company would be unlikely to continue as a going concern.
Sales for the nine months ended September 30, 1999, were less than
sales for the similar period in 1998. Because of a substantial decline in WCW
licensed product sales, the Company expects sales revenues for the whole of 1999
to be substantially below those of the prior year. Sales during the month of
October 1999 were approximately $642. As of November 12, 1999, the Company had
sales and bookings for shipments to be made during November and December 1999 of
approximately $739. Not all "bookings" constitute contractual commitments, and
may therefore be subject to cancellation or modification by customers. The
Company expects sales in the fourth quarter to be substantially below the fourth
quarter of 1998 and substantially below, also, each of the first two quarters of
1999. This significant drop in revenues will result in continued operating
losses during the fourth quarter of 1999, which will have a significant adverse
effect on the Company's cash flow. These continued operating losses could
prohibit the Company from making timely payments and continuing as a going
concern if other sources of cash are not secured.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market (net realizable value). Costs in finished
goods include direct materials, outsourced production cost, direct labor and
certain indirect manufacturing overhead expenses.
In order to increase cash flow and satisfy inventory conditions related
to obtaining prospective financing, the Company has been negotiating the sale of
certain of its raw materials and finished goods inventories with numerous
entities. Subsequent to September 30, 1999, the Company consummated the sale of
a majority of its finished goods inventories. While the Company expects
additional sales of inventories to be completed, there can be no assurances that
such sales will be completed at prices deemed acceptable to the Company.
Inventories are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Raw materials $ 2,496 $ 2,735
Finished goods 861 622
Allowance for inventory obsolescence (950) (200)
-------- ---------
$ 2,407 $ 3,157
======== =========
</TABLE>
Littlefield, Adams & Company, September 30, 1999 Quarterly Report on
Form 10-Q; Page 7
<PAGE> 8
LITTLEFIELD, ADAMS, & COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company is currently involved in litigation with Muller
International Sourcing, L.L.C ("Muller"). In September 1999, Muller filed a
complaint in the amount of $245 against the Company for payment of raw materials
shipped to the Company, the quality and quantity of which the Company questions.
In October 1999, the Company filed a verified answer, asserting its defenses and
counterclaims. The Company believes that it will be successful in such defenses
and counterclaims, although there can be no assurances that it will be.
NOTE 3: RECOVERABILITY OF LONG-LIVED ASSETS
The Company has assessed the recoverability of its investment in
long-lived assets to be held and used in operations under the guidelines set
forth in SFAS No. 121 and determined that an impairment loss was required as of
September 30, 1999. Such assessment required the Company to make certain
estimates of future sales volumes and prices which are expected to occur over
the remaining useful lives of its long-lived assets. Such long-lived assets
primarily consist of the Company's investment in property, plant, and equipment.
During the third quarter of 1999, the Company evaluated its production
costs between it and those of its third-party production contractor. That
evaluation led to the decision to cease in-house production, except for a
minimal ability to produce small orders, if economically sound. The Company
expects that substantially all future production will be outsourced to
third-party contractors. Accordingly, the Company expects that substantially all
its production equipment will be sold and its production facility essentially
closed. It will have minimal future operating cash flows generated by its
production equipment. The Company assessed the carrying value of its production
equipment and leasehold improvements and recognized an impairment loss of $233.
NOTE 4: DEBT
Long-term debt balances are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Note payable to Floyd, interest at 8.75%, payable in
60 monthly payments, collateralized by machinery
and equipment and furniture and fixtures $ 433 $ --
Notes payable to Floyd, refinanced as disclosed above -- 482
Capitalized lease obligations 139 37
--------- ---------
Total debt 572 519
Less - current portion (486) (507)
---------- ---------
$ 86 $ 12
========= =========
</TABLE>
The Company signed a promissory note, effective May 1, 1999 in the
amount of $464 evidencing its outstanding obligations to Floyd. The note is
payable in sixty monthly payments and bears an interest rate of prime plus 1%,
adjustable annually. The term note is collateralized by machinery and equipment
and furniture and fixtures. As of September 30, 1999, the Company is in default
of the Floyd Loan Agreement as a result of a cross default provision and Floyd
deeming itself insecure based on the reduced value of Floyd's collateral, as
informed by the Company (see Note 1 for further details).
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 8
<PAGE> 9
LITTLEFIELD, ADAMS, & COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5: CONVERTIBLE SUBORDINATED DEBENTURES
On April 24, 1998, Littlefield completed a private offering of $1.2
million in principal amount of 7% Convertible Subordinated Debentures (the
"Debentures"). The participants in the private offering included officers and
directors of the Company and several accredited investors. General terms of the
Debentures include the right to convert, after a period of one year, into shares
of Littlefield common stock at a rate of one and one-third shares of stock for
each dollar of principal amount of the Debentures. Any unconverted Debentures
are payable on demand after eighteen months. Interest is payable semi-annually
on the last day of March and September. The Company, with sixty days notice, may
call the Debentures for a premium after one year. If all of the Debentures 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 Electronic Bulletin Board. The
Debentures are currently payable on demand. However, since the Company would be
unable to repay the Debentures if a demand for payment were made, any demand for
payment by the holders of the Debentures would likely result in the Company
being unable to continue as a going concern.
The Debentures became convertible on April 24, 1999. From April 24,
1999, to September 30, 1999, approximately $395 in principal amount was
converted into 526,662 shares of Littlefield common stock. The principal amount,
as of September 30, 1999, is $805.
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 9
<PAGE> 10
LITTLEFIELD, ADAMS, & COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6: EARNINGS PER SHARE
Diluted earnings per share have been calculated as follows:
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
--------------------------- ---------------------------
1999(a)(b) 1998 1999(a)(b) 1998(a)(b)
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Earnings:
Net income (loss) applicable to
common stock $ (1,416) $ 1,627 $ (2,843) $ 1,401
Net effect of assumed conversion:
Interest applicable to debentures -- 20 -- 35
----------- ----------- ----------- -----------
Net income (loss) for diluted earnings
per share $ (1,416) $ 1,647 $ (2,843) $ 1,436
=========== =========== =========== ===========
Shares:
Weighted average number of shares
of common stock outstanding 3,342,572 2,790,057 3,091,120 2,784,013
Weighted average impact of
potential common shares
applicable to:
Stock options -- 409,126 -- 229,193
Convertible subordinated
debentures -- 1,600,000 -- 937,730
----------- ----------- ----------- -----------
Weighted average shares used for
computation of diluted
earnings (loss) per share 3,342,572 4,799,183 3,091,120 3,950,936
=========== =========== =========== ===========
Diluted earnings (loss) per common share $ (0.43) $ 0.34 $ (0.92) $ 0.36
=========== =========== =========== ===========
</TABLE>
(a) The stock options have an antidilutive effect on net loss per share and
are, therefore, excluded from the computation of diluted earnings per
share.
(b) The convertible subordinated debentures have an antidilutive effect on net
loss per share and are, therefore, excluded from the computation of diluted
earnings per share.
Certain securities that could potentially dilute basic earnings per
share in the future that were not included in the computation of diluted
earnings per share, because to do so would have been antidilutive, were as
follows:
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 10
<PAGE> 11
LITTLEFIELD, ADAMS, & COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Stock options:
Range of exercise prices
------------------------
$1.00 to $6.88 653,609 345,978 560,414 517,863
Convertible subordinated debentures 1,073,331 1,306,076
--------- --------- --------- ---------
Total 1,726,940 345,978 1,866,490 517,863
========= ========= ========= =========
</TABLE>
In the quarter ended September 30, 1999, Littlefield's common stock traded at a
high of $2.00 per share and a low of $0.75 per share.
NOTE 6: SUBSEQUENT EVENT
In October 1999, the Company signed a non-binding letter of intent with
eCONTENT INC. (OTC BB: ETNT), formerly known as Media Vision Productions, Inc.
("MVPI"), to be merged into a newly formed, wholly-owned subsidiary of ETNT.
Under the terms of the letter of intent, Littlefield shareholders would receive
approximately 1.2 shares of common stock for each share currently held, subject
to adjustment based on possible stock issuances by either party prior to the
completion of the merger; however, shareholders of Littlefield would receive, in
the aggregate, newly issued ETNT shares equal to not less than 75% of the number
of ETNT shares outstanding immediately prior to the merger (computed on a
fully-diluted basis but excluding any shares issued or issuable to or with
respect to a small television programming company with whom ETNT is currently
engaged in acquisition discussions).
The proposed merger is subject to a number of substantial conditions,
including: each party's satisfactory completion of its due diligence review; the
negotiation and execution of a definitive merger agreement; the execution by
ETNT of a definitive agreement to acquire the small television programming
company; the receipt of fairness opinions from independent investment bankers;
approval of the transaction and the definitive agreement by the respective
boards of directors and stockholders of Littlefield and ETNT; and, other
conditions. The letter of intent provided for a definitive agreement to be
executed by October 8, 1999, and for the transaction to be completed by December
31, 1999. While merger discussions continue, the parties have not yet commenced
negotiations of the definitive agreement, and this transaction will not close by
December 31, 1999. No assurances can be given that any or all of these
conditions will be satisfied or that the merger will be completed.
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 11
<PAGE> 12
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This report contains projections and forward-looking statements that
are based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this report, the words
"anticipate," "estimate," "expect," "predict," "project," "believe," and similar
expressions are intended to identify forward looking statements. The
forward-looking statements were prepared on the basis of assumptions which
relate, among other things, to the market acceptance of the Company's products,
including the Company's licensed and proprietary products; the cost of producing
and marketing the Company's products; the prices at which the Company's products
may be sold; and the Company's market share for its products. Such assumptions
may prove not to be accurate or appropriate, and even if such assumptions do
prove to be accurate and appropriate, the actual results of the Company's
operations in the future may vary widely due to increased competition in the
industry, an increase in interest rates, general economic conditions and other
risks and uncertainties, including without limitation risks associated with
having a high percentage of the Company's revenues being derived from sales
related to one license. Accordingly, the actual results of the Company's
operations in the future may vary widely from the forward-looking statements
included herein.
The following discussion provides information which management believes
is relevant to assessing and understanding the Registrant's results of
operations and financial condition. This discussion should be read in
conjunction with the condensed financial statements included in this Quarterly
Report on Form 10-Q and their accompanying notes, and also in conjunction with
the Registrant's 1998 Annual Report on Form 10-K.
As described in more detail below, the Company has incurred significant
operating losses through September 30, 1999, anticipates additional operating
losses in the 1999 fourth quarter and has only temporary credit facilities in
place to help meet its cash requirements. The Company has reduced fixed
expenses, particularly those related to production, thereby lowering the
Company's break-even point. If the Company is unable to eliminate these
operating losses and secure permanent financing, the Company would be unlikely
to continue as a going concern.
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 12
<PAGE> 13
LITTLEFIELD, ADAMS, & COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items related to the Company's results of operations as a percentage of net
product sales.
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net product sales $ 286 100.0% $ 12,274 100.0% $ 6,026 100.0% $ 15,598 100.0%
Cost of products sold 497 173.8% 8,357 68.1% 5,781 95.9% 10,809 69.3%
--------- --------- --------- --------
Gross profit (loss) (211) (73.8%) 3,917 31.9% 245 4.1% 4,789 30.7%
--------- --------- --------- --------
Operational expenses:
Selling expenses 245 85.7% 1,598 13.0% 1,249 20.7% 2,173 13.9%
General and
Administrative
expenses 596 208.4% 427 3.5% 1,290 21.4% 892 5.8%
Impairment loss 233 81.5% 34 0.3% 233 3.9% 34 0.2%
Other operating
expenses 91 31.8% -- 0.0% 91 1.5% -- 0.0%
--------- -------- --------- -------
Total operating expenses 1,165 407.4% 2,059 16.8% 2,863 47.5% 3,099 19.9%
--------- --------- --------- --------
Income (loss) from
Operations (1,376) (481.2%) 1,858 15.1% (2,618) (43.4%) 1,690 10.8%
========= ========= ========= ========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO 1998
Net Product Sales
Third quarter net product sales for 1999 were $286,000, a decrease of
$11,988,000, or 97.7%, compared to the 1998 third quarter as a result of the
significant decline in the sales of World Championship Wrestlng products.
During the third quarter of 1999, World Championship Wrestling, Inc., a
Time Warner Company, ("WCW") licensed products accounted for approximately 75%
of net product sales, The Simpsons and King of the Hill (both owned by Twentieth
Century Fox) licensed products contributed approximately 9% of net product
sales, Hagar licensed products accounted for approximately 6% of net product
sales and Garfield licensed products added 7% of net product sales. The
Company's proprietary products sold to Target accounted for approximately 2% of
net product sales in the 1999 third quarter. Approximately 1% of net product
sales in the 1999 third quarter were generated from the sale of generic screen
printed products.
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 13
<PAGE> 14
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2.-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In the 1998 third quarter, sales of WCW licensed products generated 99%
of net product sales. Shipments of licensed products relating to the two
licensing agreements the Company has with Twentieth Century Fox ("The Simpsons"
and "King of the Hill") made up the remaining 1% of sales for the three months
ended September 30, 1998.
The Company's average selling price for goods sold in the 1999 third
quarter was 32% lower than the average selling price in the third quarter of
1998. Contributing to the lower average selling price in the third quarter of
1999 was a higher percentage of lower priced youth goods in the overall product
composition and the sales of the lower priced generic goods. During the third
quarter of 1999, sales of youth goods comprised approximately 31% of net sales,
as compared to a more typical historical range for the Company of approximately
24% of net sales. Normal wholesale prices and gross profits on youth goods are
approximately 12% to 19% less than comparable adult goods. Also, the Company
granted one-time sales allowances to several of its customers decreasing its
third quarter net product sales. Additionally, the Company continued to
recognize a downward trend in the average selling price of WCW licensed
products.
Sales during the month of October 1999 were approximately $642,000. As
of November 12, 1999, the Company had sales and bookings for shipments to be
made during November and December 1999 which total approximately $739,000. Not
all "bookings" constitute contractual commitments, and may, therefore, be
subject to cancellation or modification by customers.
Cost of Products Sold
Cost of products sold, as a percentage of net sales, was (173.8%) in
the third quarter of 1999, as compared to 68.1% in the third quarter of 1998.
Significantly contributing to the increase in the cost of products sold
percentage in the 1999 third quarter are certain in-house production expenses
required to be included in the cost of products sold that are more fixed in
nature, and do not necessarily increase or decrease proportionately with changes
in sales volume. Approximately 79% of the goods shipped during the 1999 third
quarter were produced by a third-party screen printing contractor compared to
approximately 76% during the 1998 third quarter.
Selling and Administrative Expenses
In the 1999 third quarter, selling expenses decreased by $1,353,000
over the 1998 third quarter, from $1,598,000 to $245,000, primarily due to the
decrease in royalty and promotional expenses resulting from decreases in sales
volume. Expressed as a percentage of net sales, selling expenses were 85.7% in
the 1999 third quarter, compared to 13.0% in the 1998 third quarter.
General and administrative expenses increased by $169,000 from the 1998
third quarter to the 1999 third quarter. The change reflects a general increase
in various administrative expenses and additional costs related to consulting
and contemplated mergers. Expressed as a percentage of net sales, general and
administrative expenses were 208.4% in the 1999 third quarter, compared to 3.5%
in the 1998 third quarter.
Impairment Loss
During the third quarter of 1999, the Company evaluated its production
costs between it and those of its third-party production contractor. That
evaluation led to the decision to cease in-house production, except for a
minimal ability to produce small orders, if economically sound. The Company
expects that substantially all future production will be outsourced to
third-party contractors. Accordingly, the Company expects that substantially all
its production
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 14
<PAGE> 15
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2.-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
equipment will be sold and its production facility essentially closed. It will
have minimal future operating cash flows generated by its production equipment.
The Company assessed the carrying value of its production equipment and
leasehold improvements and recognized an impairment loss of $233,000.
Interest Expense
Interest expense in the third quarter of 1999 decreased by $104,000,
from $144,000 to $40,000, compared to the third quarter of 1998, reflecting
lower levels of borrowing in the 1999 third quarter. Additionally, in the third
quarter of 1999, the Company reduced its interest expense by borrowing at a
lower interest rate from its long-term line of credit facility. The Company's
long-term revolving line of credit facility became effective December 10, 1998.
The Company, as of June 30, 1999, was in breach of its covenants relating to its
long-term revolving line of credit. On October 20, 1999, the Company ended its
borrowing arrangement under this facility by repaying all amounts owed plus
accrued interest with the proceeds of a $500,000 bridge loan obtained from an
individual and guarantied by an officer and his wife.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO 1998
Net Product Sales
Sales for the nine months ended September 30, 1999, were less than
sales for the similar period in 1998. Because of a substantial decline in WCW
licensed product sales, the Company expects sales revenues for the whole of 1999
to be substantially below those of the prior year. Sales during the month of
October 1999 were approximately $642,000. As of November 12, 1999, the Company
had sales and bookings for shipments to be made during November and December
1999 of approximately $739,000. Not all "bookings" constitute contractual
commitments, and may therefore be subject to cancellation or modification by
customers. The Company expects sales in the fourth quarter to be substantially
below the fourth quarter of 1998 and also, substantially below each of the first
two quarters of 1999.
Net product sales for the nine months ended September 30 were
$6,026,000 in 1999 compared to $15,598,000 in 1998, a decrease of 61.4%. The
bulk of the decrease in net product sales is due to the decline in sales of WCW
licensed product. Sales of WCW licensed products commenced in late April 1998
and represented approximately 83% of total net product sales for the first nine
months of 1999 versus 91% in the first nine months of 1998. Sales of WCW and
Warner Brothers cross-licensed products contributed an additional 3% of net
product sales in the first nine months of 1999. Sales of The Simpsons and King
of the Hill (both owned by Twentieth Century Fox) licensed products accounted
for 9% of net sales, the Company's proprietary Stix-N-Stones products supplied
3% of net sales and generic printed products furnished 2% of net sales.
The Company's average selling price for goods sold in the nine months
ended September 30, 1999 was 14% lower than in the same period in 1998 due to
lower WCW merchandise pricing. Also, the Company granted one time sales
allowances to certain of its customers. Negatively impacting the average selling
price per unit was the amount of youth goods sold during the nine months ended
September 30, 1999. Normal wholesale prices on youth goods are approximately 12%
to 19% less than comparable adult goods.
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 15
<PAGE> 16
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cost of Products Sold
For the nine months ended September 30, cost of products sold, as a
percentage of net sales, was 95.9% in 1999 versus 69.3% in 1998. Contributing to
the increase in the cost of products sold in the first three quarters of 1999
were additional inventory obsolescence charges management deemed prudent to take
during the second quarter of 1999 due to the high carrying value of inventory.
Certain in-house production expenses required to be included in the cost of
products sold are more fixed in nature, and do not necessarily increase or
decrease proportionately with changes in sales volume. Approximately 79% of the
goods shipped during the nine months ended September 30, 1999, were produced by
a third-party screen printing contractor compared to 74% during the nine months
ended September 30, 1998.
Selling and Administrative Expenses
For the nine months ended September 30, 1999, selling expenses
decreased by $924,000 over the same period of 1998, from $2,173,000 to
$1,249,000, primarily due to the decreases in royalty and promotional expenses
resulting from decreases in sales volume. Expressed as a percentage of net
sales, selling expenses were 20.7% in the nine months ended September 30, 1999,
compared to 13.9% in the nine months ended September 30, 1998.
General and administrative expenses increased by $398,000 for the nine
months ended September 30, 1999, compared with the same period of 1998. The
change reflects a general increase in various administrative expenses and
additional costs related to consulting and contemplated mergers. Expressed as a
percentage of net sales, general and administrative expenses were 21.4% in the
nine months ended September 30, 1999, compared to 5.8% in the nine months ended
September 30, 1998.
Impairment Loss
During the third quarter of 1999, the Company evaluated its production
costs between it and those of its third-party production contractor. That
evaluation led to the decision to cease in-house production, except for a
minimal ability to produce small orders, if economically sound. The Company
expects that substantially all future production will be outsourced to
third-party contractors. Accordingly, the Company expects that substantially all
its production equipment will be sold and its production facility essentially
closed. It will have minimal future operating cash flows generated by its
production equipment. The Company assessed the carrying value of its production
equipment and leasehold improvements and recognized an impairment loss of
$233,000.
Interest Expense
Interest expense in the first nine months of 1999 increased by $23,000,
from $202,000 to 225,000, compared to the first nine months of 1998 due to
increased borrowings, primarily in the first six months of 1999, offset by a
lower effective interest rate in 1999.
Inventories
The balance of net inventories decreased $750,000, from $3,157,000 to
$2,407,000, or approximately 23.8%, from December 31, 1998 to September 30,
1999. The reduction in inventory reflects additional inventory reserves
management deemed prudent to take in the 1999 second quarter due to the high
carrying value of inventory. The amount of additional reserves is $750,000. The
annualized inventory turnover rate for the nine months ended September 30, 1999
was down to 3.2 turns per year compared to an annualized rate of 7.2 turns per
year for the nine
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 16
<PAGE> 17
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
months ended September 30, 1998. The lower turnover rate in the 1999 first nine-
months reflects the substantial decrease in net product sales.
Accounts Receivable
Net trade and factor receivables decreased from $7,815,000 at December
31, 1998, to $380,000 at September 30, 1999. The reduction in receivables is due
to the decrease in sales volume from the 1998 third quarter compared to the 1999
third quarter as well as the collection of outstanding receivables.
LIQUIDITY AND CAPITAL RESOURCES
Littlefield signed a $10,000,000 Revolving Promissory Note (the
"Provident Note") with The Provident Bank ("Provident") on December 10, 1998.
The outstanding principal balance was due and payable on December 10, 2000.
Accrued interest was payable monthly. The Provident Note was secured by accounts
receivable arising from sales to Wal-Mart, Kmart, and Target stores, and
inventory. Interest on the Provident Note accrued at prime plus an applicable
margin. The initial margin was 3%. The prime rate in effect at September 30,
1999 was 8.25% and at December 31, 1998 was 7.75%. The Provident Note provided
for possible reductions in the interest rate charged, down to a rate as low as
prime plus 1%. To achieve such reductions, Littlefield had to successfully meet
specified financial milestones. Effective March 1, 1999, the interest rate
charged was reduced to prime plus 2.5%. The Company could 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 was required to maintain at Provident. The
total amount outstanding at any time could not exceed $10,000,000. Collection of
payments on eligible receivables was directed to a lock box at Provident. The
servicing of the covered accounts receivable was done by Littlefield.
The Company signed a promissory note, effective May 1, 1999 (the "Floyd
Note") in the amount of $464,000 evidencing its outstanding obligations to The
Bank of Floyd ("Floyd"). The Floyd Note was payable in sixty monthly payments
and carried an interest rate of prime plus 1%, adjustable annually. The term
note is collateralized by machinery and equipment and furniture and fixtures.
The Company was in default, as of June 30, 1999, under the Loan and
Security Agreement dated December 10, 1998 between the Company and The Provident
Bank ("Provident") and under the Business Loan Agreement dated as of May 1, 1999
between the Company and The Bank of Floyd ("Floyd") (the "Provident Loan
Agreement" and "Floyd Loan Agreement", respectively).
Provident and the Company amended the Provident Loan Agreement such
that the maximum borrowing availability would be $500,000, the interest rate
increased to Prime plus 3 1/2 %, and the Provident Note payable on demand and in
any case not later than October 15, 1999.
In August 1999, the Company commenced discussions with Provident and
Floyd in order to obtain a waiver of the breached financial covenants and amend
the financial covenants in the Provident Loan Agreement. The Company was
unsuccessful in obtaining such waiver of the breached financial covenants and
amendments to the financial covenants. In October 1999, the Company reached an
agreement to repay all borrowings from Provident (including accrued interest)
and accordingly repaid all amounts due to Provident (approximately $492,000) on
October 20, 1999.
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 17
<PAGE> 18
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The amounts paid to Provident were obtained through a bridge
refinancing carried out with Mr. Andrew E. Trolio of Broomall, Pennsylvania. The
$500,000 bridge loan is secured by the Company's inventory and substantially all
of its accounts receivable, and is guaranteed by an officer of the Company and
his wife (with regard to any deficiencies in payment in her case). The bridge
loan is repayable in two installments, with $100,000 due on November 30, 1999,
and the remaining $400,000 due on December 14, 1999, and bears interest
(calculated based on the original principal amount for the 60-day term
notwithstanding any repayments or prepayments of principal) at the rate of 15%
per annum. The Company paid a closing fee of $15,000 and, in addition, issued
five-year warrants to the lender to purchase up to 71,429 shares of the
Company's stock, exercisable at a price of $.70 per share. A similar warrant for
the same number of shares is being issued by the Company to the officer of the
Company in consideration for the guaranty that he and his wife provided and that
was a condition to the closing of the loan. Although, the Company believes that
it will be able to repay the bridge loan, no assurances can be given the Company
will be able to and in the event that the Company is unable to repay the bridge
loan, the Company would be unlikely to continue as a going concern.
Also, in October 1999, based on information the Company had provided
Floyd regarding the reduced value of Floyd's collateral, Floyd deemed itself
insecure, which is an Event of Default under the Floyd Loan Agreement. The
Company reached an agreement with Floyd whereby Floyd will forbear exercising
its rights under the Floyd Loan Agreement including, but not limited to,
acceleration of all sums due. The forbearance is contingent upon: (a) proceeds
from the sale of a certain press and dryer to be paid in full to Floyd, which
was accomplished in October 1999; (b) the Company continuing to make monthly
installments required under the terms of the Floyd Loan Agreement; and (c)
payment by the Company of three additional installments of approximately equal
amounts on October 15, November 15, and December 15, 1999, which will
collectively pay in full all sums due under the Floyd Loan Agreement. As of
November 12, 1999, the Company is in compliance with the conditions of the
forbearance. There can be no assurance that the Company will be able to maintain
its compliance with the conditions required for the continuance of the
forbearance. If such forbearance is not continued, then Floyd can at any time
declare all amounts owed by the Company to Floyd (approximately $254,000 as of
November 12, 1999) to be immediately due and payable. Floyd would also have the
right to commence legal action against the Company for the repayment of the
entire debt owed to it, plus certain other amounts and, if unpaid, to proceed
against the Company's assets. The Company does not believe that it would be in a
position to repay Floyd should Floyd demand immediate payment, and such an event
could prevent the Company from continuing as a going concern.
The amounts previously classified as long-term revolving line of credit
and long-term debt related to the Provident Loan Agreement and The Floyd
Agreement, respectively, are now classified as current.
As of September 30, 1999, the outstanding balance of $358,000 under the
Provident Loan Agreement is classified as current and as of December 31, 1998,
the outstanding balance of $3,125,000 under the Provident Loan Agreement is
classified as a long-term liability. The remaining borrowing availability from
Provident as of September 30, 1999, under the now terminated Provident Loan
Agreement, was $142,000.
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% (with accounts receivable
which Merchant Factors Corp. approves for credit being factored at the rate of 1
1/8%); (c) the Company may receive advances of up to 80% of the net amount of
outstanding approved receivables assigned; (d) payments received against
assigned receivables are held for five business days before being applied
against outstanding advances; (e) the minimum annual amount of factoring
commissions is $50,000, payable monthly; and (f) the Discount Factoring
Agreement, as amended, shall continue in effect until December 31, 2000.
Accounts that are credit approved by Merchant Factors
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 18
<PAGE> 19
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Corp. are at its risk, which minimizes the Company's credit risk. The Company
must 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 at an interest rate of prime plus
2% and are secured by the assigned accounts receivable on which the Company pays
1 1/8% of the amount assigned. At September 30, 1999, and December 31, 1998, the
Company had net factored receivables amounting to $63,000 and $2,050,000,
respectively, most of which had been approved for credit by Merchant Factors
Corp. The remaining borrowing availability from Merchant Factors Corp. as of
September 30, 1999, was approximately $56,000. However, on November 11, 1999,
Merchant Factors Corp. orally informed the Company that it would not advance
funds to the Company against accounts receivable factored with it.
In October 1999, the Company signed a non-binding letter of intent with
eCONTENT INC. (OTC BB: ETNT), formerly known as Media Vision Productions, Inc.
("MVPI"), to be merged into a newly formed, wholly-owned subsidiary of ETNT.
Under the terms of the letter of intent, Littlefield shareholders would receive
approximately 1.2 shares of common stock for each share currently held, subject
to adjustment based on possible stock issuances by either party prior to the
completion of the merger; however, shareholders of Littlefield would receive, in
the aggregate, newly issued ETNT shares equal to not less than 75% of the number
of ETNT shares outstanding immediately prior to the merger (computed on a
fully-diluted basis but excluding any shares issued or issuable to or with
respect to a small television programming company with whom ETNT is currently
engaged in acquisition discussions).
The proposed merger is subject to a number of substantial conditions,
including: each party's satisfactory completion of its due diligence review; the
negotiation and execution of a definitive merger agreement; the execution by
ETNT of a definitive agreement to acquire the small television programming
company; the receipt of fairness opinions from independent investment bankers;
approval of the transaction and the definitive agreement by the respective
boards of directors and stockholders of Littlefield and ETNT; and, other
conditions. The letter of intent provided for a definitive agreement to be
executed by October 8, 1999 and for the transaction to be completed by December
31, 1999. While merger discussions continue, the parties have not yet commenced
negotiations of the definitive agreement, and this transaction will not close by
December 31, 1999. No assurances can be given that any or all of these
conditions will be satisfied or that the merger will be completed.
For the nine months ended September 30, 1999, operating activities
provided net cash of $4,175,000, while net cash of $132,000 was used in
investing activities. The Company borrowed a total of $11,232,000 and repaid
$15,311,000 during the nine months ended September 30, 1999, in addition to
receiving $4,000 related to a stock transaction made by a director and former
officer, $1,000 related to the sale of common stock to an employee and $25,000
related to the sale of common stock to the widow of a former director and
officer, resulting in net cash used in financing activities of $4,049,000.
During the first nine months of 1999, there was a net decrease in cash of
$6,000.
At September 30, 1999, the Company had working capital of $282,000 and
a working capital ratio of 1.09/1. This compares to December 31, 1998, when the
Company had net working capital of $5,548,000 and a working capital ratio of
1.93/1.
As of September 30, 1999, the Company had a backlog, which consisted of
bookings for orders of approximately $1,278,000. From October 1, 1999, through
November 12, 1999, the Company received additional bookings from customers for
approximately $103,000. Not all "bookings" constitute contractual commitments,
and may therefore be subject to cancellation or modification by customers.
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
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 19
<PAGE> 20
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
"Hagar the Horrible", "Free for All", and "Zits" with Hearst Entertainment, Inc.
The comic strips are nationally syndicated by King Features Syndicate. In May
1999, the Company signed a license agreement with Tribune Media Services for
"Lola". In June 1999, the Company increased its license products portfolio with
the addition of Dilbert, an United Media owned property created by Scott Adams.
The Dilbert license agreement allows the Company to sell to mid-tier and
specialty stores in addition to the mass market. In July 1999, to further expand
its product offering, the Company added Garfield, created by Jim Davis. The
Garfield license allows the Company to sell to mid-tier, specialty gift,
department stores and mass marketers.
The Company manufactures and sells imprinted apparel primarily to
national and regional retail discount chains. The success of the Company's
licensed product sales with World Championship Wrestling, World Championship
Wrestling and Warner Brothers' Looney Tunes cross-license, The Simpsons, King of
the Hill, Pepsi and Mountain Dew, Hagar the Horrible, Free for All, Zits and
Kawasaki Motors Corp., U.S.A., is an integral part of that effort. The Company
coordinates the development of marketing and sales strategies with its licensors
and customers as possible.
YEAR 2000 READINESS
The Year 2000 Issue exists because many computer systems and
applications currently use a two-digit year field to represent a four-digit
year, such as 98 to represent 1998. Computer systems that incorrectly process
dates occurring for the year 2000 and beyond can either fail or yield unreliable
and erroneous information. The Company is continuing to assess its Year 2000
readiness with regard to information technology ("IT") systems, which include
the Company's computer systems and applications that provide accounting and
financial reporting, and its non-IT systems, which include the Company's
production, shipping and office equipment.
<TABLE>
<CAPTION>
Projected Estimated
Year 2000 Year 2000 Cost of
Readiness Readiness Year 2000
Status Date Readiness
--------- --------- ---------------
<S> <C> <C> <C>
IT Systems:
Computer Hardware Ready
Operating software Ready
Application software Ready
Non-IT Systems:
Production equipment Ready
Shipping equipment Ready
Office Equipment Assessing November 1999 $ 0 - $ 20,000
</TABLE>
In response to the increases in its 1998 sales volume, the Company
began a process of implementing new management and accounting software in the
first quarter of 1999. The new software will, when fully implemented,
significantly enhance management's access to information related to sales and
inventories. The installation of the new management and accounting software
required the Company to upgrade its computer hardware and operating systems,
which have served the Company for the past five years. The Company installed new
computer hardware, operating systems and application software in the second
quarter of 1999.
In the fourth quarter of 1998, the Company tested, in conjunction with
one of its customers and a third-party network provider, it's Electronic Data
Interchange ("EDI") systems. The EDI systems are used to transact business
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 20
<PAGE> 21
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
electronically with the Company's larger customers. The Company received
confirmation from its third-party network provider that the Company's EDI
systems were Year 2000 ready. Additionally, in January 1999, the Company
received a request from one of its larger customers to upgrade the Company's EDI
software to a newer version. This newer version has certain expanded
capabilities and is engineered to be Year 2000 ready. In the second quarter of
1999, the Company upgraded its EDI software to the newer version and began
transactional testing of its upgraded EDI system with several of its larger
customers who have requested such tests.
In addition to the Company's internal Year 2000 readiness, the Company
initiated, in the fourth quarter of 1998, a communication process with third
parties including its lending and financial institutions and its largest
customers and vendors, to assess their Year 2000 readiness and the potential
risk to the Company. The Company's largest customers have established Year 2000
readiness plans and have communicated their expected readiness. A majority of
the Company's other customers, vendors and third-parties including its lending
and financial institutions have communicated to the Company that they are either
Year 2000 ready or expect to be Year 2000 ready and that they do not anticipate
an interruption in their ability to accept and provide goods and services and to
timely pay for them.
Although the Company expects its critical systems to be compliant by
December 31, 1999, there is no assurance these results will be achieved.
However, the impact of a failure of any of the Company's information systems
would be mitigated to the extent that other alternate processes, including
manual processes, were able to meet processing requirements. Presently,
Littlefield expects alternate procedures would be able to meet the Company's
processing needs.
Littlefield relies on third parties for raw materials, finished goods,
utilities, transportation and other key services. In addition, the Company is
dependent upon its customers for cash flow. As described above, the Company has
initiated formal communications with its significant suppliers and large
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to eliminate their own Year 2000 Issues. During the 1999
third quarter, the Company expects to have identified significant customers and
suppliers of goods and services which have either indicated to the Company that
they will not be able to eliminate Year 2000 Issues which may negatively impact
Littlefield, or have not responded to the Company's request for information
regarding Year 2000 Issues. At that time, Littlefield will begin developing
contingency plans for potential non-compliance by these identified third
parties. Year 2000 Issues that adversely impact these third parties could also
effect the operations of the Company. There can be no assurance the systems of
other companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company.
The Company has evaluated its Year 2000 Issues, and has provided in the
table above an estimated range of the costs that may be incurred in order to
eliminate any Year 2000 Issues. The total costs that will be incurred by
Littlefield in connection with resolving its Year 2000 Issues will be impacted
by the Company's ability to successfully identify its Year 2000 Issues, the
level of effort required to remediate the issue and the ability of third parties
to successfully address their own Year 2000 Issues. Total costs incurred to date
relative to the remediation of the Company's Year 2000 Issues have been expensed
as incurred and have not been material.
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, September 30, 1999 Quarterly Report
on Form 10-Q; Page 21
<PAGE> 22
LITTLEFIELD, ADAMS, & COMPANY
PART I
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of September 30, 1999, Littlefield had financial instruments that
consisted of: (1) a $500,000 line of credit facility with The Provident Bank;
(2) a Discount Factoring Agreement with Merchant Factors Corp.; (3) one
promissory note with The Bank of Floyd; (4) 7% Convertible Subordinated
Debentures; (5) other immaterial debt consisting of notes payable and capital
leases; and (6) factored accounts receivable. Items (1), (2) and (3) have
variable rates of interest based on the "prime rate" plus a specified margin.
Items (4) and (5) have fixed interest rates. On item (6), the Company pays
factoring fees of 1.125% of the amounts factored. The Company believes the
average collection period for factored receivables is approximately 40 days. The
prime rate in effect as of September 30, 1999 was 8.25%. 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 September 30, 1999, about
the Company's financial instruments, primarily debt obligations, that are
sensitive to changes in interest rates. The table presents principal 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
September 30,
Current 2002 2003 Total Fair Value
------- ---- ---- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Liabilities
Short-term Debt:
Fixed Rate $ 805 $ -- $ -- $ 805 $ 805
Average interest rate 7.00% -- -- 7.00%
Variable Rate $ 793 $ -- $ -- $ 793 $ 793
Average interest rate 9.89% -- -- 9.89%
Long-term Debt:
Fixed Rate $ 54 $ 50 $ 36 $ 140 $ 140
Average interest rate 10.28% 9.84% 9.22% 9.85%
</TABLE>
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 22
<PAGE> 23
LITTLEFIELD, ADAMS & COMPANY
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is currently involved in litigation with Muller
International Sourcing, L.L.C ("Muller"). In September 1999, Muller
filed a complaint in the amount of $245,000 against the Company for
payment of raw materials shipped to the Company, the quality and
quantity of which the Company questions. In October 1999, the Company
filed a verified answer, asserting its defenses and counterclaims. The
Company believes that it will be successful in such defenses and
counterclaims, although there can be no assurances that it will be.
Item 3. DEFAULTS UPON SENIOR SECURITIES
The Company was in default under the Loan and Security Agreement dated
December 10, 1998 between the Company and The Provident Bank
("Provident") and is in default under the Business Loan Agreement dated
as of May 1, 1999 between the Company and the Bank of Floyd ("Floyd")
(the "Provident Loan Agreement" and "Floyd Loan Agreement",
respectively).
The Provident Loan Agreement contained certain financial covenants
including, among others, a requirement that the Company maintain a
specified minimum consolidated tangible net worth. As of June 30, 1999,
the Company was not in compliance with such minimum tangible net worth
requirement. In addition, under cross default provisions in the Floyd
Loan Agreement, the Event of Default under the Provident Agreement also
constituted an Event of Default under the Floyd Loan Agreement. The
Company reached an agreement to repay all borrowings from Provident
(including accrued interest) and accordingly repaid all amounts due to
Provident (approximately $492,000) on October 20, 1999 with proceeds of
a loan provided by Mr. Andrew E. Trolio of Broomall, Pennsylvania. The
$500,000 bridge loan is secured by the Company's inventory and
substantially all of its accounts receivable, and is guaranteed by an
officer of the Company and his wife (with regard to any deficiencies in
payment in her case). The bridge loan is repayable in two
installments, with $100,000 due on November 30, 1999, and the remaining
$400,000 due on December 14, 1999, and bears interest (calculated based
on the original principal amount for the 60-day term notwithstanding
any repayments or prepayments of principal) at the rate of 15% per
annum. The Company paid a closing fee of $15,000 and, in addition,
issued five-year warrants to the lender to purchase up to 71,429 shares
of the Company's stock, exercisable at a price of $.70 per share. A
similar warrant for the same number of shares is being issued by the
Company to the officer of the Company in consideration for the guaranty
that he and his wife provided and that was a condition to the closing
of the loan.
In October 1999, based on information the Company had provided Floyd
regarding the reduced value of Floyd's collateral, Floyd deemed itself
insecure, which is an Event of Default under the Floyd Loan Agreement.
The Company reached an agreement with Floyd whereby Floyd will forbear
exercising its rights under the Floyd Loan Agreement including, but not
limited to, acceleration of all sums due. The forbearance is contingent
upon: (a) proceeds from the sale of a certain press and dryer to be
paid in full to Floyd, which was accomplished in October 1999; (b) the
Company continuing to make monthly installments required under the
terms of the Floyd Loan Agreement; and (c) payment by the Company of
three additional installments of approximately equal amounts on October
15, November 15, and December 15, 1999, which will collectively pay in
full all sums due under the Floyd Loan Agreement. As of November 12,
1999, the Company is in compliance with the conditions of the
forbearance. There can be no assurance that the Company will be able to
maintain its compliance with the conditions required for the
continuance of the forbearance. If such forbearance is not continued,
then Floyd can at any time declare all amounts owed by the Company to
Floyd (approximately $254,000 as of November 12, 1999) to be
immediately due and payable.
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 23
<PAGE> 24
Floyd would also have the right to commence legal action
against the Company for the repayment of the entire debt owed
to them, plus certain other amounts and, if unpaid, to proceed
against the Company's assets. The Company does not believe
that it would be in a position to repay Floyd should Floyd
demand immediate payment, and such an event, the Company would
be unlikely to continue as a going concern.
Item 5. OTHER INFORMATION
On June 9, 1999, the Company postponed its Annual Meeting of
Shareholders, previously scheduled for June 11, 1999. The
Company has not rescheduled its annual meeting, which will not
be held this year.
On May 14, 1999, Mr. Marty Shifrin, who served as Chairman of
the Board, resigned as a director. On July 19, 1999, Mr.
Warren L. Rawls resigned his position as Chief Financial
Officer and Director. Also, on July 19, 1999, Mr. John J.
Tsucalas, CFA, and Mr. L. Clarke Hill, Jr., were elected as
Directors of the Board. Additionally, Mr. Tsucalas was elected
as interim Chief Financial Officer. On July 27, 1999, Mr.
William E. Goettelman, who has served five years as a
Director, was elected Chairman of the Board of Directors and
Chief Executive Officer following Mr. Michael Balber's
resignation as a Director on July 27, 1999. Mr. Balber
resigned as President of the Company on October 8, 1999. On
September 8, 1999, Mr. Tsucalas was elected interim Chief
Executive Officer following the resignation of Mr. Goettelman
as Chief Executive Officer. Mr. Goettelman continues to serve
as Chairman of the Board of Directors.
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 24
<PAGE> 25
LITTLEFIELD, ADAMS & COMPANY
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LITTLEFIELD, ADAMS & COMPANY
----------------------------
(Registrant)
Date: November 12, 1999 /s/ John J. Tsucalas
--------------------------------------
John J. Tsucalas
Director, interim Chief Executive
Officer and interim Chief Financial
Officer (principal executive,
financial & accounting officer)
Littlefield, Adams & Company, September 30, 1999 Quarterly Report
on Form 10-Q; Page 25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 107
<SECURITIES> 0
<RECEIVABLES> 608
<ALLOWANCES> 228
<INVENTORY> 2,407
<CURRENT-ASSETS> 3,255
<PP&E> 1,134
<DEPRECIATION> 854
<TOTAL-ASSETS> 3,553
<CURRENT-LIABILITIES> 2,973
<BONDS> 86
0
0
<COMMON> 3,361
<OTHER-SE> (2,907)
<TOTAL-LIABILITY-AND-EQUITY> 3,553
<SALES> 6,026
<TOTAL-REVENUES> 6,026
<CGS> 5,781
<TOTAL-COSTS> 5,781
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9<F1>
<INTEREST-EXPENSE> 225
<INCOME-PRETAX> (2,843)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,843)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,843)
<EPS-BASIC> (0.92)
<EPS-DILUTED> (0.92)
<FN>
<F1>Bad debt expense of 9 is included in the 1,290 reported as General and
Administrative expenses.
</FN>
</TABLE>
