-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Iv+Yi0I0Spe9O5CN41YWTMGBYznoYSR8k+fADBvqxTyz3tbEmzp8Oow53CRR+aRp 2t/L5SG7KfSFKxckoctq4w== 0000950124-98-004463.txt : 19980817 0000950124-98-004463.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950124-98-004463 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: LITTLEFIELD ADAMS & CO CENTRAL INDEX KEY: 0000059870 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-APPAREL, PIECE GOODS & NOTIONS [5130] IRS NUMBER: 221469846 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08176 FILM NUMBER: 98687706 BUSINESS ADDRESS: STREET 1: 6262 EXECUTIVE BOULEVARD CITY: HUBER HEIGHTS STATE: OH ZIP: 45424 BUSINESS PHONE: 4147438743 MAIL ADDRESS: STREET 1: 6262 EXECUTIVE BOULEVARD CITY: HUBER HEIGHTS STATE: OH ZIP: 45424 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ---- ---- ---- ---- ---- FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________ Commission file number 1-8176 LITTLEFIELD, ADAMS & COMPANY - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New Jersey #22-1469846 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6262 Executive Blvd., Huber Heights, OH 45424 - -------------------------------------------------------------------------------- (Address of principal executive offices, and Zip Code) Registrant's telephone number, including area code (937) 236-0660 -------------- - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 10, 1998 ----- ------------------------------ Common Stock, par value 2,790,057 shares $1.00 per share 2 LITTLEFIELD, ADAMS & COMPANY ----------------------------
INDEX Page No. ----- -------- Part I. Financial Information Item 1. Condensed Financial Statements (Unaudited) Condensed Balance Sheets - June 30, 1998, and December 31, 1997 3 Condensed Statements of Operations - for the three and six months ended June 30, 1998, and 1997 4 Condensed Statements of Cash Flows - for the six months ended June 30, 1998, and 1997 5 Notes to Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II. Other Information Item 1. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18
Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q PAGE 2 3 LITTLEFIELD, ADAMS & COMPANY CONDENSED BALANCE SHEETS (UNAUDITED)
ASSETS June 30, December 31, 1998 1997 -------------- -------------- (DOLLARS IN THOUSANDS) Current assets: Cash and cash equivalents $ 66 $ 57 Accounts receivable: Trade, less allowances of $16 at 6/30/98 and $11 at 12/31/97 610 5 Due from factor, less allowances of $60 at 6/30/98 and $0 at 12/31/97 2,001 182 Other 33 33 Inventories 1,145 641 Prepaid expenses and other 221 155 -------------- -------------- Total current assets 4,076 1,073 Property, plant and equipment, net 486 416 Other assets 11 9 -------------- -------------- TOTAL ASSETS $ 4,573 $ 1,498 ============== ============== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Notes payable $ 7 $ 17 Factor borrowing 1,053 11 Current portion of long-term debt 543 570 Accounts payable 1,120 117 Accrued expenses 408 337 -------------- -------------- Total current liabilities 3,131 1,052 Long-term debt, less current portion 27 18 Deferred compensation 45 44 Convertible subordinated debentures 1,200 -- Commitments and contingencies -- -- Shareholders' investment: Common stock, $1.00 par; authorized 25,000,000; issued 2,808,221 for 1998 and 2,798,221 for 1997; outstanding 2,790,057 for 1998 and 2,780,057 for 1997 2,808 2,798 Capital in excess of par value 6,320 6,318 Accumulated deficit (8,845) (8,619) -------------- -------------- 283 497 Treasury stock, at cost - shares of 18,164 for 1998 and 1997. (113) (113) -------------- -------------- 170 384 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 4,573 $ 1,498 ============== ==============
The accompanying notes are an integral part of these condensed financial statements. Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 3 4 LITTLEFIELD, ADAMS & COMPANY CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended June 30, For the six months ended June 30, 1998 1997 1998 1997 ----------------------------------- ----------------------------------- (DOLLARS IN THOUSANDS, (DOLLARS IN THOUSANDS, Except per share amounts) Except per share amounts) Revenues: Net product sales $ 2,908 $ 450 $ 3,324 $ 1,759 ---------- ----------- ---------- ---------- Costs and expenses: Cost of products sold 2,025 542 2,452 1,770 Selling and administrative 695 570 1,040 1,193 ---------- ----------- ---------- ---------- Total costs and expenses 2,720 1,112 3,492 2,963 ---------- ----------- ---------- ---------- Income (loss) from operations 188 (662) (168) (1,204) Other expense: Interest (41) (37) (58) (91) ---------- ----------- ---------- ---------- Income (loss) before income taxes 147 (699) (226) (1,295) Provision for income taxes -- -- -- -- ---------- ----------- ---------- ---------- Net income (loss) $ 147 $ (699) $ (226) $ (1,295) ========== =========== ========== ========== Weighted average common shares for: Basic earnings per share 2,781,815 2,780,057 2,780,941 2,780,057 Diluted earnings per share 4,255,873 2,780,057 2,780,941 2,780,057 Basic earnings per common share: Net earnings (loss) per share $ 0.05 $ (0.25) $ (0.08) $ (0.47) ========== ========== ========== ========== Diluted earnings per common share: Net earnings (loss) per share $ 0.04 $ (0.25) $ (0.08) $ (0.47) ========== ========== ========== ==========
The accompanying notes are an integral part of these condensed financial statements. Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 4 5 LITTLEFIELD, ADAMS & COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30, ---------------------------------------- 1998 1997 ----------------- ---------------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss $ (226) $ (1,295) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 59 108 Changes in operating assets and liabilities: Accounts and other receivables, net (2,424) 2,362 Inventories, net (504) 466 Prepaid expenses and other current assets (66) (68) Accounts payable 1,003 (823) Accrued expenses 71 (455) ---------------- ---------------- Net cash provided by (used in) operating activities (2,087) 295 Cash flows from investing activities: Purchase of property and equipment (129) (13) Other (2) 17 ---------------- ---------------- Net cash provided by (used in) investing activities (131) 4 Cash flows from financing activities: Proceeds from line of credit and factor borrowings, net 1,042 (311) Proceeds from bank and other notes 280 95 Payments of bank and other notes (307) (78) Proceeds from sale of convertible subordinated debentures 1,200 -- Proceeds from sale of common stock 12 -- ---------------- ---------------- Net cash provided by (used in) financing activities 2,227 (294) ---------------- ---------------- Net increase in cash and cash equivalents 9 5 Cash and cash equivalents at beginning of period 57 54 ---------------- ---------------- Cash and cash equivalents at end of period $ 66 $ 59 ================ ================ Supplemental disclosure of cash flows information: Cash paid during the period for interest $ 42 $ 91 Cash paid during the period for income taxes $ -- $ 25
The accompanying notes are an integral part of these condensed financial statements. Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 5 6 LITTLEFIELD, ADAMS, & COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1: BASIS OF PRESENTATION The accompanying condensed financial statements include the accounts of Littlefield, Adams & Company (the "Company," "Littlefield," and the "Registrant"). The condensed balance sheet at June 30, 1998, the condensed statements of operations for the three and six months ended June 30, 1998 and 1997, and the condensed statements of cash flows for the six months ended June 30, 1998 and 1997, have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the 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, 1997. 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. Accordingly, the actual results of the Company's operations in the future may vary widely from the forward-looking statements included herein. 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. NOTE 2: FUTURE OPERATIONS 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 1995, and the Company incurred a net loss of $1,937 for the year ended December 31, 1997. Sales of Harley-Davidson licensed products accounted for 90% and 89% of total net product sales for the years ended December 31, 1996, and 1995. Approximately 29% of total revenues for the year ended December 31, 1997, related to 1996 Harley-Davidson revenues, 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. For the six months ended June 30, 1998, the Company incurred a net loss of $226. The Company is reporting net income of $147 for the second quarter which ended June 30, 1998, and has working capital of $945 at June 30, 1998. Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 6 7 LITTLEFIELD, ADAMS, & COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The diminished revenues experienced by the Company during 1997 and the first quarter of 1998 have had a material adverse effect on the results of operations and financial condition. With net sales of $2,908 in the 1998 second quarter, the Company generated income from operations of $188 for the quarter. The significant increase in revenues, plus the $1.2 million in proceeds from the Company's private offering of 7% Convertible Subordinated Debentures completed on April 24, 1998, are currently providing sufficient cash flows for the Company to satisfy its obligations as they become due. Shipments of approximately $2,800 during the month of July 1998 and cancelable bookings, as of July 31, 1998, for shipments of approximately $7,000 during August and September of 1998 are indications that the Company can now sustain itself for the foreseeable future. However, the Company has limited financial resources other than the proceeds of the Debenture offering and cash flows from sales. As such, in the event that expected future product sales would be materially adversely effected due to the cancellation of customers' orders or any other unforeseen events, the Company would be unable to continue operating as a going concern for any extended period of time. The ability of the Company to continue as a going concern is dependent upon the ongoing support of its stockholders, customers and creditors and its ability to generate sufficient sales to sustain its existing operations and meet the Company's obligations as they become due. The accompanying financial statements have been prepared assuming the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. 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, The Simpsons, King of the Hill, Pepsi and Mountain Dew, Miller Brewing Company, Hershey Foods Corporation and Kawasaki Motors Corp., U.S.A. is an integral part of that effort. Additionally, the Company has entered into the boxer shorts segment of the apparel industry with the delivery of approximately $160 of Simpsons' boxer shorts in May 1998. Marketing strategies include the development of programs which center around promotional milestones for customers. An example would be the Company's Father's Day program focusing on Homer Simpson (from "The Simpsons") and Hank Hill (from "King of the Hill"). Special in-store promotions that include live appearances by professional wrestlers have been undertaken in conjunction with WCW. NOTE 3: INVENTORIES Inventories are stated at lower of cost (determined by the first-in, first-out method) or market (net realizable value). Costs include direct materials, direct labor and certain indirect manufacturing overhead expenses. Inventories are summarized as follows:
June 30, December 31, 1998 1997 -------------- -------------- Raw materials $ 592 $ 700 Finished goods 578 46 Allowance for inventory obsolescence (25) (105) -------- --------- $ 1,145 $ 641 ======== =========
Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 7 8 LITTLEFIELD, ADAMS, & COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 4: DEBT Long-term debt balances are as follows:
June 30, December 31, 1998 1997 -------------- -------------- Note payable to a bank, principal callable on demand, interest at 9.50%, payable monthly at 0.25% of the outstanding principal balance plus accrued interest, collateralized by machinery and equipment and furniture and fixtures $ 449 $ 455 Note payable to a bank, principal callable on demand, due September 1, 1999, interest at 9.50%, payable monthly, collateralized by machinery and equipment and furniture and fixtures 69 96 Other 52 37 --------- --------- Total debt 570 588 Less - current portion (543) (570) --------- --------- $ 27 $ 18 ========= =========
Short-term Loans Payable: In March, 1998, certain individuals, which included some officers and shareholders of Littlefield, 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, described below, which was completed on April 24, 1998. In April, 1998, all of the loans were either converted into such Debentures or repaid. 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 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 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. Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 8 9 LITTLEFIELD, ADAMS, & COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 6: 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 had no effect on previously reported earnings per share presented in these condensed financial statements. Diluted earnings per share have been calculated as follows:
For the three months For the six months ended June 30, ended June 30, ---------------------------- ---------------------------- 1998 1997 (a) 1998 (a)(b) 1997 (a) ----------- ----------- ----------- ----------- Earnings: Net income (loss) applicable to common stock $ 147 $ (699) $ (226) $ (1,295) Net effect of assumed conversion: Interest applicable to debentures 16 -- -- -- ----------- ----------- ----------- ----------- Net income (loss) for diluted earnings per share $ 163 $ (699) $ (226) $ (1,295) =========== =========== =========== =========== Shares: Weighted average number of shares of common stock outstanding 2,781,815 2,780,057 2,780,941 2,780,057 Weighted average impact of potential common shares applicable to: Stock options 278,453 -- -- -- Convertible subordinated debentures 1,195,605 -- -- -- ----------- ----------- ----------- ----------- Weighted average shares used for computation 4,255,873 2,780,057 2,780,941 2,780,057 =========== =========== =========== =========== Diluted earnings (loss) per common share $ 0.04 $ (0.25) $ (0.08) $ (0.47) =========== =========== =========== ===========
(a) The stock options have an antidilutive effect on net loss per share and are, therefore, excluded from the computation of diluted earnings per share. (b) The convertible subordinated debentures have an antidilutive effect on net loss per share and are, therefore, excluded from the computation of diluted earnings per share. Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 9 10 LITTLEFIELD, ADAMS, & COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Certain securities that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share, because to do so would have been antidilutive, were as follows:
For the three months For the six months ended June 30, ended June 30, ----------------------------- ---------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Stock options: Range of exercise prices ------------------------ $1.00 to $6.88 $ 480,877 $ 902,352 $ 759,166 $ 860,454 Convertible subordinated debentures -- -- 601,106 -- ----------- ----------- ----------- ----------- Total $ 480,877 $ 902,352 $ 1,360,272 $ 860,454 =========== =========== =========== ===========
NOTE 7: COMMON STOCK As of June 30, 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. Included in the weighted average common shares outstanding used to calculate net loss per common share for the three and six months ended June 30, 1997, are 485,000 and 17,076 shares of common stock issued in May 1997 in connection with the class action and derivative action settlements, respectively. Such shares were considered to be outstanding during all of 1997 for purposes of determining net loss per share (Note 6). As of September 8, 1997, the Company's Common Stock trades on the NASD's OTC Electronic Bulletin Board under the symbol "FUNW." The symbol reflects FunWear, a registered trademark used by the Company. Prior to September 8, 1997, the Company's Common Stock was traded on the American Stock Exchange under the symbol "LFA." NOTE 8: COMPREHENSIVE INCOME In July 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. The objective of SFAS 130 is to report a measure of all changes in the equity of an enterprise that result from transactions and other economic events of the period other than transactions with shareholders. Comprehensive income is the total of net income and all other non-shareholder changes in equity. Effective January 1, 1998, the Company adopted SFAS 130. The Company has no items of other comprehensive income in any period presented in these condensed financial statements. Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 10 11 LITTLEFIELD, ADAMS, & COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information which management believes is relevant to assessing and understanding the Registrant's results of operations and financial condition. This discussion should be read in conjunction with the condensed financial statements included in this Quarterly Report on Form 10-Q and their accompanying notes, and also in conjunction with the Registrant's 1997 Annual Report on Form 10-K. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items related to the Company's results of operations as a percentage of net product sales.
For the three months For the six months ended June 30, ended June 30, ----------------------------- ----------------------------- 1998 1997 1998 1997 ----------- ----------- ---------- ------------ Net product sales (in thousands) $ 2,908 $ 450 $ 3,324 $ 1,759 100.0% 100.0% 100.0% 100.0% Less: Cost of products sold 69.6% 120.4% 73.8% 100.6% Selling and administrative expenses 23.9% 126.7% 31.3% 67.8% ---------- ---------- ---------- ----------- Income (loss) from operations $ 6.5% $ (147.1)% $ (5.1)% $ (68.4)% ========== ========== ========== ===========
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 1995, and the Company incurred a net loss of $1,937,000 for the year ended December 31, 1997. Sales of Harley-Davidson licensed products accounted for 90% and 89% of total net product sales for the years ended December 31, 1996, and 1995. Approximately 29% of total revenues for the year ended December 31, 1997, related to 1996 Harley-Davidson revenues, 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. For the six months ended June 30, 1998, the Company incurred a net loss of $226,000. The Company is reporting net income of $147,000 for the second quarter which ended June 30, 1998, and has working capital of $945,000 at June 30, 1998. The diminished revenues experienced by the Company during 1997 and the first quarter of 1998 have had a material adverse effect on the results of operations and financial condition. With net sales of $2,908,000 in the 1998 second quarter, the Company generated income from operations of $188,000 for the quarter. The significant increase in revenues, plus the $1.2 million in proceeds from the Company's private offering of 7% Convertible Subordinated Debentures completed on April 24, 1998, are currently providing sufficient cash flows for the Company to satisfy its obligations as they become due. Shipments of approximately $2,800,000 during the month of July 1998 and cancelable bookings, as of July 31, 1998, for shipments of approximately $7,000,000 during August and September of 1998 are indications that the Company can now sustain itself for the foreseeable future. However, the Company has limited financial resources other than the proceeds of the Debenture offering and cash flows from sales. As such, in the event that expected future product sales would be materially adversely effected due to the cancellation of customers' orders or Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 11 12 LITTLEFIELD, ADAMS, & COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS any other unforeseen events, the Company would be unable to continue operating as a going concern for any extended period of time. The ability of the Company to continue as a going concern is dependent upon the ongoing support of its stockholders, customers and creditors and its ability to generate sufficient sales to sustain its existing operations and meet the Company's obligations as they become due. The accompanying financial statements have been prepared assuming the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. FOR THE THREE MONTHS ENDED JUNE 30: 1998 COMPARED TO 1997 Net Product Sales Second quarter net product sales for 1998 were $2,908,000, an increase of $2,458,000 (546%) compared to the 1997 second quarter. The significant increase was primarily due to the enthusiastic demand for World Championship Wrestling (WCW) licensed products. During April 1998, the Company and World Championship Wrestling, Inc., a Time Warner Company, finalized a license agreement for the names, likenesses, characters, trademarks and/or copyrights of World Championship Wrestling ("WCW") and New World Order ("nWo"). The license agreement runs through March 15, 2001. Sales of WCW products, which commenced in late April 1998, accounted for approximately 71% of second quarter 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 29% of sales for the three months ended June 30, 1998. The Company's average selling price for goods sold in the 1998 second quarter was 12.5% higher than the average selling price in the second quarter of 1997. Sales during the month of July 1998 were approximately $2,800,000. As of July 31, 1998, the Company had bookings for shipments during August and September of 1998 which totaled approximately $7,000,000. Not all "bookings" constitute contractual commitments, and may therefore be subject to cancellation or modification by customers. The Company has participated in special promotions with WCW, including live appearances by professional wrestlers. Additional promotions involving live appearances by professional wrestlers are scheduled during the 1998 third quarter. Cost of Products Sold Gross profit margin, as a percentage of net sales, was 30.4% in the second quarter of 1998 as compared to (20.4)% in the second quarter of 1997. With the much lower sales volume in the 1997 second quarter, the cost of products sold exceeded net product sales due to the unabsorbed overhead. Certain expenses required to be included in the cost of products sold are more fixed in nature, and do not necessarily increase or decrease with changes in sales volume. Selling and Administrative Expenses In the 1998 second quarter, selling and administrative expenses were $125,000 greater than during the 1997 second quarter. Royalty expenses were up $267,000 due to the increase in the sales of licensed products. Decreases in overhead moderated the net increase in selling and administrative expenses. As a percentage of net sales, selling and administrative expenses were 24% in the 1998 second quarter as compared to 127% in the 1997 second quarter. Lack of sales leverage in the 1997 second quarter caused the percentage reported to be abnormally high. Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 12 13 LITTLEFIELD, ADAMS, & COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest Expense Second quarter interest expense on short-term debt was less in 1998 compared to 1997, but overall interest was up slightly due to accrued interest of $16,000 on the 7% Convertible Subordinated Debentures which were issued on April 24, 1998. Interest rates on short-term debt experienced by the Company in the second quarters of 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. FOR THE SIX MONTHS ENDED JUNE 30: 1998 COMPARED TO 1997 Net Product Sales Net product sales for the six months ended June 30 were $3,324,000 in 1998 compared to $1,759,000 in 1997, an increase of 89%. The significant increase in sales volume related to the Company's new WCW license. Sales of WCW products realized in the second quarter of 1998 were the primary reason for the increase. Sales of WCW licensed products represented approximately 62% of total sales for the first half of 1998. The Simpsons and King of the Hill licensed products accounted for approximately 32% of sales for the first six months of 1998, while sales of generic goods represented another 3%. Year-to-date as of June 30, the Company's average selling price for goods sold in 1998 was 3% lower than in the same period in 1997. The sales of lower-priced generic goods in the 1998 first quarter contributed to the lower average selling price. Cost of Products Sold For the six months ended June 30, gross profit margin, as a percentage of net sales, was 26.2% in 1998 versus (0.6)% in 1997. The cost of goods sold during the six months ended June 30, 1997 exceeded net product sales due to the unabsorbed overhead. Certain expenses required to be included in the cost of products sold are more fixed in nature, and do not necessarily increase or decrease with changes in sales volume. The year-to-date gross profit margin in 1998 was significantly affected by the very large increase in sales volume that occurred during the 1998 second quarter. Selling and Administrative Expenses Selling and administrative expenses were $153,000 lower for the first six months of 1998 as compared to the first six months of 1997. While royalties were up $250,000 due to the increase in sales of licensed products, the overall reduction in overhead during 1998 caused a net decrease in selling and administrative expenses. As a percentage of net sales, selling and administrative expenses were 31% for the six months ended June 30, 1998 as compared to 68% for the six months ended June 30, 1997. The diminished revenues experienced in 1997 caused the percentage reported to be abnormally high. Interest Expense For the six-month periods ended June 30, interest expense declined by $33,000 from 1997 to 1998. This reflects the reduced borrowing of short-term debt during 1998 due to reduced overhead and the $1.2 million raised in the private offering of 7% Convertible Subordinated Debentures completed on April 24, 1998. Interest expense related to the Debentures amounted to $16,000 for the six months ended June 30, 1998. The Company incurs interest on the Debentures at a rate of 7%, which is considerably lower than the interest rates experienced by the Company on short-term debt. Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 13 14 LITTLEFIELD, ADAMS, & COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $504,000 from December 31, 1997 to June 30, 1998, with all of the increase being attributable to the activities during the second quarter. The annualized inventory turnover rate for the six months ended June 30, 1998 was up to 4.3 turns per year compared to an annualized rate of 3.2 turns per year for the six months ended June 30, 1997. The 89% increase in sales volume was primarily responsible for the increase in annualized inventory turns. Accounts Receivable Net trade and factor receivables increased from $187,000 at December 31, 1997 to $2,611,000 at June 30, 1998. The significant increase in sales volume during the 1998 second quarter, and particularly within the last one-half of the second quarter, produced the great increase in receivables. Management believes the receivables will be collected within the terms of the sales. Liquidity and Capital Sources Effective February 1, 1996, the Company entered into a discount factoring agreement with Merchant Factors Corp., which was to expire in August 1997. On July 15, 1997, the Company renewed and amended both its factoring and accounts receivable financing agreements with Merchant Factors Corp., extending the renewal dates to December 31, 1998. All of the Company's accounts receivable which Merchant Factors Corp. approves for credit, excluding Wal-Mart, are being factored at the rate of 1 1/8%. Accounts that are credit approved by Merchant Factors 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. Under the factoring agreement, the Company may borrow up to 75% of the net accounts receivable at an annual interest rate of prime plus 2.5%. By letter dated March 24, 1998, Merchant Factors Corp. informed the Company that the Company may borrow up to 85% of the net accounts receivable. Borrowings are secured by the Company's accounts receivable and inventories. At June 30, 1998, and December 31, 1997, the Company had net factored receivables amounting to $2,001,000 and $182,000, respectively, most of which had been approved for credit by Merchant Factors Corp. In addition, the Company has an accounts receivable financing arrangement with Merchant Factors Corp. covering only its accounts receivable from Wal-Mart, which amounted to $610,000 and $5,000, respectively, at June 30, 1998, and December 31, 1997. This agreement allowed the Company to borrow up to 75% of its net receivables from Wal-Mart at an annual interest rate of prime plus 5%. By letter dated March 24, 1998, Merchant Factors Corp. informed the Company that the Company may borrow up to 85% of the net accounts receivable. In a letter dated July 24, 1998, Merchant Factors Corp. informed the Company that effective August 1, 1998, sales to Kmart would be covered by this accounts receivable financing arrangement. Prior to August 1, 1998, receivables from Kmart were factored. Borrowings are secured by the Company's accounts receivable and inventories. The Company does not pay any factoring fees for the financing of the Wal-Mart accounts receivable. Merchant Factors Corp. has periodically issued purchase guarantees and/or letters of credit against the factoring and accounts receivable financing agreements. At June 30, 1998, there were $634,000 of outstanding purchase guarantees and/or letters of credit issued by Merchant Factors Corp.. At June 30, 1998, the combined remaining borrowing availability from Merchant Factors Corp., after considering the above guarantees, was approximately $596,000, as compared to $138,000 at December 31, 1997. Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 14 15 LITTLEFIELD, ADAMS, & COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the six months ended June 30, 1998, operating activities used cash of $2,087,000, while $131,000 was used in investing activities. The Company borrowed a total of $3,400,000 during the six months ended June 30, 1998, and repaid $1,185,000. 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 $2,227,000. During the first six months of 1998, there was a net increase in cash of $9,000. At June 30, 1998, the Company had working capital of $945,000 and a working capital ratio of 1.30/1. 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. The availability of cash flow from operations subsequent to June 30, 1998 is dependent on the ability of the Company to acquire and sell licensed and proprietary products throughout 1998 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") completed on April 24, 1998. Based on the Company's estimates which include the funds from the Debentures, the sales and bookings subsequent to June 30,1998 discussed above, the Company believes it can sustain itself for the foreseeable future. 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, The Simpsons, King of the Hill, Pepsi and Mountain Dew, Miller Brewing Company, Hershey Foods Corporation and Kawasaki Motors Corp., U.S.A. is an integral part of that effort. Additionally, the Company has entered into the boxer shorts segment of the apparel industry with the delivery of approximately $160,000 of Simpsons' boxer shorts in May 1998. Marketing strategies include the development of programs which center around promotional milestones for customers. An example would be the Company's Father's Day program focusing on Homer Simpson (from "The Simpsons") and Hank Hill (from "King of the Hill"). Special in-store promotions that include live appearances by professional wrestlers have been undertaken in conjunction with WCW. 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.
Projected Estimated Year 2000 Year 2000 Cost of Readiness Readiness Year 2000 Status Date Readiness -------------- -------------- -------------------- IT Systems: 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 Not assessed June 1999 $ 0 - $ 20,000
Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 15 16 LITTLEFIELD, ADAMS, & COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In the third quarter of 1998, the Company plans to begin testing, in conjunction with its largest customer and third-party network providers, it's Electronic Data Interchange ("EDI") systems. The EDI systems are used to transact business electronically with the Company's larger customers. The Company anticipates that the EDI systems will be Year 2000 ready in June 1999. In addition to the Company's internal Year 2000 readiness, the Company plans to initiate, in the third 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. Currently, the Company does not anticipate an interruption in business as the millennium approaches due to the relatively minor nature of its internal Year 2000 deficiencies, the sufficient time available to correct those deficiencies and the ability of the Company's largest customers, possessing substantial financial resources, to timely become Year 2000 ready. Failure of the Company and/or third parties to be adequately Year 2000 ready would likely have a negative effect on the Company's operations. The Company plans to begin developing Year 2000 contingency responses as specific predicaments are examined. 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. Accordingly, the actual results of the Company's operations in the future may vary widely from the forward-looking statements included herein. Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 16 17 LITTLEFIELD, ADAMS & COMPANY ---------------------------- PART II - OTHER INFORMATION --------------------------- Item 1. LEGAL PROCEEDINGS ----------------- The Company is currently not involved in any litigation or other reportable legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- (a) The 1998 Annual Meeting of Shareholders was held on June 12, 1998, with a quorum of more than 50% of the outstanding shares represented by proxy or in person. (b) At the 1998 Annual Meeting of Stockholders, William E. Goettelman and Michael B. Balber were elected as directors to serve for a three-year term until the annual meeting in the year 2001. Additionally, Warren L. Rawls was elected as a director to serve for a two-year term until the Annual Meeting in the year 2000. Directors Martin B. Shifrin and Stanley I. Halbreich, previously elected as directors for terms ending at the Annual Meeting of Stockholders for 2000 and 1999, respectively, continue to serve as directors of the Company. (c) The votes cast for the election of Messrs. Goettelman, Balber and Rawls were as follows:
Number of Number of Votes For Votes Withheld ---------- -------------- William E. Goettelman 2,100,109 37,601 Michael B. Balber 2,100,209 37,501 Warren L. Rawls 2,099,052 38,658
(d) Proposal No. 2, to amend the Littlefield, Adams & Company Incentive Plan was approved. (e) There were 1,996,387 votes cast for Proposal No. 2, while 133,310 votes were cast against, 8,013 votes abstained, and there were 650,547 broker non-votes. Item 5. OTHER INFORMATION ----------------- Any shareholder proposal submitted with respect to the Company's 1999 Annual Meeting of Shareholders, which proposal is submitted outside the requirements of Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), will be considered untimely for purposes of Rule 14a-4 and 14a-5 under the Exchange Act if notice thereof is received by the Company after March 21, 1999 Item 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits required by Item 601 of Regulation S-K 10.1 Letter from Merchant Factors Corp. dated July 24, 1998, informing the Company that effective August 1, 1998, sales to Kmart would be covered by the accounts receivable financing arrangement. 27. Financial Data Schedule (b) Reports on Form 8-K None. Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 17 18 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LITTLEFIELD, ADAMS & COMPANY ---------------------------- (Registrant) Date: August 10, 1998 /s/ Michael B Balber ------------------------- Michael B. Balber Executive Vice President Date: August 10, 1998 /s/ Warren L. Rawls ------------------------- Warren L. Rawls Chief Financial Officer, Treasurer and Secretary (principal financial & accounting officer) Littlefield, Adams & Company, June 30, 1998 Quarterly Report on Form 10-Q; Page 18 EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 [MERCHANT FACTORS CORP. LOGO] ------------------------------------------------------------------------------ 1430 Broadway, New York, New York 10018 (212) 840-7575 FAX (212) 869-1752 July 24, 1998 Mr. Stanley Halbreich Littlefield, Adams & Co. Sports Imprints Division 350 Fifth Avenue, Ste. 4213 New York, NY 10118 Dear Stanley: This will confirm our telephone conversation with respect to Merchant Financial Corporation, as opposed to Merchant Factors Corp. Originally, we agreed we would finance your sales to Walmart and K-Mart under Merchant Financial, and all other accounts will be under Merchant Factors. As you know, most of your advances have been on Merchant Factors and sales on Merchant Financial has a large availability. Effective 8/1/98, please assign sales to K-Mart under Merchant Financial and you will start to take your advances under Merchant Financial. We are pleased to note your activity on your license of WCW, and can only hope that it continues for a long time. Best of luck. Very truly yours, /s/ Walter Kaye WALTER KAYE President WK/dcb EX-27 3 EXHIBIT 27
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 66 0 2,687 76 1,145 4,076 1,218 732 4,573 3,131 1,227 0 0 2,808 (2,638) 4,573 3,324 3,324 2,452 2,452 0 0 58 (226) 0 (226) 0 0 0 (226) (0.08) (0.08) Bad debt expense of 1 is included in the 1,040 reported as Selling and Administrative expenses.
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