SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal quarter ended September 30, 2006
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file No. 0-24805
-------
Littlefield Corporation
-----------------------
(Exact name of small business issuer as specified in its charter)
Delaware 74-2723809
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2501 North Lamar Blvd., Austin TX 78705
---------------------------------------
(Address of principal executive offices)
(512) 476-5141
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [ X ]
As of September 30, 2006, the Issuer had 10,833,334 shares of its Common Stock,
par value $.001 per share outstanding.
Transitional Small Business Disclosure Format: YES [ ] NO [ X ]
Littlefield Corporation
FORM 10-QSB
For the quarter ended September 30, 2006
INDEX
Part I. Financial Information
Item 1. Financial Statements
a) Consolidated Statements of Operations for the Three
Months Ended September 30, 2006 and 2005.............................. 2
b) Consolidated Statements of Operations for the Nine
Months Ended September 30, 2006 and 2005.............................. 4
c) Consolidated Balance Sheet as of September 30, 2006................... 6
Consolidated Statements of Cash Flows for the Nine
d) Months Ended September 30, 2006 and 2005.............................. 7
e) Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations............................................. 19
Item 3. Controls and Procedures 21
Part II. Other Information
Item 1. Legal Proceedings............................................. 22
Item 6. Exhibits.......................................................... 22
Signatures 22
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Littlefield Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, 2006 2005
---- ----
(Restated)
REVENUES:
Entertainment $1,822,417 $1,625,390
Hospitality 1,000,272 930,129
Other 35,242 18,100
------------- -------------
TOTAL REVENUES 2,857,931 2,573,619
------------- -------------
DIRECT COSTS AND EXPENSES:
Direct salaries and other compensation 689,576 599,684
Rent and utilities 642,012 640,627
Other direct operating costs 859,514 699,881
Depreciation and amortization 153,060 164,080
License expense 35,289 21,831
Provision for doubtful accounts 34,104 493
------------- -------------
TOTAL COSTS AND EXPENSES 2,413,555 2,126,596
------------- -------------
GROSS MARGIN 444,376 447,023
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and other compensation 202,885 117,269
Legal and accounting fees 317,746 167,124
Depreciation and amortization 30,487 23,269
Compensation expense related to options 14,311 0
Other general and administrative 169,357 111,705
------------- -------------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES 734,786 419,367
GAIN ON DISPOSITION OF FIXED ASSETS 5,701 1,001,874
------------- -------------
OPERATING INCOME (284,709) 1,029,530
OTHER INCOME (EXPENSE):
Interest and investment income 50,699 7,978
Interest expense ($7,877 and $10,315 respectively to related parties) (73,345) (57,062)
Gain on settlement 0 56,993
Other income 0 0
------------- -------------
TOTAL OTHER INCOME (EXPENSE) (22,646) 7,909
------------- -------------
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (307,355) 1,037,439
PROVISION FOR INCOME TAXES 33,156 15,000
------------- -------------
NET INCOME (LOSS) (340,511) 1,022,439
OTHER COMPREHENSIVE INCOME 0 2,411
------------- -------------
NET COMPREHENSIVE INCOME (LOSS) ($340,511) $1,024,850
============= ==============
See notes to consolidated financial statements.
2
Littlefield Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, 2006 2005
---- ----
(Restated)
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share ($0.031) $0.098
--------------- -----------------
Diluted earnings (loss) per share ($0.031) $0.097
=============== =================
Weighted average shares outstanding - basic 10,833,341 10,444,823
Weighted average shares outstanding - diluted 10,833,341 10,521,577
See notes to consolidated financial statements.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Littlefield Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended September 30, 2006 2005
---- ----
(Restated)
REVENUES:
Entertainment $5,990,736 $5,117,177
Hospitality 3,323,155 2,868,557
Other 78,126 75,123
------------- -------------
TOTAL REVENUES 9,392,017 8,060,857
------------- -------------
DIRECT COSTS AND EXPENSES:
Direct salaries and other compensation 2,016,298 1,835,081
Rent and utilities 1,882,134 1,666,314
Other direct operating costs 2,404,389 2,012,868
Depreciation and amortization 482,652 607,645
License expense 106,179 48,654
Provision for doubtful accounts 101,165 135,290
------------- -------------
TOTAL COSTS AND EXPENSES 6,992,817 6,305,852
------------- -------------
GROSS MARGIN 2,399,200 1,755,005
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and other compensation 493,335 383,673
Legal and accounting fees 396,057 713,450
Depreciation and amortization 81,130 70,126
Compensation expense related to options 95,669 66,750
Other general and administrative 409,014 499,746
------------- -------------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES 1,475,205 1,733,745
GAIN ON DISPOSITION OF FIXED ASSETS 10,047 997,396
------------- -------------
OPERATING INCOME 934,042 1,018,656
OTHER INCOME (EXPENSE):
Interest and investment income 94,667 13,353
Interest expense ($23,630 and $23,815 respectively to related parties) (181,710) (191,317)
Gain on sale of investments 0 9,312
Gain on Settlement 0 744,286
Other income 37,527 0
------------- -------------
TOTAL OTHER INCOME (EXPENSE) (49,516) 575,634
------------- -------------
NET INCOME BEFORE PROVISION FOR INCOME TAXES 884,526 1,594,290
PROVISION FOR INCOME TAXES 63,930 36,840
------------- -------------
NET INCOME 820,596 1,557,450
OTHER COMPREHENSIVE INCOME 0 3,170
------------- -------------
NET COMPREHENSIVE INCOME $820,596 $1,560,620
============= =============
See notes to consolidated financial statements.
4
Littlefield Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended September 30, 2006 2005
---- ----
(Restated)
EARNINGS PER SHARE:
Basic earnings per share $0.077 $0.151
------------- -------------
Diluted earnings per share $0.076 $0.150
============= ==============
Weighted average shares outstanding - basic 10,696,316 10,324,811
Weighted average shares outstanding - diluted 10,841,168 10,410,239
5
Littlefield Corporation
CONSOLIDATED BALANCE SHEET (Unaudited)
ASSETS
------
Current Assets: September 30, 2006
------------------------
Cash and cash equivalents $1,803,064
Accounts receivable, net of allowance for doubtful accounts of $100,352 822,255
Equity Securities, available for sale 3,130
Restricted Cash 918,290
Other prepaid expenses and current assets 275,650
------------------------
Total Current Assets 3,822,389
------------------------
Property and Equipment - at cost, net of accumulated depreciation and amortization 6,088,824
Other Assets:
Goodwill 4,905,111
Intangible assets, net 631,071
Other non-current assets 209,707
------------------------
Total Other Assets 5,745,889
------------------------
TOTAL ASSETS $15,657,102
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Long term debt, current portion 173,369
Trade accounts payable 177,546
Legal Settlements - current portion 309,885
Reserve for settlements 1,630,000
Other current liabilities - related party 462,887
Accrued expenses 490,901
------------------------
Total Current Liabilities 3,244,588
------------------------
Long-term Liabilities:
Legal Settlements - net of current portion 696,660
Long term debt, net of current portion 2,311,020
Long term debt-related party 105,650
------------------------
Total Long-term Liabilities 3,113,330
------------------------
Total Liabilities 6,357,918
------------------------
Stockholders' Equity:
Common stock, $.001 par value, (authorized 20,000,000 shares, issued 11,959,532
shares, outstanding 10,833,334 shares) 11,960
Additional paid-in-capital 23,352,852
Treasury stock - 1,126,198 shares, at cost (1,433,809)
Accumulated Comprehensive Income (2,100)
Accumulated deficit (12,629,719)
------------------------
Total Stockholders' Equity 9,299,184
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,657,102
========================
See notes to consolidated financial statements.
6
Littlefield Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months Ended September 30, 2006 2005
(Restated)
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $820,596 $1,557,450
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 563,782 677,772
Gain on investment sales 0 (9,312)
Stock based compensation expense 95,669 66,750
Loss (gain) on sale of fixed assets 0 (997,396)
Provision for bad debt 34,104 0
Gain on exercise of deferred compensation 0 (54,749)
Increase (decrease) in cash flows as a result of changes in asset and liability account
balances:
Accounts receivable 335,663 (273,269)
Other assets and licenses (76,393) (192,987)
Trade accounts payable (248,119) 23,889
Accrued expenses and other current liabilities (219,514) 111,583
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,305,788 909,731
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment expenditures (286,688) (225,304)
Proceeds from sale of equity securities 0 48,548
Gain on sale of assets 0 369,809
Proceeds from collection of Note Receivable 1,184,214 845,000
--------------- ---------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 897,526 1,038,053
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (65,668) (52,260)
Payments on notes payable (1,157,554) (1,040,589)
Collection of Subscriptions 46,000 0
Proceeds from options exercised 158,000 59,750
--------------- ---------------
NET CASH (USED) IN FINANCING ACTIVITIES (1,019,222) (1,033,099)
--------------- ---------------
NET INCREASE IN CASH 1,184,092 914,685
CASH AT BEGINNING OF PERIOD 618,972 527,103
--------------- ---------------
CASH AT END OF PERIOD $1,803,064 $1,441,788
=============== ===============
See notes to consolidated financial statements.
7
Littlefield Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine months Ended September 30, 2006 2005
----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments:
Interest $162,014 $32,321
=========== ============
Income taxes $156,779 $0
=========== ============
Non-cash transactions:
Issuance of treasury stock for subscription receivable $0 $46,000
=========== ============
Issuance of treasury stock for deferred compensation and 401K plan $24,403 $0
=========== ============
Sale of fixed assets for a note receivable $0 $1,400,000
=========== ============
See notes to consolidated financial statements.
8
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2006
--------------------------------------------------------------------------------
NOTE 1 - PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION.
--------------------------------------------------------------------------------
The unaudited consolidated financial statements include the accounts of
Littlefield Corporation and its wholly owned subsidiaries (the "Company"). The
financial statements contained herein are unaudited and, in the opinion of
management, contain all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for the periods
presented. The preparation of the condensed consolidated financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities and the
reported amount of revenue and expenses during the reported period. Actual
results could differ from these estimates. Where appropriate, items within the
consolidated condensed financial statements have been reclassified to maintain
consistency and comparability for all periods presented.
The operating results for the nine-month period ended September 30, 2006 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2006. Except for historical information contained herein,
certain matters set forth in this report are forward looking statements that are
subject to substantial risks and uncertainties, including the impact of
government regulation and taxation, customer attendance and spending,
competition, and general economic conditions, among others. This Quarterly
Report on Form 10-QSB contains "forward-looking" statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 and information
relating to the Company and its subsidiaries that are based on the beliefs of
the Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," and "intend" and words or phrases of similar
import, as they relate to the company or its subsidiaries or Company management,
are intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitations, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, seasonality, distribution
networks, product introductions and acceptance, technological change, changes in
industry practices, onetime events and other factors described herein and in
other filings made by the company with the Securities and Exchange Commission,
based upon changing conditions, should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The company does not intend to update
these forward-looking statements.
--------------------------------------------------------------------------------
NOTE 2 - RESTATEMENT.
--------------------------------------------------------------------------------
In July 2006, we identified certain errors that had resulted in misstatements of
previously reported stock option expenses. In July 2006 management and the Audit
Committee of the Board of Directors concluded that we would amend our previously
filed Form 10-QSB for the quarter ended March 31, 2006 to correct our reported
stock option expenses. In August 2006 management and the Audit Committee of the
Board of Directors concluded that we would also amend our previously filed 2005
Form 10-KSB to correct our reported stock options expenses. The restated
financial statements for the first quarter are contained in Amendment No. 1 to
the Company's report on Form 10-QSB/A for the period ended March 31, 2006, which
was filed with the SEC, August 22, 2006. The restated financial statements for
the year 2005 are contained in Amendment No. 1 to the Company's report on Form
10-KSB/A for the period ended December 31, 2005, which was filed with the SEC,
August 31, 2006. Management and the Chairman of the Audit Committee also
discussed these matters with our independent registered public accountants.
The following table sets forth the affects of restatements made to correct the
error in our reported Q1 2006 stock option expenses for a modification to
certain stock option agreements in 2005.
9
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2006
--------------------------------------------------------------------------------
NOTE 2 - RESTATEMENT (Continued).
--------------------------------------------------------------------------------
FOR THE QUARTER ENDED September 30,
Consolidated Statement of Operations 2005 2005
Previously
Restated Reported
Compensation Expense $0 $0
Total General and Administrative 419,367 419,367
Operating Income 27,656 27,656
Net Income Before Taxes 1,037,439 1,037,439
Net Income 1,022,439 1,022,439
Net Comprehensive Income $1,024,850 1,024,850
Basic Earnings Per Share $0.012 $0.012
Diluted Earnings Per Share $0.012 $0.012
Weighted average shares outstanding - basic 8,625,225 8,589,355
Weighted average shares outstanding - diluted 8,689,856 8,569,300
FOR THE NINE MONTHS ENDED September 30,
Consolidated Statement of Operations 2005 2005
Previously
Restated Reported
Compensation Expense
$66,750 $0
Total General and Administrative 1,733,745 1,666,995
Operating Income 21,260 88,010
Net Income Before Taxes 1,594,290 1,661,055
Net Income 1,557,450 1,624,200
Net Comprehensive Income $1,560,620 1,627,370
Basic Earnings Per Share $0.018 $0.019
Diluted Earnings Per Share $0.018 $0.019
Weighted average shares outstanding - basic 8,529,714 8,517,627
Weighted average shares outstanding - diluted 8,608,026 8,587,572
10
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2006
--------------------------------------------------------------------------------
NOTE 3 - PROPERTY AND EQUIPMENT.
--------------------------------------------------------------------------------
Property and equipment at September 30, 2006 consists of the following:
Land $764,053
Buildings 3,221,713
Leasehold improvements 3,889,877
Rental inventory and bingo equipment 1,837,554
Equipment, furniture and fixtures 2,425,209
Automobiles 380,836
---------------
12,519,242
Less: Accumulated depreciation and amortization (6,430,418)
---------------
Property and equipment, net $6,088,824
===============
Total depreciation expense, for owned and leased assets, charged to operations
for the nine months ended September 30, 2006 and 2005 was approximately $553,400
and $661,000 respectively.
--------------------------------------------------------------------------------
NOTE 4 - GOODWILL & OTHER INTANGIBLE ASSETS.
--------------------------------------------------------------------------------
Goodwill at September 30, 2006 consists of the following:
Gross Carrying Accumulated
Amount Amortization Total
------------------ ------------------ -------------
Goodwill $6,704,907 $(1,799,796) $4,905,111
================== ================== =============
Entertainment Hospitality Total
------------------ ------------------ -------------
Balance at December 31, 2005 $4,533,727 $371,384 $4,905,111
Goodwill acquired in the Quarter -0- -0- -0-
Impairment losses -0- -0- -0-
------------------ ------------------ -------------
Balance at September 30, 2006 $4,533,727 $ 371,384 $4,905,111
================== ================== =============
Intangible assets at September 30, 2006 consists of the following:
Gross
Carrying Accumulated
Amount Amortization Total
=================== ================= =============
Intangible Assets with Indefinite Lives:
Bingo licenses $589,720 $(51,974) $537,746
Intangible Assets with Finite Lives:
Covenants not to compete $297,500 $(204,175) $93,325
-------------
Intangible Assets, Net of Accumulated Amortization $631,071
=============
Amortization expense charged to operations for the nine months ended September
30, 2006 and 2005 was approximately $10,375 and $17,215 respectively.
11
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2006
--------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' EQUITY.
--------------------------------------------------------------------------------
At September 30, 2006 the Company holds 1,126,198 treasury shares at an average
purchase cost of $1.27.
--------------------------------------------------------------------------------
NOTE 6 - SHARE BASED PAYMENTS.
--------------------------------------------------------------------------------
Effective January 1, 2006, the Company adopted FASB Statement of Financial
Accounting Standards No. 123R (Revised 2004), Share-Based Payment, which
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements based on the provisions of SFAS 123 issued
in 1995. We have adopted this statement using the modified prospective method of
implementation, whereby the prospective method records the compensation expense
from the implementation date forward, but leaves prior periods unchanged.
The Company recorded approximately $96,000 in compensation expense in the period
ended September 30, 2006 related to options issued under its stock-based
incentive compensation plans. This includes expense related to both options
issued in the current year and options issued in prior years for which the
requisite service period for those options includes the current year. The fair
value of these options was calculated using the Black-Scholes options pricing
model. Information related to the assumptions used in this model is set forth in
the Company's Annual Report on Form 10-KSB/A for the fiscal year ended December
31, 2005. For options issued in 2006, the following assumptions were used:
dividend yield of 10%, expected volatility of 68%, risk free interest rates of
5.0% and an expected life of 7 years.
--------------------------------------------------------------------------------
NOTE 7 - PRO FORMA INFORMATION UNDER SFAS 123 FOR PERIODS PRIOR TO 2006.
--------------------------------------------------------------------------------
The following table represents the effect on net income and earnings per share
as if the Company had applied the fair-value recognition provisions of SFAS 123
to all of its share-based compensation awards for the quarter ending September
30, 2005:
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
(Restated) (Restated)
------------------------ ---------------------
Net Income - as reported $ 1,022,439 $ 1,557,450
Stock-based compensation included in reported net income, net of related tax
effects - 66,750
Total stock-based compensation expense determined under the Fair Value Based
method, net of related tax effects (24,214) (172,040)
------------------------ ---------------------
Net Income - pro forma $ 998,225 $ 1,452,160
Earnings Per Share
Basic - as reported $ 0.098 $ 0.151
Basic - pro-forma $ 0.096 $ 0.141
Diluted - as reported $ 0.097 $ 0.150
Diluted - pro-forma $ 0.095 $ 0.139
12
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2006
--------------------------------------------------------------------------------
NOTE 8 - EARNINGS (LOSS) PER SHARE.
--------------------------------------------------------------------------------
A reconciliation of basic to diluted earnings per share is as follows:
Nine months ended September 30,
------------------------------- 2005 2005
2006 2006 (Restated) (Restated)
Basic Diluted Basic Diluted
-------------- -------------- -------------- -------------
Numerator:
Net income (loss) $820,596 $820,596 $1,557,450 $1,557,450
============== ============== ============== =============
Denominator:
Weighted average shares outstanding 10,696,316 10,696,316 10,324,811 10,324,811
Effect of dilutive securities:
Preferred stock --- --- --- ---
Stock options and warrants --- 144,852 --- 85,428
-------------- -------------- -------------- -------------
Weighted average shares outstanding 10,696,316 10,841,168 10,324,811 10,410,239
============== ============== ============== =============
Earnings (loss) per share $0.077 $0.076 $0.151 $0.150
============== ============== ============== =============
--------------------------------------------------------------------------------
NOTE 9 - COMPREHENSIVE INCOME.
--------------------------------------------------------------------------------
The Company has adopted Financial Accounting Standards Board Statement No.
130, Reporting Comprehensive Income. Statement No. 130 establishes new rules for
the reporting and display of comprehensive income and its components; however,
the adoption of this Statement has no impact on net income or shareholders'
equity. Statement No. 130 requires unrealized gains or losses to be included in
other comprehensive income.
The components of comprehensive income for the quarters ended September 30, 2006
and 2005, are as follows:
2006 2005
(Restated)
--------------- ---------------
Net income $820,596 $1,557,450
Other comprehensive income
Net unrealized gain $0 $3,170
--------------- ---------------
Total comprehensive income $820,596 $1,560,620
=============== ===============
--------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES.
--------------------------------------------------------------------------------
The Company recorded approximately $63,930 and $36,840 of state income tax
expense, respectively, for the nine months ended September 30, 2006 and 2005.
The Company does not expect to incur material federal income tax charges until
the depletion of its accumulated federal income tax loss carry-forwards, which
totaled approximately $6,200,000 at December 31, 2005 that begin expiring in the
year 2015.
13
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2006
--------------------------------------------------------------------------------
NOTE 11 - RELATED PARTY TRANSACTIONS.
--------------------------------------------------------------------------------
In July 2001 the Company acquired Premiere Party Rentals. In conjunction with
this purchase, the Company issued two promissory notes payable in the amount of
$500,000 each to the seller (a related party), as partial consideration for this
purchase, and entered into a three-year employment agreement with the seller.
These notes were paid in full prior to the beginning of the third quarter of
2005. For the nine months ended September 30, 2006 and 2005, the Company
recognized $0 and $3,750, respectively, of interest expense related to these
obligations.
In August 2001, the Company acquired Word of Mouth Custom Catering. In
conjunction with this purchase, the Company issued two promissory notes payable
in the amount of $200,000 each to the two sellers (related parties), as partial
consideration for this purchase, and entered into three-year employment
agreements with the sellers. In November 2003, the relationship with one of the
sellers changed from that of an employee to an independent contractor on a
consulting basis, in August of 2004 the agreement terminated with the remaining
employee as per the original agreement. The terms of the notes did not change.
These notes were payable at an annual rate of 8.0% and a maturity date of August
2005. These obligations were paid in full in August 2005. For the nine months
ended September 30, 2006 and 2005, the Company recognized $0 and $3,000,
respectively, of interest expense related to these obligations.
The President and CEO of the Company had personally guaranteed $300,000 of a
note payable to a third party lender, in the original total amount of $540,000.
The note was paid in full in May 2005. The Company accrued a total of $61,275 in
loan guaranty fees to its President in 2002. This amount has been added to his
bonus amount accrued in 2002 in the amount of $300,000, plus accrued interest
and is presented on the balance sheet as Other current liabilities - related
party. For the nine months ended September 30, 2006 and 2005, the Company
recognized $18,282 and $18,282 respectively, of interest expense related to
these obligations.
The Company purchased the President's office furniture and antiques for a total
price of $105,650 in July 2002. This amount was set up on a note payable with
interest only payments for 4 years at 6.75% with the principal amount due in
July 2006 as a balloon payment. In 2006, the note was revised with interest only
payments for 5 years at 6.75% with the principal amount due in July 2010.
Interest paid on this note for the nine months ended September 30, 2006 and 2005
was $5,348 and $5,347 respectively.
--------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
--------------------------------------------------------------------------------
Generally speaking, the Securities and Exchange Commission guidelines require a
company to report any pending legal and/or regulatory proceedings that involves
a claim for damages in excess of ten percent (10%) of its current assets. The
litigation and proceedings discussed below do not necessarily meet this
threshold, but are included in the interest of full disclosure. In general, the
Company will vigorously defend itself against all claims to the fullest extent
possible:
Pondella Hall for Hire, Inc., d/b/a Eight Hundred v. American Bingo and
Gaming, Case No. 97-2750, Circuit Court of the Twelfth Judicial Circuit in and
for Manatee County, Florida.
800438 Ontario Ltd v. American Bingo and Gaming Corporation, Case No.
99-1161, Circuit Court of the Twelfth Judicial Circuit in and for Manatee
County, Florida.
These two related cases arise from a transaction carried out by a predecessor,
American Bingo & Gaming Corporation ("American Bingo"), in July 1995, when
American Bingo bought three Florida bingo centers from two corporations owed and
controlled by Phillip Furtney. More specifically, American Bingo purchased the
assets of Pondella Hall for Hire and Fountains Bingo from Pondella Hall for
Hire, Inc., and the stock of Bingo Trail from 800438 Ontario Ltd. American Bingo
paid the Furtney controlled entities over $450,000 at the time of purchase and
agreed to pay additional compensation of $450,000 over a period of twenty-four
months and transfer stock in American Bingo having a value of an additional
$450,000. Several months after the acquisition of the three halls, the Florida
Attorney General's office obtained an indictment and brought a civil proceeding
related to two of the three halls for alleged gambling related offenses. This
investigation had been ongoing at, and for some time prior to, the acquisition
of the
14
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2006
--------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
--------------------------------------------------------------------------------
halls, but had not been disclosed to American Bingo by the sellers. As a result
of these legal proceedings, and the very real threat of additional legal
proceedings against the American Bingo and its officers, the halls were closed
and sold to third parties. Additionally, American Bingo settled the litigation
brought by the Florida Attorney General by pleading to misdemeanor sales tax
violations, paying substantial fines, and agreeing to terms which precluded
American Bingo from business in the state of Florida. (This prohibition has
since been lifted as a result of further negotiations with the State of
Florida.)
American Bingo did not pay the remaining amounts under the acquisition contracts
since they believed the sellers breached the contracts and committed fraud by
failing to disclose the ongoing investigation by the Florida Attorney General's
office. Pondella filed a two count Complaint against American Bingo in the
Circuit Court for Manatee County, alleging breach of contract and common law
conversion. At the same time, 800438 Ontario also filed a similar Complaint
against American Bingo for breach of contract. American Bingo answered both
Complaints by denying the essential allegations. Additionally, American Bingo
brought Counterclaims against Pondella and 800438 for fraud, negligent
misrepresentation, breach of warranties, contractual indemnity, breach of
guaranty, deceptive and unfair trade practices, and violation of Chapter 517 of
the Florida Statutes. American Bingo also brought claims against Furtney for his
role. However, Furtney, a Canadian citizen and resident of Canada and Mexico,
would not accept service of American Bingo's Complaints and American Bingo was
unable to obtain service of its Complaints on Furtney. The Complaints against
Furtney were dismissed before trial due to lack of service.
A jury trial on all claims, except American Bingo's claims against Furtney, was
conducted in January 2005. The Jury found for Pondella and 800438 Ontario on all
their claims and against American Bingo on their claims against Pondella and
800438 Ontario. Following trial, the Judge granted American Bingo's motion for a
directed verdict on Pondella's claim for conversion. The principal amount of
Pondella's judgment is $410,000 and with interest and attorney's fees totals
$802,039. The principal amount of 800438 Ontario's judgment is $450,000 and with
interest and attorney's fees totals $808,996. The Company has appealed these
judgments to the Florida Second District Court of Appeal and intends to
vigorously pursue its rights on appeal. Additionally, the Company has bonded off
both judgments, which precludes any efforts to collect on the judgments during
the appeal. The range of potential loss on these two cases is between zero and
the amount of the judgments, plus accrued interest. The company accrued a total
of $1,610,000 on its financial statements related to these matters, $1,500,000
on the 2004 financial statements and $110,000 on its 2005 financial statements.
There have been no substantial changes to the status of these two consolidated
cases. The appeal is still pending. Oral arguments were heard on October 24,
2006. The court has now "taken the case under advisement." Decisions usually
come within 3-9 months after oral argument.
Littlefield Corporation f/k/a/ American Bingo and Gaming v. Philip Furtney,
Case No. 2001 CA 4000, Circuit Court of the Twelfth Judicial Circuit in and for
Manatee County, Florida.
As set forth in the previous section, the Company also brought claims against
Philip Furtney related to his failure to disclose the existence of the
investigation of the Florida Attorney General regarding the bingo halls acquired
by American Bingo from the Furtney controlled entities. These claims were
dismissed from the original litigation based upon the Company's inability to
serve the Complaints on Furtney, a foreign resident, when he refused to
voluntarily accept service of the Complaints. This dismissal did not decide or
relate to the merits of the claims against Furtney. The Company refiled the
Complaints against Furtney in separate litigation and was finally successful in
serving Furtney when he appeared in Florida for trial of the Pondella/800438
Ontario cases in January 2005. The Company intends to vigorously pursue its
claims against Furtney. The case against Furtney is in discovery.
There have been no substantial changes to this case. The matter is still
pending. The case has now been set for trial and is on a trial calendar for the
week of December 11, 2006.
15
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2006
--------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
--------------------------------------------------------------------------------
Lenrich Associates LLC v. Littlefield Corporation, et al; Civil Action No.
00-CP-10-4742, South Carolina Court of Common Pleas, County of Charleston.
Lenrich Associates brought this action against the Company based on a commercial
lease guaranty that was signed by the Company. The tenant on the lease was
Concessions Corp., a subsidiary of the Company and had been used as the location
of the "Lucky II" facility, which was closed in early 2000. The lease expired in
February 2003. Because rental payments under the lease were in arrears, Lenrich
Associates sought to enforce the guaranty against the Company. The Company's
liability under the guaranty was capped at the lesser of two years of fixed and
additional rent or the amount of fixed and additional rent corresponding to the
time period mandated by South Carolina law. A settlement agreement had been
reached for $147,500, which has been accrued for by the Company in June 2002.
However, the plaintiff withdrew their support of the settlement agreement
shortly thereafter. Effective January 1, 2006 a settlement was reached between
the two parties in which Littlefield will pay a sum of $500,000. The Company
accrued for the remaining balance of approximately $353,000 in the 2005
financial statements. A payment was made in one lump sum payment of $250,000 on
January 3, 2006 and additional payment have been made in the amount of $10,000 a
month and will continue for the next 25 months, final payment to be made January
5, 2008.
Littlefield Corp. v. Dye, Civil Action No. 2002-cp-08-478.
The Company filed an action on March 6, 2002, in Berkeley County, South Carolina
for collection on a note signed by Danny C. Dye. The note, which was executed on
December 10, 1998, was in the amount of $80,000. The Company alleged that Dye
owed $58,481 toward the principal balance, plus $19,257 in accrued interest
through December 31, 2002. On January 14, 2003, Mr. Dye amended his answer to
assert counterclaims against the Company for fraudulent breach of contract and
violation of the South Carolina Payment of Wages Act based on allegations that
the Company failed to pay Dye amounts due under an employment contract. Mr. Dye
alleged that the Company owed him $375,000 in unpaid salary and sought treble
damages under the Payment of Wages Act for a total amount of $1,250,000 in
damages. On September 19, 2005, the parties agreed to voluntarily dismiss their
claims pursuant to South Carolina Rule of Civil Procedure 40(j). Rule 40(j)
permits parties to voluntarily dismiss claims with leave to restore the case to
the active trial roster within one year of dismissal. If the parties do not
restore the case to the trial roster within one year, all claims are dismissed
with prejudice. Neither Mr. Dye nor the Company elected to restore this case to
the trial roster within the one year period and thus the claims of both parties
are now dismissed with prejudice.
Collins Entertainment Corp. v. Coats and Coats Rental Amusement, d/b/a
Ponderosa Bingo and Shipwatch Bingo, Wayne Coats, individually, and American
Bingo & Gaming Corp., Civil Action No. 97-CP-10-4685.
This case has been settled. After a split, adverse decision by the South
Carolina Supreme Court, the Company entered into settlement negotiations while
also preserving its right to further review with the United States Supreme Court
on the issue of punitive damages. Subsequent to the filing of the Company's
petition for a writ of certiorari with the United States Supreme Court, the
matter was settled on August 25, 2006. At the time of settlement, the judgment
against the Company, including principal and interest, totaled $2,792,033. The
total settlement reached included an initial payment of $1,025,000 due upon
execution of the settlement agreement plus 46 consecutive monthly payments of
$25,000 commencing October 1, 2006, for a total settlement of $2,175,000. In the
event of a default of payment of the remaining amounts due, the original
judgment amount less amounts previously paid shall be due and payable. In
recognition of the fair value of the settlement, the Company, in its third
quarter of 2006, recorded an additional $184,000 in legal expense in addition to
previously recognized legal expense of $1,727,000 in prior years. The carrying
amount of the settlement liability outstanding as of September 30, 2006 was
$856,545 for 44 remaining payments. The Company withdrew the petition to the
United States Supreme Court and will receive a full release of all claims and a
satisfaction of the judgment upon the record when payments are completed.
Amy Ramon, Jessica Searsy, and Casey Ramon v. Clark C. Lilly, Littlefield
Corporation, Managed Care Center for Addictive and Other Disorders, Inc., South
Plains Volunteer Services, Inc., Marion Moss Enterprises, Inc., Alcoholic
Service Knocks for Women, Inc., Lubbock Area Addictive Services, Meeks
Management Corporation, and Littlefield Charitable Bingo Management Consulting,
Inc. Cause No. 2006-535,397 in the 237th District Court of Lubbock County,
Texas.
This case involves claims brought by three bingo employees of various charities
which operate from a bingo hall leased to the charities by a subsidiary of
Littlefield Corporation. Plaintiffs have sued, among others, Littlefield
Corporation, and two of its Littlefield Corporation
16
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2006
--------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
--------------------------------------------------------------------------------
subsidiaries, Meeks Management Company (sued as Meeks Management Corporation)
and Littlefield Charitable Bingo Management Consulting, Inc. The plaintiffs
claim that the bingo hall manager sexually harassed them and terminated them in
violation of their rights under nondiscrimination provisions of the Texas Labor
Code and also assert various tort claims against the defendants under state law,
including claims for negligent supervision and retention of the alleged
harasser. Plaintiffs allege that the defendants (other than the bingo hall
manager), including Littlefield and its named subsidiaries, were their employers
and the employers of the accused harasser. Discovery is ongoing. Littlefield and
its named subsidiaries intend to vigorously defend this case because the
plaintiffs and the alleged harasser were not their employees. A motion is
pending to consolidate this case with the three other similar cases pending in
Lubbock County.
Christina Caudle v. Clark C. Lilly, Littlefield Corporation, Managed Care
Center for Addictive and Other Disorders, Inc., South Plains Volunteer Services,
Inc., Marion Moss Enterprises, Inc., Alcoholic Service Knocks for Women, Inc.
and Lubbock Area Addictive Services. Cause No. 2006-535,400 in the 99th District
Court of Lubbock County, Texas.
This case involves claims brought by a bingo employee of various charities which
operate from a bingo hall leased to the charities by a subsidiary of Littlefield
Corporation. The plaintiff claims that the bingo hall manager sexually harassed
her and terminated them in violation of their rights under nondiscrimination
provisions of the Texas Labor Code and also asserts various tort claims against
the defendants under state law including claims for negligent hiring and
retention of the alleged harasser. Plaintiff alleges that the defendants (other
than the bingo hall manager), including Littlefield and/or the related
companies, were her employers and the employers of the accused harasser.
Discovery is ongoing in this case. Littlefield intends to vigorously defend this
case because the plaintiff and the alleged harasser were not its employees. A
motion is pending to consolidate this case with the three other similar cases
pending in Lubbock County.
Courtney A. Bigham v. Clark C. Lilly, Littlefield Corporation, Managed Care
Center for Addictive and Other Disorders, Inc., South Plains Volunteer Services,
Inc., Marion Moss Enterprises, Inc., Alcoholic Service Knocks for Women, Inc.
and Lubbock Area Addictive Services. Cause No. 2006-535,453 in the 99th District
Court of Lubbock County, Texas.
This case involves claims brought by a bingo employee of various charities which
operate from a bingo hall leased to the charities by a subsidiary of Littlefield
Corporation. The plaintiff claims that the bingo hall manager sexually harassed
her and terminated them in violation of their rights under nondiscrimination
provisions of the Texas Labor Code and also asserts various tort claims against
the defendants under state law including claims for negligent hiring and
retention of the alleged harasser. Plaintiff alleges that the defendants (other
than the bingo hall manager), including Littlefield and/or the related
companies, were her employers and the employers of the accused harasser.
Discovery is ongoing in this case. Littlefield intends to vigorously defend this
case because the plaintiff and the alleged harasser were not its employees. A
motion is pending to consolidate this case with the three other similar cases
pending in Lubbock County.
Regina Butler v. Clark C. Lilly, Littlefield Corporation, Managed Care
Center for Addictive and Other Disorders, Inc., South Plains Volunteer Services,
Inc., Marion Moss Enterprises, Inc., Alcoholic Service Knocks for Women, Inc.
Lubbock Area Addictive Services, and Meeks Management Corporation, and
Littlefield Charitable Bingo Management Consulting, Inc. Cause No. 2006-535,470
in the 72th District Court of Lubbock County, Texas.
This case involves claims brought by a bingo employee of various charities which
operate from a bingo hall leased to the charities by a subsidiary of Littlefield
Corporation. Plaintiff has sued, among others, Littlefield Corporation, and two
subsidiaries, Meeks Management Company (sued as Meeks Management Corporation)
and Littlefield Charitable Bingo Management Consulting, Inc. The plaintiff
claims that the bingo hall manager sexually harassed her and terminated them in
violation of their rights under nondiscrimination provisions of the Texas Labor
Code and also asserts various tort claims against the defendants under state law
including claims for negligent hiring and retention of the alleged harasser.
Plaintiff also asserts claims for retaliatory discharge, negligent supervision,
intentional infliction of emotional distress, slander & libel. Plaintiff alleges
that the defendants (other than the bingo hall manager), including Littlefield
and the named subsidiaries, were her employers and the employers of the accused
harasser. Discovery is ongoing in this case. Littlefield and its subsidiaries
intend to vigorously defend this case because the plaintiff and the alleged
harasser were not their employees. A motion is pending to consolidate this case
with the three other similar cases pending in Lubbock County.
17
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2006
--------------------------------------------------------------------------------
NOTE 13 - SEGMENTS.
--------------------------------------------------------------------------------
The Company's Chief Operating Decision Maker ("CODM"), the President and CEO,
evaluates performance and allocates resources based on a measure of segment
profit or loss from operations which is included in the Company's gross margin.
The Company has identified two operating segments based on the different nature
of the services and legislative monitoring and, in general, the type of
customers for those services. The entertainment segment encompasses bingo center
services provided to charitable organizations in South Carolina, Texas and
Alabama. The Hospitality segment is the tent rental business (acquired November
2000) and the party rental and catering businesses in Austin, Texas, which were
acquired in July and August of 2001.
A summary of the segment financial information reported to the CODM is as
follows:
September 30, 2006
------------------
Entertainment Hospitality Adjustment Consolidated
----------------- -------------- -------------- ---------------
Revenue $5,991,000 $3,323,000 $78,000 $9,392,000
Depreciation and Amortization 302,000 181,000 81,000 564,000
Segment profit (loss) 2,601,000 (268,000) (1,512,000) 821,000
Segment Assets 24,600,000 1,342,000 (10,285,000) 15,657,000
September 30, 2005 (Restated)
-----------------------------
Entertainment Hospitality Adjustment Consolidated
----------------- -------------- -------------- ---------------
Revenue $5,117,000 $2,869,000 $75,000 $8,061,000
Depreciation and Amortization 366,000 242,000 70,000 678,000
Segment profit (loss) 1,823,000 (318,000) 52,000 1,557,000
Segment Assets 23,965,000 1,431,000 (9,473,000) 15,923,000
The adjustments represent other income and expense, depreciation and
amortization related to corporate assets, corporate administration, taxes,
corporate assets and corporate capital expenditures to reconcile segment
balances to consolidated balances.
--------------------------------------------------------------------------------
NOTE 14 -- SUBSEQUENT EVENTS.
--------------------------------------------------------------------------------
None
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Our Company was formed in 1994 as a Delaware corporation to consummate the
acquisition of charitable bingo centers and video gaming operations, and
completed the initial public offering in December of 1994. We operate primarily
through wholly owned subsidiaries in Texas, Alabama and South Carolina.
The statements in this Quarterly Report on Form 10-QSB relating to matters that
are not historical facts, including, but not limited to statements found in this
"Management Discussion and Analysis of Financial Condition and Results of
Operations", are forward-looking statements that involve a number of risks and
uncertainties. Factors that could cause actual future results to differ
materially from those expressed in such forward-looking statements include, but
are not limited to the impact of government regulation and taxation, customer
attendance, spending, competition, general economic conditions, and other risks
and uncertainties as discussed in this Quarterly Report and the 2005 Annual
report on Form 10-KSB/A.
In August 2006, we restated our financial statements for the year ended December
31, 2005, and quarter ended March 31, 2006, to correct errors in reporting share
based compensation. The amended Form 10-QSB/A for the quarter ended March 31,
2006 was filed on August 22, 2006. The amended Form 10-KSB/A for the year ended
December 31, 2005 was filed on August 31, 2006. This 10-QSB for the third
quarter of 2006 contains all financial adjustments and is based on the restated
financial statements for the first quarter of 2006. References in this 10-QSB to
our operations, assets, liabilities and cash flows for the third quarter of 2005
and the full year 2005 include the previously reported revisions to financial
information for the period ended December 31, 2005.
We intend to grow our business through acquisitions and the selective start up
of charitable bingo halls in markets in which we currently operate and other
attractive markets.
Results of Operations
---------------------
Revenues
--------
The following table sets forth the Company's revenues by segment for the nine
months ended September 30, 2006 and 2005:
2005
2006 (Restated) Change % Change
---- ---------- ------ --------
Total Revenues $ 9,392,000 $ 8,061,000 $ 1,331,000 17%
Entertainment 5,991,000 5,117,000 874,000 17%
Texas 3,707,000 2,873,000 834,000 29%
South Carolina 1,183,000 1,097,000 86,000 8%
Alabama 1,101,000 1,147,000 (46,000) (4%)
Hospitality $ 3,323,000 $ 2,869,000 $ 454,000 16%
Revenues for the Company increased 17% over the comparable nine-month period in
2005 with both the Entertainment and the Hospitality segments contributing to
the increase in revenue. Entertainment accounted for 64% of total revenues
compared with 63% of total revenues in 2005. By state, Entertainment revenues
for Texas, South Carolina and Alabama were 62%, 20%, and 18% of total
Entertainment revenue respectively compared to 56%, 22% and 22% in the first
nine months of 2005. Hospitality accounted for 35% of total revenues for the
nine months, compared to 36% of total revenues in 2005. The revenue increase in
Texas mainly reflects the October 2005 purchase of an additional bingo hall.
Costs and Expenses
------------------
Cost of services increased 11% over the comparable nine-month prior year period.
This, in conjunction with the higher revenue growth, resulted in a gross profit
margin percentage increase to 25.5% from 21.8% in 2005. The table below
summarizes the gross profit margin by segment for the nine month periods ended
September 30, 2006 and 2005:
2005
2006 (Restated) Change % Change
---- ---------- ------ --------
Total Gross Profit $ 2,399,000 $ 1,755,000 $ 644,000 37%
Entertainment 2,601,000 1,823,000 778,000 43%
Hospitality ($268,000) ($318,000) $ 50,000 NM
19
The increases in gross profit margin can be attributed to higher revenues and
management's concentration on cost savings throughout the organization. The
Entertainment gross profit margin as a percent to sales increased to 43.4%
versus 35.6% respectively for the nine month year-to-date periods of 2006 and
2005. The Hospitality gross loss was reduced $50,000 from the comparable period
last year.
Direct salaries and other compensation were up 10% over the prior year
representing staff additions corresponding to the higher revenues. Rent and
utilities were up approximately $216,000 or 13% in the first nine months of 2006
compared to the same period in 2005. This increase is largely related to a
greater number of facilities in 2006 than were present in the same period of
2005. The remainder of the rent increase is a result of the annual increases in
rent and higher utility costs. Other direct operating costs in 2006 were up 19%
over the prior year, mainly due to higher costs associated with the increased
revenue, higher property taxes, and higher repairs and maintenance at our
facilities than occurred in the first nine months of 2005. License expense was
up 118%, a result of the timing of the payment on licenses and a change from
accruing license expense into a prepaid asset account and simply expensing this
cost when paid. The allowance for doubtful accounts was decreased by $34,000.
Depreciation and amortization expense totaled approximately $564,000 ($483,000
Direct plus $81,000 G&A) in the first nine months of 2006, a decrease of about
$114,000 from the first nine months of 2005. The decrease is largely a result of
the disposition of assets in late 2005.
General and administrative expenses, excluding related depreciation expense,
stock based compensation expense and a $184,000 charge associated with the
settlement of a nine year legal dispute totaled approximately $1,115,000 in the
first nine months of 2006, compared to approximately $1,597,000 in 2005, a
decrease of about $482,000, mainly related to lower legal expenses from 2005.
Compensation expense related to options is discussed in Note 6, Share Based
Payments and the legal settlement is discussed in Note 12, Commitments and
Contingencies.
The gain on the disposition of fixed assets in 2005 resulted mainly from the
gain on the sale of a property in South Carolina in September 2005.
Other income and expense was an expense of approximately $50,000 for the first
nine months of 2006, compared to other income of approximately $576,000 for the
first nine months of 2005. The other income in 2005 was mainly from a gain on
settlement on a note receivable. The remaining expenses were net interest
expenses. Interest expense was down approximately $10,000 compared to the first
nine months in 2005. This was a result of lower debt in the first nine months of
2006.
Net Income
----------
We realized net income of approximately $821,000 for the first nine months of
2006; $0.077 per basic and $0.076 per fully diluted share. Net income for the
first nine months of 2005 was $1,557,000; $0.151 per basic and $0.150 per fully
diluted share. The weighted average number of basic Common Stock shares
outstanding totaled 10,696,316 in the first nine months of 2006 compared to
10,324,811 in the first nine months of 2005. Net income in the nine month period
of 2005 included $1,742,000 from a gain on fixed asset sales and gain on the
settlement of a note receivable.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents at September 30, 2006, totaled approximately
$1,803,000 and represented 12% of total assets of approximately $15,657,000.
Current assets totaled approximately $3,822,000 at September 30, 2006. Current
liabilities totaled $3,245,000, leaving the Company with working capital of
approximately $577,000 and a current ratio of 1.18 to 1. Current liabilities
include legal reserves for settlements totaling $1,630,000 of which $1,610,000
is related to the Pondella Hall case discussed in Note 12 to the unaudited
financial statements; the reserve for settlements is not expected to be paid, if
at all, for one to two years.
Cash provided by operating activities for the nine months ended September 30,
2006, totaled approximately $1,306,000 compared to cash provided of $910,000
during the same period of 2005, an increase of approximately $396,000. Cash
flows provided by operating activities in the first nine months of 2006 were
increased by net income of approximately $821,000, non-cash depreciation expense
of approximately $564,000 and stock based compensation of approximately $96,000
and offset by net changes in asset and liability accounts of approximately
$175,000.
Net cash provided by investing activities totaled approximately $898,000 for the
nine months ended September 30, 2006, compared to net cash provided of
approximately $1,038,000 in the nine months ended September 30, 2005. In the
first nine months, cash was used in the amount of approximately $286,000 for the
purchase of capital assets and offset by the collection of a note receivable in
the amount of approximately $1,184,000. In the same nine month period of 2005
cash was used for the purchase of capital assets of about $225,000.
20
Cash used by financing activities in the first nine months of 2006 totaled
approximately $1,019,000, compared to net cash used in financing activities in
the first nine months of 2005 of approximately $1,033,000. In the nine months
ended September 30, 2006, approximately $1,223,000 of cash was used to pay down
the normal principal payments on both capital leases and notes payable and was
partially offset by $46,000 from the collection of a subscription receivable and
approximately $158,000 from the exercise of stock options by employees.
At September 30, 2006, we had approximately $15,657,000 in total assets with
total liabilities of approximately $6,358,000 and approximately $9,299,000 of
shareholders equity. Total assets include approximately $1,803,000 in cash,
$1,101,000 of other current assets and net account receivables and $918,000 of
restricted cash, $6,089,000 of net property and equipment, $5,536,000 of
intangible assets, and $210,000 of other assets. Total liabilities primarily
consist of accounts payable of approximately $178,000, and notes payable
obligations of approximately $3,491,000 and accrued and related-party
liabilities and reserves for legal settlements of $2,689,000.
Item 3. Controls and Procedures
The Company's management evaluated, with the participation of the Chief
Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Disclosure controls and procedures are designed with the
objective of ensuring that (i) information required to be disclosed in the
Company's reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and (ii) the information is accumulated and communicated
to management, including the principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosures.
After the close of the second fiscal quarter 2006, the Company's management and
board of directors determined that it was necessary to restate the financial
results for the first quarter of 2006 and for the year 2005 because of errors in
accounting for share based compensation in the first quarter 2006, which
occurred in connection with the Company's accounting for stock option expense
under Statement of Financial Accounting Standards No. 123R, "Share Based
Compensation," which the Company adopted in the first quarter of 2006, and to
correct errors in our reported 2005 10K for stock option expenses related to a
modification to certain stock option agreements and to record a stock
subscription receivable in 2005. Because of the required amendment to our
financial statements made after the close of the second fiscal quarter 2006, our
Chief Executive Officer and Chief Financial Officer concluded that, as of
December 31, 2005 and June 30, 2006, our disclosure controls and procedures were
not effective due to the fact that we had failed to correctly account for share
based compensation expense.
The restated financial statements for the first quarter are contained in
Amendment No. 1 to the Company's report on Form 10-QSB/A for the period ended
March 31, 2006, which has been filed with the SEC, August 22, 2006. The restated
financial statements for the year 2005 are contained in Amendment No. 1 to the
Company's report on Form 10-KSB/A for the period ended December 31, 2005, which
has been filed with the SEC, August 31, 2006. Net Income in Q1 2006 was
increased by approximately $341,000 as a result of a correction in the
accounting for stock options. The Company had originally booked expenses of
approximately $365,000 related to the stock options and upon discovery of the
error, management and the Board of Directors made the decision to restate the
10-QSB for the first quarter of 2006. Net income in 2005 was reduced by
approximately $67,000 as a result of a correction in accounting for stock
options.
We have taken steps to improve our internal control over financial reporting
during the second and third fiscal quarters of 2006, including hiring of an
outside consultant to advise management on the proper accounting for stock
options, strengthening the formal process of documenting changes to options
issued, and requiring two officers to verify the documentation of the changes or
exercising of stock options. Other than the changes described in this paragraph,
there have been no other changes in our internal control over financial
reporting during the fiscal quarter ended September 30, 2006, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Our management, including the Chief Executive Officer and Chief Financial
Officer, believe that, with the changes described in the preceding paragraph,
our disclosure controls and procedures were effective, as of the end of the
period covered by this quarterly report, to ensure that information required to
be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the SEC rules and forms.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of material pending legal proceedings, see Note 12 to the
unaudited Consolidated Financial Statements included in Part I hereof, which
Note 12 is incorporated herein by reference.
Item 6. Exhibits
31.1 Rule 31a-14(a) / 15d-14(a) Certifications
32.1 Section 1350 Certifications
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Littlefield Corporation
November 14, 2006
By:
/s/ JEFFREY L MINCH
--------------------
Jeffrey L. Minch
President and Chief Executive Officer
/s/ RICHARD S. CHILINSKI
------------------------
Richard S. Chilinski
Chief Financial Officer
22