UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2008 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: 0-24805
LITTLEFIELD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-2723809
------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2501 N Lamar Blvd
Austin, Texas 78705
---------------------------------------- ----------
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (512) 476-5141
-----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller Reporting Company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
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 November 3, 2008
Common Stock - $0.001 par value 16,754,901
Littlefield Corporation
FORM 10-Q
For the quarter ended September 30, 2008
INDEX
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
a) Consolidated Balance Sheets as of September 30, 2008 (unaudited)
and December 31, 2007 .............................................. 2
b) Consolidated Statements of Operations (unaudited) for the Three
Months Ended September 30, 2008 and 2007............................ 3
c) Consolidated Statements of Operations (unaudited) for the Nine
Months Ended September 30, 2008 and 2007............................ 5
c) Consolidated Statements of Cash Flows (unaudited) for the Nine
Months Ended September 30, 2008 and 2007............................ 7
d) Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial Condition
And Results of Operations........................................... 19
Item 3 Quantitative and Qualitative Disclosures about Market Risk 23
Item 4 Controls and Procedures 23
Part II. OTHER INFORMATION
Item 1 Legal Proceedings .................................................. 24
Item 6 Exhibits ........................................................... 24
Signatures and Certifications ...................................... 24
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Littlefield Corporation
CONSOLIDATED BALANCE SHEETS
ASSETS
------
September 30, December 31,
2008 2007
---------------- ----------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 5,233,848 $ 1,965,624
Accounts receivable, net of allowance for
doubtful accounts of $68,373 and $148,734 427,525 519,845
Other current assets 299,098 554,297
---------------- ----------------
Total Current Assets 5,960,471 3,039,766
---------------- ----------------
Property and Equipment - at cost, net of
accumulated depreciation and amortization 8,098,026 6,926,559
Other Assets:
Goodwill 6,501,361 4,905,111
Intangible assets, net 912,324 699,196
Other non-current assets 213,424 217,615
---------------- ----------------
Total Other Assets 7,627,109 5,821,922
---------------- ----------------
TOTAL ASSETS $ 21,685,606 $ 15,788,247
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Long term debt, current portion $ 725,505 $ 195,517
Long term debt, legal settlements, current
portion 253,762 231,272
Trade accounts payable 221,395 232,339
Accrued expenses 753,329 1,063,053
---------------- ----------------
Total Current Liabilities 1,953,991 1,722,181
---------------- ----------------
Long-term Liabilities:
Long term debt, net of current portion 3,260,088 3,442,932
Long term debt, legal settlements, net of
current portion 189,896 362,964
Other liabilities, related party 66,000 48,000
---------------- ----------------
Total Long-term Liabilities 3,515,984 3,853,896
---------------- ----------------
Total Liabilities 5,469,975 5,576,077
---------------- ----------------
Stockholders' Equity:
Common stock, $0.001 par value, (authorized
40,000,000 shares, issued 17,534,707 shares,
outstanding 16,754,901 shares) 17,535 12,344
Additional paid-in-capital 30,668,943 23,710,845
Treasury stock - 779,806 shares, at cost (993,891) (1,146,638)
Accumulated deficit (13,476,956) (12,364,381)
---------------- ----------------
Total Stockholders' Equity 16,215,631 10,212,170
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,685,606 $ 15,788,247
================ ================
See notes to unaudited consolidated financial statements.
2
Littlefield Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30,
2008 2007
---------------- ----------------
REVENUES:
Entertainment $ 2,078,799 $ 2,130,630
Hospitality 430,592 868,102
Other 24,422 14,534
---------------- ----------------
TOTAL REVENUES 2,533,813 3,013,266
---------------- ----------------
DIRECT COSTS AND EXPENSES:
Direct salaries and other compensation 511,809 703,030
Rent and utilities 823,484 667,788
Other direct operating costs 961,189 823,092
Depreciation and amortization 235,939 168,058
License expense 14,437 34,660
---------------- ----------------
TOTAL COSTS AND EXPENSES 2,546,858 2,396,628
---------------- ----------------
GROSS MARGIN (LOSS) (13,045) 616,638
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and other compensation 376,830 301,799
Legal and accounting fees 97,743 182,957
Depreciation and amortization 31,217 29,079
Share-based compensation expense 12,964 14,311
Other general and administrative 156,363 167,927
---------------- ----------------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES 675,117 696,073
GAIN ON DISPOSAL OF ASSETS --- 11,002
OPERATING INCOME (LOSS) (688,162) (68,433)
OTHER INCOME AND EXPENSES:
Interest and investment income 42,290 24,324
Interest expense ($0 and $1,688 respectively
to related parties) (90,299) (93,105)
---------------- ----------------
TOTAL OTHER INCOME AND EXPENSES (48,009) (68,781)
---------------- ----------------
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES (736,171) (137,214)
PROVISION FOR INCOME TAXES 22,911 4,132
---------------- ----------------
NET INCOME (LOSS) (759,082) (141,346)
OTHER COMPREHENSIVE INCOME --- ---
---------------- ----------------
NET COMPREHENSIVE INCOME (LOSS) ($759,082) ($141,346)
================ ================
See notes to unaudited consolidated financial statements.
3
Littlefield Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30,
2008 2007
---------------- ----------------
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share ($ 0.045) ($ 0.012)
================ ================
Diluted earnings (loss) per share ($ 0.045) ($ 0.012)
================ ================
Weighted average shares outstanding - basic 16,754,901 11,325,469
================ ================
Weighted average shares outstanding - diluted 16,754,901 11,325,469
================ ================
See notes to unaudited consolidated financial statements.
4
Littlefield Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended September 30,
2008 2007
---------------- ----------------
REVENUES:
Entertainment $ 6,392,907 $ 6,646,077
Hospitality 2,073,476 3,486,253
Other 71,692 38,226
---------------- ----------------
TOTAL REVENUES 8,538,075 10,170,556
---------------- ----------------
DIRECT COSTS AND EXPENSES:
Direct salaries and other compensation 1,866,017 2,277,071
Rent and utilities 2,137,556 1,927,928
Other direct operating costs 2,932,098 2,546,373
Depreciation and amortization 667,213 482,593
License expense 74,650 95,336
---------------- ----------------
TOTAL COSTS AND EXPENSES 7,677,534 7,329,301
---------------- ----------------
GROSS MARGIN 860,541 2,841,255
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and other compensation 1,006,167 855,346
Legal and accounting fees 504,651 404,830
Depreciation and amortization 95,314 86,208
Share-based compensation expense 39,170 42,933
Other general and administrative 555,133 528,475
---------------- ----------------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES 2,200,435 1,917,792
GAIN ON DISPOSAL OF FIXED ASSETS 474,387 23,100
OPERATING INCOME (LOSS) (865,507) 946,563
OTHER INCOME AND EXPENSES:
Interest and investment income 88,700 56,357
Interest expense ($0 and $11,813 respectively
to related parties) (268,513) (345,275)
Other expense --- (4,398)
---------------- ----------------
TOTAL OTHER INCOME AND EXPENSES (179,813) (293,316)
---------------- ----------------
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES (1,045,320) 653,247
PROVISION FOR INCOME TAXES 67,255 54,335
---------------- ----------------
NET INCOME (LOSS) (1,112,575) 598,912
OTHER COMPREHENSIVE INCOME --- 4,713
---------------- ----------------
NET COMPREHENSIVE INCOME (LOSS) ($1,112,575) $ 603,625
================ ================
See notes to unaudited consolidated financial statements.
5
Littlefield Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended September 30,
2008 2007
---------------- ----------------
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share ($ 0.074) $ 0.054
================ ===============
Diluted earnings (loss) per share ($ 0.074) $ 0.053
================ ===============
Weighted average shares outstanding - basic 15,083,201 11,187,178
================ ===============
Weighted average shares outstanding - diluted 15,083,201 11,345,558
================ ===============
See notes to unaudited consolidated financial statements.
6
Littlefield Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
September 30,
------------------------------------
2008 2007
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,112,575) $ 598,912
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Depreciation and amortization 762,527 568,801
Gain on sale of fixed assets (474,387) (23,100)
Bad debt allowance (57,936) ---
Stock-based compensation expense 39,170 42,933
Increase (decrease) in cash flows as a result
of changes in asset and liability account
balances:
Accounts receivable 120,024 413,449
Other assets 252,292 362,311
Trade accounts payable (10,944) 20,031
Accrued expenses and other current
liabilities (249,173) (203,737)
---------------- ----------------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (731,002) 1,779,600
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,991,615) (1,336,673)
Purchase of goodwill and intangibles (1,374,704) ---
Proceeds from the sale of property and
equipment 250,000 29,252
Proceeds from the sale of investments --- 3,741
Proceeds from the collection of notes
receivable 384,662 1,603
---------------- ----------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (2,731,657) (1,302,077)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable, legal settlements
and capital leases (303,433) (1,223,066)
Proceeds from sale of common stock 7,000,000 476,560
Proceeds from note payable --- 401,958
Proceeds from options exercised 34,316 15,250
---------------- ----------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES 6,730,883 (329,298)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,268,224 148,225
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,965,624 2,549,566
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,233,848 $ 2,697,791
================ ================
See notes to unaudited consolidated financial statements.
7
Littlefield Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended
September 30,
------------------------------------
2008 2007
---------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments:
Interest $ 268,513 $ 331,460
=============== ===============
Income taxes $ 92,551 $ 65,087
=============== ===============
Non-cash transactions:
Issuance of treasury stock under deferred
compensation plan $ 25,817 $ 15,250
=============== ===============
Issuance of treasury stock under employee
stock purchase plan $ 16,734 $ 31,256
=============== ===============
Purchase of acquisition assets in exchange for
note payable $ 500,000 $ ---
=============== ===============
See notes to unaudited consolidated financial statements.
8
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2008
--------------------------------------------------------------------------------
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 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 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, 2008, are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2008. 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-Q 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 - PROPERTY AND EQUIPMENT.
--------------------------------------------------------------------------------
Property and equipment at September 30, 2008 and December 31, 2007, consists of
the following:
September 30, December 31,
2008 2007
Land $ 740,467 $ 740,467
Buildings 3,395,498 3,404,348
Leasehold improvements 5,763,284 4,756,267
Rental inventory and bingo equipment 2,093,596 1,989,605
Equipment, furniture and fixtures 3,171,476 2,604,406
Automobiles 385,144 468,626
---------------- ----------------
15,549,465 13,963,719
Less: Accumulated depreciation and
amortization (7,451,439) (7,037,160)
---------------- ----------------
Property and equipment, net $ 8,098,026 $ 6,926,559
================ ================
Total depreciation expense, for owned and leased assets, charged to operations
for the nine months ended September 30, 2008 and 2007, was approximately
$739,000 and $546,700, respectively.
9
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2008
--------------------------------------------------------------------------------
NOTE 3 - GOODWILL & OTHER INTANGIBLE ASSETS.
--------------------------------------------------------------------------------
Goodwill at September 30, 2008 is as follows:
Gross
Carrying Accumulated
Amount Amortization Total
---------------- ---------------- ----------------
Goodwill at December 31, 2007 $ 6,704,375 $ (1,799,264) $ 4,905,111
Goodwill acquired during period 1,638,618 --- 1,638,618
Goodwill disposed of during period (42,368) --- (42,368)
---------------- ---------------- ----------------
Goodwill at September 30, 2008 $ 8,300,625 $ (1,799,264) $ 6,501,361
================ ================ ================
Entertainment Hospitality Total
---------------- ---------------- ----------------
Balance at December 31, 2007 $ 4,533,727 $ 371,384 $ 4,905,111
Goodwill acquired during the year 1,638,618 --- 1,638,618
Goodwill disposed of during period --- (42,368) (42,368)
---------------- ---------------- ----------------
Balance at September 30, 2008 $ 6,172,345 $ 329,016 $ 6,501,361
================ ================ ================
Intangible assets at September 30, 2008 consists of the following:
Gross
Carrying Accumulated
Amount Amortization Total
--------------- ---------------- ---------------
Intangible Assets with Indefinite
Lives:
Bingo licenses at December 31, 2007 $ 694,719 (51,974) $ 642,745
Licenses acquired during the period 186,620 186,620
--------------- ---------------- ---------------
Bingo licenses at September 30, 2008$ 881,339 (51,974) $ 829,365
Intangible Assets with Finite Lives:
Covenants not to compete at December
31, 2007 $ 297,500 (241,039) $ 56,461
Change in covenants not to compete 50,000 (23,502) 26,498
--------------- ---------------- ---------------
Covenants not to compete at
September 30, 2008 $ 347,500 (264,541) 82,959
Intangible Assets, Net of
Accumulated Amortization $ 912,324
===============
Amortization expense charged to operations for the nine months ended September
30, 2008 and 2007, was approximately $23,500 and $22,100, respectively.
--------------------------------------------------------------------------------
NOTE 4 - SHAREHOLDERS' EQUITY.
--------------------------------------------------------------------------------
At September 30, 2008 the Company holds 779,806 treasury shares at an average
purchase cost of $1.27. In March 2008, the Company sold, at a ten percent (10%)
premium, 5,190,568 shares of its common stock to an institutional investor for
$7,000,000.
10
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2008
--------------------------------------------------------------------------------
NOTE 5 - 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 $39,200 and $42,900 in compensation expense
in the nine month periods ended September 30, 2008 and 2007, respectively,
related to options issued under its stock-based incentive compensation plans.
This includes expense related to 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. There were no options issued in the nine month periods ended September
30, 2008 and 2007.
--------------------------------------------------------------------------------
NOTE 6 - EARNINGS PER SHARE.
--------------------------------------------------------------------------------
A reconciliation of basic to diluted earnings per share is as follows:
Nine months ended September 30, 2008 2008 2007 2007
------------------------------ Basic Diluted Basic Diluted
---------------- ---------------- --------------- ---------------
Numerator:
----------
Net income (loss) $ (1,112,575) $ (1,112,575) $ 598,912 $ 598,912
================ ================ =============== ===============
Denominator:
------------
Weighted average shares
outstanding 15,083,201 15,083,201 11,187,178 11,187,178
Effect of dilutive
securities:
Stock options and warrants --- --- --- 158,380
---------------- ---------------- --------------- ---------------
Weighted average shares
outstanding 15,083,201 15,083,201 11,187,178 11,345,558
================ ================ =============== ===============
Earnings (loss) per share $ (0.074) $ (0.074) $ 0.054 $ 0.053
================ ================ =============== ===============
Stock options to acquire 217,136 and 168,683 shares for the nine months ended
September 30, 2008 and 2007, respectively were excluded in the computations of
diluted EPS because the effect of including the stock options would have been
anti-dilutive.
11
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2008
--------------------------------------------------------------------------------
NOTE 7 - ACCOUNTING FOR STOCK BASED COMPENSATION
--------------------------------------------------------------------------------
The Company applies FASB Statement of Financial Accounting Standards No. 123R
(Revised 2004), Share Based Payment, using the modified prospective method of
implementation, whereby the prospective method records the compensation expense
from the implementation date forward, however leaves prior periods recorded in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees
("APB 25") in accounting for its stock options. At September 30, 2008, the
Company has implemented five shareholder approved stock option plans. These
plans are intended to comply with Section 422 of the Internal Revenue Code of
1986, as amended. The plans collectively provide for the total issuance of
3,600,000 common shares, as adjusted for the 20% stock dividend in 2006, over
ten years from the date of each plan's approval. In addition, the plans allow
for additional increases of 15% of the then outstanding shares each year through
2008.
Transactions under the stock option plans are summarized below. At September 30,
2008, a total of 445,410 options were outstanding under these plans.
Employee Stock Plans
-----------------------------------
Weighted
Average
Options Exercise Price
-----------------------------------
Outstanding at 12/31/07 617,910 $ 0.74
Granted --- ---
Exercised (67,500) 0.51
Forfeited (105,000) 1.78
--------------- --------------
Outstanding at 09/30/08 445,410 $ 0.53
=============== ==============
No options were issued during 2008.
Aggregate intrinsic value represents the value of the Company's closing stock
price on the last trading day of the period in excess of the exercise price
multiplied by the number of options outstanding or exercisable. The total
intrinsic value of options exercised during 2008 was $43,835. Total unrecognized
stock-based compensation expense related to non-vested stock options was
approximately $18,100 as of September 30, 2008, related to approximately 73,500
shares with a per share weighted average fair value of $0.48. We anticipate this
expense to be recognized over a weighted average period of approximately 0.25
years.
The following table summarizes information about options outstanding at
September 30, 2008 under the stock option plans adjusted for the 2006 stock
dividend:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------
Weighted Avg.
Remaining
Range of Number Contractual Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------
2008: $1.26 - $1.87 16,500 7.6 years $1.32 16,500 $1.32
$0.00 - $1.25 428,910 6.0 years $0.50 355,410 $0.50
--------------- ---------------
445,410 6.1 years $0.53 371,910 $0.54
Aggregate
intrinsic value $172,716 $144,051
The weighted average remaining contractual life of options exercisable as of
September 30, 2008 was 6.0 years.
12
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2008
--------------------------------------------------------------------------------
NOTE 8 - 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 nine months ended September 30,
2008 and 2007 are as follows:
2008 2007
--------------- ---------------
Net income (loss) $ (1,112,575) $ 598,912
Other comprehensive income
Reclassification adjustment
for loss included in net income
--- 4,713
--------------- ---------------
--- 4,713
--------------- ---------------
Total comprehensive income (loss) $ (1,112,575) $ 603,625
=============== ===============
--------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES.
--------------------------------------------------------------------------------
The Company recorded approximately $67,300 and $54,300 of state income tax
expense, respectively, for the nine months ended September 30, 2008 and 2007.
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 $6,700,000 at December 31, 2007, and begin expiring in the
year 2015.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN
48) on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109, Accounting for Income Taxes, by prescribing a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. If a tax position is more likely than not to be sustained upon
examination, then an enterprise would be required to recognize in its financial
statements the largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement. As a result of our implementation of
FIN 48 at the time of adoption and as of December 31, 2007, the Company did not
recognize a liability for uncertain tax positions. We do not expect our
unrecognized tax benefits to change significantly over the next twelve months.
The tax years 2003 through 2007 remain open to examination by the taxing
jurisdictions in which we file income tax returns.
13
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2008
--------------------------------------------------------------------------------
NOTE 10 - RELATED PARTY TRANSACTIONS.
--------------------------------------------------------------------------------
In 2002, the President was awarded a $300,000 bonus. In August 2007, the Board
of Directors approved and payment was made to the President and CEO for the
accrued bonus and accrued interest thereon. The Company accrued $11,813 in
interest in 2007 on this liability.
During 2006, the Company renewed the employment agreement with its President and
CEO; in accordance with this agreement, the Company accrued $18,000 and $18,000
of deferred compensation in the nine months ended September 30, 2008 and 2007,
respectively.
--------------------------------------------------------------------------------
NOTE 11 - 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.
The Company is obligated to make payments over approximately the next three
years in settlement of litigation that was concluded in prior periods. At
September 30, 2008, the carrying value of these obligations was $443,658. The
Company is current in all its settlement payment obligations.
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.
In this case, Littlefield initially sought recovery from Philip Furtney
["Furtney"] for fraud, negligent misrepresentations, and breach of guaranty.
This litigation arises from the 1995 acquisition of three Florida bingo centers
by a predecessor, American Bingo & Gaming Corporation, from two corporations
controlled by Furtney - Pondella Hall for Hire, Inc., and 800438 Ontario.
Several months after the acquisition of the three centers, the Florida Attorney
General obtained an indictment for alleged racketeering against two American
Bingo subsidiaries that operated two of the centers and brought a civil
proceeding for racketeering against the same two subsidiaries and American Bingo
based upon the same allegations. The indictment and civil litigation were the
result of an investigation that had been ongoing for over one year prior to the
acquisition of the centers. Furtney was aware of the investigation and its
serious nature, but did not disclose the investigation to American Bingo. In
fact, the agreements related to the sales specifically and falsely stated that
there were not any ongoing governmental investigations. American Bingo settled
the litigation brought by the Florida Attorney General and sold its Florida
centers as a condition of the settlement. The resolution of this long pending
matter was substantially delayed when Furtney, a citizen of Canada and part time
resident of Mexico, avoided service of the Complaint and would not permit his
United States attorney to accept service of the Complaint. Littlefield was
successful in finally serving Furtney when he was in the United States in 2005,
to attend related litigation.
Furtney passed away in September 2007, several months before the scheduled trial
date. In the event a defendant dies following the commencement of litigation,
the Florida Rules of Civil Procedure provides that a plaintiff may substitute
the defendant's estate as the defendant and continue to pursue the claim to
judgment. Furtney's estate has now been substituted as the defendant and
Littlefield intends to vigorously pursue the claim for all damages related to
the purchase of the Florida centers from Furtney's estate, including all sums
paid in the acquisition, all costs incurred by American Bingo in the litigation
with the state of Florida, and judgments Littlefield was required to pay to
Pondella and 800438 Ontario as a result of related litigation. Littlefield is
now awaiting a trial date which has been delayed by the Estate's decision to
change trial counsel. The Estate's new counsel has now entered an appearance and
we expect that the Court will schedule a Case Management Conference in the near
future, at which time a new trial date will be set.
14
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2008
--------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES.
--------------------------------------------------------------------------------
In South Carolina Department of Revenue v. Littlefield Corporation, Midlands
Promotions, Inc., Low Country Promotions, Inc., and Gamecock Promotions, Inc.,
05-ALJ-17-0413-CC,
The South Carolina Department of Revenue issued an administrative bingo
violation against the above referenced parties alleging that the Company has an
unlawful number of bingo promoter licenses. The Department of Revenue seeks to
revoke all bingo promoter licenses held by the Company's South Carolina
subsidiaries and seeks a $5,000 penalty. The Department of Revenue is seeking to
pierce the corporate veil of the Company to thereby attribute the promoter
licenses to the Company. The Department of Revenue's theory is that the three
South Carolina subsidiaries are sham corporations and that, as a matter of law,
the Company should be deemed the holder of the 12 promoter licenses at issue.
South Carolina law provides that a promoter may only have 5 licenses. The
Company moved for summary judgment and it was denied. However, certain
originally named charities were dismissed from the lawsuit. The case was stayed
until co-counsel returned from active military duty, which occurred at the end
of June 2008.
Additionally, in Littlefield Corporation, Gamecock Promotions Inc., Palmetto
Upstate Promotions Inc., and Midlands Promotions Inc. v. South Carolina
Department of Revenue, 07-ALJ-17-623-CC, the Company and its subsidiaries
protested the South Carolina Department of Revenue's initial denial of six
additional promoters licenses that the Department of Revenue denied on the same
theories upon which they seek to revoke the other subsidiaries' promoter
licenses, as described above. Although both parties' Motions for Summary
Judgment were denied in this proceeding, in June 2008, the administrative law
judge in this protest proceeding ordered that the six licenses be issued pending
trial and resolution of the proceedings between the Department of Revenue and
the Company.
The Company and its subsidiaries will seek to consolidate both of the above
proceedings for discovery and trial, because both proceedings involve the same
legal and factual issues. The Company and its subsidiaries are vigorously
defending the revocation proceeding and the right to hold the additional
licenses for which the subsidiaries applied and assert that Littlefield
Corporation is not the holder of these promoter licenses, but rather that its
lawfully formed subsidiaries are separate corporations that each hold a lawful
number of the promoter licenses.
Cause No. 8285-D; West Texas Bingo, Inc v. Rodger Hiatt, in the 350th Judicial
District Court of Taylor County, Texas.
In this case, the Company is plaintiff. The Company filed suit against the
Defendant alleging the Defendant interfered with the Company's bingo operations
and/or business operations at Super Bingo, which is located in Abilene, Texas.
The Defendant asserted counterclaims against the Company alleging that the
Company's claims were harassing and constituted intentional infliction of
emotional distress. Defendant's claims were dismissed by the Court via summary
judgment in June 2008, and there are currently no pending claims being asserted
by Defendant against West Texas Bingo, Inc. or Littlefield Corporation. The
lawsuit is ongoing and the parties are currently engaged in discovery. The
matter has not been set for trial, nor have the parties scheduled a pre-trial
mediation.
Cause No.24, 182-B; West Texas Bingo, Inc. v. Janie Wall, in the 104th Judicial
District Court of Taylor County, Texas.
In this case, the Company is plaintiff. The Company filed suit against the
Defendant alleging the Defendant interfered with the Company's bingo operations
and/or business operations at Super Bingo, which is located in Abilene, Texas.
The Defendant asserted counterclaims against the Company alleging that the
Company's claims were harassing and constituted intentional infliction of
emotional distress. Defendant's claims were dismissed by the Court via summary
judgment in June 2008, and there are currently no pending claims being asserted
by Defendant against West Texas Bingo, Inc. or Littlefield Corporation. Although
there are pending claims being asserted by Defendant, Defendant recently moved
the Court for leave to assert additional claims against Littlefield Corporation
and its CEO; the Court has not yet ruled upon Defendant's request. The lawsuit
is ongoing and the parties are currently engaged in discovery. The matter has
not been set for trial, nor have the parties scheduled a pre-trial mediation.
15
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2008
--------------------------------------------------------------------------------
NOTE 12 - SALE AND ACQUISITION OF BUSINESSES.
--------------------------------------------------------------------------------
On April 15, 2008, the Company sold the assets of its custom catering business
unit reflecting the Company's focus on its charitable bingo business in Texas,
South Carolina, Alabama and Florida. The asset sale resulted in a gain on sale
of $474,387 resulting from a $650,000 sales price less $175,613 of disposed
assets, at net book value.
The assets of the catering business unit were sold for $650,000 with payment
consisting of $250,000 in cash and a three year $400,000 note receivable at
seven percent (7%). During the third quarter of 2008, the note was paid in full
less a discount of $22,000 granted for the early payoff of the note.
The amounts of sales, gross profit and gross profit on a basic per share basis
of the catering business unit included in the third quarter and nine months to
date of 2008 compared to the comparable prior year periods are as follows:
2008 2007
Nine months year Nine months year
Q308 Q307 Change to date to date Change
---------- ------------ ----------- ---------------- ---------------- ------------
Revenue $ --- $ 396,745 $ (396,745) $ 497,039 $ 1,673,549 $(1,176,510)
Gross profit $ --- ($106,918) $ (106,918) $ (33,263) $ (56,983) $ 23,720
Gross profit per share $ 0.00 $ ( 0.01) $ ( 0.00) $ ( 0.01)
On July 14, 2008, the Company, through a wholly-owned South Carolina subsidiary,
Columbia One Corp. entered into an asset purchase agreement with Kokomos Inc., a
South Carolina corporation, and its sole owner, acquiring all of the assets of
six (6) bingo halls located in Greer (2), Columbia (3) and Goose Creek (1) South
Carolina. The assets were purchased for $1.8 million, consisting of $750,000 in
cash paid at closing and a promissory note for $1,050,000, secured by the assets
being purchased. The original agreement allowed for the purchase price to be
reduced by $300,000 to $1.5 million if a single, lump sum payment of $750,000
was made on or before September 30, 2008, in full satisfaction of the promissory
note. On September 26, 2008 the Company paid an additional $250,000 on the note
and amended the agreement to allow for the reduction in purchase price to $1.5
million if $500,000 is paid on the note by January 6, 2009. The promissory note
bears interest of 6% per annum, matures October 1, 2013 and is payable in
quarterly installments commencing on January 1, 2009.
16
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2008
--------------------------------------------------------------------------------
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. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies except that depreciation and amortization are allocated to
each segment from functional department totals based on certain assumptions
which include, among other things, revenues. Also, the Company's CODM does not
view segment results below gross profit (loss), therefore, general and
administrative expenses, net interest income, other income, and the provision
for income taxes are not broken out by segment below.
The entertainment segment encompasses charitable bingo hall operations in Texas,
Alabama, South Carolina and Florida. The hospitality segment includes income
from party and tent rentals, separating the catering business unit sold at the
beginning of the second quarter. The entertainment and hospitality segments were
identified based on the different nature of the services and legislative
monitoring and, in general, the type of customers for those services.
A summary of the segment financial information, separating the catering business
unit sold at the beginning of the second quarter, reported to the CODM for the
nine months ended September 30, 2008 and 2007, is as follows:
September 30, 2008
------------------
Entertainment Hospitality Catering Adjustment Consolidated
------------- ----------- ---------- ------------ -------------
Revenue $6,393,000 $1,576,000 $497,000 $72,000 $8,538,000
Depreciation and Amortization 476,000 180,000 12,000 95,000 763,000
Segment profit (loss) 1,164,000 (342,000) (33,000) (1,902,000) (1,113,000)
Segment Assets 33,014,000 919,000 (12,247,000) 21,686,000
September 30, 2007
------------------
Entertainment Hospitality Catering Adjustment Consolidated
------------- ----------- ---------- ------------ -------------
Revenue $6,646,000 $1,813,000 $1,673,000 $39,000 $10,171,000
Depreciation and Amortization 305,000 147,000 31,000 86,000 569,000
Segment profit (loss) 3,118,000 (257,000) (57,000) (2,206,000) 598,000
Segment Assets 27,552,000 1,487,000 (12,856,000) 16,183,000
The Adjustments generally represent other corporate expenses and revenue, other
income, depreciation and amortization related to corporate assets, corporate
gains and losses on disposition of assets, inter-company eliminations and
corporate capital expenditures to reconcile segment balances to consolidated
balances.
A summary of items included in the "Adjustment" follows:
2008 2007
------------ ------------
Gross profit - other revenue $ 72,000 $ 37,000
General and administrative expense (2,201,000) (1,919,000)
Gain on disposal of assets 474,000 23,000
Other income and expenses (180,000) (293,000)
Provision for income taxes (67,000) (54,000)
------------ ------------
Total "Adjustment" $ (1,902,000) $ (2,206,000)
============ ============
17
Littlefield Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2008
--------------------------------------------------------------------------------
NOTE 14 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
--------------------------------------------------------------------------------
Recent Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. This
standard defines fair value, establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America, and
expands disclosure about fair value measurements. This pronouncement applies
under other accounting standards that require or permit fair value measurements.
Accordingly, this statement does not require any new fair value measurement.
This statement is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. However, SFAS 157 is amended by
Financial Statement Position ("FSP") FAS 157-1, Application of FASB Statement
157 to FASB Statement 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13, which excludes from the scope of this provision arrangements
accounted for under SFAS 13, Accounting for Leases. SFAS 157 is also amended by
FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delays the
effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). This FSP
partially defers the effective date of Statement 157 to fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years for items
within the scope of this FSP. We adopted SFAS 157 on January 1, 2008, except as
it applies to those nonfinancial assets and nonfinancial liabilities as noted in
FSP FAS 157-2. The partial adoption of SFAS 157 did not have a material impact
on our consolidated financial position or results of operations.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities - including an amendment of FASB Statement 115.
This standard permits an entity to measure many financial instruments and
certain other assets and liabilities at fair value on an
instrument-by-instrument basis. This statement is effective for fiscal years
beginning after November 15, 2007. We adopted SFAS 159 on January 1, 2008, as
required. The adoption of SFAS 159 did not have a significant impact on our
financial position or results of operations.
In December 2007, the FASB issued SFAS 141(R), Business Combinations--a
replacement of FASB Statement No. 141, which significantly changes the
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. This statement is effective prospectively,
except for certain retrospective adjustments to deferred tax balances, for
fiscal years beginning after December 15, 2008. We are currently evaluating the
requirements of SFAS 141(R) and have not yet determined the impact on our
consolidated financial statements.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities. This Statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. This statement is effective for
fiscal years and interim periods beginning after November 15, 2008. Early
application is encouraged. We are currently evaluating the requirements of SFAS
161 and have not yet determined the impact on our consolidated financial
statements.
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful
Life of Intangible Assets. FSP No. FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, Goodwill and
Other Intangible Assets. The intent of the position is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141R, and other U.S. generally accepted accounting
principles. The provisions of FSP No. FAS 142-3 are effective for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. We are currently evaluating the
requirements of FSP No. FAS 142-3 and have not yet determined the impact on our
consolidated financial statements.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company reported nine months year-to-date 2008 adjusted revenue declined 5%
from the comparable prior year period. Adjusted revenue removes year-to-date
revenue related to the Company's catering business which was sold during the
second quarter of 2008. During the third quarter, revenue was affected by two
hurricanes and the national economic crisis which lowered attendance levels at
halls particularly in South Carolina and offset the contribution of new halls
acquired in January and July of this year. The Company operated at above
breakeven excluding the significant unfavorable impact on earnings of
renovations, re-openings and the start-up of new halls in Texas and ongoing
legal expenses. The halls we acquired in July and their historical financial
performance are described in greater detail in the Reports on Form 8-K and 8-K/A
filed with the SEC on July 14, 2008 and September 26, 2008.
Results in the first nine months of 2008 include the effect of approximately
$1,504,000 of notable items: $1,426,000 from the effects of renovations,
re-openings and start-ups of new halls at several halls in Texas, $493,000 of
legal and acquisition related expenses and $39,000 for non cash expenses for
compensation expense related to stock options which were partially offset by a
$454,000 net gain on sale of catering business unit assets after direct
expenses. The Company has underway a broad program of renovations, re-openings
and start-ups of new halls affecting nine locations within the Company's
portfolio of 41 bingo centers including Pensacola, Florida, and San Angelo,
Abilene, Odessa, El Paso, McAllen and Corpus Christi, Texas. The Company
announced plans to open additional halls in McAllen and El Paso, Texas, later in
the year. The San Angelo bingo hall opened during the first quarter while the
Corpus Christi bingo hall opened in May of the second quarter of 2008. The legal
expenses were mainly related to our expansion plans and operations in South
Carolina, Texas legal items, our completed Florida acquisition and our
litigation with Furtney seeking recovery of prior settlements and other damages.
Results in the first nine months of 2007 included approximately $329,000 of
notable items: $313,000 from legal expenses related to South Carolina, Texas and
our attempt to expand into Arkansas, and $43,000 for non cash expenses for
compensation expense related to stock options offset by $27,000 related to
start-up activities.
The Company has also increased the level of capital spending associated with the
implementation of its entertainment destination strategy which encompasses
bettering the infrastructure, interior environment, amenities and activities of
the bingo centers in the Company's portfolio.
Revenues
The following table sets forth the Company's revenues by segment for the nine
months ended September 30, 2008 and 2007, adjusted for the sale of the catering
business unit at the beginning of the second quarter:
2008 2007 $ Change % Change
---------- ------------ ----------- --------
Total Revenues $8,538,000 $ 10,171,000 $(1,633,000) (16%)
Less: Catering 497,000 1,673,000 (1,176,000) (61%)
Adjusted revenue 8,041,000 8,498,000 (457,000) (5%)
Entertainment 6,393,000 6,647,000 (254,000) (4%)
Texas 3,858,000 4,112,000 (254,000) (6%)
South Carolina 1,232,000 1,415,000 (183,000) (13%)
Alabama / Florida 1,303,000 1,120,000 183,000 16%
Hospitality 1,576,000 1,813,000 (237,000) (13%)
Other $ 72,000 $ 38,000 $ 34,000 NM
During the first nine months of 2008, total adjusted revenues for the Company
decreased 5% from 2007 with both Entertainment and Hospitality segments
contributing to the decline in revenue. Entertainment revenue decreased 4% with
Texas being the most significant contributor mainly as a result of the effect on
revenue of hall renovations and re-openings totaling $364,000. Absent the
effects of the strategic investments to strengthen its long-term position in
certain markets by renovating then reopening and merging certain halls in Texas,
the underlying performance of the Texas portfolio was up approximately 4% from
the prior year. The Entertainment segment accounted for 79% of total adjusted
revenues compared with 78% of total adjusted revenues in 2007. By state,
Entertainment revenues for Texas, South Carolina and Alabama / Florida were 60%,
19% and 21% of total Entertainment revenue respectively compared to 62%, 21% and
17% in 2007. The increase in Alabama / Florida mainly represented the purchase
of a new Florida hall in January 2008. Hospitality revenue decreased 13% from
the prior year reflecting lower event activity. Hospitality accounted for 20% of
total adjusted revenues in 2008, compared to 21% of total adjusted revenues in
2007. Other revenue includes other ancillary services and miscellaneous revenue
not reported as segment revenue.
19
Gross profit and Costs and Expenses
-----------------------------------
The table below summarizes the Company's gross profit by segment for the nine
months ended September 30, 2008 and 2007, adjusted for the sale of the catering
business unit at the beginning of the second quarter:
2008 2007 $ Change % Change
---------- ------------ ----------- --------
Total Gross Profit $ 861,000 $ 2,841,000 $(1,980,000) (70%)
Less: Catering gross
profit (loss) (33,000) (57,000) 24,000 NM
Adjusted gross profit 894,000 2,898,000 (2,004,000) (69%)
Entertainment 1,164,000 3,118,000 (1,954,000) (63%)
Hospitality (342,000) (257,000) (85,000) (33%)
Other $ 72,000 $ 37,000 $ 35,000 NM
The decrease in adjusted gross profit was mainly attributed to the effects of:
(1) renovations and openings at several halls in Texas in the amount of
$1,426,000, (2) higher Texas administrative expenses added to manage the new
bingo centers and renovation activity of $184,000, (3) increased legal and
acquisition matters of $180,000 and (4) lower hospitality revenue.
The nine month year-to-date direct costs and expenses for 2008 and 2007,
adjusted for the sale of the catering business, are set forth in the following
table:
2008 2007
Nine months Nine months
year to date year to date $ Change % Change
---------- ------------ ----------- --------
Adjusted Revenue $8,041,000 $ 8,498,000 $ (457,000) (5%)
Adjusted direct costs
and expenses
Direct salaries and
other compensation 1,565,000 1,394,000 171,000 12%
Rent and utilities 2,101,000 1,846,000 255,000 14%
Other direct operating
costs 2,752,000 1,823,000 929,000 51%
Depreciation and
amortization 655,000 452,000 203,000 45%
License expense 74,000 85,000 (11,000) 5%
---------- ------------ ----------- --------
Total adjusted costs
and expenses 7,147,000 5,600,000 1,547,000 28%
Adjusted Gross profit $ 894,000 $ 2,898,000 $(2,004,000) (69%)
Adjusted cost of services increased 28% over the comparable nine-month prior
year period mainly as a result of the costs associated with renovations,
re-openings and start-ups of new bingo centers. This, in conjunction with lower
revenues, resulted in a decline of gross profit percent (gross profit as a
percent of sales) to 11% from 34% in 2007.
Direct salaries and other compensation were 12% above the prior year. The
increase mainly represented increased staffing, travel and other expenses
related to the renovations and start-ups of bingo centers.
Rent and utilities in 2008 were up approximately 14% over 2007, which largely
reflected the addition of our new halls in Florida and Corpus Christi and El
Paso Texas. In 2008 and 2007, we did not recognize lease costs on a
straight-line basis as provided in SFAS 13, paragraph 15 and FTB 85-3. Instead,
lease costs were recognized based on payments made or accrued during each month.
If the Company had recognized lease expense on a straight-line basis in 2008 and
2007, total lease costs would not have materially changed the Company's
financial results. In general, the Company enters into long term leases
underlying its operations. At the same time, the Company generally enters into
agreements which are renewed annually with its customers. This permits the
Company to adjust its customer agreements in response to general price increases
and limits the effect of lease escalation clauses. Generally, the Company's
leases require payments of rent and a pro-rata share of real estate maintenance,
taxes and insurance.
20
Other direct operating costs in 2008 were up 51% over the prior year, mainly due
to costs such as advertising, promotions and development expenses of the new
halls and re-opening after major renovations. The provision for doubtful
accounts was reduced as a result of the payment of a settlement reached with
certain customers.
Depreciation and amortization expense totaled approximately $750,000 ($655,000
Cost of Services plus $95,000 G&A) in 2008 versus $538,000 in the prior year.
The increase was mainly attributed to capital spending on new halls, renovations
and implementation of the Company's entertainment destination strategy.
General and administrative expenses, excluding related depreciation expense, the
noted legal fees and stock-based compensation totaled approximately $1,553,000
in 2008, compared to approximately $1,476,000 in 2007, an increase of about
$77,000. The increase mainly related to planned staff, compensation and travel
related increases.
Other income and expense was a net expense of approximately $180,000 for 2008,
compared to approximately $293,000 in 2007. The difference mainly stems from
lower interest expense from the refinancing of legal settlements and certain
notes payable during 2007 and higher interest income on higher average cash and
cash equivalent balances.
Our income tax expense for 2008 was approximately $67,000 compared to $54,000 in
2007, all of which is related to the expected effective tax rate for state
income taxes. As of December 31, 2007, the Company had a net operating loss
available for carryover on its federal income taxes of approximately $6,700,000.
Net Income (Loss)
-----------------
During the first nine months of 2008, we realized a net loss of approximately
$1,113,000; $(0.07) per basic share and $(0.07) per fully diluted share. Net
income for the first nine months of 2007 was approximately $599,000; $0.05 per
basic share and $0.05 per fully diluted share. The weighted average number of
basic Common Stock shares outstanding totaled 15,083,201 in 2008 compared to
11,187,178 in 2007. The increase in shares outstanding mainly represents the
sale of 5,190,568 shares of common stock on March 27, 2008.
Adjusted for the noted items above, the adjusted net income during the first
nine months of 2008 was approximately $392,000 and basic earnings per share were
$0.03 per share in 2008 versus an adjusted net income of $932,000 and basic
earnings per share of $0.08 last year.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents at September 30, 2008, totaled approximately
$5,234,000 and represented 24% of total assets of approximately $21,686,000.
Current assets totaled approximately $5,960,000. Current liabilities totaled
approximately $1,954,000 and include amounts expected to be paid for early
payoff of the South Carolina acquisition note during the first quarter of 2009.
Working capital was approximately $4,006,000 with a current ratio of 3.1 to 1
compared to approximately 1.8 to 1 in December 2007.
Cash used by operating activities for the nine months ended September 30, 2008
totaled approximately $731,000 compared to cash provided of $1,780,000 during
2007. Cash flows from operating activities in 2008 were decreased by a net loss
of approximately $1,113,000, the gain on sale of the catering business of
approximately $474,000 and provided by non-cash depreciation expense of
approximately $763,000, stock based compensation of approximately $39,000 and by
other net changes in asset and liability accounts of approximately $54,000.
Net cash used in investing activities totaled approximately $2,732,000 for
capital expenditures mainly for bingo hall renovations, leasehold improvements,
the acquisition of halls in Florida and South Carolina and additional licenses
during the nine months ended September 30, 2008. This compared to net cash used
in investing activities of approximately $1,302,000 in 2007 mainly for the
purchase of capital assets.
Cash provided by financing activities in 2008 totaled approximately $6,731,000,
compared to net cash used in financing activities in 2007 of approximately
$329,000. During the first nine months of 2008, approximately $7,000,000 of cash
proceeds were obtained through the sale of common stock, approximately $34,000
was provided by exercised options and $303,000 was used for the payment of notes
payable and legal settlement obligations. In 2007, approximately $477,000 of
financing was obtained from the sale of common stock, exercise of stock options
of $15,000 and $402,000 from notes payable and $1,223,000 was used for the
payment of notes payable and legal settlements.
21
At September 30, 2008, we had approximately $21,686,000 in total assets with
total liabilities of approximately $5,470,000 and approximately $16,216,000 of
shareholders' equity. Total assets include approximately $5,234,000 in cash,
$428,000 of net accounts receivable, other current assets of $298,000,
$8,098,000 of net property and equipment, $7,414,000 of intangible assets and
$214,000 of other assets. Total liabilities primarily consist of accounts
payable of approximately $221,000 and notes payable obligations of approximately
$3,986,000, legal settlement obligations of $444,000 and accrued liabilities of
$753,000 and related-party liabilities of $66,000.
In 2008, we plan to continue to use our cash generated from operations to make
leasehold improvements and renovations in our bingo operations. We also plan to
use advantageous combinations of bank financing, seller financing, treasury
stock, and cash on new bingo hall acquisitions when favorable terms can be
obtained.
Financial Risk Management
Off-Balance Sheet Arrangements. We have no off-balance sheet debt.
Market Risk. In the normal course of business, we employ established procedures
to manage our exposure to changes in the market value of our investments. There
were no significant investments in marketable securities at September 30, 2008
or 2007. The Company holds its funds in cash and certificates of deposit
generally insured by the FDIC with uninsured amounts setting off loans payable.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. This
standard defines fair value, establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America, and
expands disclosure about fair value measurements. This pronouncement applies
under other accounting standards that require or permit fair value measurements.
Accordingly, this statement does not require any new fair value measurement.
This statement is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. However, SFAS 157 is amended by
Financial Statement Position ("FSP") FAS 157-1, Application of FASB Statement
157 to FASB Statement 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13 , which excludes from the scope of this provision arrangements
accounted for under SFAS 13, Accounting for Leases. SFAS 157 is also amended by
FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delays the
effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). This FSP
partially defers the effective date of Statement 157 to fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years for items
within the scope of this FSP. We adopted SFAS 157 on January 1, 2008, except as
it applies to those nonfinancial assets and nonfinancial liabilities as noted in
FSP FAS 157-2. The partial adoption of SFAS 157 did not have a material impact
on our consolidated financial position or results of operations.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities - including an amendment of FASB Statement 115.
This standard permits an entity to measure many financial instruments and
certain other assets and liabilities at fair value on an
instrument-by-instrument basis. This statement is effective for fiscal years
beginning after November 15, 2007. We adopted SFAS 159 on January 1, 2008, as
required. The adoption of SFAS 159 did not have a significant impact on our
financial position or results of operations.
In December 2007, the FASB issued SFAS 141(R), Business Combinations--a
replacement of FASB Statement No. 141, which significantly changes the
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. This statement is effective prospectively,
except for certain retrospective adjustments to deferred tax balances, for
fiscal years beginning after December 15, 2008. We are currently evaluating the
requirements of SFAS 141(R) and have not yet determined the impact on our
consolidated financial statements.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities. This Statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. This statement is effective for
fiscal years and interim periods beginning after November 15, 2008. Early
application is encouraged. We are currently evaluating the requirements of SFAS
161 and have not yet determined the impact on our consolidated financial
statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Response to this item is included in "Item 2 - Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Market Risk" above.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls
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.
Based upon their evaluation, our management including the Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures (as defined in Rule 13a-15(e) or 15 d - 15(e) under the
Securities Exchange Act) are effective, as of the end of the period covered by
this report on Form 10-Q, 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.
There have been no changes in our internal control over financial reporting
during the quarter ended September 30, 2008, that have materially affected or
are reasonably likely to materially affect, our internal control over financial
reporting.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure
controls or our internal controls over financial reporting will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, but not absolute, assurance that the
objectives of a control system are met. Further, any control system reflects
limitations on resources, and the benefits of a control system must be
considered relative to its costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within Littlefield
Corporation have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of a control. A design of a control system is also based
upon certain assumptions about potential future conditions; over time, controls
may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and may not be detected.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of material pending legal proceedings, see Note 11 to the
unaudited Consolidated Financial Statements included in Part I hereof, which
Note 11 is incorporated herein by reference.
Item 6. Exhibits
Exhibit Description
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, 2008
By:
/s/ JEFFREY L MINCH
--------------------
Jeffrey L. Minch
President and Chief Executive Officer
/s/ RICHARD S. CHILINSKI
------------------------
Richard S. Chilinski
Chief Financial Officer
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