Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, September 26, 1993 TAG: 9309220337
SECTION: BUSINESS PAGE: F-1 EDITION: METRO
SOURCE: SANFORD NOWLIN SPECIAL TO THE ROANOKE TIMES & WORLD-NEWS
DATELINE: SAN ANTONIO, TEXAS LENGTH: Long
The San Antonio-based public company's stock value was climbing; it was trading at about $30 per share on an unadjusted basis as of early July, up sharply from about 50 cents a share in early 1991.
No wonder investors took notice. Almost weekly, the company fired off press releases touting new acquisitions or deals. And Curtis Younts, Littlefield's major shareholder, president and chief executive officer, claimed that the company's unprofitable past was behind it.
By July 9, though, the company's stock had dropped to $27.75 a share. And during the week of July 12, Littlefield's stock took a nose dive, falling to $11.75 on July 16.
On Aug. 5, trading on the stock was halted and the firm's management said it suspected "certain persons" were seeking to depress the value of Littlefield stock by spreading false information.
Questions about the truthfulness of an announcement by Littlefield on a contract and a delay by several months in the release of the firm's 1992 financial report also fueled the drastic drop in the company's stock price.
Younts said last week, however, that he and other Littlefield officials "aren't trying to hype anything. He said the stock dropped in value July 16 because of a 3-for-2 split. He also said he planned to hold a stockholders' meeting in October.
The company has about 1,100 stockholders, some 70 to 80 of them in Western Virginia, Younts said.
Younts bought a controlling stake in Littlefield during 1991, initially generating excitement about the company in some investing circles. He moved the firm's headquarters from Roanoke to San Antonio and promised a quick and dynamic turnaround of what was considered a near-dormant company.
Indeed, Littlefield, which owns companies in both the medical and the apparel-imprinting industries, was the American Stock Exchange's top gainer during 1991. The ranking was based on the firm's stock price jump of 2,175 percent that year.
Younts contends that the sudden downturn in the company's stock value this summer was precipitated by rumors spread by short-sellers of the company's stock. He maintains that Littlefield has been working with the Securities and Exchange Commission on an investigation of the matter, something the SEC will neither confirm nor deny.
Short-sellers make money from the decline in value of a stock. They borrow a block of stock, typically through a broker, anticipating a decline in its price and agreeing to take delivery of the stock in the future at a projected price. When the stock hits its anticipated low, the investors buy the stock back at the lower price, replace the borrowed stock and pocket the difference as profit.
The resumption of trading in its stock and the release of its 1992 financial report in mid-August have not stopped the rumors surrounding Littlefield, and it remains controversial in investing circles.
Two Littlefield shareholders with an aggregate of 400 shares have filed class-action lawsuits in U.S. District Court in San Antonio against the company. They claim the company has deliberately misled the public and its shareholders. In addition, many brokers say they continue to have serious concerns about the company.
Lawyers for the two investors - Frank Murray of Bridgeport, N.Y., and Jerry King - declined to comment on the litigation.
At the heart of the allegations against the company are claims that its public statements about acquisitions and contracts are misleading and unfounded. Both suits allege Littlefield and some of its associates "caused or permitted the issuance of false and misleading positive public statements in press releases or other documents regarding Littlefield."
"Any time a company makes a public statement, certain expectations are effected in stock price," says Jim Barge, publisher of OTC Opportunities, a newsletter that follows over-the-counter stocks. "My main concern is that there are statements being made that the company has been able to give no legitimate reasons for."
Barge, who was bullish on Littlefield's stock in his April newsletter, recommended two months later that his readers take their money elsewhere.
Meanwhile, Younts dismisses the suits as frivolous and maintains that the SEC ultimately will put an end to the rumors.
One of the key areas of controversy is a contract that a Littlefield subsidiary, Medical Sales Associates, has with the U.S. Department of Veterans Affairs.
In a press release issued Feb. 22, Littlefield said its contract to supply a patented wheelchair support cushion to the VA was - according to Curtis Bowman, president of MSA - worth "over $40 million in sales for the first year of the contract."
By mid-July, stories began appearing on the Dow Jones financial news service, bringing into question the actual value of the contract.
VA officials claimed the contract was assigned an estimated value of $87,500 over 3 1/2 years. According to the VA, contracts for products that have not been carried in the VA system before are automatically assigned a value of $25,000 per year, but that it was possible for Littlefield to sell more or less than its prediction.
Younts, responding to Dow Jones reporters, defended the company's prediction, saying it expected to sell $40 million worth of the cushions over 3 1/2 years. He claims that the company arrived at the figure by multiplying 46,000 - or 25 percent of the country's wheelchair-bound veterans - by the per-cushion price, $850.
And Younts stands by that projection.
"We've already shipped more units than the $87,500," Younts says.
Neither Younts nor the VA would say how many cushions the VA had purchased.
And just as Younts has stuck with his number, so has the VA.
Charles Dukes, supervisor-contract specialist with the VA's National Acquisition Center in Hines, Ill., says he thinks it is unlikely that Littlefield would be able to meet its own sales prediction.
"I don't personally see it," Dukes says. "There are other companies that offer [wheelchair] restraints - and that's basically what this is - so they're not the only people to have this kind of product. We have schedules to purchase wheelchairs that aren't even worth $40 million."
Younts' reply to Dukes' comment: "We'd be glad to see what his superiors said to him. We'd be happy to see if he has a job after this is over."
Younts also points to a lawsuit filed in Texas District Court in Travis County disputing ownership of the cushion's patent. An Austin firm, Continental Health, is suing Littlefield over the rights to the cushion and, according to Younts, places a value of far more than $40 million on the VA contract.
Younts says he does not remember the exact value Continental put on the contract and adds that the information is "scaled in depositions."
Younts says Littlefield has spent $100,000 to $200,000 defending itself against the suit.
"If that contract was only worth $87,500, do you think we'd be spending that much money to defend ourselves?" Younts asks.
Another Littlefield announcement that has raised questions is an early April press release stating that the company had secured a contract with Americare Health Group - of which Littlefield is 25 percent owner. The contract calls for building at least 150 medical diagnostic, treatment and rehabilitation clinics by the end of 1993. Further, the release claimed Americare planned to build 1,500 to 2,000 such clinics over the next three years.
By Younts' own admission, his firm has not yet constructed a clinic. He says "four or five will be operable by the end of the month," none of which Littlefield is under contract to build.
Younts says the numbers in Littlefield's press release were supplied by Americare and do not reflect a recent change in Americare's development strategy. Americare now has decided to lease some properties for clinics rather than build them.
Paul Caviglia, chief financial officer of Islip, N.Y.-based Americare, says he was unaware his company ever projected that it would build 150 clinics by the end of the year.
"You could go to our press releases and I don't think you would find that number," Caviglia says.
Caviglia adds that his firm operates two clinics and plans to have four more open within 60 days. He says Littlefield is not under contract to work on any of the properties because they are company-owned. Rather, Littlefield is licensed to build franchised clinics, he adds.
In addition, the shareholder lawsuits question the manner in which Littlefield reported its purchase of 25 percent of Americare's stock.
On March 31, Littlefield announced publicly a contract between Medical Sales Associates and Americare, which is based in a chiropractic clinic. Under that contract, Americare gained the right to market certain MSA products in return for giving Littlefield approximately 8.5 million shares, or 25 percent, of Americare's stock.
Littlefield initially placed a $10.6 million value on that deal, basing it on a price of $1.25 per share for Americare's common stock. Littlefield's SEC filing for the first quarter of 1993 reported an increase in net income - from a net loss of 6 cents per share during the first quarter of 1992 to a net gain of $7.72 per share during the same period this year. (The figures had not been adjusted for the payment of dividends or stock splits.)
The shareholders who brought suit against Littlefield see the deal differently. "Indeed, Americare common stock is only thinly traded . . . and, as of July 16, 1993, was quoted at a bid price of only 3/16," the shareholders allege in their lawsuits.
The shareholders also claim that "even if MSA could sell its entire 8.5 million shares" at 18.75 cents per share, it would amount to only $1.6 million.
Littlefield, in its filing for the second quarter of this year, claimed that it had revised its valuation of the Americare stock due to two outside appraisals. According to the filing, Littlefield says its Americare stock is worth approximately $5.3 million.
Not mentioned in the shareholder suits, but troublesome to several brokers who spoke on condition of anonymity, are apparent discrepancies between the firm's unaudited filing with the SEC for the second quarter of 1992 and its audited SEC filing for fiscal year 1992, which ended Dec. 31. In addition, Littlefield's report for the second quarter of 1992 was released in August, about four months after such reports normally become available.
According to Littlefield's annual statement: "The management's clean-up efforts have improved through better scheduling and improved production time. This has resulted in better gross margins on sales."
The SEC document lists a net income for the quarter of $418,000 on net sales and other revenue of $1.6 million. That compares with net income of $22,000 on $1.3 million in sales for the second quarter of 1991.
The bulk of Littlefield's revenues for the second quarter of the year were generated from sales of screen-imprinted sportswear and leisure garments, the product of its Roanoke-based Collegiate Pacific Inc. subsidiary.
However, the company's report states that $696,000 of its revenue for the entire year was attributable to one-time gains from a stock sale and consulting fees. The stock sale, which is noted in the annual report but not in the quarterly report, occurred during the second quarter and brought Littlefield a gain of $446,000, the company said.
Younts says the stock sale involved an investment in Ringside International Broadcasting Corp. - now called Environmental Chemical Group - another company in which he has a controlling share.
If that $446,000 return on investment is separated from the company's income for the second quarter, Littlefield would actually report a loss on operations of $28,000 rather than the gain reported in its statement to shareholders.
Comparing that loss to a $22,000 profit during 1991's second quarter, "gross margins on sales" appear to decrease rather than increase from second quarter 1991 to second quarter 1992, according to an analysis of the SEC documents.
No one-time, second-quarter gains were noted in the firm's 1991 report to shareholders.
The other one-time gain mentioned in Littlefield's fiscal 1992 report is $250,000 in earnings labeled as "consulting fee." The company's statement does not say during what quarter that fee was earned.
"I do consulting work for a lot of companies," Younts says. "This involved a series of deals outside Littlefield Adams. I elected that rather than doing it individually, I'd do it through the company."
When questioned further about the one-time gains from consulting and the stock deal, Younts said: "Business is business. We did whatever we needed to do."
Also fueling the controversy surrounding Littlefield are unanswered questions about acquisition plans the company made public but failed to complete.
In July 1991, the company announced its intention to buy San Antonio Tent & Awning Co., a 91-year-old firm in which Younts has a controlling stake. SATAC is now called S.A. Sports.
Littlefield never issued a news release announcing that the deal had been terminated. However, in its 1992 filing with the SEC, Littlefield did mention that the deal had been called off.
Younts said the original deal for San Antonio Tent & Awning Co. was for it to be purchased with 1.3 million shares of Littlefield stock, and by the time all of the reports were analyzed, the company was worth only maybe 100,000 to 150,000 shares. "Why should we do the deal, then?" he said.
Similarly, in September 1992, the company announced its intention to purchase New York-based Steinwurtzel Acquisition Corp., a company whose 1993 sales are expected to exceed $30 million, according to Littlefield.
But, again, the company never issued a public statement that the deal had fallen through. Rather, that news was contained in only Littlefield's 1992 annual report to shareholders. Younts said the deal for Steinwurtzel was subject to "due diligence," and "the numbers weren't there" when Littlefield officials began looking closely. He said Steinwurtzel has since gone bankrupt.
Littlefield's head of investor relations, Don Merrill, stresses that the firm properly informed its investors that those deals had been called off by reporting the information in the company's quarterly and annual SEC filings.
"It's sort of an ends-justifies-the-means situation," Merrill says. "You throw five [deals] up and hope one or two stick."
Merrill adds: "Curtis [Younts] never put out a release on those because he was too busy looking at the next deal. We're still a small company and growing fast. Yes, we probably should have put out releases on those, but that was something that didn't happen because of how fast we were moving forward."
Littlefield offers a similar explanation for the four-month delay in reporting its fiscal 1992 financial results.
According to Younts, the report did not come out on schedule because the auditing of the company's numbers was trickier than usual. Before releasing its annual filing, Littlefield acquired four companies - MSA; Ohio-based screen imprinter Funwear Inc.; and NuTech Inc. and Cornerstone Labs, both California-based research and development firms. That made it necessary for auditors to plumb through financial reports and contracts for the new acquisitions.
However, the annual report notes both NuTech and Cornerstone Labs had no significant operations during 1992 and that there were no operations in MSA. MSA's only listed asset was "the intangible rights to a contract to sell certain medical products to Veterans [Affairs] hospitals."
Despite the lack of financial activity, Younts maintains that auditing four acquisitions was time-consuming because auditors Carniero, Chumney & Company still had to view contracts between Littlefield and those firms.
Younts says he tried to urge Carniero, Chumney to speed up its audit, but to no avail. "They told us, `Forget it. When we have it right, we'll release it,' " Younts says.
Carniero, Chumney officials declined comment on the audit.
While Younts attributes the controversy surrounding Littlefield to short-selling of its stock, stockbrokers familiar with the company all deny doing anything that runs afoul of SEC regulations. Some say short-selling is a natural part of day-to-day market activity; all maintain that they have not spread false information about company.
Younts, however, says the short sellers are dealing out lies to the investing public and will get their comeuppance. Younts maintains that short-sellers have spread stories that he had fled the country and other false rumors.
"The shorts are over," Younts says. "They've fired their volleys. The shorts are going to be on their way into the courthouse. We've got the evidence to back us up."
Younts, who claims to own about 28 percent of Littlefield's common stock, says his continued investments in the firm should demonstrate his seriousness about running it properly.
He contends the company is moving in the right direction. He points to Littlefield's financial numbers for the first half of 1993 to prove his case.
Littlefield has posted net income of $6.4 million - with $5.3 million coming from its Americare stock deal - on net sales of $8.9 million for the six months, according to the company's unaudited financial statements.
And, to the company's credit, several brokers, who also asked not to be named, still are bullish on the stock.
According to Merrill, Littlefield anticipates sales of more than $20 million by year end for its apparel subsidiaries, citing a "phenomenal" number of apparel orders coming from a recent trade show in Las Vegas.
Younts also points to several license agreements recently secured by the company. They enable Littlefield to print a variety of designs on clothing featuring popular images such as Warner Brothers cartoon characters.
Beyond that, Younts says Littlefield's medical subsidiary, MSA, is developing 11 new health care products and could begin shipping a specially designed mattress in the coming months.
"If a person really looks at what Littlefield Adams has with the textiles, then treat everything else - all the medical part - as gravy, they'll understand that the company is for real," Younts says.
by CNB