<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
June 18, 1996
----------------------------------------------------
(Date of Report - Date of earliest event reported)
THE L.L. KNICKERBOCKER CO., INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 0-25488 33-0230641
- ------------------------------- ----------------------- -----------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Identification
Number)
30055 Comercio, Rancho Santa Margarita, California 92688
- -------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 858-3661
Page 1 of 25 pages
<PAGE>
This Form 8-K/A amends the Form 8-K filed July 3, 1996.
The following item has been amended:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
-------------------------------------------------------------------
(a) Financial Statements of Business Acquired
-----------------------------------------
Included as part of this Form 8-K/A are audited financial
statements of Krasner Group, Inc. for the fiscal years ended January 28, 1996
and January 29, 1995.
(b) Pro Forma Financial Information:
--------------------------------
Included as part of this Form 8-K/A are Historical and Pro Forma
Condensed Consolidated Statements of Operations of the registrant for the fiscal
year ended December 31, 1995 (unaudited); a Historical and Pro Forma Condensed
Consolidated Balance Sheet at March 31, 1996 (unaudited) and Historical and Pro
Forma Condensed Consolidated Statements of Operations for the three months ended
March 31, 1996 (unaudited).
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 3, 1996
THE L.L. KNICKERBOCKER CO., INC.,
a California corporation
By: /s/Anthony P. Shutts
---------------------------------
Anthony P. Shutts
Chief Financial Officer
3
<PAGE>
The L.L. Knickerbocker Co., Inc. (the "Company") and
Krasner Group, Inc. ("Krasner")
Historical and Pro Forma Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Acquisition Pro Forma
Company Krasner Adjustments Note Condensed
Historical Historical Incr. (Decr.) Reference Consolidated
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 3,158,828 $ 2,848,610 $ 6,007,438
Cost of goods sold 1,403,519 3,140,189 4,543,708
----------------------------------------------------- ----------------
Gross Margin 1,755,309 (291,579) - - 1,463,730
Selling, general
and administrative expenses 1,264,380 1,247,567 58,283 1 2,570,230
----------------------------------------------------- ----------------
Income (loss) from operations 490,929 (1,539,146) (58,283) (1,106,500)
Other Income/ (expense) 44,425 (54,828) (10,403)
----------------------------------------------------- ----------------
Income (loss) before taxes 535,354 (1,593,974) (58,283) (1,116,903)
Provision (benefit) for Income Taxes 212,648 (482,698) (176,711) 2 (446,761)
----------------------------------------------------- ----------------
Net Income (loss) $ 322,706 $ (1,111,276) 118,428 $ (670,142)
===================================================== ================
Earnings per share $ 0.02 $ (0.05)
============== ================
Weighted average common and common
equivalent shares outstanding 16,057,063 (2,099,217) 10
176,000 9 14,133,846
============== ================
</TABLE>
Page 4
<PAGE>
The L.L. Knickerbocker Co., Inc. (the "Company") and
Krasner Group, Inc. ("Krasner")
Historical and Pro Forma Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Acquisition Pro Forma
Company Krasner Adjustments Note Condensed
Historical Historical Incr. (Decr.) Reference Consolidated
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 13,140,346 $ 10,242,061 $ 23,382,407
Cost of goods sold 6,327,322 8,027,374 14,354,696
----------------------------------------------------- ----------------
Gross Margin 6,813,024 2,214,687 - 9,027,711
Selling, general
and administrative expenses 4,767,170 2,567,921 233,130 1 7,568,221
----------------------------------------------------- ----------------
Income (loss) from operations 2,045,854 (353,234) (233,139) 1,459,490
Other Income/ (expense) 105,879 (181,565) (75,686)
----------------------------------------------------- ----------------
Income (loss) before taxes 2,151,733 (534,799) (233,130) 1,383,804
Provision (benefit) for Income Taxes 883,213 (175,308) (154,383) 2 553,522
----------------------------------------------------- ----------------
Income (loss) from continuing operations 1,268,520 (359,491) (78,747) 830,282
Loss from Discontinued Operations (2,709,780) (2,709,780)
----------------------------------------------------- ----------------
Net Income (loss) $ 1,268,520 $ (3,069,271) (78,747) (1,879,498)
===================================================== ================
Earnings per share $ 0.10 $ (0.15)
============== ================
Weighted average common and common
equivalent shares outstanding 13,280,199 (1,229,519) 10
349,411 9 12,400,091
============== ================
</TABLE>
Page 5
<PAGE>
The L.L. Knickerbocker Co., Inc. (the "Company") and
Krasner Group, Inc. ("Krasner")
Historical and Pro Forma Condensed Consolidated Balance Sheet
Three Months Ended March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Acquisition Pro Forma
Company Krasner Adjustments Note Condensed
Historical Historical Incr. (Decr.) Reference Consolidated
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ----------------
Current assets
Cash and equivalents $ 2,794,166 $ (79,532) $ (50,000) 3
(70,000) 4 $ 2,594,634
Accounts receivable 4,167,978 917,862 5,085,840
Inventories 627,394 2,216,964 2,844,358
Other current assets 2,322,381 1,693,861 4,016,242
-------------------------------------------------- -------------
Total current assets 9,911,919 4,749,155 120,000 14,541,074
Property and equipment, net 227,068 711,326 938,394
Goodwill 2,331,303 5 2,331,303
Other assets 791,338 58,712 850,050
------------------------------------------------- --------------
Total assets $ 10,930,325 $ 5,519,193 $ 2,211,303 $ 18,660,821
================================================= ==============
LIABILITIES
- ----------------
Current liabilities
Current maturities of
long-term liabilities $ 2,545,775 (711,374) 6 $ 1,834,401
Accounts payable $ 398,268 1,194,016 $ 1,592,284
Accured liabilities 967,412 1,651,379 $ 2,618,791
------------------------------------------------- --------------
Total current liabilities 1,365,680 5,391,170 (711,374) 6,045,476
Long-term liabilities -
Other liabilities 77,228 - 77,228
------------------------------------------------- --------------
Total liabilities 1,442,908 5,391,170 - 6,122,704
Stockholders' equity
Common Stock 7,139,244 13,909 (13,909) 7
1,485,000 8 8,624,244
Series A Convertible Preferred Stock 15,500 (15,500) 7 -
Paid In Capital 250,000 1,521,071 (1,521,071) 7 250,000
1,565,700 8 1,565,700
Less Common Stock held in Treasury (7,434) 7,434 7 -
Retained earnings 2,098,173 (1,415,023) 1,415,023 7 2,098,173
------------------------------------------------- -------------
Total stockholders' equity 9,487,417 128,023 2,922,677 12,538,117
------------------------------------------------- -------------
Total liabilities and stockholders' equity $ 10,930,325 $ 5,519,193 $ 2,211,303 $ 18,660,821
================================================= =============
</TABLE>
Page 6
<PAGE>
The L.L. Knickerbocker Co., Inc.
Notes to Historical and Pro Forma Unaudited
Condensed Consolidated Financial Statements
The following statements set forth pro forma financial data of the Company
for the year ended December 31, 1995, the three months ended March 31, 1996, and
as of March 31, 1996. The pro forma condensed consolidated statements of
operations for the year ended December 31, 1995 and for the three months ended
March 31, 1996 gives pro forma effect to the Acquisition, related purchase
accounting adjustments and to certain other adjustments as if the Acquisition
and related transactions had occurred on January 1, 1995. The Krasner Group,
Inc. historical information included in the pro forma Statements of Operations
for the year ended December 31, 1995, reflect the results of operations of
Krasner Group, Inc. for the fiscal year beginning February 1, 1995 and ending on
January 28, 1996, in order to present a full twelve month period. Additionally,
the Krasner Group, Inc. historical information included in the pro forma
Statements of Operations for the three months ended March 31, 1996, reflect the
results of operations of Krasner Group, Inc. for the period January 29, 1996 to
April 28, 1996, in order to present a full three month period. The pro forma
condensed consolidated balance sheet data as of March 31, 1996 gives pro forma
effect to the Acquisition and related transactions as if they had been
consummated on March 31, 1996. The adjustments relating to the Acquisition and
related transactions are described in the notes hereto. The pro forma
adjustments are based upon available information and certain assumptions that
the Company believes are reasonable.
The pro forma financial data does not necessarily reflect the results of
operations or the financial position of the Company which actually would have
resulted had the Acquisition been consummated as of the date or for the period
indicated, and the pro forma financial data excludes the nonrecurring effects of
certain purchase adjustments which will be reflected in financial statements
prepared in accordance with generally accepted accounting principles. The pro
forma adjustments are based on management's preliminary assumptions regarding
purchase accounting adjustments. The actual allocation of the purchase price
will be adjusted in accordance with Statement of Financial Accounting Standards
No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises",
to the extent that actual amounts differ from management's estimates.
_______________________________________________________________________________
7
<PAGE>
The pro forma financial data should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto.
(1) To record amortization of Goodwill recorded in connection with the
acquisition of Krasner Group, Inc.
(2) To adjust the income tax benefit assuming an effective income tax rate
of 40%.
(3) To record the cash payment of a finder's fee in connection with the
acquisition of Krasner Group, Inc.
(4) To record a cash payment in partial settlement of a liability owed to
a creditor of Krasner Group, Inc.
(5) To record Goodwill in connection with the acquisition of Krasner
Group, Inc.
(6) To record, as part of the acquisition, the settlement of a note payable
owed to a creditor of Krasner Group, Inc.
(7) To eliminate the historical equity accounts of Krasner Group, Inc. as
required by Purchase accounting rules.
(8) To record the fair value of L.L. Knickerbocker Co., Inc. common stock and
common stock purchase warrants issued in connection with the acquisition.
(9) To reflect L.L. Knickerbocker Co., Inc. shares issued for the acquisition.
(10) To remove common stock equivalents from total weighted average shares due
to consolidated net loss.
________________________________________________________________________________
8
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
KRASNER GROUP, INC.
FOR THE YEARS ENDED JANUARY 28, 1996
AND JANUARY 29, 1995
<PAGE>
Krasner Group, Inc.
Consolidated Financial Statements
For the year ended January 28, 1996 and January 29, 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors ........................................ 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets ........................................... 2
Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit) ............................................... 4
Consolidated Statements of Cash Flows ................................. 5
Notes to Consolidated Financial Statements ............................ 6
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Krasner Group, Inc.
We have audited the accompanying consolidated balance sheets of Krasner Group,
Inc. as of January 28, 1996 and January 29, 1995, and the related consolidated
statements of operations and retained earnings (accumulated deficit) and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Krasner Group,
Inc. at January 28, 1996 and January 29, 1995, and the consolidated results of
its operations and its cash flows for the years the ended in conformity with
generally accepted accounting principles.
August 2, 1996
<PAGE>
Krasner Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 28 January 29
1996 1995
-----------------------------
<S> <C> <C>
ASSETS (NOTES 5 AND 6)
Current assets:
Cash, including interest bearing deposits $ 99,925 $ 225,401
Accounts receivable, net of allowance for doubtful
accounts and returns of $311,070 in 1996 and
$320,273 in 1995 1,457,999 1,657,774
Inventories, net (note 4) 1,250,605 1,741,106
Prepaid expenses and other current assets 69,953 45,922
Current assets of discontinued operations (Note 12) 1,930,008 1,601,543
Refundable income taxes (Note 8) 325,000 -
Deferred income taxes (Note 8) - 123,405
---------------------------
Total current assets 5,133,490 5,395,151
Machinery and equipment, at cost, net of
accumulated depreciation of $1,265,885 in
1996 and $866,513 in 1995 835,421 833,114
Other assets 44,046 68,023
---------------------------
Total assets $6,012,957 $6,296,288
===========================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JANUARY 28 JANUARY 29
1996 1995
------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable $1,406,693 $ 629,172
Accrued payroll and related liabilities 175,611 189,839
Accrued federal and state income taxes - 99,746
Other accrued expenses 476,982 529,597
Capitalized lease obligations due within one year
(Note 7) 40,354 37,573
Note payable due within one year to the
predecessor owner of Penthouse Gallery, Inc.
(Note 6) 362,453 293,264
Note payable to bank (Note 5) 2,933,200 950,000
Allowance for operating losses of discontinued
operations (Note 12) 508,000 -
------------------------------
Total current liabilities 5,903,293 2,729,191
Deferred income taxes (Note 8) - 52,036
Long-term portion of note payable to the predecessor
owner of Penthouse Gallery, Inc. (Note 7) 373,921 673,058
Long-term capitalized lease obligations (Note 6) 43,296 80,765
Stockholders' equity (capital deficiency):
Series A convertible redeemable preferred stock,
$.01 par value, 4,000,000 shares authorized,
1,550,000 issued (liquidation value: $1 per
share) (Note 10) 15,500 15,500
Common stock, $.01 par value, 10,000,000
shares authorized, 1,390,900 issued
(1,388,900 in 1995) 13,909 13,889
Capital in excess of par value 1,521,071 1,520,611
Retained earnings (accumulated deficit) (1,850,599) 1,218,672
------------------------------
(300,119) 2,768,672
Less common stock held in treasury, at cost
(30,975 shares) 7,434 7,434
------------------------------
Total stockholders' equity (capital deficiency) (307,553) 2,761,238
------------------------------
Total liabilities and stockholders' equity
(capital deficiency) $6,012,957 $6,296,288
==============================
</TABLE>
See accompanying notes
<PAGE>
Krasner Group, Inc.
Consolidated Statements of Operations and
Retained Earnings (Accumulated Deficit)
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 28 JANUARY 29
1996 1995
------------------------------
<S> <C> <C>
NET SALES $10,242,061 $10,241,720
Cost of goods sold 8,027,374 6,487,608
------------------------------
Gross profit 2,214,687 3,754,112
Selling, general and administrative expenses 2,567,921 2,450,059
------------------------------
Operating income (loss) (353,234) 1,304,053
Other income (expense)
Miscellaneous income (expense) (647) (117,258)
Interest income 5,808 2,854
Interest expense (186,726) (92,902)
------------------------------
Income (loss) from continuing operations before
income taxes (534,799) 1,096,747
Provision (benefit) for income taxes (Note 8) (175,308) (371,040)
------------------------------
Income (loss) from continuing operations (359,491) 725,707
Discontinued operations (Note 12):
Loss from operations of discontinued catalog
companies (net of income tax benefit of
$34,208 and $223,728 at January 28, 1996 and
January 29, 1995, respectively) (1,293,666) (416,741)
Loss on disposal of catalog companies, including
provision of $508,000 for operating losses during
phase-out period (net of income tax benefit of
$52,084) (1,416,114) -
------------------------------
Net income (loss) (3,069,271) 308,966
Retained earnings, beginning of year 1,218,672 909,706
------------------------------
Retained earnings, beginning of year $(1,850,599) $1,218,672
==============================
</TABLE>
See accompanying notes.
<PAGE>
Krasner Group, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 28 JANUARY 29
1996 1995
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(3,069,271) $ 308,966
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 399,372 315,033
Deferred income taxes (253,631) (71,369)
Loss on disposal of discontinued operations 1,468,198 --
Increase (decrease) in cash from changes in
assets and liabilities:
Accounts receivable 199,775 (280,172)
Inventories 490,501 697,007
Prepaid expenses and other assets (54) 52,617
Accounts payable and accrued expenses 610,932 (185,956)
Assets and libilities of discontinued
operations (1,288,663) (1,325,045)
------------------------------
Net cash used in operating activities (1,442,841) (488,919)
INVESTING ACTIVITIES
Capital expenditures (401,679) (349,241)
Purchase of Penthouse Gallery, Inc. assets (Note 3) -- (100,000)
------------------------------
Net cash used in investing activities (401,679) (449,241)
FINANCIAL ACTIVITIES
Sale of common stock 480 --
Principal payments under capital lease obligations (34,688) (17,700)
Net borrowings under note payable to bank 1,983,200 950,000
Borrowings (payments) under note payable to
predecessor owner of Penthouse Gallery, Inc. (229,948) --
Purchase of treasury stock -- (7,434)
------------------------------
Net cash provided by financing activities 1,719,044 924,866
------------------------------
Net (decrease) in cash (125,476) (13,294)
Cash at beginning of year 225,401 238,695
------------------------------
Cash at end of year $ 99,925 $ 225,401
==============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 261,743 $ 91,216
==============================
Income taxes $ 112,540 $ 249,020
==============================
</TABLE>
See accompanying notes.
<PAGE>
Krasner Group, Inc.
Notes to Consolidated Financial Statements
January 28, 1996 and January 29, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements for continuing operations include the
accounts of Krasner Group, Inc. (KG) and certain subsidiaries, Charisma
Manufacturing Co., Inc. (Charisma), and TCJC, Inc. (TCJC). All material
intercompany accounts and transactions have been eliminated.
Charisma is a manufacturer of costume jewelry products which it sells both to
outside customers and to TCJC, a related entity. TCJC wholesales costume
jewelry; manufactures and wholesales women's fashion accessories.
The discontinued operations consisted of DermaScience Laboratories, Inc.
(DermaScience), Direct Marketing (a former division of TCJC), and KGI Fashions,
Inc. (KGIF) (Note 12).
The Company performs credit evaluations on all new customers and does not
require collateral. Credit losses are provided for in the financial statements
and consistently have been within management's expectations.
2. SUMMARY OF INSIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
KG maintains its accounts on a 52-53 week fiscal year ending on the last Sunday
in January.
INVENTORIES
Inventories are valued at the lower of cost, determined using the first-in,
first-out (FIFO) method, or market.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
<PAGE>
Krasner Group, Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MACHINERY AND EQUIPMENT
Machinery and equipment under capital leases are recorded at the lower of the
present value of minimum lease payments at the beginning of the lease term or
fair value at the inception of the lease.
Depreciation on machinery and equipment is provided on the straight-line method
over the estimated useful lives of the assets which range from two and one-half
to ten years. Machinery and equipment under capital leases are amortized on the
straight-line method over the shorter of the lease term or the estimated useful
life of the asset.
ADVERTISING COSTS
Costs of advertising (catalog costs) are capitalized and amortized over the life
of the catalog mailing (approximately four months). The capitalized advertising
amounted to approximately $2,400,300 and $698,300 with related amortization of
$2,171,600 and $678,000 for the years ended January 28, 1996 and January 29,
1995, respectively. At January 28, 1996, the unamortized balance of the
capitalized advertising was written off in connection with the discontinued
operation.
INCOME TAXES
Under FASB Statement 109, deferred tax assets and liabilities are determined
based on differences between financial reporting and the tax basis of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements to
conform to the 1996 presentation.
<PAGE>
Krasner Group, Inc.
Notes to Consolidated Financial Statements (continued)
3. ACQUISITION OF PENTHOUSE GALLERY, INC.
On January 23, 1995, the Company acquired certain assets and assumed certain
liabilities of Penthouse Gallery, Inc. (subsequently renamed KGI Fashions, Inc.
(KGIF). KGIF is engaged in the business of manufacturing and selling women's
apparel primarily through its catalogs and also to specialty apparel retail
stores. The acquisition was accounted for as a purchase transaction and,
accordingly, the purchase price was allocated to assets and liabilities based on
their estimated fair value as of the date of acquisition. Operating results for
the period from January 23, 1995, through January 29, 1995, are included in the
income statement of the Company for the year ending January 29, 1995.
The total cost of the acquisition is summarized as follows:
<TABLE>
<S> <C>
Cash paid to predecessor owner $ 100,000
Note payable to predecessor owner (Note 6) 966,322
Acquisition related costs 29,783
Accounts payable 89,109
-------------
$1,185,214
=============
</TABLE>
A summary of the purchase price allocation is as follows:
<TABLE>
<S> <C>
Accounts receivable $ 18,587
Inventory 1,050,011
Prepaid expenses 36,878
Fixed assets 49,955
Other assets 29,783
-------------
$1,185,214
=============
</TABLE>
In connection with the acquisition, the Company entered into a noncompetition
and nondisclosure agreement with the seller. This agreement calls for royalty
payments ranging from 1% to 5% of net sales over the next five years.
The cost associated with the acquisition were completely expensed in 1996, in
connection with the discontinuance of KGI Fashions, Inc. (Note 12).
<PAGE>
Krasner Group, Inc.
Notes to Consolidated Financial Statements (continued)
4. INVENTORIES
Inventories consisted of the following at January 28, 1996 and January 29, 1995:
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <C> <C>
Finished goods $1,020,640 $1,906,379
Work-in-process 330,532 362,893
Raw materials 1,443,855 868,920
---------------------------
2,795,027 3,138,192
Less: inventories of discontinued segment 1,544,422 1,397,086
---------------------------
$1,250,605 $1,741,106
===========================
</TABLE>
5. REVOLVING LINE OF CREDIT AGREEMENT
During fiscal 1995, KG had two line of credit agreements with separate banks.
The first agreement was for a $1,500,000 line of credit under which advances or
letters of credit were available for working capital purposes. The availability
was limited based upon levels of receivables and inventory. At January 29, 1995,
there was $950,000 outstanding under this line of credit. Letters of credit in
the aggregate amount of $152,796 were outstanding at January 29, 1995. Interest
was charged at the bank's floating prime rate plus 1.75%(10.25% at January 29,
1995). The line was secured by all of KG's assets and the personal guarantee of
one stockholder, limited to $400,000, plus a portion of the line outstanding in
excess of $950,000, such guarantee not to exceed $750,000. The agreement
provided for maintenance of certain ratios and limits distributions that would
cause a violation of such provisions (see Note 10). This agreement was
terminated on September 26, 1995.
The second agreement existing in 1995 was for a $200,000 line of credit payable
on demand. Interest on the outstanding principal balance was due monthly at the
bank's prime lending rate plus 1/2% (9% at January 29, 1995). The line of credit
was secured in equal amounts by two stockholders. At January 29, 1995, there was
no amount outstanding under this line of credit. This agreement was terminated
on September 26, 1995.
On September 22, 1995, KG entered into a $3,000,000 line of credit agreement
under which advances of letters of credit are available for working capital
purposes. The availability is limited based upon levels of receivables and
inventory. At January 28, 1996, there was $2,933,200 outstanding under this line
of credit. Letters of credit in the
<PAGE>
Krasner Group, Inc.
Notes to Consolidated Financial Statements (continued)
5. REVOLVING LINE OF CREDIT AGREEMENT (CONTINUED)
aggregate amount of $56,272 were outstanding at January 28, 1996. Interest is
charged at the prime interest rate plus 1.625% (9.875% at January 28, 1996).
The line is secured by all of KG's assets and the personal guarantee of one
stockholder, limited to $800,000. The agreement provides for maintenance of
certain ratios and limits distributions that would cause a violation of such
provisions.
On June 27, 1996, the Company entered into an amendment to modify its line of
credit agreement. The amended agreement provides for guarantees by L.L.
Knickerbocker Inc. (see Note 13), waiver of certain covenant violations and
termination of the agreement on September 30, 1996. The Company anticipates
replacement of the line of credit with another financial institution.
The carrying value of the debt approximates market value.
6. NOTE PAYABLE TO PREDECESSOR OWNER OF PENTHOUSE GALLERY, INC.
In connection with the purchase of certain assets and the assumption of certain
liabilities of Penthouse Gallery, Inc. (see Note 3) KGIF is obligated under a
note payable, which is guaranteed by KG, to the predecessor owner in the amount
of $736,374 and $966,322 for fiscal years 1996 and 1995, respectively. The note
was payable in eighteen quarterly installments of principal with interest on the
outstanding balance at 10.5%, with payments commencing on March 1, 1995. In
1996, KGIF modified the note to be payable in thirteen quarterly installments.
The modification agreement also allowed a deferral of interest and principal
payments by KGIF from December 1 to June 1, 1996 (except for minor principal
payments). The note is secured by a second priority interest in all the assets
of KGIF. The maturities of the note payable are as follows for the next three
fiscal years: 1997 - $362,453; 1998 - $299,137; and 1999 - $74,784.
7. LEASES
KG leases facilities and equipment under both operating and capitalized leases.
Office, showroom and plant facilities are leased under four noncancelable
operating leases that expire in August 1999 for the New York premises and
January 2001 for the Rhode Island facilities. Certain manufacturing and other
equipment are leased under obligations meeting the requirements for
capitalization, which have varying terms and expiration dates. Machinery and
equipment includes costs of $178,000 and $178,000 with related accumulated
amortization of $114,000 and $75,000 on capital leases at January 28, 1996
<PAGE>
Krasner Group, Inc.
Notes to Consolidated Financial Statements (continued)
7. LEASES (CONTINUED)
and January 29, 1995, respectively. Lease amortization is included in
depreciation expense. Future minimum payments, by year and in the aggregate,
under the capital leases and noncancelable operating leases with initial or
remaining terms of one year or more consisted of the following at January 28,
1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-----------------------------------
<S> <C> <C>
1997 $ 53,465 $188,638
1998 25,387 147,360
1999 6,840 132,848
2000 255 107,472
2001 -- 56,400
Subsequent to 2000 -- --
-----------------------------------
Total minimum lease payments 85,947 $632,718
=================
Amounts representing imputed interest 2,297
------------------
Present value of future minimum lease
payments 83,650
Less amounts due in one year 40,354
------------------
$ 43,296
==================
</TABLE>
Rent expense under operating leases was approximately $223,914 in fiscal year
1996 and $144,000 in fiscal year 1995.
8. INCOME TAXES
The deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of January 28, 1996 and
January 29, 1995, respectively, are as follows:
<TABLE>
<CAPTION>
JANUARY 28 JANUARY 29
1996 1995
---------------------------------------
<S> <C> <C>
Deferred tax assets:
Inventory reserve $ 726,925 $ 20,609
Reserve for discontinued operations 202,895 --
Net operating loss carryforward 106,988 --
Other - net 68,836 123,244
---------------------------------------
Total deffered tax assets 1,105,644 143,853
</TABLE>
<PAGE>
Krasner Group, Inc.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
JANUARY 28 JANUARY 29
1996 1996
--------------------------------
<S> <C> <C>
Valuation allowance for deferred
tax assets (1,059,294) --
--------------------------------
Net deferred tax assets 46,350 143,853
Deferred tax liabilities:
Property, plant and equipment 46,350 72,484
--------------------------------
Total deferred tax liabilities 46,350 72,484
--------------------------------
Net deferred tax assets $ -- $ 71,369
================================
</TABLE>
At January 28, 1996, the company has net operating losses of $1,300,000 of which
approximately $1,000,000 can be carried back to recover previously paid taxes
resulting in carryforwards of approximately $ 300,000 that expire in 2011.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
JANUARY 28 JANUARY 29
1996 1995
----------------------------------
<S> <C> <C>
Continuing Operations
Current
Federal $ (223,961) $ 393,549
State 7,394 31,562
----------------------------------
Total current (216,567) 425,111
Deferred
Federal 31,962 (41,887)
State 9,297 (12,184)
----------------------------------
Total deferred 41,259 (54,071)
----------------------------------
$ (175,308) $ 371,040
==================================
Discontinued Operations:
Current $ (116,402) $(206,430)
Deferred 30,110 (17,298)
----------------------------------
$ (86,292) $(223,728)
==================================
</TABLE>
<PAGE>
Krasner Group, Inc.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The variance between the statutory rate and the actual rate is primarily due to
state taxes and loss carryforwards not given benefit.
9. BUSINESS CONCENTRATIONS
TCJC has agreements for the exclusive rights to manufacture and sell to QVC
Network specified product classifications under the following names: Kenneth
Jay Lane, Nolan Miller, Mary McFadden, Carlos Falchi, and Dennis Basso.
Accounts receivable from QVC Network represented approximately 98% and 99% of
accounts receivable from continuing operations at January 28, 1996 and January
29, 1995, respectively. Sales to QVC Network accounted for approximately 98% of
the Company's continuing operations total net sales for 1996 and 1995, as
follows.
<TABLE>
<CAPTION>
1996 1995
--------------------------
<S> <C> <C>
Nolan Miller 67% 40%
Kenneth Jay Lane 14 41
Mary McFadden 7 6
Carlos Falchi 7 4
Other 3 7
--------------------------
98% 98%
==========================
</TABLE>
The 1995 operations include a credit of approximately $89,000 that represents
the recovery of an account balance from one customer that had been fully
reserved in 1994.
Total royalty expense was approximately $749,000 in 1996 and $701,000 in 1995.
10. PREFERRED STOCK
Each share of preferred stock has one voting right and is convertible into an
equal number of common shares; such number of common shares can be increased
based upon the issuance price of new shares, if any, as defined. The preferred
stock is subject to mandatory conversion in the event of a public offering of
common stock that meets certain criteria.
<PAGE>
Krasner Group, Inc.
Notes to Consolidated Financial Statements (continued)
10. PREFERRED STOCK (CONTINUED)
In each year, commencing with the year beginning February 1, 1989, the Series A
preferred stockholders are entitled to receive dividends at the rate of $.15 per
share per annum. Although such dividends are cumulative, they are payable only
as declared by the Board of Directors. Dividends in arrears at January 28, 1996
and January 29, 1995, are $1,627,500 and $1,395,000, respectively (see Note 5).
All shares of preferred stock outstanding at March 31, 1993, were subject to
three equal annual redemptions commencing March 31, 1993, through March 31,
1995, at a redemption price of $1.00 per share plus all declared but unpaid
dividends. The holders of the preferred stock have waived their right to redeem
the preferred stock and payment of all dividends in arrears to which they are
entitled for at least one year from January 28, 1996.
11. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
KG has an Incentive and Nonqualified Stock Option Plan (the Plan) under which
incentive stock options (ISOs) and nonqualified stock options (Nonqualified
Options) may be granted to key employees of KG or any subsidiary for the
purchase of up to an aggregate of 138,889 shares of KG's common stock.
Nonqualified Options may also be granted to individuals providing services to or
acting as directors or officers of KG or any subsidiary.
The Plan provides certain guidelines as to purchase price per share as follows;
the purchase price shall not be less than the fair market value of the common
stock on the date the option is granted (for ISOs, 110% of the fair market value
in the case of a greater-than-10% stockholder); for ISOs, the aggregate fair
market value of KG's common stock shall not exceed $100,000 during the first
year that the option becomes exercisable. Under its present terms, the Plan
will expire in 1998.
As of January 28, 1996, a total of 110,000 incentive stock options are
outstanding at a price of $.24 per common share. The outstanding options vest
20% per year. A total of 66,800 incentive stock options were exercisable at
January 28, 1996. No nonqualified stock options are outstanding.
<PAGE>
Krasner Group, Inc.
Notes to Consolidated Financial Statements (continued)
12. DISCONTINUED OPERATIONS
In January 1996, the Board of Directors of the Company approved a plan to
dispose of the catalog companies (DermaScience Laboratories, Inc.; KGI Fashions,
Inc.; and Martin Rochelle, the direct marketing cost center of TCJC, Inc.).
KGIF was acquired by the Company in 1995 (see Note 3). The Company plans to
discontinue catalog operations by use of discount catalogs and other liquidating
alternatives that are currently planned by December 31, 1996. Revenues of the
discontinued segment totaling $3,982,935 and $994,489 in 1996 and 1995,
respectively, are not included as revenues in the accompanying financial
statements. Assets of the discontinued segment, consisting principally of
inventory have been segregated in the accompanying financial statements. In
connection with the planned disposal in fiscal 1996, the Company recorded a
pre-tax charge of $1,468,000, comprised of anticipated operational losses on the
discontinued segment ($508.000), inventory write down ($811,000) and write down
of other related assets ($149,000).
13. SUBSEQUENT EVENT
On June 17, 1996, the Company entered into a purchase and sale agreement with
L.L. Knickerbocker, Inc. (a publicly-traded company on a national exchange).
The agreement includes the sale of all of the shares of Krasner Group at a price
of $1,575,899, with provisions for additional proceeds of up to $2,330,000
contingent upon the ultimate proceeds from sales of the inventory over the
following three years.